Kesko Oyj (KESKOB) Earnings Call Transcript & Summary

Distinguished shareholders, 80 years ago, Kesko was founded in Katajanokka in Helsinki, when 4 retailer-owned regional wholesale businesses were merged. Already at its birth, Kesko was a major corporation in Finland. Kesko started its operations on January 1, 1941. Kesko and the K Group can be considered a Finnish success story. During 80 years, Kesko has developed into a leading Nordic retailer, a retail group, which retail sales are already approximately EUR 14 billion. We operate in 8 European countries, and the K Group has 1,800 stores. We have about 1.9 million customer contacts per day. One key element in Kesko and the K Group are the independent K retailers of whom there are 1,200. Whereas, all together, at Kesko and K Group, retailers and their personnel included, they are already 46,000 today. Kesko is financially strong. As a company, we are practically debt-free, excluding lease liabilities. As the Chairperson of the Board stated in his own speech, our growth strategy is working and enables further growth in sales and profit also in the future. We have been determined in executing the company's strategy. A good example of this are the already completed more than 30 acquisitions and divestments. Investments into growth and the future are all together more than EUR 3 billion. But at the same time, successful divestments have freed almost EUR 1 billion in capital, which in part has provided a solid foundation for the growth and development of the company. I can assure you, distinguished shareholders, that the transformation from a traditional retailer into One unified K has been a big one. It has also been a significant cultural change, but also a considerable change that is visible and audible in the customer interface, and customer feedback has been extremely positive. Today, we can state that this great visible change has also been a major commercial success. The results show that the strategy of K and Kesko works well in a changing operating environment, in an environment that is characterized by globalization, consolidation of trade, sustainable development and focusing on climate change-related issues, the accelerating technological advancements, multichannel and online sales as well as major changes in the demographics in Finland and in the other areas where we as, K Group, operate. I'm very proud to tell you today once again, that the successful strategy execution has already seen the net sales of our core operations growth by over EUR 3 billion. This is a strong message to all our stakeholders and customers of the fact that we are successfully executing the company growth strategy. Growth is important. But what is also extremely important is the fact that, at the same time, we have been able to steadily grow and improve the profitability of the company. I'm also very pleased to say that the profitability development in recent years has been stronger than ever. A great example of which is the record result of 2020, operating profit of EUR 568 million. In our case, there is solid proof that growth and transformation is worthwhile, owing to a good profitable growth and a good commercial development. We have been able to grow Kesko's market capitalization, which today is already about EUR 10 billion. At the same time, the return of a Kesko B share, together with the dividend and growth of capitalization, is already 320%. And as the Chairperson of the Board stated in his speech, the number of Kesko's shareholders has also grown considerably during these years, being particularly strong in the last 12 months. The financial statement of 2020 is a pleasure to present. A record result in the year 2020, net sales grew close to EUR 10.7 billion. Operating profit exceeded the EUR 600 million limit. Comparable operating profit is the record-breaking EUR 567.8 million. Profit before tax also very strong, EUR 527.6 million. Earnings per share for continuing operations, EUR 1.09. And comparable earnings per share, EUR 0.97. When we look at net sales in more detail with the help of illustrative figures, which take into consideration the change in the consolidation manner of Kesko Senukai for last year, we can state that strong growth continued in the grocery trade. Growth was 3.6%. In building and technical trade, the growth was even 5.7%. In car trade, there was a small minus, and a solid overall growth of 3.6%. It is also very pleasant to look at our comparable operating profit. Our large divisions, the grocery trade, building and technical trade once again substantially improved their profitability. In grocery trade, a record operating profit of EUR 375 million, a profit improvement last year of EUR 47 million. In building and technical trade, a significant jump of EUR 72 million profit improvement, and we got to almost EUR 188 million. In car trade, in a difficult operating environment, the profit declined, but we were still able to maintain the operating profit in the plus. We have still been able to improve our comparable return on capital employed. In grocery trade, we came close to 17%. In building and technical trade, a significant improvement of 11.2%. In car trade, a slight drop to 6.3%. But in overall operations, we reached 12%. The company's financial position is very strong. Cash flow from operating activities improved once again, considerably, and was EUR 1,152,000,000 in 2020. Company's liquid assets were, at the turn of the year, EUR 306 million; capital expenditure almost EUR 400 million; interest-bearing net debt, excluding lease liabilities, EUR 285 million, which means that Kesko can pay off its debt with less than half a year's cash flow. Lease liabilities decreased significantly, partly due to the change in the consolidation manner of Kesko Senukai. The year 2020, by divisions. Sales and profit growth continued strong in the grocery trade. Net sales grew to EUR 5,732,000,000. And comparable operating profit grew to a new record level of EUR 375 million. Growth and profitability in grocery trade are on a solid basis due to a good continuously improving customer experience; good store-specific business ideas, which are supported by customer data generated by Kesko; well-functioning retailer business model being a forerunner in utilizing digitalization; constant improvement in efficiencies and in strong foodservice business, Kespro. In grocery trade, we have been able to grow our market share 5 years in the running. Our market share is close to 38%. And so far, we have been able to grow our retail sales in the Finnish grocery trade by EUR 1.8 billion. Our development in online grocery is also positive, which again sends a strong message about Kesko's and K's ability to transform. The online grocery supports the growth of our sales and market share. Market share in online grocery has grown in a short period of time already to over 50%. Online grocery sales grew last year by almost 400%. Growth is continuing strong this year as well. And so far, already 500 K stores offer online grocery services. Customer satisfaction is also on an excellent level in online grocery, the NPS being on the level of 83. In building and technical trade, implementation of country-specific strategies yields good results. Building and technical trade net sales grew being over EUR 3.6 million (sic) [ EUR 3.6 billion ]. And as mentioned before, operating profit, once again a record of EUR 188 million. We have good progress in all key areas of building and technical trade. It has continued strong in Finland. Onninen has developed favorably as part of Kesko. In Sweden, we have good sales and profitability development. As in Norway, good development in growth and profitability have been notable. In building and technical trade, our business is developing well according to the long-term targets we have set. We started out from a rather modest level of profitability, and we have been able to raise that to over 5%. In other words, we are well on our way to join the best in Europe also in this respect. The best operators in Europe are making a 6% to 8% operating profit. And I do not see any reason why Kesko could not be at that level sometime in the future. Changes in the car trade to increase sales and profitability have been implemented, but more are needed. Car trade net sales stayed below EUR 900 million. Operating profit was, like I mentioned, clearly in the plus in a difficult operating environment being EUR 23 million. Key focus areas for car trade are raising profitability to a new level, accelerating sales growth significantly, improving customer experience and good collaboration with the Volkswagen Group in the future as well, and growing used car sales significantly in the future. Then regarding the dividend and guidance. Kesko's Board of Directors, in its meeting, has decided to propose to the Annual General Meeting dividend of EUR 0.75 to be distributed per share, totaling nearly EUR 300 million. This means that the dividend improves once again from the previous year and is well in line with the target we have set. The Board of Directors have also proposed that the dividend be paid in 2 installments. The outlook for the current year is good, which is reflected in the earnings guidance that the company provided in February. We estimate that in 2021, our comparable operating profit will be in the range of EUR 520 million to EUR 620 million when in 2020, the illustrative comparable operating profit was EUR 554 million. Once more, I would like to state that we have a well-functioning strategy, which is well executed by Kesko as well as by its retailers. And we will continue executing the strategy in all divisions. Finally, distinguished shareholders, I want to thank you warmly on my behalf for the trust and confidence that you have shown and continue to show towards the company. At this point in time, I also want to thank everyone at Kesko, the K retailers and everyone at K Group for their strong efforts also in 2020 for the success of the company. Also, warm thanks to the extensive stakeholder group who also have a key role in Kesko's success. Warm thanks to all of you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]