Kesko Oyj (KESKOB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Kesko's Third 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. In third quarter, sales growth improved profit. Now I will first give an overview of our business performance in third quarter and our updated guidance and outlook. After the presentation, we will be happy to take questions both by phone and via chat. Key events in third quarter. Again record result, Kesko's all-time best quarter result. Our quarter result has now improved 14 quarters in a row relative to comparison period. In grocery trade, profitability improved despite the changes in operating environment. Building and technical trade division's result was good thanks to strong B2B trade. In Sweden we completed 2 acquisitions, Follinge Sag and Djurbergs Jarnhandel. The acquired companies will be added to our Swedish B2B focused K-Bygg chain. Net sales growth continued in third quarter. The net sales totaled EUR 3 billion. It was up comparably by 3.4% or EUR 107 million thanks to our strong strategy execution. Net sales increased in building and technical trade as well as in grocery trade. The rolling 12-months net sales was EUR 11.7 billion. Comparable operating profit for third quarter was EUR 243 million and profitability 8.1%. The rolling 12-months operating profit was EUR 826 million and operating margin 7.1%. Also return on capital employed, 1 of our financial targets, improved and was at the level of 17.6%. It improved in grocery trade and building and technical trade divisions. Kesko's financial position is strong. Cash flow from operating activities was EUR 319 million. Cash flow was excellent in grocery trade and building and technical trade. In car trade, there was significantly lower inventories in third quarter 2021 due to availability issues. Capital expenditure totaled EUR 90 million, including EUR 53 million capital expenditure on store sites. CapEx also included EUR 13 million investments in acquisitions in Sweden. Net debt to EBITDA was 0.2. In grocery trade, profit continued to improve in third quarter. Net sales totaled almost EUR 1.6 billion and grew by EUR 58 million. Net sales grew in Kespro, also sales to K grocery store chains grew. The rolling 12-months net sales exceeded EUR 6 billion. Comparable operating profit for third quarter was EUR 133.4 million and profitability was 8.5%. Rolling 12-months operating profit was nearly EUR 470 million. Profitability improved in particular thanks to strong growth in Kespro's foodservice business. In third quarter, profit improved in grocery trade thanks to good development in Kespro and K Group grocery stores. Grocery sales in K Group grocery stores were up by 0.9%, which is below the market. We have added focus on price competitiveness in our grocery stores. Marketing is based on the premium and bargains concept. Our stores have also been successful in price comparisons in the media. In the picture there is an example of the marketing campaign headlined The Cheapest Shopping Basket from K stores. Foodservice operator Kespro's sales were up by 15.1%. Market share growth continued strong. Kespro's market share is now 46%. Online consumer grocery sales up by 3.4%. Online growth was supported by Wolt collaboration. Our online consumer service K-Ruoka.fi was named the best online grocery store in Finland. K-Citymarket's nonfood sales were down by 2.7%. I am pleased to announce that Kesko has expanded its collaboration with Wolt. In a short term, we have created an effective concept for fast grocery deliveries in Finland. There is big demand for fast grocery deliveries across the country as is also the growing international trend. Currently already 127 neighborhood K-Markets at 40 locations offer fast deliveries together with Wolt. By the end of the year, the number of stores will be some 160. Also the assortment is wide up to 5,000 products. Our online grocery sales turned positive in third quarter thanks to the fast deliveries. In building and technical trade, result was good thanks to strong B2B trade. Net sales grew comparably by EUR 70 million to over EUR 1.2 billion. Net sales grew in comparable terms in Finland, Sweden, Poland and Baltic countries. In Norway, net sales decreased in comparable terms. Net sales growth continued strong in Onninen's technical wholesale. The growth was supported by good volume development as well as rising prices in some product categories. In building and home improvement trade, sales grew in B2B trade, but decreased in B2C trade. The division's rolling 12-month net sales was over EUR 4.7 billion. Comparable operating profit decreased by EUR 1.7 million and was EUR 103 million. The profitability was high 8.5%. The rolling 12-months operating profit was nearly EUR 350 million and operating margin 7.3%. In third quarter, good result in all businesses in building and technical trade. In Finland, the result was strong both in Onninen and K-Rauta. In Norway, profitability was good for both Onninen and Byggmakker. The result was also good in Sweden thanks to B2B focused K-Bygg, Onninen and MIAB. Onninen's result was good also in Poland and the Baltics. Result was strong also in sports trade, but profitability was down from the exceptionally high levels seen in the comparison period. The share of result reported by Kesko from the Kesko Senukai joint venture was down by EUR 4.4 million. In car trade, profitability was at a good level in third quarter. Net sales decreased by EUR 19 million due to availability problems and totaled EUR 242 million. The division's rolling 12-months net sales was EUR 900 million. In car trade, operating profit was EUR 13.3 million despite the difficult operating environment. Operating declined EUR 4.9 million -- operating profit declined EUR 4.9 million. Operating margin was 5.5%. In third quarter, result was good in car trade despite availability issues. Net sales were down due to new car delivery problems. Profitability was at a good level thanks to better sales margins and efficiency measures. Used car business progressed well. In service business, net sales grew. K Charge network is growing and charging has more than doubled in a year. Kesko is a unique trading sector company. Kesko is a strong company. All our 3 divisions are generating good results. Operating profits have risen to a new level and operating margins have clearly improved in recent years. This gives us a solid basis for good performance in the future even in a turbulent operating environment. In Finnish food trade, Kesko has a strong position and we are doing well also in a price-driven market. If we first look at K grocery stores, our market share 36.6% and we have the most extensive store network in Finland with some 1,200 stores. K is #1 choice for customers who value service and quality, but also a good choice for customers seeking affordable prices. Our online grocery store is the leading online grocery store in Finland. Kesko is a European forerunner in using digitalization and customer data. Our efficient and high quality processes and systems create a significant competitive advantage. Kespro is the clear market leader in foodservice wholesale with a market share of 46%. Kespro's sales were over EUR 1 billion and over 70% of Kespro sales are via digital channels. Kespro has extensive selections and also strong own brands. The customer base is wide from private restaurants to public sector operators. There are also significant synergies with K Group grocery stores. K Group is the leading operator in technical wholesale and building and home improvement trade in Northern Europe with total retail and B2B sales of EUR 6.5 billion. Green transition, energy efficiency improvement needs and growing building renovation will support the demand. B2B sales are strong in all our operating countries as shown on the slide. In Finland, the sales are almost EUR 3 billion with B2B trade's share being 80%. In Sweden, B2B share has grown to over 70% and retail sales are EUR 700 million. And in Norway, B2B is over 80% with EUR 1.2 billion sales. Onninen in Baltics is 100% B2B with EUR 500 million -- sorry. Onninen and Poland together is 100% B2B with EUR 500 million sales. Kesko Senukai is more B2C focused with retail sales of EUR 1.2 billion. Sales via digital channels is growing fast, now it is over EUR 1.7 billion. Onninen is Finland's biggest and best online store for technical wholesale. Kespro's online store is the biggest in foodservice wholesale in Finland. Also B2C sales are on a good level with well-functioning stores for consumer online grocery and sports goods. I would like to also highlight that K-Rauta's online store was named the best in the business in Sweden. Kesko is responsible and sustainable operator. We are increasing efficiency in energy use. Some 50% to 80% of K Group's electricity consumption in 2022 to '25 is hedged. We aim to cut our electricity use by as much as 20% during peak times. Results can already be seen, our electricity use in September was down by 4%. We are also preparing for possible disruptions in energy distribution. And then the strategy and outlook. We have a good strategy. We continue strategy execution in all our business areas. We continue to invest in growth as well as it is important to improve operational efficiency due to weakened economic outlook and rising inflation. Our guidance for 2022. Kesko estimates that its comparable operating profit in 2022 will be in the range of EUR 790 million to EUR 840 million. Before, the company estimated that the comparable operating profit would be in the range of EUR 750 million to EUR 840 million. In 2021 Kesko's comparable operating profit totaled EUR 775.5 million. Outlook for 2023. Kesko's net sales and operating profit are expected to remain at a good level also in 2023 despite the challenges in the company's operating environment. The grocery trade market is expected to remain stable as a whole, in part supported by price inflation. Kesko is a strong operator in all areas of food trade. Consequently, operating profit is expected to remain at a good level despite rising costs. The construction market is expected to decrease somewhat compared to 2022. New building construction is expected to decrease, but renovation building and construction related to the green transition are expected to continue to grow. B2B trade accounts for over 80% of the sales for Kesko's building and technical trade division. Good profit levels in building and technical trade are underpinned by the significant share of renovation building and the strong demand for products related to saving energy and the green transition. In the car trade market, the availability and demand for cars are expected to remain below their long-term average in 2023. Despite the market situation, profitability in Kesko's car trade division is expected to remain at a good level thanks to the transformation and efficiency measures carried out. Ladies and gentlemen, thank you.

Thank you, Mikko, and now it's time for questions. We will first turn to the conference call line, but there is also a possibility to post questions using the chat functions. And when using the chat function, please note that there is a slight delay before we see the questions. So just ask your questions as soon as it pops into your mind. But now conference call line, please.

[Operator Instructions] We'll take first question from our participant.

This is Magnus Raman with Kepler Cheuvreux. I have a question firstly on the grocery business in terms of historic patterns here where you had market share losses for the grocery business in times of economic weakness and how you regard that if we are now entering such a period. Also related to what you stated in the presentation about price comparisons, is there anything different you think that you would like to highlight this time around compared to historic patterns? And also perhaps if you can help us understand to what extent you're willing to take a leading position in price to protect your market share position.

Yes. All in all, we are very satisfied how is performing our grocery business and grocery division. As you can see also from numbers, we have succeeded again very well even in a situation when market situation and whole business landscape is changing. You are right, we have lost some market share in consumer business. But all in all, we can see that also in this current situation, our store formats and concepts are performing well and we are doing great job. At the same time, of course important to recognize that on the B2B side, we have gained heavily market share meaning that all in all in Finnish food business, our market share is pretty stable. But we are living also quite unusual situation at the moment in Finnish grocery business because especially Finnish Co-operative, Finnish S Group has had in this year unusual many store openings and those new stores are little bit also disturbing this situation. But Ari definitely is more than happy to open little bit more this situation.

And currently we are investing heavily to the prices, but we are able to keep the margins good level because we can increase the share of the private brands especially Pirkka, the best choices of the Pirkka brand and K-Menu, and we can see development in that area. We have also soft launched a new concept including premium and bargains for the consumers in the stores. And that's something that customer seems to be very happy that under the same roof, you can find the best bargains and also the best premium and we think it's going to be a very strong asset in the future.

And Ari, as I mentioned, quite many new store openings made and completed by S Group. Maybe you can little bit more open also that development.

We haven't opened any hypermarkets during the recent years. But they have been open if you calculate everything together, almost like 10 and during this year 3. Because of that, we have been able to increase all the time sales per square meter and gross margin per square meter, which is actually the most important way to improve the results of the stores in the long term and it also keep us in very good position in the future that we are able to do investments in the future also.

We don't expect any more -- so many new store openings made by them in the coming years.

We are expecting it will be slowed down in the future.

[Operator Instructions] We'll take our next question from the next participant.

This is Fredrik Ivarsson from ABG. I had a question on the outlook for the grocery market. You say you expect a stable market, but positive food price inflation implying that you assume that volumes will be down if I read it correctly. Can you just confirm that and also talk around how you reasoned around your outlook?

You are right. Our expectation is that price inflation will continue especially in Finnish market. We are little bit behind other Europe in food price inflation and expectation is that the inflation continues end of this year and we will see definitely also still quite big inflation in the first half of 2023. But as Ari explained, we are very confident that we are in strong and very good position to compete and succeed also in this current situation in B2C business. But at the same time, we can see that on the B2B side, we will see strong development, market development also in future. And of course when we remember that at the same time when demand remains strong on B2B side, we are gaining heavily market share meaning that volumes are increasing and we are very optimistic that this volume increase will continue also on the B2B side in future. Altogether means that the outlook is positive in grocery business.

And a follow-up. As you mentioned B2B, I suppose you allude to Kespro, which has seen a very strong margin over the coming or last quarters, mid-single digits or so. Can you give us any clues on the margin development of Kespro in the third quarter? Was it equally good as in Q2?

No. I can just underline that we are extremely happy how Kespro is performing and they are doing amazing job operationally. But also we are extremely happy that steadily Kespro gains so much market share and we are optimistic that this positive trend will continue also in future.

We will take our next question.

This is Jutta Rahikainen from SEB. I was wondering about the building and technical trade now in the third quarter specifically. The EBIT was slightly, very little, but still slightly down. So could you describe what's happening there? Is it a certain geography or is it costs, volumes, something specific? Just to get a feeling on the kind of current trading momentum in that part of your business.

First, maybe I can start and underline that also building and technical trade very strong numbers and very strong development thanks to situation that all businesses in building and technical trade division are performing well and of course because we have such a strong position in Northern Europe in B2B business. When we look at building and technical trade numbers, let's say, [ disappoints ] are coming from Baltics joint venture Kesko Senukai mainly I believe due to very high cost inflation in Baltic countries, little bit suffered and profitability declined in Kesko Senukai. That was this drawback. But all other businesses succeeded very well. And due to that reason, we are optimistic that we will continue strong performance also in future. Those numbers, Jutta, as you know, Jukka knows much better and he's more than happy to open little bit more numbers. Jukka, please.

So just to add a little. So if you take out the Kesko Senukai and the sporting goods business, which had really high comparatives last year, actually the margins were quite close to previous year. And Onninen was especially strong with a really good sales growth so there the margin even improved. And then in building and home improvement, then there the margin was a bit lower than last year. But altogether very good, strong in the core operations there. So happy with the margin.

Okay. And if I can follow up on that. Are you seeing in your Nordic home markets any kind of cyclical slowdown signs? I know you described Europe's late cyclical and that's probably the case still. But are you seeing some kind of economic negative effects on your building and technical trade, thinking about the B2B side specifically here?

As you mentioned, on B2B side, the outlook is positive and we are not worried not at all. Difficulties there are on B2C side, but as you know, our stake on B2C is so small that we don't expect such a big negative impact coming from that. And this decline on B2C side we have seen already not just in Northern Europe, but European wide. But Jorma, maybe you can open little bit more this current situation.

Yes. As it's forecasted that the volume will decrease -- total construction volume will decrease little bit next year in all of those main markets. But important thing is that the share at renovation will increase. And in our business, if you look for example Finland and the total construction volume, new buildings is more than half of that business. But in our business, in our figures, renovation is more than half and now we expect that the renovation will increase. That's positive for us. And the second thing is this green transition and those energy savings products and the share of those products and those related products is quite remarkable in our figures. So as we know, total volume will go a little bit down, but renovation and green transition savings will go up and our share on that business is quite big.

Okay. And then I have one more question, which is completely different. On your CapEx and I'm looking into '22 and '23, what should we estimate? You probably don't have that much store openings, but then these -- or at least 1 of the larger logistics investments is kicking off. So could you provide us a ballpark for CapEx this year -- sorry, '23 and why not also '24?

Yes. CapEx numbers, we will open more definitely early February when we will publish 2022 numbers and when we will give more guidance for 2023. But all in all, important to remember that we have growth strategy since 2015 and we have very systematically and successfully, I would like to say also, implemented our growth strategy and based on that, spent quite much money also to invest on growth. And definitely we continue implementation of this strategy and we have done lot of investments. We have modernized the grocery stores. We have opened also some new store, but not so much especially in 2022. We have made successful acquisitions especially in building and technical trade as well as [indiscernible] of course was very successful. A lot of investments in digitalization, on IT side, car trade and we continue investments. And I would like to remind that the current situation what we have in Europe in economy offers also interesting opportunities and we are seeking and we are searching those opportunities very carefully also at the moment. We continue investments. Maybe Jukka, you can little bit more open also on current situation our plans and ideas.

Yes, sure. So this year we have invested a bit more than last year and we'll continue investing into our operations, store refurbishments and renewals is one of the key topics. And otherwise we of course, during these times prioritize the CapEx very carefully. But at the same time like you mentioned, the distributor center investments are then on contrary increasing a bit of the CapEx. So not really too far from this year, I would say, but high prioritization; but then the certain distribution center CapEx is then adding the numbers upwards a bit, but not really too far from this year.