Kesko Oyj (KESKOB) Earnings Call Transcript & Summary

Dear all, warmly welcome virtually to Helsinki, and thank you for tuning in for Kesko's Q3 2024 Release Call. Today's headline is a turn for better in building and technical trade. Other divisions did well as well, but we wanted to highlight the building and technical trade after many harsh quarters. Our agenda today is the following: President and CEO, Jorma Rauhala, will give the Q3 presentation. We have here together with us business division presidents, Ari Akseli for grocery trade; Sami Kiiski for building and technical trade; and Johanna Ali for car trade as well as CFO, Anu Hamalainen. After Jorma's presentation, it is time for questions both by phone and via chat function. All the materials related to Q3 can be found at our web page, kesko.fi under Investors. My name is Hanna Jaakkola, responsible for IR at Kesko. I will be at your service after the presentation for your questions and discussions. But now, Jorma, the virtual stage is yours, please.

Thank you, Hanna. Ladies and gentlemen, welcome also on my behalf to this release call. I am Jorma Rauhala and I have now the pleasure to present Kesko's Q3 results. Yes, a turn for the better in building and technical trade is our headline and it highlights the big change in the third quarter. Other divisions performed well, too. Now I will give an overview of our business performance and open up elements behind the results. Key events in the third quarter, Kesko's net sales increased and comparable operating profit decreased. Building and technical trade net sales increased. The turnaround can be seen. Year-on-year result increased for the first time in 8 quarters. Grocery trade net sales increased. Result was flat year-on-year. Car trade net sales and result decreased. Profitability was at a good level. Kesko announced it will acquire 3 builders' merchant in Denmark, Roslev Trælasthandel, Tømmergaarden and CF Petersen & Søn. The compound net sales of the companies' total approximately EUR 400 million. Once the acquisition are completed in first half of 2025, Kesko's market share in Danish building and home improvement trade is set to rise to some 20%. Kesko issued a EUR 300 million green bond, which will mature on 2nd February 2030. Net sales in Q3 totaled EUR 3 billion. It was up by EUR 77 million. Net sales increased in building and technical trade, and grocery trade. Rolling 12 months net sales were flat compared to 2023 and were over EUR 11.7 billion. In Q3, comparable operating profit was EUR 201.5 million, and operating margin was 6.7%. Comparable operating profit increased slightly in grocery trade and building and technical trade, and decreased in car trade. Rolling 12 months, operating profit was EUR 650 million and operating margin was 5.5%. Return on capital employed was 11.5%. Return on capital employed decreased compared to '23 in all divisions as earnings declined. Financial position, increase in working capital impacted cash flow in Q3. Cash flow from operating activities was EUR 286 million. Cash flow was impacted by calendar as the last day of the quarter this year was Monday, while last year, it was Saturday. There are typically large out payments of trade payables on Mondays. Also inventory growth affected the cash flow. Net debt to EBITDA was 1.2, well below our maximum target of 2.5. Interest-bearing net debt increased year-on-year as a result of investments in acquisitions, grocery trade store site network and logistics. I'll open up the logistic investments on the next slide. Onnela is Kesko's history's largest construction project. It is also largest ongoing construction project in Finland at the moment. This is an investment in future growth. The center will serve both Onninen's technical trade and K-Auto's spare parts business. Implementation of the center will take place in stages from Q3 '25 onwards. Whilst the center is on full use by the end of '26, it will remarkably improve Onninen's efficiency. Timing for the construction has been good, and the project cost is estimated to be less than the original cost estimate of EUR 300 million. Total investment so far is EUR 174 million. Capital received by Kesko through the issuance of green notes is used to finance the project. In this project, special attention has been paid to reducing energy consumption and carbon footprint, which reduces costs and emissions over the property's long life cycle. The site will host, for example, some 100 geothermal wells and an entire solar power plant. Expenses. Expenses were up due to Davidsen acquisition and real estate costs. We have succeeded well in focusing on cost efficiency. For example, excluding Davidsen, personnel expenses have increased only by 0.3% year-to-date despite wage increases. Fixed costs were EUR 484 million, and cost ratio was 16%. It was down compared to last quarter but up year-on-year. Now to the grocery trade, stable performance. In Q3, net sales totaled EUR 1.6 billion and increased by EUR 16 million. Rolling 12 months net sales totaled over EUR 6.3 billion. In grocery trade, comparable operating profit for Q3 was EUR 118.8 million, and it was close to last year's level, up by EUR 0.5 million. Profitability was 7.4%. Rolling 12 months operating profit was EUR 440 million, and operating margin was 6.9%. Key events in grocery trade in Q3. In the grocery trade division, net sales and profit increased. Operating margin was flat year-on-year. K Group grocery sales were down by 0.1%. Kespro's net sales were up by 3.1%, again, exceeding market growth. K-Citymarket nonfood sales were down by 4.1%. Good development continued in online grocery. Online sales were up by 13.9%, thanks to express deliveries. Total grocery trade market was approximately 1.5%, and group sales performance was slightly below the market. Grocery price inflation in Finland was approximately 0.4%. Customer flows continue to grow, thanks to campaigns, but average purchase was down. According to our strategy, media business and data utilization are supporting profitability. Strategy execution is proceeded according to plan. I want to highlight our key actions in grocery trade strategy: one, strengthening store-specific business ideas; two, developing our store site network; three, improving price competitiveness. Impact from stronger store-specific business ideas and investments in price will become visible from yearly '25 onwards. Investments in the store network continue. Impacts will become visible in the end of Kesko's strategy period. This year, we will open 50 new stores and 44 renewed stores, of which 7 new and 14 renewed stores in Q4 '24. In '25, we will open 18 new and 46 renewed stores. In building and technical trade, the result was better than expected. Net sales increased by EUR 78 million to EUR 1.1 billion, thanks to Davidsen acquisition. In comparable terms, net sales decreased by 2.2% due to the challenging construction cycle. Rolling 12 months net sales were over EUR 4.6 billion. Comparable operating profit for the building and technical trade division totaled EUR 70.1 million and operating margin 6.2%. Rolling 12 months operating profit was EUR 173.6 million, and operating margin was 4.1%. Comparable operating profit increased, thanks to positive profit development in K-Rauta Finland and Davidsen acquisition. Key events in building and the technical trade in Q3. Construction cycle is still weak, but we have seen a turnaround. Result for the Davidsen grew for the first time in 8 quarters. Sales have picked up in both building and home improvement trade and technical trade, but the market continues to be challenging. Net sales and operating profit development was better than anticipated. Operating profit for Onninen Finland was at last year's level. Sales and profitability for solar power products have returned to normal levels. In Norway, there have been logistic-related delays in Elektroskandia's integration and Byggmakker slightly underperformed the market. In Sweden, increased focus on B2B trade under the K-Bygg brand has proceeded according to plan. Credit risks are well under control. Write-downs of overdue trade receivables totaled EUR 0.5 million. Share of result from Kesko Senukai was EUR 4.8 million. In this picture, we can see K-Rauta's and Onninen's sales development in Finland since 2019. We showed this picture last quarter. And here, you can see the Q3 development added. K-Rauta is the market leader in building and home improvement business in Finland and Onninen in technical trade. Both have nearly to 50% market shares. So this picture describes the Finnish building and home improvement market well. In the graph, we can see now that after several quarters of weak cycle, sales are turning. This positive trend has continued also in Q3, but numbers are still below 0 level. We believe that the moderate sales development will continue, but there are no major sales hikes in sight. Low comparable figures support the development, too. This is Byggmakker's sales development, which is very similar to K-Rauta and Onninen's graph. Norway is our second largest operating country, and Byggmakker's market share in '23 were some 13%, and Byggmakker is among the largest players in the market. Here, too, we can see the consumer COVID boost starting in late 2020 and then in '21, we saw B2B sales increase with high demand and global price increases. Turning construction cycle started to affect '22 and sales declined sharply in first half of 2022. After several quarters of weak cycle, we can now see sales returning. We estimate that the construction cycle will turn in 2025 in Norway, too. In car trade, we saw good performance in a challenging market. In car trade, net sales for Q3 decreased by EUR 16 million and were EUR 295 million. Net sales decreased in new cars and increase in used cars and services. In the comparison period, net sales for new cars increased by the clearing of order books as the availability of cars improved. The comparable operating profit totaled EUR 17.9 million and decreased by EUR 6.5 million year-on-year. Operating margin was 6%. Rolling 12 months operating profit was EUR 63.5 million, and operating margin was 5.4%. Key events in car trade in Q3. Market demand for new cars stayed muted. Q3 first registration in Finland were minus 24.4%. Net sales and comparable operating profit decreased as market continued to be challenging. Profitability remained at a good level. New car sales were down, but in new car orders, the share of brands represented by Kesko grew. Used car sales were up. K-Auto's market share strengthened significantly. Service sales continued to grow. Acquisition of Autotalo Lohja was completed in September. In sports trade, net sales and comparable operating profit increased and market share strengthened. Our business portfolio in car trade is balanced. 47% of K-Auto sales were new cars, 32% used cars and 21% services. And now to profit guidance 2024 and outlook for 2025. Kesko's operating environment is estimated to remain challenging in 2024. Kesko's net sales and operating profit are estimated to remain at a good level in 2024 despite the challenges in the company's operating environment. Kesko estimates that its comparable operating profit in 2024 will amount to EUR 630 million to EUR 680 million. Previously, the comparable operating profit was estimated to amount to EUR 620 million to EUR 680 million. The profit guidance specification is based on third quarter positive profit development in building and technical trade. Outlook for 2025. The operating environment is estimated to improve in 2025, and Kesko's comparable operating profit is also estimated to improve in 2021 -- in 2025. In grocery trade, B2C trade and the foodservice market are estimated to remain stable. In 2025, the comparable operating margin for the grocery trade division is estimated to stay clearly above 6% despite the investments in price and store site network in accordance with Kesko's strategy for '24-'26. In building and technical trade, the cycle is expected to improve in 2025 from the historically low levels. Profitability in the building and technical trade division is estimated to improve compared to 2024. In car trade, new car orders are expected to stay at a low level in 2025. Demand for used cars and services is estimated to remain good. Profitability for the car trade division is estimated to remain at a good level in 2025 despite weak demand for new cars. Well, this was my presentation. Thank you. I guess it's time for questions now.

Yes. Thank you, Jorma, for your presentation. Now it's time for questions like you said. Let's turn to the conference call line first.

[Operator Instructions] The next question comes from Maria Wikstrom.

It's Maria Wikstrom from SEB. I have 2 questions. I mean firstly, on the 2025 guidance, I think you were probably the first company to actually guide for '25 and wanted to have a little bit more color, firstly, if you have included 3 -- these 3 acquisitions from Denmark in your guidance and if you could a little bit elaborate what kind of consumer environment you are picturing for '25 in your guidance, please.

Yes. Thank you for your questions. And what comes to next year, we haven't included those 3 targets, what we are now acquiring. And as we stated, we see that building and construction market will recover. Of course, we have to remember that it's now in historically low level. So -- but we expect that, that market will improve in every country, in every 8 countries. So that's the, I would say, the biggest change what will happen. In car trade, no big changes. We see that still new cars will be quite low level, what comes to next year in the Finnish market. And in food grocery business, the market is quite stable. But also in that side, we could kind of expect that it wouldn't be worse than this year because of consumer confidence and salary increases and things like that. So I would say that all 3 divisions, mainly building and technical trade there, we can see some more positive trends but also current grocery business, not any negative signs.

Okay. And then a bit more detail on the building and technical trade. I think in your numbers, we have seen the DIY part already to see a pickup. And I think that was quite evident if we look at the -- like the Byggmakker results from Sweden. But what kind of lag you see for the technical trade to show a pickup as well, I mean, across your markets?

I can start and maybe Sami can continue. But if you look at our figures, last quarter figures or whole year figures, there is not any big differences between building and home improvement and technical trade. So they kind of goes hand in hand what comes to market. But Sami, maybe you can continue.

Yes. Thank you, Jorma. It's exactly like Jorma said. The big picture for technical trade is pretty much same in all our operating countries but of course, still more differences. And of course, we have a little bit different market shares or how we concentrate also in the business-wise. Do we have more HEPAC or electrics, but the big picture is same.

And then my final question on the grocery trade. Sami, you have indicated that you will be investing in prices in order to gain some of the loss of market share. So with the investment in prices, I mean, how you're going to match a negative effect on profits from lower prices in order to -- as you guide for clearly above 6% margins for '25 and '26? So can you give a bit more color on these impacts and how you're going to compensate?

Ari, would you like to have this one?

Yes. Thank you for excellent question, and we could say that when we are investing to the prices, it always bring more sales at the same time. So that's the good part. And the other part is that we have new income sources like a data business and also media businesses, and these are bringing new incomes at the same time. So we think that it will have some kind of negative effect, of course, but because of these factors, it will be not so big.

Thank you for your questions. Is there any new questions on the line? Yes, please.

The next question comes from Svante Krokfors from Nordea.

Svante Krokfors from Nordea. Question still regarding the price investments. What should we think about the timing on the grocery side and how will you monitor this so that we don't see any kind of negative development starting in grocery's EBIT margin?

Yes, Ari, I think you can take this one. As we stated that the price investment will be visible early next year, but you can continue, Ari.

I think that the most important factor, how we are doing this pricing, new pricing is that we use a lot of data. So we put targeted offers, and we can always calculate very clearly what is the effect of each and every offers. So it's -- and at the same time, we have new income in -- coming when we are able to increase the sales. And also all the store owners are participating to this price program, so they are also putting effort for that.

And then you mentioned you had some -- on building and technical trade, you mentioned some issues in Elektroskandia and Byggmakker. Could you elaborate a bit on this? And what kind of measures have you taken?

So I can start, and Sami can continue. But as we have said earlier, the Elektroskandia and Onninen integration was maybe the biggest integration, what we have in Kesko's history. Even Suomen Lähikauppa integration was kind of easier, but it was very challenging. But we managed very well, and we ended that integration, let's say, May, June, but we have some delays in logistics. But Sami, you can open a little bit.

Thank you for the good question. And like Jorma said, it has been and still a rather big integration. It's more related to our logistics and also how we have 2 warehouses there and how we do our shipments to our customers, and there has been a little bit delays in shipments and also how we treat our so-called split orders in a way. So we believe that nothing what we cannot fix this. We can fix it, but it has been a little bit delayed in the shipments for some of the customers, not all.

And with Byggmakker, I would say that, there, we are very close when it comes to market development, not any big crisis on that one. But can you open a little bit on Byggmakker also?

Exactly. And Norwegian market also having troubled waters in a way and I think we are well positioned there. We see mainly that maybe we are a little bit losing market share in consumer business, but that has been also our study so that we want to concentrate more B2B. And there, we have -- there, we are well positioned and we don't see any big changes, pretty flat development for us.

And lastly, a question regarding the EPBD directive by -- the Energy Performance of Buildings Directive. Have you made any internal analysis how this could impact the technical trade side?

Sami, can you -- I think we don't have any calculation about that one, how that could be effect to us. But of course, that could be a positive one for us. But we are not counting so much on that, what comes our outlook for next year.

The next question comes from Calle Loikkanen from Danske Bank.

I have 2 questions, a bit of a follow-up to the previous ones. Firstly, starting on the grocery trade. When do you expect the market share losses to start turning to flat or even growth?

Ari, you can say also, but I think it's in our strategy -- in this strategy period.

Exactly like that during the strategy period, especially because network development takes time.

Okay. Okay. That makes sense. But do you think you have to revisit the strategy that you have? I mean consumers have been very price sensitive and price focused and probably that -- maybe that doesn't change in the coming years. So do you need to -- do you think you need to adjust the strategy that you have in grocery trade in terms of pricing and market share?

No, I don't think so because we don't count on that, that somehow the market would remarkably improve, that the consumer wouldn't be any so price sensitive. It's include our strategy that our consumer continues to be price sensitive. It would be a positive surprise if that will improve. But like I said, we will make those investments and of course, price investments, we can see those effect earlier. Of course, we believe and we trust that next year -- this year, we will lose less market share than last year. And of course, next year will be better and latest on our strategy period, '26, I think that we will gain market share.

Okay. Okay. That's helpful. And then on the building and technical trade, looking at the Q3 margins, can you elaborate on what the margins would have been if we exclude the acquisitions?

Exclude acquisition, but it's all -- okay. Okay. Okay. Then it's mainly Davidsen, so not big effect. Davidsen was okay. Davidsen was a little bit better than what we expected, but I would say that no major differences, yes.

The next question comes from Miika from DNB Markets.

It's Miika here from DNB. Solid result in building and technical trade despite the challenging market. I was wondering if there was anything temporary that helped your performance during the quarter. And is it reasonable to expect continued profit growth for Q4 in the division?

There wasn't any special item. It was -- I would say that why it was better than we expected, Q3, was because of sales. So it was better than we expected and also gross margin. And costs are very good in our control. What comes Q4, it includes our guidance.