Kesko Oyj (KESKOB) Earnings Call Transcript & Summary

Dear all, warmly welcome virtually to Helsinki, and thank you for tuning in for Kesko's Q3 2026 Release Call. Our headline today is Kesko's profit improved significantly. Technical trade continues as the driver. This describes well the source of the profit improvement. We have the usual agenda today. First, President and CEO, Jorma Rauhala, will give the presentation. After the presentation, we are happy to take questions from the virtual audience. We have here with us our business division presidents, Ari Akseli for Grocery Trade; Sami Kiiski for Building & Technical Trade; and Johanna Ali for Car Trade; as well as CFO, Anu Hamalainen. [Operator Instructions] All the materials related to the quarter can be found at our website, kesko.fi under Investors. My name is Hanna Jaakkola, responsible for IR at Kesko. I will be happy to have discussions and answer your follow-up questions after the presentation. But now Jorma, the virtual stage is yours, please.

Thank you, Hanna. Ladies and gentlemen, welcome also on my behalf to this release call. I am Jorma Rauhala, and I have now the pleasure to present Kesko's Q3 results. Kesko's profit improved significantly. Technical trade continues as a driver is our headline. In Q3, net sales and comparable operating profit grew in all divisions, but the biggest profit improvement was indeed in technical trade. But now I will give an overview of our business performance and open up elements behind the results as well as present our updated guidance and new outlook for 2027. After the presentation, we are ready for the Q&A. Summary of the third quarter '26. Net sales and comparable operating profit grew in all divisions, in Grocery Trade, K Group stores gained market share and comparable operating profit grew slightly despite investments. In [ Pilling ] and technical trade, comparable operating profit increased significantly, especially thanks to technical trade. Sales and profit in [ building and home ] improvement trade developed positively, especially in Denmark, Norway and Sweden. In car trade, sales increased and comparable operating profit improved slightly. Kesko has obtained the necessary authority approvals for acquiring the down operations in Sweden, Norway and Denmark. The acquisition is expected to be completed on 2nd November 2026. Profit guidance was updated. Kesko now expects its comparable operating profit in '26 to amount to EUR 690 million to EUR 730 million. Net sales in Q3 totaled nearly EUR 3.4 billion, it was up by EUR 167 million. Net sales increased in all businesses. Rolling 12 months net sales increased to over EUR 13 billion for the first time ever. In Q3, comparable operating profit was EUR 231.4 million, and operating margin was 6.8%. Comparable operating profit increased in all divisions. Rolling 12 months operating profit was EUR 702.1 million, and operating margin was EUR 5.4 million. Return on capital employed was 10.6% in [ billing and technical ] return on capital employed improved to 8.9%, thanks to increased earnings. Return on capital employed decreased in grocery trade and in car trade compared to the year-end. Financial position. Cash flow from operating activities was at a good level EUR 331.4 million. It's strengthened significantly as specific thanks to increased earnings. Capital expenditure was clearly lower than in Q3 2025 at EUR 95 million. I'll open up investments on the next page. Net debt to EBITDA improved to EUR 1.5 billion, at the end of last quarter, it was EUR 1.7 billion. This key figure is well below our maximum target of EUR 2.5 billion. Capital expenditure totaled EUR 95 million, we continued the investments to strengthen our growth, [ surgery ] network and the main CapEx for store site investments. For example, during the quarter, we opened several renovated K-Citymarkets. Other investments include investments in, for example, the leasing car fleet. In comparison period, we booked the last investments in logistics center on [ Nel ]. Expenses. Expenses are well under control. Personnel costs increased especially due to salary review around in autumn in Finland. Last year, it was in spring. Despite increased costs, the cost rates remained at 15.7%. Now the grocery trade in Q3. Market share continued to grow. Profits were at a good level. In Q3, Net sales totaled nearly EUR 1.7 billion, and it increased by EUR 45 million. Sales to K-food store chains increased by 3.7%. Kespro food stores business net sales declined by 1%. Rolling 12 months, net sales totaled nearly EUR 6.6 billion. In grocery trade, comparable operating profit for Q3 was EUR 118.9 million, and it was up by EUR 1.4 million. Profitability was 7%. [ Kespro's ] operating profit declined by EUR 2 million to EUR 20.5 million. Rolling 12 months operating profit was EUR 424.4 million, and operating margin was at the same level as last year at 6.5%. In Q3, grocery trade divisions net sales increased and comparable operating profit improved slightly. The total gross rate market in Finland grew by approximately 0.6%. K Group grocery sales were up by 1.8%. K Group grocery stores gained market share in Q3. Customer close and main shopping basket sizes continue to grow. My main shopping baskets, we refer to bigger baskets with several food categories, including protein products for main meals. Kesko's net sales were down by 1%. [ Kespro ] continued to gain market share. K-Citymarket nonfood sales were up by 3.8%. Online grocery sales were up by 10.9%, online were 3.9% of K Group grocery sales. Grocery price inflation in Finland was approximately 1.5% in Q3 and 1.4% for January, September 2026. Demand for quality products and services in K Group grocery stores remained at a good level. Market share in grocery trade continued to grow. Market share for K Group grocery stores took an upturn a year ago, and the market shares gain have continued every month since October 2025. All K Group grocery chains have gained market share in their size segments in '26. Our market share growth has been the strongest in supermarkets, which is the biggest segment of the Finnish grocery trade market. The good performance is thanks to our strategy execution. The investments in store site -- in store quality, prices and store site network. Store network plays a key role in growing our market share. A total of 67 stores in all 3 sites will be updated and 26 stores new or replacements opened in 2026. Plans for '27 include 68 store renovation and 30 openings of new or replacement stores. In building and technical trade sales grew and profit improved driven by B2B trade. In [ Piling ] and technical trade, net sales increased by EUR 94 million to over EUR 1.3 billion. Net sales grew in comparable terms in all businesses and all operating countries. Net sales improved in comparable terms by 6.4%. In comparable terms, technical trade net sales increased by 10.5% and building and home improvement trade net sales by 3.1%. Rolling 12 months, net sales were over in. Comparable operating profit for the building and technical trade division totaled EUR 93.8 million, and operating margin was EUR 7.1 million. Operating profit increased by EUR 22.1 million. Rolling 12 months operating profit was EUR 223.8 million, and operating margin was 4.4%. In technical trade, comparable operating profit grew in all countries. In [ building and home ] improvement, comparable operating profit fell in Finland due to weak consumer sales but stayed at a good level. Comparable operating profit grew in Denmark, Sweden and Norway. In the building and technical trade gave us net sales grew in all operating countries in Q3. Profit improved in particular, thanks to strong sales in technical trade and in building and home improvement trade in Denmark, Norway and Sweden. The share of result from Kesko Senukai also supported the profitability improvement. Market demand has picked up in industrial projects, data centers and infrastructure construction, for example, but remains muted in new housing construction and B2C trade. In Finland, in technical trade. One sales grew and profit improved. Growth was supported by strengthening market share. In Finland, in building and home improvement trade, get out of sales grew in B2B trade, but profit was down due to muted B2C trade. Sales to consumer account for approximately 40% of [ Kerata ] sales. Clearly, more than in other countries. In Norway, owning and sales grew and profit improved clearly. [ Bug make ] sales grew and profit improved. In Denmark, [ Davidson ] sales grew and profit improved significantly. In Sweden, [indiscernible] sales growth was strong and also profit improved. In Poland and Baltics owning and sales growth was strong and profit improved. The share of result from Kesko Senukai was EUR 14.1 million, and this figure includes both Q3 and 2 in the comparison period, Kesko Senukai share of result was reported for the whole January, September 2025, and it was EUR 7.4 million. In addition to good sales development, the share of result increased due to the change in the accounting treatment of supplier bonuses. Previously, the majority of bonuses have been recorded in Q4, and now they have been recorded throughout the year. Retail and B2B sales for K-Rauta, Onninen and Finland is shown in this graph. Onninen's Q3 sales increased clearly, 12% wide competitor sales development was 1.4%. In One Finland, also price increased. K-Rauta's sales decreased by 0.4% in Q3 and competitor sales decreased by 0.6%. As I said earlier, the sales development for consumers have been soft. Reasons for soft B2C sales may include mooted residential market and increased interest rates. B2B sales are stronger and K-Rauta strongest categories include heavy building materials like timber. And now to the Kesko's biggest acquisition ever, Kesko is acquiring the technical trade operator, [ Dahl ] companies in Sweden, Norway and Denmark front, [ Saint-Gobain ]. The compound net sales of the business is to be acquired totaled some EUR 2.1 billion in 2025. Kesko announced in September that the European Commission had approved the acquisition and confidentially. Other required approvals had already been obtained earlier. Kesko expects the acquisition to be completed on second of November. Kesko's Board of Directors is planning to begin a rights issue after the transaction is completed. In the share issue, only B shares would be offered to holders of both A and B shares. Kesko will arrange an extraordinary general meeting tomorrow, in which the Board seeks authorization to issue a maximum of 12 million new B shares. The Board was authorized by the 2026 [ AGM ] to issue 33 million shares. So the maximum number of new sales that could be issued would total EUR 45 million. In car trade, sales increased and profit improved. In car trade, net sales for Q3 increased by EUR 29 million to EUR 384 million. Net sales increased in new cars, used cars and sports trade but decreased in services. Rolling 12 months, net sales were over EUR 1.4 billion. The comparable operating profit totaled EUR 23.5 million and increased by EUR 0.8 million year-on-year. Operating margin was 6.1%, rolling 12 months operating profit was EUR 78.9 million, and operating margin was 5.6%. Car trade division net sales increased and comparable operating profit improved slightly in Q3. Market demand for new cars picked up. Q3 first registration of passenger gas and vans were up by 14.5%. In and first registration of brands represented by Kesko were up by 23.9%. K-Rauta's order book for new cars continue to grow in units. It was up by nearly 70% year-on-year and by some 65 year-to-date. The conversion of the stronger order book into sales depends on the availability of costs. Delivery times are typically 3 to 4 months or 6 to 8 months for some models. Used car sales from dealerships in Finland were down by 2.7% in units while K-Auto used car sales increased by 3.4%. Service sales in car trade decreased slightly. In sports trade, net sales grew while comparable operating profit decreased. Profit guidance and outlook. We are specifically specifying the profit guidance for 2026, Kesko estimates that its 2026 comparable operating profit will amount to EUR 690 million to EUR 730 million. Kesko previously estimated that the comparable operating profit would amount to EUR 670 million to EUR 730 million. The profit guidance does not include impacts from the Dahl acquisition on the comparable operating profit. Key uncertainties impacting Kesko's outlook and developments in consumer confidence and investment appetite, as well as geopolitical crisis and [ denser ]. The operating environment for Kesko is estimated to improve in 2027 in all divisions and all operating countries. Kesko's net sales and comparable operating profit are also estimated to improve in all divisions and all operating countries. In grocery trade, B2C trade is estimated to pick up slightly and the food service business to remain stable. In '27, the comparable operating margin for the grocery trade division is estimated to continue to be clearly about 6% despite the investments in price and the store side network. The comparable operating profit for the [ gross-grade ] division is estimated improved in 2027 compared to 2026. In Peeling and technical trade, the cycle has gradually improved, but it has remained muted in new housing construction. In 2027, the cycle is expected to continue to improve. The comparable operating profit for the building and technical division is estimated to improve in '27 compared to '26 in all Kesko operating countries. The division's comparable operating profit is expected to improve even excluding the impact of the Dahl acquisition. In car trade market, demand for new cars is expected to pick up compared to '26. The net sales and comparable operating profit for Kesko car trade are estimated to improve in 2027 compared to 2026. And some conclusion to summarize the presentation. Net sales grew and profit improved in all 3 divisions. Grocery trade continued to gain market share good profitability despite investments. clear profit growth in building and technical trade, driven by technical trade. There was also a positive development in building and home improvement trade especially in Denmark, Sweden and Norway. Good sales development in card rate and strong order book in new cars. Kesko's biggest ever acquisition. The technical trade operations of Dahl in Sweden, Norway and Denmark is expected to be completed on 2nd of November. Share issue is under planning. We estimate that Kesko's operating environment, net sales and comparable operating profit will improve in 2027. Thank you. This was my presentation. Now I guess -- it's time for questions.

Yes. Thank you, Jorma. Indeed, it's time for questions. Let's first to turn to the conference call line. [Operator Instructions] But now conference call line, please.

[Operator Instructions] Next question comes from Fredrik Ivarsson from ABG Sundal Collier.

I have a few. I'll take them one by one. So first, a more general question. when we get the food retail market, it grew around 0.5% in Q4, whereas food price inflation is 1.5%. That means volume mix is minus one roughly. This looks like a big step back in Q3 when I compare it to previous quarters. So I wonder what was your read into that number in terms of consumer behavior?

So yes, the grocery market grew all in all, that 0.6% Q3 and our sales growth was 1.8%, and we clearly gained market share. But of course, yes, it's clear that the total growth was less than the food inflation. But Ari, do you see some elements behind that?

I think the key elements are that customers are still looking at value for money. They are looking for campaigns. They are looking better solutions and offers [ phone ] sales. And that's the main reason. Customers are still a little bit nervous. But at the same time, there is also some promising signs in our sites because the quality offering is appealing more customers.

Okay. But you didn't see sort of weakening consumer behavior in Q3 versus previous months?

No, it was about the same level. If you look about general figures.

Okay. Good. Second, on the guidance. When I look at the full year guidance, midrange implies Q4 EBIT growth of around 5% and that could be compared to the run rate of around 10%. So is that just you being cautious? Or have you seen any weakening signs during the last month?

No, we haven't seen any weakening signs and of course, we have also to take account this Kesko Senukai last year, Kesko Senukai last quarter was, if I remember right, it was EUR 12.4 million. And as I told earlier, it was mainly because of the supplier bonuses. But now they have booked already throughout the years those bonuses this is definitely one reason that Q3 was kind of stronger now. And then because of that, Kesko Senukai also Q4 will be a little bit weaker. But all in all, we don't see any big changes, what comes the trend. Of course, we have -- each division have a little bit different. Those coming months for grocery, for example, December is very important when it comes to K-Citymarket on food comes to building and technical trade, especially December is very all in all, weak, what comes to sales month, but no, we don't see any big changes.

Okay. Good. Third question on the margin in Building & Home Improvement. It was up almost 1 percentage points, and that's despite a quite low like-for-like of 3%. So what were the main drivers for that strong margin in Building & Home Improvement.

Of course, one was this Kesko Senukai, you have to be remind that one, but...

Excluding Senukai.

Sami, do you want to add something on that?

Yes. Thanks, Fredrik, for the good question. A little bit the big picture, of course, it so that the particularly technical trade, the sales was in good shape, I would say, sold and the price effect was also positive overall. And of course, we have been taking good care of our businesses. So the cost levels are in a good level. And of course, then when the sales are increasing, the results are getting better also.

Okay. Just to the one percentage point look quite steep given the fairly low like-for-like -- but okay. I read into to the cost control statements there. And then -- and last, just a housekeeping one, given that all now from November, how should we model working capital movements in Q4?

Anu, would you take this one?

Yes. I would say that it's difficult really to say at the moment, but I would look at the sort of -- in general, the Kesko Group numbers and then on top of that, what we know already is that Dahl's working capital is -- should be on a good level, but we have not yet sort of published our numbers for working capital. So we need to come back to that later on.

Thank you, Fredrik. Any further questions in the conference call. No, I don't see any. I have one question at the moment from the chat function. So I'm reading what are the key operational priorities for the next quarter?

Okay. Maybe I will start and then colleagues can continue. But all in all, of course, we continue to execute our strategy. And of course, most probably, we will close our Dahl deal next Monday. And of course, the aim is that customer work is not disrupted at all. I would say though, all in all, in big picture, those are the big things what we are doing. But maybe Ari, you can start and Sami then [indiscernible] do you have some specific?

Yes. Maybe the most important factor is that keep in mind the seasonality of our business. especially with the city market nonfood business. So if I think about what is the key in there that most of the profit of the city market nonfood is coming during the November and December. So they are really important during this period. And a total strong execution in Christmas sales including assortment, availability and commercial activities. These are the key operational priorities for the next quarter.

Yes. For us, of course, the focus is still to serve our customers well and this quarter 4 is for us a bit smaller quarter, of course. And we have minus 2 Business Day, even in October. But still, of course, important to focus to serve the customers well in both businesses and all countries. And of course, taking good care of our availability. We are building up, of course, this is that kind of business that we are now building up availability for next year also, that is an important priority. And of course, then preparing for next year. But of course, shortly about this deal if and when this will happen, of course, then to take good care of our new businesses and get to know our new colleagues and get to know our business then better. And of course, then take care that we have business continuity there also in the short line and start from there.

Thanks, Sami. And Johanna?

Yes. And in the car trade, operationally, of course, the most important is to succeed in [indiscernible] great customer experience every day. In addition to commercial activities, the focus areas are at the end of the year, of course, the used car inventory management and production planning for new cars with car manufacturers.

Okay. Thank you, Johanna.

Thank you. I see that there's one question coming on the conference call line. So please go ahead.

The next question comes from Miika Ihamaki from DNB Carnegie.

This is Miika from DNB Carnegie. Can you hear me?

Yes, we can, Miika.