Kesko Oyj (KESKOB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Kesko's Full Year 2021 Release Call. I'm Kesko's CEO, Mikko Helander. I have, together with me, our business presidents, Jorma Rauhala, Ari Akseli, Matti Virtanen as well as our CFO, Jukka Erlund; and IR, Hanna Jaakkola. Today's agenda is the following, I will first give an overview of our business performance in 2021 and Q4. Thereafter, I will go through our guidance for 2022. After the presentation, we will be happy to take questions, both by phone and via sat. EUR 776 million, the best result in our annual result has improved for 7 years in a row, and our quarterly result has also been recorded for 11 quarters in a row. The record result is a strong proof that our growth strategy is working and being successfully executed. Key events In 2021. Like I said, this is the best result in Kesko's history. We were able to significantly increase our profit in comparable terms by nearly EUR 208 million. Our net sales grew by 8.2% in grocery trade of retail sales and profit record strong sales growth at all-time best profit also in building and technical trade incorporate the division is going through strong transformation. And as a result, we saw significant profit improvement. Net sales growth continued in 2021. The net sales totaled EUR 11.3 billion. It was up comparably by 8.2%, thanks to our strong strategy execution. Net sales increased in all our 3 divisions. Comparable operating profit for 2021 was record high EUR 776 million and profitability, 6.9%. It increased due to good net sales growth and sales margin development as well as improved cost efficiencies. Comparable operating profit increased in all our 3 divisions Return on capital employed, one of our strategic targets continued to improve and was at the level of 17.2%. It improved in all our divisions business. Kesko's financial position is strong, operating cash flow from operating activities was close to EUR 1.2 billion, capital expenditure totaled of EUR 277 million. Another of our financial targets, net debt added to EBITDA, was 0 well below the target level. We continued the investments in sales growth and better operational efficiency. In accordance with our growth strategy, we bought Byggarnas Partner in the Stockholm area. Also in December, we announced the acquisition of Kungalvs Travaruaktiebolag in Gothenburg region. The acquisition is expected to be completed in the first quarter this year. All-time best Q4. First some Q4 key figures. Net sales and operating profit continued to strengthen resulting in operating margin of 7.2%. EPS was EUR 0.40. The net sales in Q4 2021 totaled nearly EUR 2.9 billion, which was up comparably by 7.2%. The growth was especially strong in building and technical trade. Comparable operating profit for Q4 was record high EUR 204 million, and it increased by nearly finally EUR 38 million. The profitability was 7.1%. It increased due to good sales development in grocery trade and building and technical trade and improved cost efficiency in all divisions. Good development continued in food trade. Net sales totaled EUR 1.557 billion and grew comparably by improved comparably by 2.6%. Net sales grew in city market, nonfood and Kesko. Comparable operating profit for Q4 was record high EUR 131 million and it increased by EUR 8 million. Profitability was 8.4%. Profitability improved, especially thanks to growth in Kesko's food service business and KCT markets nonfood sales. During the quarter, retail sales market grew by 1% and retail price growth was 2.1%. Food service market growth was 16% and restrictions on restaurants in Finland impacted the foodservice business towards the end of the quarter. Our result was a record, K Group grocery trade retail sales were up by 0.1% and Kesko sales were up by 20%. PCT market nonfood sales grew by 4%. Online grocery sales grew by 14% in 2021, but decreased in Q4 due to very strong comparison figures. Profit growth continued strong for building and technical trade. Net sales grew comparably by 18.5% to EUR 1.1 billion. Net sales grew in comparable terms in all operating countries. Growth in B2B trade continued strong in all operating countries. In addition, growth has been supported by strong volume development in the construction market and continued price in material prices. Comparable operating profit grew nearly by EUR 30 million to EUR 74 million. The profitability improved and was high 6.7%. Comparable operating profit grew in both building and home improvement trade and its technical trade in all operating countries. The changes that we have carried out in the recent years, have had a significant positive impact on the division's profitability. Also, the acquisitions and their successful integration have supported profitability. In addition, the market development has been strong. During the quarter, construction and renovation market was growing in Northern Europe, both focused on B2B trade. Demand in B2C trade has come down from last year's peak levels. Product prices continued to increase, and there were reliability issues in some product categories. Our result was record sales and profitability improved in all operating countries. In Finland, both Onninen and K router sales grew, clearly also profit improved further. In Norway, development in Onninen was particularly strong and profit improved also for [ Pasi Makinen ]. In Sweden, good development continued in sports trade, both market share and profitability continued to grow. In car trade, transformation is proceeding and bringing results. Net sales for Q4 totaled EUR 219 million. It declined comparably by 6.3% due to availability issues regarding new cars. Comparable operating profit for the car trade division grew by EUR 2.4 million. Profit improved, thanks to higher sales margins and cost adjustment measures. In Q4, demand for new and old cars as well as serving decreased. First registrations of new cars were down by 15.5% due to component shortages. In Q4, 40% of new car registrations were EVs and plug-in hybrids. Our profit improved, thanks to sales margin growth and cost savings. New car sales were down due to availability issues. Share of EV cars and plug-in hybrids was 47% of our sales, market share of K Group branch was 14.7% in Q4. Transformation of our operations is proceeding well, and all businesses are profitable. Outlook for 2022 is good. Guidance for '22. Kesko estimates that its comparable operating profit in 2022 will be in the range of EUR 680 million to EUR 800 million. In 2021, Kesko's comparable operating profit totaled EUR 776 million. We continue the execution of our growth strategy. Our strategy provides a good foundation to continue on the growth path to increase sales and improve profit even further. Profitability in food trade is on a solid basis. We have the most extensive network of grocery stores across Finland combined with effective online sales. Our strengths include also the K retail model and store-specific business ideas that are built by using data to ensure the best customer experience. There are still plenty of potential in implementing store-specific business ideas further. We will also continue investments in updating the stores. Kesko is a strong market leader in growing foodservice wholesale. There are significant synergies with our grocery stores. Once the pandemic eases demand for services is expected growth and food sales are expected to partly shift from B2C trade to foodservice wholesale. Also, food price inflation is expected to support sales growth. We aim to continue strengthening our market-leading position in online grocery online grocery. Online grocery has grown by almost 450% in 2 years. K is the biggest online grocery pressure operator in Finland with over 500,000 grocery stores in online network. We offer very competitive prices. We have our own brands and our purchase volumes are large to ensure competitive prices. Customers value plus our customer loyalty program with both general and customer-specific push solvers, push the money and available deliveries. Store-specific business ideas are visible also online with local products and service products. Our selection is the biggest on the market with as much as 40,000 products. There are different delivery options, home delivery, click and collect, fast delivery. Last year, we delivered some 2 million orders. Customer experience is excellent with NPS of 81, feedback emphasizes wide selections and high quality. We are constantly developing our capabilities. The automated in-store collection system in Finland will start operating first half of this year. Good growth, good outlook -- growth outlook for building a technical trade is good. Growth is supported by our focus on growing B2B trade complemented by good B2C trade. There are still further potential to improve operations and customer experiences by developing sales processes by increasing the level of digitalization and improving the efficiency of internal operations. Our aim is to accelerate growth with acquisitions also going forward. Green transition, changes in population structure and urbanization will continue to support construction growth. Once the pandemic eases, demand in B2C trade is expected to normalize, while demand in B2B, which now accounts for 75% of the division sales, is expected to remain good. Price inflation is expected to support growth, but prolonged price inflation would lead to lower construction volumes. Also for car trade, 2021 results were record, the transformation of car division's growing sales and improving profitability. Our focus on selling new cars, used cars and services offer significant growth potential. Good collaboration with the Volkswagen Group and Volkswagen Group's strong product offering supports our success. We are putting efforts to improve competitiveness through better customer experience, digitalization of operations and better efficiency of internal processes. Demand is expected to be boosted by the need to reduce traffic emissions and update the Finnish vehicle stock. Delivery issues related to the availability of semiconductors will continue to hit the business also in 2022. Dividend proposal. Kesko's ability to produce profits and the strong financial position enabled a good dividend capability. Kesko's Board of Directors proposes EUR 1.60 dividend to the annual general meeting. It is over EUR 420 million in total. The proposed dividend is proposed to be paid in 4 installments in 2022, in April, June, September and December. The payout ratio is 74%, and it is in line with Kesko's dividend policies.

Thank you so much, Mikko, for the presentation. And now we are ready for questions. Let's first take questions from the conference call line. Please, operator, we are ready.

[Operator Instructions] And we've received the first question. It is from Nicklas Skogman Handelsbanken.

Yes. It was a bit difficult to hear you for the first 14 minutes. There must have been something wrong with the phone line. So apologies if you have mentioned something on this topic, but I'm keen to know what you're seeing in terms of pricing in the B&T segment. I understand that has been driving -- going up quite a lot over the past couple of quarters. What are you seeing now in terms of 2022? You expect H1 to still be very positively affected by pricing and then it sort of flattens out in H2? Or what's your view on that, please?

Yes, good question. We have seen already some price inflation in building and technical trade. And we expect that this development continues also in 2022. It varies in different product categories, but it is obvious that based on increases, raw materials, manufacturing costs are increasing. And due to that reason, as I said, we are expecting also a clear price inflation in '22. Erlund, would you like to add something?

Totally agree with what you said. If you look at also construction forecast companies, but what they are forecasting and they are saying the same. And also, we see the first quarter that prices has still increased.

And of course, we are working very hard to transfer those higher costs to the sales prices.

Yes. I think we managed very well on that last year.

Exactly.

Okay. Very good. And for the grocery division, what sort of volume demand year-on-year do you expect in 2022, thinking about food retail specifically?

In food retail we expect also cost and pricing inflation volume-wise, especially if and when pandemic will end during this year, we are expecting volume-wise maybe a slight decline. But at the same time, we should remember that there will be also volume shifted from grocery to food service. And when you remember that we are a clear market leader in food service this development might be also positive for us when at the same time, we are expecting also price inflation in grocery and food business. Ari, do you want to add something about that?

No, I agree with you. This is the big picture that markets will be volume-wise flat, but good part for Kesko is that we operate in the port market, in the food service and also in the grocery market.

Yes, exactly.

We have another question. It is from Spencer [indiscernible] Markets.

A couple of questions. First one is how do you look at your relative position versus competitors in grocery, if we assume that the food -- assuming that food inflation continues to rise and perhaps rises more than expected?

In all, we have gained heavily market share in last 7 years from competition. And of course, due to that reason -- this is the main reason also why our profitability is today very good in grocery business. We are working hard to continue this development. Of course, More and more, we are looking food trade as one complete entity because, again, I remind you that we have a very strong position in Finnish food service market. And for us, most important is that all in all, our share in the food trade is growing. In grocery, already, we have a very strong position, and we are very pleased that we have succeeded to make Kesko also a clear market leader in fast growing food online business, food online -- our grocery store network and food service is a very strong combination. And we believe strongly that based on this combination, we are in good position to continue growth also in future.

And then on the same theme, could you elaborate a bit on, you suggested a split from store sales to K store sales to K's process. Could you elaborate a bit on how that impact your margins and in your full year guidance or perhaps just the impact on your margins from that shift?

Yes, my colleagues definitely they can do that. Before that, I would like to stress also that this strong combination of grocery stores online as well as leading position in food service, make Kesko also quite unique player in food business in Europe, and that is definitely one of those main reasons why Kesko is so well performing and so profitable also in food trade. But Ari or Jukka, you are the best guys to open a bit more on those numbers.

Sure. I would say Channel shifting away from grocery stores to Kespro doesn't really play a big role. Both of those channels are very profitable for us. So in that sense, we don't expect a very big sort of differences in the results coming from that side.

Okay. That's very clear. And then on -- could you elaborate a bit on CapEx expectations for this year. And perhaps also split into stores and online investments and so on? Yes, can you hear me? Guys can you hear me?

Now we can hear.

Okay. Great. Yes, so on CapEx, could you elaborate on CapEx levels going forward and perhaps also the split between store investments and online investments and so on?

It is important part of our growth strategy that we invest heavily on future, and we continue bigger investments. Jukka, maybe you can open a little bit more on those numbers.

Yes. So we'll continue upgrading our stores and the stores still take the biggest proportion of our CapEx. So we'll continue on that side. Upgrading the stores, but we also continue investing to the digital capabilities and IT capabilities and so on. So in order to offer a new kind of services for our customers and like you know, also new technologies on the online grocery picking side as well. So we'll continue on those side but not really a big change happening in the sort of proportion of those CapEx's part, but according to our strategy, continue our CapEx.

Of course, acquisitions, we are seeking continuously new targets to make also in future acquisitions and support our strong growth also based on acquisitions.

And then the final question is on the guidance, which is EBIT guidance '22, which is understandably wide. Could you elaborate a bit on -- I mean, issues that you cannot affect yourself, like the pandemic development and construction market. What needs to happen in the environment for you to either reach the low end or the high end?

Now pandemic, as you mentioned, of course, is still a big issue. No? At the same time, we should remember that from Kesko's point of view, definitely, we can say that we have managed very well also this pandemic situation. And I believe that we will do also this year. But the pandemic is a question mark, of course, geopolitical situation is now, let's say, interesting, at least in Europe, and why not, also worldwide that could complicate the business environment and this step also our businesses, but nobody knows no inflation. We mentioned already inflation is now going up. And in longer term, especially in building and technical trade inflation might be negative. But in the short term, we believe that the inflation in all our business is supporting also our growth. But especially geopolitical situation, pandemic, definitely, those are bigger issues and issues where we don't have so much impact.

Thank you for very good answers. And perhaps the last question, which I guess you will not answer, but regarding order, which now has ramped up operations, do you have any observations or comments that you want to share?

Definitely, we want to share. We like competition and newcomers challenge us, it is great. And very, very important to remember that in the last 2 years, we have succeeded to increase our grocery online business nearly 450%. That is very strong message that we are doing also excellent job in online business. And we invest in online services, customer satisfaction is sky high. NPS, 81. Nearly 2 million deliveries last year. And outlook is very positive in online business as well as important to remember that the foundation of our successful online business is also store network. We have excellent K stores nationwide 1,200,000 K grocery stores, and we have succeeded to combine online services on those stores. And that creates a very, very strong and successful platform to succeed in online business also in the future. Of course, we invest also money on new technology and I think, Ari maybe you can continue and open even more those details how we are developing also our online services.

Like Mikko mentioned, we are a clear market leader in online grocery business in Finland, and we have many capabilities, which are very strong when you are playing in that field, like for example, buying power, it's totally different than comparing to the -- for example, order. We have a strong share of the private brands. And the price difference between private brands and our brand is at least 20% And at the same time, we have very good variation of different delivery models, fast deliveries, cooperation with Wolt, for example, inter collect and also customers have visit strongly supporting the model that they can pick up, online shopping from the stores. We have much wider assortments like 40,000 SKUs in grocery comparing to the 5,000. And most customers actually are doing the online shopping because they like to save time. If you have very limited assortment, it actually means that you have to go still to the stores. So we are very confident with the situation.

And we actually proved you wrong. We answered the last question as well. Well, we have a couple of questions here from the chat, but are there any more questions from the conference call lines?

No, there are no further questions at the line.

All right. Then I turn to the chat, and I have 3 questions here. First of all, Jutta Rahikainen in SEB asking, what level of food inflation do you expect probably for this year? We already discussed that but if you would like to comment.

That is so difficult question that maybe I ask Ari to answer.

Thank you very much, Mikko, for that because it seems actually that in Finland, food inflation seems to be at the moment at the lower level than general European level. But it's expected that it will grow during the year.

And then a question, we slightly touched the geopolitical issues. Any updates on Senukai, please, geopolitics probably does not help, is the question.

No, no. Geopolitics is geopolitics and I don't see any impact coming from geopolitics in Kesko-Senukai and our Baltic businesses. All in all, we should remember that 2021 was also successful for Kesko in Baltics. First, online businesses in the Baltic countries developed very well as well as Kesko-Senukai had good progress volume sales price as well as profit-wise. Also outlook for 2022 is positive in Baltic countries. Okay. Between us the Kesko family, we have some issues. And we are working also on that side. And one day, I believe we will reach some kind of resolution. When, I don't know, but most important that the business itself is performing pretty well.

Very good. And then the last question, [Operator Instructions] But Jutta is asking, do I read your guidance framework correctly that it assumes that the pandemic to ease during 2020? Pandemic to ease.

Yes. At least, we hope. At least, we hope. At least, we hope. But we can say that Jutta pretty carefully saw our guidance.

Very good. Well, I would like to thank all the active participants and our management here for the questions. Have a nice day.

Exactly. Have a nice day. Thank you for your participation. Thanks. Bye-bye.

Bye.