Kesko Oyj (KESKOB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Kesko's Second Quarter Release Call. I'm Kesko's CEO, Mikko Helander. I have together with me our business area Presidents, Jorma Rauhala; Ari Akseli and Matti Virtanen as well as CFO, Jukka Erlund and Investor Relations, Hanna Jaakkola. Second quarter '22 was the best second quarter in Kesko's history and record result in Building and Technical trade. Today's agenda is the following. I will first give an overview of our business performance in second quarter and our updated guidance for 2022. After the presentation, we will be happy to take questions, both by phone and via chat. Key events in second quarter. The best second quarter result in Kesko's history, impact of the pandemic on Kesko's businesses has clearly declined. Building and Technical Trade division result was record. In Grocery trade sales grew and profitability stayed at a good level. In Car trade, profitability improved in a difficult operating environment. Net sales growth continued in second quarter. The net sales totaled EUR 3.1 billion. It was up comparably by 3.9%, thanks to our strong strategy execution. Net sales increased in Building and Technical trade as well as in Grocery trade. Comparable operating profit for second quarter was EUR 236 million and profitability, 7.6%. The rolling 12 months operating profit was nearly EUR 820 million and operating margin of 7.1%. The growth was especially good in Grocery trade. Return on capital employed continued to improve and was at the level of 17.9%. It improved in Grocery trade and Building and Technical Trade divisions. Kesko's financial position is strong. Cash flow from operating activities was EUR 263 million. Cash flow was impacted by growth in working capital as we have strategically grown our inventories to ensure product availability. Capital expenditure totaled EUR 125 million, including EUR 77 million capital expenditure on store sites. CapEx included also acquisitions of Kungälvs trade in Sweden and Seljord Elektriske in Norway, both acquired during the second quarter. One of our financial targets, net debt to EBITDA was 0.2, well below the target level. In Grocery trade, strong position in all areas of food trade helped our performance in a changing market. Net sales totaled over EUR 1.5 billion and grew by EUR 75 million. Net sales grew in Kespro, also sales to K Grocery store chains grew. The rolling 12 months net sales exceeded EUR 6 billion for first time ever. Comparable operating profit for second quarter was EUR 124 million and profitability was 8%. Profitability improved in particularly, thanks to strong growth in Kespro’s foodservice business. In second quarter, profit improved, thanks to good development in Kespro and Grocery stores. Kespro's performance continued strong. Sales growth was nearly 30%. Sales to K grocery store grew by 1%. Consumer online grocery sales were down by 8.8% from last year's exceptional levels. K-Citymarket’s nonfood sales were slightly down. We were able to improve operational efficiency further. And now let's look at the market and the operating environment. Just less than 40 years ago, Finnish people spent some 20% of their disposable income in food and 100 years ago it was 60%. Despite inflation, the share of food in Finnish people's consumption expenditure is expected to continue to stay at a low level. Shopping in grocery stores is returning to normal levels. And at the same time, also foodservice market is returning to normal as restrictions have been lifted. Consumer online grocery sales are above prepandemic levels. Rising food prices are causing the whole food trade market to grow, but it is also impacting consumer behavior. At the same time, demand and consumption of quality products are supported by good consumer purchasing power and improved employment rates. Kesko is a strong operator in all areas of food trade. And we are able to meet the various different customer needs. Interest towards quality food has grown and the trend continues. Also popularity of eating out and high-quality ready meals continues to grow. At the same time, price is increasingly important for many consumers. Only K Grocery stores offer both premium and bargainings under one roof. In the picture, there is an example of K-Citymarket campaign of these characteristics. What comes to eating out, Kespro is the leading partner for private and public foodservice customers in Finland, not to forget that we offer growing wide online sales services for both B2B customers and consumers. In Building and Technical Trade, our focus on B2B trade led to a record result. Net sales grew comparably by EUR 106 million, EUR 106 million to over EUR 1.3 billion. Net sales grew in comparable terms in Finland, Sweden, Poland and the Baltics. Net sales in Norway decreased in comparable terms. The growth was supported by good market volume development as well as rising prices in some product categories. The division's rolling 12 months net sales was nearly EUR 4.7 billion. Comparable operating profit grew by EUR 1.1 million to nearly EUR 110 million. The profitability improved and was high at 8.2%. Profit for the Building and Technical Trade division continued to strengthen in technical wholesale. In Building & Home improvement trade, comparable operating profit grew in Finland, was flat in Sweden and decreased Norway. The changes that we have carried out in recent years have a significant positive impact on the division's profitability. Second quarter sales growth continued in B2B trade. Onninen's performance continued strong in all operating countries. B2B sales continued to grow also in Building and Home Improvement Trade, but the growth slowed down. B2C sales are still at a good level, but clearly down from the peak pandemic levels. In Finland, especially Onninen's sales grew and profit improved. In Sweden, sales grew, thanks to K-Bygg which focuses on B2B trade. In Norway, Onninen's performance was good and Byggmakker’s sales and profits were down. Share of result of Kesko Senukai, which focuses on B2C rate was down by EUR 5.9 billion due to rapidly accelerated inflation. And then to the Operating Environment. Construction and renovation activity has continued high in Northern Europe. The growth comes from B2B trade. In B2C, volumes are down, but returning to normal prepandemic levels. Rising prices are causing the market to grow. Rising interest rates are expected to affect residential market and thereby construction activity. Prolonged war in Ukraine is resulting issues with energy prices and energy availability and it is -- and it increases uncertainty. Green transition supports demand. Construction is increasingly outsourced to professionals 80% of Kesko's sales B2B sales and 20% consumer sales. Construction and renovation have become increasingly technical and subject to tighter regulations. As a result, they are increasingly outsourced to professionals. Green transition is growing the market. To mention examples, there is an increasing need of energy production, e-mobility and home energy efficiency. Building renovation continues to grow due to repair debt in buildings and infrastructure. Kesko's position in B2B trade is strong in all operating countries. Good extensive services for consumers are also important going forward. In Car trade, active measures in all car trade areas resulted in improved profitability. Net sales decreased by EUR 60 million due to availability problems and totaled EUR 230 million. In Car trade, operating profit was EUR 13 million despite the difficult operating environment and declined net sales. Profitability improved, thanks to sales margin growth and cost savings and operating margin was 5.6%. In second quarter, net sales were down due to availability issues with new cars. Sales continued strong despite the availability issues and order book is at a record level. Profitability was boosted by sales margin growth and cost efficiency. Measures to grow the used car business is proceeding according to plan. Net sales for the service business grew and profitability improved. K Charge network is growing and charging has more than doubled in a year. And then to Car trade operating environment. Car trade registrations were down due to availability issues, also used car sales were down. Service business demand is stable and charging services are growing. Share of electric and hybrid car sales is growing fast. Tax benefits and rising fuel prices are supporting the demand. Components shortages and the war in Ukraine is affecting car availability globally. Issues related to energy prices and energy availability in Europe increasing uncertainty regarding new car production. Better Profitability Through Transformation. There is a significant profit improvement potential once car availability returns to normal levels. We have turned all our car trade operations to profit, meaning new cars, used cars and services. In new cars, we have the most extensive selection of low emission electric, hybrid and combustion engine vehicles by the Volkwagen Group. We are growing used car business profitability. In Service business, we are renewing operations and the improving customer experience. All in all, better management of sales, customer service and operations play a key role, as well as digitalization of sales and internal processes. Not to forget better utilization of synergies and customer relationships with Kesko's other divisions. Summary and Guidance. Kesko's quarter result has improved on its comparison period for 13 quarters in a row. The impact of the pandemic on Kesko's businesses has clearly decreased. The record result is a strong indication that our strategy is working and people in K Group are doing an excellent job under changing circumstances. Guidance for 2022. Kesko estimates that its 2022 comparable operating profit will be in the range of EUR 750 million, EUR 840 million. Previously, the company estimated that its comparable operating profit would be in the range of EUR 730 million, EUR 840 million. Last year, our comparable operating profit totaled EUR 776 million. Outlook assessments are made more difficult by uncertainties related to our operating environment and the overall economy. Key issues include the ongoing war in Ukraine, problems in the European energy markets accelerating inflation, rising interest rates and developments in the COVID-19 pandemic. Ladies and gentlemen, thank you.

Thank you, Mikko, for your presentation. And now let's go to Q&A, and let's start from the conference call line. Operator?

[Operator Instructions] Our first question comes from the line of Nicklas Skogman from Handelsbanken.

Yes. Hello, good morning. I have a couple of questions, please. The first one is on the margin development within B&T. Could you just help us understand what's going on there with earnings just growing 1% and sales growing by 8%. Is it that we're annualizing these inventory price gains from last year?

Yes, it might be Jukka, you can little bit open those numbers.

Yes, sure. So like we reported, maybe one thing which is worth mentioning is the profitability impact of the Kesko Senukai operations, which had a negative effect on the second quarter numbers in Building and Technical Trade, then you -- if you go a bit deeper on the numbers, you can see that in the Technical Trade side, the profitability came up from last year. And there in the Building and Home Improvement side, the EBIT went a bit -- was a bit softer than last year second quarter and the effect was mostly coming from our Norwegian operations. So overall, different kind of impacts there mostly positive, but some negatives as well. So mostly the Kesko Senukai effect and the Norwegian operations.

Okay. And on the Norwegian operations, I noticed both weakness, if you will, in both the Building and Home Improvement in Norway and in Norway is there. Is there changes in the market right now?

Onninen business, all in all, everywhere is still very strong. In Byggmakker business, we have seen already some decline, not dramatic, but some decline. But maybe Jorma, you can a little bit more open the situation in Norwegian business?

Yes. All in all, like Mikko mentioned, we are very satisfied with our Onninen business in Norway. We have gained a lot of market share more than 1 year now, Onninen business is doing very well. In Byggmakker, of course, this consumer season was weak in Norway as in also other countries and it has affected our figures. And also, we have some minor internal issues there kind of assortment management and things like that. But kind of balancing with centralized assortment and local assortment. But we are doing with those issues, but I mentioned minor issues, but -- all in all, Norway's Onninen is very good. And in Byggmakker, we have something to improve.

And maybe we can also related to Norwegian business to underline that also in Norway we have very strong B2B business on Onninen side as well as Byggmakker is very strongly focused on B2B. And that is definitely due to our Norwegian and all in all, our Building and Technical Trade operations.

Okay. And then my last question for now, at least, is on the guidance. What is the key uncertainty would you argue in the guidance? Because I see that the implied development for H2 is between an earnings decline of 16% and or earnings improvement of 5% compared with last year?

No. All in all, our guidance indicates a very positive outlook. I think that we should remember this fact. But everybody knows that unfortunately we have war in Europe. Nobody knows how long time this war lasts. Energy, of course, is a concern. Energy-related issues, especially in Germany, Continental Europe, inflation we have quite many exciting measures. And those are main reasons why we have still this range. But of course, now France is a little bit smaller what we had last spring. But all in all, I repeat that our guidance indicates a positive outlook.

Okay. So it's more a general economic slowdown rather than any other sort of development that's behind the wide range, if you will.

Absolutely.

Any further questions on conference call lines?

We have one more question from the line of Svante Krokfors from Nordea.

A couple of questions regarding Grocery Trade, strong Q2 and obviously supported by foodservice, but what kind of signs have you seen of consumers trading down during Q2? And could you elaborate a bit around if that has happened, what are your measures?

Not yet so much change in Finnish Grocery Trade market. Some indication, I think that the main issue is that pandemia is now over, of course, that is very positive, especially when we look consumers and customers' behavior that is one issue. But all in all, not so much changes, some transition from B2B -- B2C business to B2B business. I would like to say that this is main change on the market, and that is very common European-wide. And of course, the beauty of Kesko is that we are such a strong player in all grocery trade fields. In the B2C business, a very strong market leader in B2B business and we provide excellent online services for companies and consumers, but not yet such a big change, but Ari, please you can open definitely even better this market situation?

Yes. Mikko, went very well the big picture. And at the same time, when the customers are in difficult times, there is need to people to find happiness in lives. So many customers are still looking at the best quality. They are looking to pizza -- Quality Pizza, Pizza Hamburgers and also [ Suzy ] at the same time. And we can see sales increase in ready meals and high-quality meals. But at the same moment, there are some customers which are looking to better prices. And we are also able to provide them. We have, K-Menu which is about minus 50 level prices comparing to big brands. But the share of these brands is very small. So the sales mix in the Kesko store is not typical with the grocery stores. We have more high-end customers, which are looking the best quality. And it's good also in this kind of economic situation.

I think that we can openly say that we are only one in Finnish market who can provide services for and fulfill expectations of different consumers and customers because -- we have excellent services. We have excellent customer experience. We have widest assortment, but the consumers can find also high-quality, low-priced goods from our stores.

Yes. It's very unique offering that we have these both ends of the offering in the -- under the same roof in the stores, and customers like it. And at the same time, the Kespro business is boosting up very much because people are spending more time out and eating outside the home. And in that field, we have very high market share, and we have been gaining rapidly more market share.

And I believe that this is the main reason why we saw also very strong development in our grocery division during the second quarter.

Okay. Thank you for good answers. Do you want to comment anything about on the grocery side, the price hikes, H1, H2 cycle?

No. Price and cost inflation is now the case and issue everywhere globally in grocery business. And we have seen this inflation also in Finland. But due to our strong market position, we have to be very careful. We are not allowed to comment very much those inflation and price related issues. But maybe, Ari, you have more courage to say something.

It's exactly like you mentioned that we are in the dominant market position, so we cannot give you any predicts by ourselves about the coming prices. But it seems that if you look about the price level in Finland and price increases, they are a little bit lower than general European or American level currently.

Question regarding BTT 80% of -- or at least 80% is business to business related. So has there been any change in your visibility into the future on business-to-business side within BTT?

We can open that more. But before that, I want to stress that in 2015 when we started our journey with current strategy, it was opposite -- nearly 80% of Kesko's sales in building a Technical Trade came from B2C from consumers. And today, it is opposite. And it was very important strategic choice what we did in 2015 when we decided to put efforts to make Kesko a strong player in B2B segment. And today, we are extremely happy that we did this strategic choice due to that. Our Building and Technical Trade reported all-time best numbers in 2022 2nd quarter. But Jorma, maybe you can open that a bit more.

Yes, you asked visibility about this B2B and specific technical trade. And if we are talking about this year, I think this latter part of this year will be also strong in technical trade. So most important months are coming now, in fact, in Onninen business, the season is on September and October. And we forecast that season will be strong. So this year, very strong still in technical trade and consumer business is kind of normalized already.

And there are no further audio questions.

Conference call aligns. Then I have questions from the chat. Many of them. So first, I will start with SEB Jutta Rahikainen's questions. Her first question is, with 4% sales to K stores, it means that you have a quite big volume drop. Can you please tell us more what you see in the finished food consumption? People buy less people, buy cheaper products, et cetera. You slightly discussed this matter already. But if anything you would like to add?

As we mentioned, the main issue is volume transition from B2C to B2B and that is not such a big issue for Kesko because we are only one in Finnish market who operates and who has a strong position in all different grocery business segments. And due to that reason, we are very optimistic that whatever happens on the market, we are in excellent position to succeed also in future. Thanks to strong position in online business, thanks to strong position in the foodservice business, and thanks to online -- strong position in consumer business.

And she continues, can you help us understand how much visibility in number of months you have in Building and Technical Trade. Are you seeing a cyclical slowdown already in demand?

I think that we have long visibility. We should remember again that we are so strongly dedicated in Building and Technical Trade on B2B business. And in B2B business, visibility is much better, much longer than in B2C business. And especially in B2B in Technical Trade visibility is even longer. And all in all, as we have also reported today construction activities continue strong in Northern Europe not just in Finland, but also other Northern European countries. And based on that, also, I repeat that the visibility, we feel is quite long. Jukka, Jorma, do you want to add something?

Maybe just to add around 50% of the business is the renovation side. So in that sense, that's very stable and growing part. So that's good to remember.

Renovation of apartments, but also a lot of renovations related infrastructure.

Have you started any cost actions already in Building and Technical Trade in B2C as the demand has weakened?

No need for special cost actions. We should remember that one reason why Kesko's operational financial performance is strongly is that we have steadily improved operational efficiency, not just in Building and Technical Trade, but also in all Kesko operations. And I guarantee that we continue measures steadily to improve operational efficiency and quality of our processes also in future. All our operations in all our businesses.

Very good. I have 2 questions regarding Car trade, and I will add this. Any thoughts on when car availability could normalize. When that happens, do you think there will be demand for new cars despite the weak consumer confidence. How is your used car efforts proceeding? And those...

Good question. I'm also very eager to hear Matti Virtanen's answer, when supply will normalize.

Yes, exactly. This is the fundamental question, I would say, for our future development. Of course, the suppliers, including Volkswagen are informing and having point that the availability in the second part of the year should be better. But this information has been given all the spring time and new things have come, of course, with the Ukraine war, and also the situation in China, which has really had an impact on the supply chain overall. So it will be very interesting to see when it's going to cut. But the feeling we have is that the improvement will be there for the second part of the year.

And there were questions about demand for new cars despite the weak consumer confidence and also used car business.

Yes. The interesting thing in the market has happened that at the same time -- when the new registrations have gone down in the market over 20% quarter-by-quarter at the same time, the demand has been compared to last year, plus 12%. So there's a really major mismatch between the actual demand of the cars and the actual capabilities of the suppliers to deliver. And that is -- has been this year, and we expect this to continue. Of course, now the recent developments in terms of the price of the diesel and benzene will have an impact maybe for the new car demand. But there is another dimension in there, and this is the big electrification of the cars at this point of time. So a huge demand for electric cars. And so in this respect, the interesting market situation will definitely continue this year.

Plus, Matti, of course, we should remember also massive tax benefits and those tax benefits, what Finnish state offers consumers we believe will maintain also strong demand, especially electric cars and hybrid cars.

Definitely, and this is the situation also all over the Europe. So we expect this situation that the demand of the cars in electric side will be bigger than the supply capability of the suppliers, and this will continue for quite long period of time.

Thank you, Matti and Mikko. Then Fredrik Ivarsson asks 3 questions. The EBIT margin in Grocery Trade expanded by 60 basis points from already high levels. In your 2022 EBIT guidance -- guidance range, do you assume a margin expansion in Grocery Trade during the second half of the year? .

Well, we don't guide the divisional level currencies. So we do expect that the grocery trade will maintain its good profitability going forward as well. So really that's what I can say.

I will read the second question, even if I know you won't answer. Do you expect food price inflation to accelerate in coming months?

No, we gave already the answer and no need to more speculate. But once again, I also repeat that also our Grocery Trade division is in excellent shape. Steadily Grocery Division has improved business in all segments, online business, foodservice business, business for consumers. And based on this exceptional setup, we feel strongly that we are in excellent shape to succeed whatever comes on to market. And I would like to repeat that those numbers what we have reported, I believe, a very strong message that our Grocery Division is in an excellent shape.

Building and Technical trade reporting strong underlying growth in June, how do you see -- have you seen any slowdown during the last weeks on the back of the falling purchasing power and consumer confidence?

No, we have reported today that in the B2C business, we have seen clearly, some decline, but we should remember that after that decline, we are more or less back to normal time, what -- back to volumes what we had before Pandemia. And this is very important to remember because easily, people get a very negative impression from B2C business. And as many times also today we have stated B2B business develops strongly. And we are in -- we are also in excellent position in B2B business in all operational countries, where Kesko Building and Technical trade business operates.

Olli Vilppo asks what are the main reasons that explain the market share decline in food retail?

Food retail, I opened that already a little bit, but you can continue before that I said that also in food retail, we have seen this return -- some kind of return back to normal. And that is maybe one main driver. But at the same time, our foodservice has increased heavily. And all in all, our total volumes I see that we have not lost volumes on a total level. And that is, of course, main reason why our financial performance improved again in the second quarter. But Ari, maybe you can a little bit more open this.

I think the big picture is excellent exactly that we have been gaining market share in the foodservice side of the business, and that's growing fast, and we have good margins also in that area. And at the same time, people are shifting to the restaurants from the stores. That's the main reason why the market is getting -- changing. And at the same time, prices increase is important for some of the customers. And we are able to provide good prices for these customers, and we have adding a little bit more marketing activities for that site. But at the same time, the most sales increase in the market is coming from the premium food, especially ready meals and so on. So we think it's -- we have excellent position whatever is coming to the market because we are able to fight in the [ order bills ] and offering at the same time great prices for the customers who are looking for opportunities to save. But at the same time, some of the customers are still looking and also looking at the foods of premium quality.

Very good. And then I have the last question. I heard that there are no more questions on conference call lines. So I will ask last question from Jutta Rahikainen goes, what is the main reason that you upgraded your low end of your EBIT guidance range?

Main reason.

Main reason of the upgrade.

There are many reasons.

Business all in all, is running well as we have reported also today. Another, of course, important reason is that time is running sometimes I feel that even flying. And we are day after day getting closer year-end. Also due to that reason, visibility somehow is improving. But those things don't change the fact what I mentioned already that our outlook is positive, but there are still plenty of question marks and uncertainty on the market, not just in Finland, but also European wide and globally. And our guidance is a combination of all those things and matters.

Very good. Thank you. I would like to thank our audience for active discussion and a lot of questions and -- thank you, gentlemen.

Me too. I want to thank you, and I want to thank audience that I want to thank my fellow managers and together with my colleagues, we wish you very pleasant day and basically very pleasant summer week. Thank you very much.