Kesko Oyj (KESKOB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Kesko's Half Year 2021 Release Call. I'm Kesko's CEO, Mikko Helander. I have, together with me, our CFO, Jukka Erlund; and Vice President, Investor Relations, Hanna Jaakkola. It is an honor to start the call with the same words as last time, again another record quarter. I will first give a short overview of our business performance. Thereafter, I will go through the company's updated strategy and financial targets. And at the end, we will be happy to take questions, both by phone and via chat. The second quarter result was a record and the best quarter ever. During the quarter, a strategy review was conducted. The outcome is clear. Kesko continues the execution of its growth strategy. Also new financial targets were set. During second quarter, good retail sales growth continued in grocery stores and foodservice businesses. Kespro sales and profitability returned to normal levels. Also in building and technical trade, sales and profitability continued well in all operating countries. In car trade, we saw a clear turnaround in both sales and profitability. Net sales in second quarter totaled nearly EUR 3 billion. It was up comparably by 12% net sales increase in all our divisions. Rolling 12 months' net sales totaled EUR 10.8 billion. Comparable operating profit for second quarter was record-high EUR 220 million. And it increased by EUR 78 million. It increased due to good sales development in all our divisions and improved efficiency. Rolling 12 months' comparable operating profit totaled EUR 683 million. Also good development when it comes to return on capital employed. It increased in all our divisions and was 15% for the whole group. Kesko's financial position is strong. Cash flow from operating activities was operatively at last year's level and our liquid assets were almost EUR 370 million. Capital expenditure totaled EUR 83 million. One of our financial targets, net debt to EBITDA, excluding IFRS 16 impact, was 0.2, clearly below the target level. In grocery trade, profitability improved for all chains and Kespro. Grocery trade net sales were nearly EUR 1.5 billion and it increased by 3.2%. Rolling 12 months' net sales totaled EUR 5.8 billion. Comparable operating profit for second quarter was record-high EUR 109 million and it increased by EUR 26 million. Profitability was 7.4% and it increased in all chains and Kespro due to good sales development and improved operational efficiency. Rolling 12 months' comparable operating profit was EUR 422 million and profitability 7.2%. During the quarter, retail sales market grew by 2.2%. Household consumption has been focusing on domestic purchases. During the quarter, the general growth in demand for online grocery was down compared to the exceptional levels a year ago. Foodservice market is recovering. Grocery sales in K-food stores were up by 0.6%. Last year, the performance was exceptionally strong, especially in online sales. Our online grocery sales declined by 23%. But it is good to remember that online sales were over 500% higher than in 2019. We believe that online grocery will grow in Finland, which is why we decided to invest in an automated collection system, which will be built in a grocery store, it will be the first of its kind in Finland. Our foodservice business is Kespro. Kespro's sales grew by almost 40%. In building and technical trade, strong development continued in all operating countries. Net sales grew comparably by EUR 275 million to EUR 1.230 billion. Net sales for the building and technical trade division grew in comparable terms in all operating countries. Net sales grew in both B2C and B2B trade. Rolling 12 months' net sales are record-high, over EUR 4 billion. Comparable operating profit for building and technical trade was almost exactly the same as for the grocery trade. It increased by EUR 45 million to record-high over EUR 108 million. The profitability improved and was 8.8%. Rolling 12 months' comparable operating profit was nearly EUR 260 million and profitability, 6.4%. Construction and renovation activity remains at a good level in Northern Europe. B2B trade has continued active, but the strong growth on B2C trade has leveled. Issues with availability have continued in the market. However, we have been able to ensure good product availability in our businesses. In Finland, strong development for K-rauta and Onninen continued. In Norway, sales and profitability have risen to a whole new level. And in Sweden, sales continued to grow and profitability to improve in all operations. In car trade, we saw a clear turnaround in both sales and profitability. Net sales for the second quarter totaled EUR 290 million and grew comparably by more than 50%. Rolling 12 months' net sales were over EUR 1 billion. Comparable operating profit for second quarter in car trade was EUR 14.3 million. And it increased by EUR 10.5 million. Profitability was 4.9%. Rolling 12 months' comparable operating profit was EUR 39 million and profitability was 3.8%, going to the right direction. In the market, the first registrations of passenger cars and vans in Finland grew by almost 50%. New all-electric cars and plug-in hybrids represent over 30% of first registrations of passenger cars. Market is clearly returning to normal levels. Car availability is a global issue due to growing demand and component shortages. Our new car sales was up by 86%. All-electric cars already represent 23% of sales. Our market share in all-electric cars is nearly 50%. And overall, the market share of our models has risen to 19.3%. Our efforts to transform our car trade operations and make them more efficient are proceeding as planned. And now Kesko's strategy review 2021. We continue the execution of our growth strategy. During the past years, profitability has improved significantly, thanks to our good strategy and its strong execution. Our strategy is based on growth, focus and transformation. We have carried out more than 30 corporate transactions, successful divestments and acquisitions supporting growth. Digitalization and customer experience have very significant roles in our strategy. Also, Kesko is forerunner in sustainability. Like I said, we continue the execution of our successful strategy. Our strategy centers on profitable growth in three selected business divisions: grocery trade, building and technical trade and car trade. Continuous improvement of customer experience, further development of digital services and corporate responsibility and sustainability are even more central to our strategy than before. We have One unified K, meaning Kesko and K-retailer together. For grocery trade, the core of the strategy is growing sales and improving profitability by offering the best customer experience and differentiating ourselves from the competition. Our market position in Finnish grocery trade and foodservice business is strong. And we want to strengthen our position further. Kesko is a forerunner in digitalization in the sector using widely, among other things, customer data in decision-making and improving multichannel customer experience. Efficient logistics and IT play a crucial role in all business operations and efficiency. In building and technical trade, we are seeking growth through sector consolidation in Northern Europe and continuous development of operations in each country. In Finland, we are a strong market leader with both K-rauta and Onninen. In Scandinavia, we are seeking further growth with acquisitions and to continue good development in both Norway and Sweden in terms of sales and profitability. In Poland, Onninen has a strong position, and we are seeking further growth also in Poland. In Baltic countries, we are a market leader with good sales and profitability development. We are committed to further grow and develop Kesko Senukai. Today, we announced that we are acquiring a company called Byggarnas Partner in Sweden. Byggarnas Partner serves professional builders and has five stores in the Stockholm area. The acquisition strengthens our position in the Swedish building and home improvement trade market. This deal is a great example of our growth strategy execution. We are seeking growth both organically and via acquisitions. And we see good further growth potential in the Swedish market. In car trade, our aim is to raise sales and profitability to a new level by offering the best customer experience in Finland, transforming and updating our operations and collaborating more closely with the Volkswagen Group. We are a leading operator in new car sales with strong market shares and a forerunner in e-mobility. Our aim is to create a significant separate business of used car sales. This includes better used car sales methods and more efficient sourcing. The third business is service sales. We are updating our servicing and repair business, expanding K Charge's network and leasing businesses. We are also a forerunner in trading sector digitalization. Our aim is to continue using digitalization to improve customer experience and make our operations more efficient. Online and digital sales are growing fast. Our rolling 12 months' digital sales were over EUR 1.3 billion. Data and analytics are the core of business operations. For example, we use widely data we receive from our K-Plussa loyalty program. Digitalization of stores and processes is proceeding at a fast pace. It makes store processes more efficient, improve customer satisfaction and, for example, offer new marketing channels for us and our partners. With personalized digital services, we are able to further increase customer loyalty. Corporate responsibility and sustainability. Sustainability is a guiding value in all operations. Our climate targets are ambitious. We are aiming for zero emission by 2030. And we are also encouraging our suppliers and customers to reduce their emissions. We are the world's most sustainable grocery trade company, offering sustainable choices for our customers. And for example, we are purchasing for responsible suppliers and enabling e-mobility. Sustainability is central to all our operations. K is a good, trusted partner, employer and a good corporate citizen. Financial targets. The Board of Directors of Kesko Corporation set the new medium-term financial targets for the company. The new target for comparable operating margin is over 6%, for comparable return on capital employed over 14.5%. The balance sheet target of interest-bearing net debt-to-EBITDA was not changed and is maximum 2.5. And then guidance. The outlook for this year is positive. And we expect a significant profit improvement also in 2021. We estimate that Kesko's comparable operating profit in 2021 will be in the range of EUR 650 million, EUR 750 million. Thank you. And now we are ready for questions. First, we will take questions from the conference call lines, please.

[Operator Instructions] We have a question from the line of Fredrik Ivarsson from ABG.

A few questions from my side. If we start on the -- within the grocery space, I think sales to the grocery stores decreased in the quarter. And that's obviously on the back of tough comps and so forth. And then I suppose comps are getting slightly softer in Q3. So curious to hear what your expectations are regarding grocery sales to the K-food stores in the current quarter.

Yes. As you mentioned, and I underlined also in our presentation, that all in all, we had strong development. But after a very exceptional second quarter 2020, online sales declined now. But anyhow, it is still 500% above year 2019, meaning that we believe strongly that online sales will continue strongly in coming years also in Finland. And our strategy to offer best-in-class multichannel services in grocery trade is winning concept. And we continue strongly development of our store network as well as online business. And based on that, we are very positive and optimistic that we can maintain strong development also in the future.

Maybe to add on that one that the traffic in the stores has been good. And obviously, renewing the stores and upgrading the stores all the time is targeting for that one.

Yes, exactly.

Okay. And then on the margin in building and technical trade, how did the gross margin develop year-on-year, given what you see on the pricing side and also maybe what your expectations is -- or are for the gross margin in H2?

All in all, we have strong development in building and technical trade in all fields and every country. And that makes us, I believe, a very strong player also in the future in building and technical trade market. And again, I underline our aim to continue consolidation of European -- Northern Europe building and technical trade. And the acquisition in Sweden is again a good example of that. But Jukka, please, you can open a little bit those numbers and margins.

Yes, especially on the gross profit side, maybe worth mentioning that obviously it's volume-driven profitability improvement that we have had, both organic but also driven by Carlsen Fritzøe acquisition that we made last year. But also the gross margin as a percentage was also somewhat higher. So it is coming from all of those sort of three sources in a way. So I think we are sort of managing the margins well. And with a higher volume, it helps in the profitability side.

Right, so gross margins slightly higher in Q2. And then do you think that year-on-year difference will be similar in Q3, Q4? Or will it come down a little bit, given what you see on the sourcing side?

Well, we don't give any estimations on that level when it comes to the outlook and so on. But I was referring to the second quarter. And like I said, we had both volume growth as well as margin improvement as well. So I think it's well under control.

Okay. Fair enough.

We are working also with price increases. Because as everybody knows, raw materials prices, costs are going up. And it is also our responsibility to bring price -- cost increases to prices. And also on that side, we are working very strongly and very well.

Right. And also on building and technical trade, what do you see in terms of supply chain constraints at the moment and any potential shortages, I guess, of building material as we look into the second half of the year?

Absolutely, it's a challenge. And it is some kind of a global challenge in our industry. But our side of situation is very well under control. Our people, they have done also in this field is very good job. And they have succeeded also to guarantee supplies. And we don't have a serious shortage, not in Finland, not in other countries. And this is definitely one reason of why we have gained market share and why we are in a good position to gain market share also in future.

Okay. Perfect. And last one for me. On Kespro, you said that profitability was in line with the normal levels. Should we think in absolute terms, EBIT in line with Q2 '19 or margin in line with Q2 '19?

No. Again, we don't give that kind of future guidance. But as you have seen, in all businesses, we are working very hard to increase our sales and to improve profitability, also in Kespro. And things are moving to the right direction. We are very, very pleased that Kesko also during pandemia has gained market share. And thanks to higher market share, now when market is recovering, we are in excellent position to increase also sales as we saw already in the second quarter. And that gives great opportunities also to improve financial performance also in Kespro business.

Right. Now I wasn't asking for any future guidance or just -- because you mentioned that Kespro is also -- profitability in line with normal levels. And I'm just curious to hear whether -- I mean, just a clarification on that statement. Was that in absolute terms or in margin terms?

No, it's getting back to normal. But what I tried to explain, we see and we feel that we are now in a good position, for example, thanks to higher market share to improve profitability in the future. But, Jukka, please, if you can maybe open a little bit more.

Yes. We were really happy with the Kespro development and how it sort of grew the business and profitability as well. But it's clear that the market is not at a normal situation at this point. So we do see that there's still sort of ways to go before we are at the same levels as we were at some point in the history. But definitely, the progress was good and it's sort of getting there. But there are still sort of potential to improve further due to situation that not sort of -- HoReCa business is not at a normal level at this point yet.

[Operator Instructions] And we have no further audio questions.

Okay. And on the chat here?

And actually, on chat, we don't have any questions. But if you have any going forward, don't hesitate calling me. But do you have any other greetings, sir, you would like to pass on to international audience?

Thank you for your participation. And Jukka, Hanna, myself, we wish you a very pleasant Friday afternoon and a sunny weekend.

Thank you.

Thanks, everybody.