Kesko Oyj (KESKOB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Kesko's Full Year 2020 Release Call. I'm Kesko's CEO, Mikko Helander. Together with me, I have our CFO, Jukka Erlund; and Vice President, Investor Relations, Hanna Jaakkola. Kesko had a very strong year 2020. We were able to increase significantly our sales and profits. I will first give an overview of our business performance in 2020 and Q4. Thereafter, we will be happy to take questions both by phone and Viasat. Main facts for 2020. We were able to increase significantly our profit in comparable terms by nearly EUR 120 million. The record result proves that we are able to successfully execute our growth strategy also during these exceptional times. The year 2020 is, of course, the year of COVID-19 pandemic, and it affected our businesses in different ways. The pandemic had a positive impact on the company's profit, but less than half of the profit growth was related to the pandemic. In 2020, Kesko sales grew, and profitability improved. The performance of all K-food store sales was excellent. In building and technical trade, the performance was good in all countries. On the other hand, foodservice business and car trade were hit by the corona pandemic. Kesko's financial position is strong, and cash flow improved clearly. In 2020, new financial targets as well as sustainability objectives were set. The net sales in 2020 totaled EUR 10.243 billion. It was up comparably by 3.6%, thanks to our strong strategic execution. Net sales increased in grocery trade and building and technical trade. These numbers are excluding Kesko Senukai. Comparable operating profit for 2020 was a record-high EUR 554 million, and it increased by almost EUR 120 million. It increased due to good sales development in grocery trade and building and technical trade. These numbers include Kesko Senukai as a joint venture instead of a subsidiary for the whole year 2020. Kesko Senukai had an impact of EUR 25 million on the group's comparable operating profit. Return on capital employed. One of our strategic targets improved and was at the level of 12%. It improved in the grocery trade and in building and technical trade. Kesko's financial position is very strong. Cash flow from operating activities continue to strengthen, and it was almost EUR 1.2 billion. And our liquid assets were over EUR 300 million. Net debt to EBITDA excluding IFRS 16 impact was 0.4, clearly below the target level. We continued the investments in sales growth and better operational efficiency even during the pandemic. We continue to execute our growth strategy during the year in both Carlsen Fritzøe building and home improvement trade sale in Norway and the MIAB and Bygg & Interiör businesses in Sweden. We have been growing our sales and profitability for a long time, which is a strong indication that our growth strategy is working and being successfully executed. As I said already earlier, the strategy is in the key role in our success also in 2020. Less than half of our profit improvement in 2020 was due to the positive impacts of the pandemic. Going forward, our strategy provides a good foundation to continue on the same path: to increase sales and improve profit even further. One of our important strategy focus areas is sustainability. Our systematic sustainability work were noticed widely internationally. Once again, for the seventh time, K Group has been ranked as the most sustainable grocery trade company in the world in the Global 100 list. By sourcing K Group, customers are sourcing a more sustainable way of eating, building and driving. All-time best Q4. First, some Q4 key figures. Net sales and operating profit continued to strengthen, resulting in operating margin of 6.2%. Earnings before -- earnings per share was EUR 0.31. Net sales -- the net sales in Q4 2020 totaled EUR 2.662 billion. It was up comparably by 4.5%. These numbers are, again, excluding Kesko Senukai. Comparable operating profit for Q4 was record-high EUR 165.6 million, and it increased by nearly EUR 45 million. It increased due to good sales development in grocery trade and building and technical trade. For the whole year, the comparable operating profit increased by EUR 119 million to EUR 554 million. These numbers include Kesko Senukai as a joint venture, and it had an impact of EUR 1.5 million on the group's comparable operating profit in Q4. And now to grocery trade, where sales and profit growth continued strong. Net sales totaled EUR 1.517 billion and grew comparably by 4.2%. Net sales grew in all food store chains but declined in Kespro. Comparable operating profit for Q4 was record-high EUR 123 million and increased by EUR 25 million. Profitability was 8.1%, and it increased due to good sales development in all food store chains and improved operational efficiency. During the quarter, retail sales market grew by 9.4%, while K-food stores were up by 10.1%. Sales grew in all K-food store chains. We saw excellent Christmas sales. Market share strengthened clearly also in December. Online grocery sales continued to grow. The corona pandemic has caused household consumption to focus especially on domestic retail. This is the fifth year in a row that our K-food stores have gained market share. We are now at the level of 37.6%. Our retail sales have grown by EUR 1.8 billion since 2015. Online grocery sales have grown this year by some 400%. And at the end of the year, 470 K-food stores offered online services. Our market share in online grocery is over 50%. NPS is high. In December, it reached the level of 83. Online sales reached 3.5% of the total grocery sales in Q4. It was 2.2% in Q3 last year. NPS is also high in our physical stores. We have been measuring our customer satisfaction systematically for years. NPS is now at the level of 65.1. It has increased 12 units in 5 years, thanks to clear strategic focus on improving customer experience. The amount of important customer feedback has also increased dramatically and is now over 2 million cases. Feedback is very valuable, and we use it widely to improve the customer's -- to improve customer experience. Here is the reason why we focus on improving customer experience. There is a strong correlation between sales growth and customer experience. The stores where NPS is over 61 are performing clearly better than the market. The delta between stores with NPS higher than 61 and lower than 61 is 5 percentage points. Stores underperforming at the market need to focus on improving customer satisfaction. There is still a lot of potential to grow both sales and profitability simply by focusing on customer experience. I want to highlight that there is still plenty of potential in continuing to implement store-specific business ideas based on customer data. Some 50% of K-food stores are currently visibly implementing store-specific business ideas widely. We are a forerunner in store digitalization, and it also improves customer experience both online and off-line and makes operations more efficient. Also, I want to underline that we have a good retailer business model. And also, it makes us unique in Finnish grocery business. Our B2B business, Kespro, has been suffering during the corona pandemic, but it did well in a difficult market. Net sales was EUR 784 million. Kespro's market share continued to grow, and we were able to keep the profitability at a good level under the difficult circumstances. To summarize the strong basis for continued growth in the grocery trade, there is further potential to improve customer experience, digital solutions and efficiency. Also, our market position is strong in foodservice, which is very important going forward as the pandemic passes. We will continue investing in growth and transformation. And now to building and technical trade division, where good development continued in all areas. Net sales excluding Kesko Senukai grew comparably by 6.3% to EUR 918 million. Net sales for the building and technical trade division grew in comparable terms in Finland, Sweden, Norway and Poland. Net sales grew in both B2C and B2B trade. Comparable operating profit including Kesko Senukai, as the joint venture increased by EUR 22 million to EUR 44 million, the profitability improved and was high, 4.8%. In the building and technical trade, comparable operating profit grew in the building and home improvement trade in Finland, Sweden and Norway. Onninen's comparable operating profit grew in Finland, Norway and Poland. The acquisitions carried out in Norway and Sweden in the last 2 years accounted for EUR 10 million for the comparable operating profit in Q4. Construction activity has stayed at a good level in Northern Europe, and B2C trade has remained active. In the market in general, growth in B2B trade flattened in both building and home improvement trade and technical wholesale. For K Group, in Q4, net sales and profit grew. B2B trade continued to grow in both building and home improvement stores. And also, Onninen’s sales grew. Completed acquisitions improved profitability. Building and technical trade is growing and performing well in Finland. The division's comparable operating profit in Finland, meaning both K-Rauta and Onninen, was nearly EUR 130 million. B2B trade share of sales was 74%. Coronavirus pandemic has not supported the B2B market development. In Sweden, the year 2020 was the year of a significant turnaround. Comparable operating profit was over EUR 15 million. Also in Sweden, majority of sales come from B2B, namely 64%. In Norway, development was good in both Byggmakker and Onninen. Comparable operating profit was EUR 30 million. Also in Norway, B2B's share is high, namely 77%. Onninen has developed well as part of Kesko. Net sales was over EUR 1.6 billion, and it has grown comparably by 20% since 2015. Onninen's comparable operating profit was over EUR 70 million. It has grown by EUR 40 million compared to the year 2015's level. In building and technical trade, strong country-specific strategies help us grow also going forward. We will continue putting basics in order and improving efficiency. Customer experience is the key to success also in this division. Digital sales channels need to be further developed even if the strategic focus is more on B2B side. Our customers need to be served well also going forward. We will continue the sector consolidation in Northern Europe. Profitable growth is at the core of strategy execution, and we are on the right track what comes to the performance and operating margin development. Increased countries' focus in our strategy execution is working. Sales and profits are up. We are on our way to join the best operators in Europe. And to car trade, where new models support sales growth. Net sales for the a Q4 totaled EUR 234 million and grew comparably by 2.3%. Comparable operating profit for Q4 in car trade was EUR 6.2 million, and it decreased by EUR 2.8 million. Profitability was 2.6%. In the market, the first registrations of passenger cars and vans in Finland were down by 10%. Market for used cars was growing. Demand for aftersales was at a good level. Our car trade sales were up by 2.1%. Used car sales grew by 14%, and order book for new cars was up by 36% at year-end. Our own leasing fleet is now over 3,200 cars. In 2020, Volkswagen was the most registered all-electric car brand in Finland. And then dividend proposal and outlook. Kesko's Board of Directors proposes EUR 0.75 dividend to the Annual General Meeting. It is nearly EUR 300 million in total. The proposed dividend corresponds a payout ratio of 77% and effective dividend yield of 3.5%. Dividend proposed to be paid in 2 installments. The proposal is in line with Kesko's dividend policy. Outlook. We estimate that comparable operating profit in 2021 will be in the range of EUR 520 million and EUR 620 million. The illustrative comparable operating profit in 2020 was EUR 554 million. The profit guidance range is wide due to the uncertainties related to the COVID-19 pandemic. Overall, the outlook for Kesko's business in 2021 is positive. We continue to celebrate Kesko's 80th anniversary. The company was founded under exceptional circumstances, and Kesko and K Group have grown into a leading retail operator in Northern Europe. I want to thank our customers, K-retailers, all K Group personnel, Kesko's shareholders and all other stakeholders for these past 80 years. Thank you. And now we are ready for questions. First, we will take questions from the conference call lines.

[Operator Instructions] Our first question is from Fredrik Ivarsson from ABG.

A few questions from me, if I may. First, I want to talk a little bit about the guidance and the outlook for 2021. Obviously, a wide range, but you leave, I guess, room for a 5%, 6% decline year-on-year versus last year levels. Curious what division do you see the most risk and where do you leave room for a sort of margin deflation.

First, I would like to stress that our outlook is positive, and we have behind of us excellent strategy execution, very strong sales and profit development already last 5, 6 years. And I repeat, outlook is positive. We expect that this strong successful implementation of strategy will continue, and that gives us excellent opportunities to beat also records in future, also in 2021. Okay. I repeat that, still, we suffered due to pandemic globally. Nobody knows yet exactly when the pandemia is over, and that makes this estimating a little bit challenging. Once again, in all businesses, we feel and we see that outlook is positive. Okay. Some risks are related to pandemia. Of course, we can see especially in case that we would be forced in some countries temporary to close stores in building a technical trade or if construction companies, more big, medium-sized construction companies would be forced in some countries to stop working on building sites maybe are the biggest risks. But at the moment, we don't see that kind of problems. And also, our feeling is that in all countries, we have also learned somehow to live better and to handle better pandemic-related matters. But those are reasons that we can see in the middle of positive outlook also some risks. But hopefully and I believe we can very well handle those risks.

Okay. So primarily within the building and technical trade I read. And a follow-up on the outlook for 2021 as well. You mentioned you expect moderate growth within the food retail market in 2021. What is your assumption here for COVID-19 in general maybe? And also, if you could share what you assume in terms of food price inflation when you say that you expect the market to grow moderately.

COVID pandemia, our understanding is that, unfortunately, pandemia will disturb our life definitely first half of 2021. And at the moment, it looks that it is not yet over even in the second half of 2021. But hopefully, situation will be better and better under control later, second half of this year, but nobody can be sure. And our expectation is that the market and our business environment is not yet back to normal this year. Hopefully next year. Cost inflation, it has been very, very, very moderate. Especially in grocery trade, we might see some increase in cost inflation on that side. But we expect bigger price increases, cost inflation in building and technical trade, and it seems to be also more global -- a global issue. But I see that we are also very well prepared to handle and manage this better.

Okay. And then if you could help us out a little bit with the margin bridge in both the grocery trade and B&T. I mean both these divisions are at historical all-time high levels. And if you could just help us with how much of the margin expansion we've seen over the full year has been due to volume and how much is price/mix of that.

It is especially thanks to steadily growing sales, market shares and also due to the fact that already many years we have succeeded to manage higher volumes through existing logistics IT systems, and that has dramatically to improve our cost efficiency everywhere. And we should remember that we have growth strategy. We are doing our utmost to maintain growth also this year and also in future. And that will give us excellent opportunities to further improve our margins and cost competitiveness.

And last question from me, if you could just give us an update on the conflict with the other owner in Senukai, that would be interesting.

No, about Kesko Senukai, situation is very well under control. And we are very pleased, as the biggest owner of Kesko Senukai, that also in Baltics, Belarus, we have succeeded to increase sales. And we have also improved in Kesko Senukai profitability again. And it is a strong message that also Kesko Senukai situation is very well under control. Those different opinions between us and the minority owner, we are negotiating, and we have also started arbitration process. And hopefully, negotiations and arbitration will help us to find a resolution between parties.

And our next question is from Nicklas Skogman from Handelsbanken.

Yes. I have a couple of questions, if I may. The first one is, I mean looking at Onninen Finland, it did well in the quarter. But then looking at your building and home improvement trade in Finland in Q4, it was only up 3.1% sales in comparable terms. And in there, I would have assumed that you have seen strong B2C demand also in Finland like we've seen across Europe. That makes me wonder how your -- how the B2B development was within your building and home improvement trade in Finland in Q4. Because I see the comps were pretty easy as well.

Yes. All in all, our building and technical trade performance also in Finland is great success story, and we highly appreciate Jorma Rauhala's, and his team, very steady work, thanks to excellent implementation, well-functioning strategy, steadily Onninen and K-Rauta increasing sales, improving profitability as well as gaining market share. And we feel strongly that this gives excellent platform, further develop and strengthen our building and technical trade all in all also in Finland. B2B segment, especially in a builder's merchant business, we have seen some signals that demand is not anymore growing. But at the same time, DIY B2C segment, very strong. But also in a B2B segment, especially in a longer term, we can see a very positive outlook. And our expectation is that also 2021 will be again very strong for us in Finland in building and technical trade business.

Okay. Because I'm trying to sort of join the statements of flattening growth in B2B with just 3% growth for your K-Rauta business knowing that B2C demand has been extremely strong. So it almost looks to me like sales were -- must have been down in the quarter to B2B in Finland in building and home improvement trade.

Yes. But as I said and I repeat, all in all, development is very strong. And when we take a little bit longer outlook, we can see clearly that we are also very strongly gaining market share. And sales profitability development is very strong. If you take some numbers from Q4, that does not give a full picture. It is better to take full picture and look a little bit longer time period, this development. And I repeat, also in building and technical trade here in the Finnish market, we can see positive -- we have a positive outlook.

Okay. Then just a question on your CapEx plans for 2021, I don't think I've heard anything communicated yet.

Yes, Jukka, you can open.

Yes. If you -- so let's start with the last year first. So as you remember, our CapEx last year was around EUR 400 million. And if you took out the acquisitions from there, I think we landed somewhere around EUR 240 million. That includes also -- that's actually the cash flow CapEx is even lower than that one due to the fact that in the CapEx overall is included, for example, the certain car sales and so on, leasing businesses and so on. So the cash flow CapEx was lower. When it comes to this year, we are pretty much on the same ballpark when it comes to the sort of organic CapEx or CapEx overall without acquisitions. So no big changes on that side. A little bit different on the mix. Obviously, store side sort of things are the biggest part of the CapEx. But also, it's highly important for us to further invest to the digital capabilities, e-commerce, et cetera. So overall, in the same ballpark as last year excluding acquisitions.

Exactly, excluding acquisitions because we are working very hard to find new good targets. And if we will succeed, then we are ready to invest also more money on new acquisitions.

Speaking of acquisitions within B&T, do you -- is your impression that price tags have gone up on the back of this bumper year for home improvement?

No. First, we can say that for the time being, we have succeeded pretty well in acquisitions. And we have succeeded to integrate also very well those acquired companies and businesses. As well as pricing has been, from Kesko's point of view, successful. Also on that side, competition is tough, and good businesses and good companies never sleep. This is matter of the fact. But we are very confident that we can continue also on that side our success story.