Kesko Oyj (KESKOB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to our 2019 financial statements release call. I'm Kesko's CEO, Mikko Helander. Together with me, I have our CFO, Jukka Erlund; and Vice President of Investor Relations, Hanna Jaakkola. On the cover of the presentation, you can see the character called Cursing Carbon that is now widely used in our climate, and it's marketing in our grocery trade business. The carbon encourages us all to follow the carbon footprint of our food basket and to make sustainable choices. I will first give a brief overview of our business performance, and thereafter, we will be happy to take questions called by phone and via chat. Year 2019 was a strong year. Our result was all-time high, our financial position and cash flow were strong. The performance of the grocery trade was excellent. Kesko was also ranked as the most sustainable grocery trade company in the world for the sixth time. Strong growth continued into building a technical trade. In the car trade, good profit generation continued despite challenges in market and availability. The net sales for cash continuing operations in 2019 totaled EUR 10.720 billion, up 3.3%, comparably 1.4%, thanks to our strong growth strategy execution. Net sales increased in grocery trade and building and technical trade. Cash cost comparable operating profit for continuing operations for '19 was record high EUR 461.6 million, up by EUR 33.1 million, the growth strongest in the grocery trade division, EUR 33.4 million. Return on capital employed. One of our strategic targets was at the level of 9.6%. It improved in the grocery trade. Our growth strategy execution continues, and during the year, our investments totaled around EUR 690 million. The most significant acquisitions include the Fresks building and home improvement store chain in Sweden, now called K-Bygg, and Volkswagen, Audi and SEAT businesses from Laakkonen, LänsiAuto and Huittisten Laatuauto. Despite the acquisitions and the investments carried out this year, our financial position is strong. At the end of December, our liquid assets totaled EUR 169 million. Cash flow from operating activities was EUR 893.1 million, excluding IFRS 16 impact. Cash flow was EUR 564.8 million. Interest-bearing net debt excluding lease liabilities was EUR 446.1 million and the corresponding net debt-to-EBITDA ratio was 0.9. The slides I just went through regarding the year '19 performance highlighted the fact that the chosen strategy works and is yielding results. Now let's focus on the last quarter of the year. The Q4 2019 was all-time best Q4 ever. I said the Q4 '19 was all-time strongest. Sales and profitability continued to strengthen in the grocery trade. In the building and technical trade, demand remained at a good level. During the last quarter, we saw a change for better in the car trade. Last but not least, I'm really proud that K-Citymarket Järvenpää was ranked the best grocery store in the world. The net sales for Kesko's continuing operations in October, December totaled EUR 2.734 billion, up 3%, comparably 0.9%. Net sales increased in all our 3 divisions. Kesko's comparable operating profit for continuing operations for the fourth quarter was EUR 129.7 million, up by EUR 15.2 million. Also, profitability improved to 4.3%. Next, we take a closer look at each of the divisions. First, grocery trade, where the growth in sales and market share is based on good customer experience. Net sales for the fourth quarter totaled EUR 1.456 billion and grew comparably by 1.9%. Net sales grew in all food store chains in Kesko. Comparable operating profit for fourth quarter was EUR 98.6 million and it increased by EUR 10.1 million. Profitability was 6.8% and it increased due to good sales and development and improved operational efficiency. During the last quarter, K Group's grocery sales increased by 3.3%, which outpaced the market growth rate of 2.9%. Price inflation was approximately 1.2%. The quarter had the same amount of wholesale days than the year before. There were some changes in the tax refund payments that had an impact on purchasing power. Our profitability continued to improve, thanks to sales growth and improved operational efficiency. Online sales growth continued strong. Kesko's acquisition of Heinon Tukku is now reviewed in Market Court. The good performance is based on our strong sales implementation. Store-specific business ideas are really the recipe behind the success. The store-specific business ideas improve customer experience and increase sales. We stand out from the competition with store-specific business ideas built on top of the chain concepts. Kesko supports the K-retailers in creating good store-specific business ideas based on customer data. The store-specific business ideas are custom-made for that particular area and customer base. Quality selections and competitive pricing play an essential role, and they have improved customer satisfaction significantly. We are never ready with the process. There is plenty of sales and profit potential in creating store-specific business ideas for all 1,200 K-food stores in Finland. We are forerunners in digitalization of the trading sector. It is very important to extensively utilize the customer data in everything we do. We get the data from 3.5 million K-Plussa royalty program customers and target to reach them in all channels. Digitalization of marketing, data-driven targeted customer communication, easy-to-use online and mobile services play all an important role in our digital strategy. Online sales of groceries are rapidly growing, and we will continue to put emphasis on more extensive digital services that enhance customer experience in 1,200 K-food stores. Like you already saw on the cover page, Kesko is the most sustainable grocery trade company in the world. Transparent purchasing change at the core of our corporate responsibility work, we are strongly involved in combating climate change. Choosing to shop at a K-Group store is a responsible act itself. Next, building and technical trade, where growth and profit improvement continued. Net sales including the specialty good trade grew by 2.5% to EUR 976.6 million. Comparable growth was minus 0.5%. Net sales grew in comparable terms in Finland, the Baltic countries and Belarus. In Norway and Sweden, net sales increased due to the acquisitions and divestments completed. Comparable operating profit excluding specialty goods trade increased by EUR 2.4 million to EUR 29.4 million. The profitability improved and was 3%. The building and technical trade market. Overall, in Q4, construction volumes in Northern Europe have returned to normal levels. The building and technical trade market in the Nordic countries decreased year-on-year. Housing construction came down. Renovation and infra construction market was growing. Kesko's profitability improved especially due to good development in K-rauta Finland, Onninen and K-Bygg in Sweden. We acquired Onninen in 2016, and it has developed well as part of Kesko. Onninen has given us strong access to the technical wholesale market. In 2019, net sales have increased and totaled nearly EUR 1.6 billion and operating profit totaled EUR 50 million. Onninen has a 38% market share and the market-leading position in Finland. Market and growth outlook for technical wholesale and Onninen is good in Finland and elsewhere in Northern Europe. I would like to highlight K-rauta's good performance in Finland. It is growing and improving profitability in Finnish market. Market-leading position has strengthened, and the market share is very close 42%. K-rauta sales were all-time high, and the profitability has increased significantly. Also with K-rauta Finland, we see potential for further growth by improving customer service and experience as well as implementing the store-specific business ideas. Also, online sales and extended opening hours give us potential for further growth. Market position in Sweden has clearly strengthened. The Fresks acquisition has given us a strong access to the growing B2B trade. We have executed a fast and successful integration of Fresks, rebranded it to K-Bygg. The new K-Bygg brand is well received. During the year, we performed the market turnaround in Onninen. Loss-making HEPAC business was divested successfully, and the process is good in the infra business, where Onninen is concentrating on in Sweden. Measures to improve profitability in K-rauta Sweden are ongoing. Going forward, Sweden is an important growth area for Kesko. And then to Norway, where we see significant growth potential. Market was challenging in '19. Demand declined in both building and home improvement trade and technical wholesale. Also, sales declined for Byggmakker and Onninen. During 2018, 2019, we have strengthened on retailing in the Byggmakker chain by acquiring 31 chain stores. Onninen sales and profitability was unsatisfactory last year, but the situation improved towards the end of the year. In the long term, we see significant growth potential also in Norway. Next, car trade. New updating range strengthens our competitiveness. Net sales in the car trade increased by 20.1% to EUR 228.5 million. The market picked up, and the comparable growth was 2.6%. Comparable operating profit was EUR 9 million, and it grew by EUR 1.8 million. Profitability was 3.9%. We have finalized extensive efficiency measures during the quarter. During the last quarter, car trade in Europe has recovered. In Finland, importing of used cars has continued, and first registrations were up by 11.6%. Our car trade sales grew and operating profit improved. Market share of brands we represent was 16.4%. The demand for electric cars is clearly growing. Our own leasing fleet has grown to some 1,900 cars. After a challenging period, the operating conditions have improved in car trade. Availability of cars has improved and range is being updated fast. We have strengthened our dealer network by acquiring independent dealers, and the integration of acquired retail outlets has been fast and successful. New leasing services have grown strongly. And the outlook. Kesko continues the determined customer-oriented transformation of its business and execution of its strategy. In comparable terms, the net sales for continuing operations for the next 12 months are expected to exceed the level of the previous 12 months. The comparable operating profit for continuing operations for the next 12-month period is expected to exceed the level of the preceding 12 months. Kesko's Board of Directors proposed a EUR 2.52 dividend to the Annual General Meeting. It corresponds to the payout ratio of 85% and an effective B share dividend yield of 4%. Dividend proposed to be paid in 2 installments. The proposal is in line with Kesko's dividend policy. The Board proposes to the Annual General Meeting 1:4 share split to improve the liquidity of the company's shares. The board proposes to the Annual General Meeting that shareholders be given 3 new A shares for each current A share and 3 new B shares for each current B share without payment. The Board also proposes a related amendment to the Articles of Association. The total shareholder return of B share from the beginning of 2015 to the end of January 2020 is almost 160%, an increase of more than EUR 47. The value of B share has more than doubled since the beginning of 2015. Thank you. And please mark the 28th of May to your calendars for our Capital Markets Day here at K-Campus in Helsinki. Now it's time for questions for the conference call lines or via chat. If you have questions afterwards, please don't hesitate contacting our Hanna Jaakkola.

[Operator Instructions] The first question we have is from the line of Fredrik Ivarsson from ABG.

Congrats on a good year, first of all. My first question is on the guidance of increasing comparable EBIT. Just curious, do you assume earnings growth within all 3 divisions? Maybe start with that question.

Yes. Yes, that is our expectation and not just an expectation. We continue very systematic implementation of our business strategies. And based on that, we expect that all 3 divisions will improve. They will increase sales, and they will improve also EBIT and financial performance.

Good. And my second question is on the grocery market in Finland. It grew pretty all right in 2019. At what pace do you expect the market to grow in 2020? And how do you sort of split that between volume and price?

Yes. Still, outlook is positive. First, the expectation is that the Finnish economy will grow. Might be that the growth rate will be a little bit lower than previous year, but anyhow, outlook is that Finnish economy continues growth. Based on that, we have also positive expectation in Finnish grocery market. Our expectation is that the price development will remain very conservative. Volume, we expect that we will see some volume growth. But of course, most important is that we are very optimistic that we can maintain very profitable growth also in future and gain also this year market share.

That's very clear. One last before I jump into the queue. On K-rauta Sweden, if we exclude the Fresks business, it seems like revenue sort of declined close to 10% in local currency. So in the second half of last year, did 2019 in total end up in black figures?

No. No, it was still in red numbers and heavy measures continue in Sweden in K-rauta. But we have with current country management, very capable new country management, very detailed, specified, needed measures to improve commercial and financial performance of K-rauta Sweden. Store-by-store, we have made those plans. And the implementation of those plans continue in 2020. And the expectation is that based on that, we will see improving numbers also in future.

A short follow-up on that one. Are you, in that case, looking to close any underperforming stores, et cetera? Or how do you think around that?

I'm not in a position to open such a detailed level of those plans. We have made, and we will fine-tune store-specific business plans. And later on, we will announce those measures.

The next question, we have Mr. Nicklas Skogman from Handelsbanken.

I've noticed that your sales outperformance in the grocery division versus the market has slowed over the past 2 quarters. Are you seeing tougher competition? Or is there anything else behind this?

Yes. Competition in Finnish grocery market has been still very tough, and it is tough between us 3 main players. And we have been very strong in this competition, thanks to our strategy and thanks to our K-retailing entrepreneurs. And we are confident that we have good chance to succeed also very well in market. But at the same time, we should remember that, of course, 2 other players who has lost market share or who has not succeeded to increase on sales, they are also working very hard. And based on that, let's see, I believe that we will see definitely 2020, again, also interesting outcomes coming from competition. But I repeat, we are in a very good shape. And we are very optimistic that we can maintain this profitable growth also in the future.

Yes. But have you noticed anything in the last 6 months or so in the market that's changed?

Yes. Yes. But starting from summer, they have been more aggressive, for example, marketing and especially nonfood segment, also in pricing, especially Finnish market leader. And that has created even tougher competition especially in the last quarter compared to previous quarters.

And I think let us also remind that as we have had the sort of work on the customer experience improvement in the whole store network during the past couple of years, of course, the comparative is also getting higher all the time. So in that sense, that's been visible in the past year's figures as well.

Yes. Okay. So maybe the benefits from the work you've done in stores are starting to be smaller and smaller as we move forward.

Yes. But we should remember that in Finland, we have about 1,200 K-stores, and we have in all those stores excellent K-retailing entrepreneurs, and that is definitely a big benefit compared to other players. And now when we provide excellent tools for those entrepreneurs to create and develop based on data, customer data, store-specific business ideas, we can expect that when also remaining entrepreneurs will fully utilize this potential, we are in a good position to maintain profitable growth also in the coming years.

Yes. And then I was wondering on the Onninen profit improvement in the quarter. How much of that was thanks to divesting the loss-making parts of the Swedish Onninen business?

It has some impact. But major issue is that Onninen Finland has very good development. And Onninen Finland steadily improves performance. Of course, we should also remember when we look at those 3.5 years that Onninen has been part of Kesko. All in all, Onninen development is strong. Also, Poland. Poland has improved dramatically. In Sweden, we implemented those quite heavy measures to make Swedish business profitable. But all in all, Finnish performance also in Onninen has been very strong.