Meko AB (publ) (1OM.F) Earnings Call Transcript & Summary

Welcome to the Meko Q3 Report 2025 presentation. [Operator Instructions] I now hand the conference over to the speakers, President and CEO, Pehr Oscarson; and CFO, Christer Johansson. Please go ahead.

Thank you. Good morning, and welcome to Meko's presentation of our results for the third quarter 2025. I'm here with our CFO, Christer Johansson, and together, we will walk you through our performance and current position. As you know, the first half of this year was marked by slower growth and lower earnings. Car owners were cautious following a prolonged economic downturn and unpredictable global environment. This also led to intense competition in Q2. This tougher competition continued into the third quarter. We achieved organic growth of 1% during the period compared with 2% in the same quarter last year. This also means that we moved from negative growth in the first half year of 2025 to showing a positive sales trend in Q3. The competitive situation also put pressure on prices, which in turn affected our profitability. Our adjusted EBIT margin improved compared to the second quarter, but decreased compared with the same quarter 2024, and we are responding to this development. Among other things, we're continuing the rollout of our new central warehouses where staffing levels will gradually be reduced. We also continue the cost-saving measures announced this summer. So let's take a look at that on the next slide. As you know, we have been working with the initiative building strong Meko for some time. These initiatives aims to improve our long-term profitability. By the end of Q2, we had achieved an EBIT improvements of SEK 200 million within these initiatives. During the summer, we launched additional cost savings, adding another SEK 100 million through staff reductions. A significant part of these reductions has now been implemented. And during the quarter, another 2% of the workforce has been given notice of termination. However, as always, it will take some time before the effect becomes visible in the P&L. All in all, this means that the end of Q4, we will have reduced the number of full-time employees by more than 500 compared to Q3 last year. We are also progressing in realizing synergies from our acquisition of Elit in Poland. 14 branches have now been closed as part of the optimization plan. Another key part is improving efficiency through our new central warehouses in connection with the commissioning of these facilities. We have vacated 4 out of those 6 facilities. And let's take a closer look where we stand with these projects moving on to the next slide. The new high-tech warehouses are now operational and together, they represent a significant upgrade to our logistics capacity. In Norway, Denmark and Finland, we are now handling goods with a high degree of automation. These hubs complemented the already automated warehouse in Sweden and together create a logistics network of very high international standard. The upgrades will naturally lead to several efficiency gains, including the reduction in the number of full-time employees. And as mentioned, we still bear some temporary costs such as double rents and staffing, but we will gradually start to see the positive effects. And as it's usually the case with major warehouse automation projects, calibration and fine-tuning take time before the full potential is needed. This improved logistics capacity was also a key topic at our Capital Markets Day in September, where we presented several other important initiatives as well. So let's move to Slide 5. One of the initiatives is an acceleration within exclusive brands. Among other things, we are launching the brand “Every Part Matters in 7 new markets, meeting the demand from more price-sensitive customers. We're also expanding our e-commerce business. The webshop Mekster is launching in Finland and then later in Denmark, making this business present across the Nordics. In addition, we will grow our commercial vehicles business to establish long-term leading position in this segment. These are only examples on how we are focused on increasing growth and improved profitability. I will hand over to Christer in just a minute, but first, I would like to highlight some interesting findings from our newly released mobility barometer on Slide 6. Even in these turbulent times, the car remains #1 for all. As a matter of fact, more people are using the car every day compared to last year. These are a couple of many trends and findings in the new edition of our barometer, the largest study of mobility in the Nordics. And this is the fourth year in a row we're making this report, and I recommend reading it. That said, I hand over to Christer, who will elaborate on the third quarter, starting with our leverage, which has been in focus lately. Please.

Thanks, Pehr. So leverage is always an area of interest, but in this quarter, more so than usual. And the reason is lower profitability, which has coincided with a period of heavy investment. This has put significant pressure on leverage, which increased from 2.7x in Q2 to 3.6x in Q3. Now of this increase, no part related to an increase in net debt, and the increase is instead driven by 2 other factors of roughly equal size. To start, we see a lower underlying EBITDA gradually working its way into the rolling 12-month average used in the leverage calculation. Secondly, since we report leverage based on unadjusted EBITDA, items affecting comparability also matter. And as mentioned in the Q2 call, Q3 2024 included positive items affecting comparability, and that quarter is now replaced, if you will, by a new one with negative items affecting comparability. So this effect alone corresponded to a 0.6x increase in leverage. Now 3.6x is high, both in relation to our targets and in relation to our financing agreements. And against that background, we have, during Q3, agreed with our banks on certain amendments to the terms. And we have also, with the final steps being taken here in October, secured a onetime waiver from the bondholders through a so-called written procedure. And this change, which received strong support by the bondholders is important because it enables us to execute the second tranche of the dividend decided upon by the AGM back in May 2025. So that payment of circa SEK 110 million will be done here in a few days. Looking at leverage in the longer perspective on Page 8, one can see this has varied a bit throughout the years. We've seen periods of elevated leverage, followed by phases of recovery. And it's important here to reiterate that we remain committed to our leverage target and getting back to the 2 to 3 range is a priority, and we are taking actions for that to happen. One area of focus is working capital. And although this helped in Q3, one should not expect much support in the near term as the fourth quarter is often seasonally weak. Another area is investment as seen on the next page, Page 9. So in Q3, we see the investment rate coming down as we said it would. And this applies to CapEx as illustrated in the graph, but the slowdown also applies to other investments such as M&A, which we've not done any and to the ERP project where we are now entering a less intense phase. So with those initial comments related to leverage, let's move on to profitability on Page 10. Here, we saw a slight uptick from Q2, but we are still operating at levels far below last year. So on a positive note, organic growth improved from minus 5% in Q2 to plus 1% in Q3 and cash flow from operations remained healthy. On the more challenging side, competition, as I mentioned, remained ever present, which affected gross margins, as I will come back to on a later page. Project-related activity was still intense in Q3, and this can be seen in the elevated level of items affecting comparability, which include temporary staff involved in moving goods to the new warehouses. Some of this carries over into Q4, where we have now consolidated Sorensen Balchen warehouse operations into the new facility outside Oslo. And it's perhaps worth here reiterating how infrequent these kind of costs are. So our old facilities in Denmark and Norway had all been in operation for, on average, 20 years. And we look at these new investments with a similar horizon, so not a very frequent event for sure. Moving to gross margin on Page 11. We've already commented on competition, which was particularly noticeable in Denmark and Poland. It's also so that growing in a lower-margin market like Poland dilutes the consolidated level, and this country mix effect amounts to circa 1 percentage point. And this effect should be less noticeable going into Q4 because now the comparables fully reflect the acquisition of Elit. Moving on and comparing adjusted EBIT with the year earlier, 2 areas stand out. So firstly, Sweden and Norway. Here, it's a combination of disappointing top line and higher fixed cost relating to the automated warehouse in Norway. Secondly, Poland. And here, it's price pressure, which has been strong and the integration of Elit, which is not yet complete. If we instead compare to Q2 on the next page, the picture looks a little bit different. So what is noticeable here is instead an improvement in Finland. It is one should admit from a low level, but still worth commenting. So let's start the business area by business area review with Finland on Page 14. We are, as you can see, back in positive EBIT organic growth of 6% helps. And even though that has come with a different mix. Operationally, there are some good signs. And to exemplify order lines per worked hour in the central warehouse is up 50% within 2025. And in fact, the actions that we've taken in Finland, which include automation and cost cutting, it is basically the same medicine as elsewhere, but the difference is that we have come further in Finland because we started earlier. So let's move to Denmark on Page 15. Here, we saw organic growth of 1%. I although measured in Swedish SEK, revenue was still down 2%. I already mentioned competition, which has led to lower gross margin in Q3. Looking ahead into Q4, the focus is to get into smooth operation in the central warehouse following the move, and we are not quite there yet. Moving to Poland and the Baltics on Page 16. On the positive side, we see organic growth of 9%, but this has, however, come at lower margins. Operationally speaking, it's worth making a distinction between Poland and the Baltics in 2025. So in the Baltics, we have been operating in a steady state, generating decent profitability. In Poland, on the other hand, it's been everything but steady state. We've implemented several structural changes, which are indeed good for the long term, but there's no denying that they have affected operations in 2025. In Sweden, Norway on Page 17, top line development remained muted. EBIT margins still exceed 10%. But clearly, we are zoomed in on actions to improve traction in the market. In Norway, the new central warehouse is operational. And in Q3, there have been a lot of focus on getting ready for Sorensen Balchen to move in, which happened here in the beginning of Q4. This leads over to the last business area on Page 18. Sorensen Balchen, another strong quarter, delivering adjusted EBIT of SEK 44 million. Q3 is also the last quarter where Sorensen Balchen operate with its own independent warehouse. And Q4 will be a transition quarter towards a model where we instead split the cost of the new central warehouse across the 2 business areas in Norway. There are no new costs for the group, but for the business area, Sorensen Balchen, they will carry a larger part of the cost affecting comparability with earlier quarters. So with that, I would like to point out that we are also now vacating quite a few of the buildings that we have used. The period of double rent is coming to an end. And in total, if you count the external locations, we are now out of 5 out of 8, counting also external locations. So still a little bit to go, but almost there. So with that, I'd like to hand back over to Pehr.

Thank you, Christer. Well, to summarize, Q3 meant a continuation of the intense competition we saw in Q2, which at the same time was a consequence of a slower market. We achieved organic growth of 1% during the period. This means we moved from negative growth in the first half of '25 to showing a slightly positive sales trend in Q3. Our adjusted EBIT margin improved compared with the second quarter, but decreased compared to the same quarter '24. And we are taking a number of actions to address this development. We are rolling out action for long-term growth and continue our cost-saving measures across the group to ensure we are better positioned as we enter 2026 as we don't expect the current market situations to change in the foreseeable future. So that was all from me. Thank you all for listening, and we will now open up for questions.

[Operator Instructions] The next question comes from Andreas Lundberg from SEB.

Starting off with cash flow, working capital swings in the third quarter, clearly positive. Can you maybe explain a little bit on the development in the third quarter, especially on payables?

Andreas, yes, as we say, cash flow was fairly strong in Q3. And in fact, if you were to go back a few years and compare to the trend over the year, you will see that Q3 is strong. On the contrary, then Q4 is often on the weaker side. So I would say that taking the seasonal trend into consideration, the Q3 is not much of an outlier, perhaps a little bit better than we anticipated, but not overly.

It's more of a normal trend, you would say, nothing specific you have done on the working capital side?

We always manage the best of our ability, but nothing exceptional. And one should not kind of extrapolate this into Q4 because, as I said, Q4 is normally on the weaker side.

But if you look out beyond Q4, how do you view the sort of working capital needs?

It's good to have the central warehouse product coming to an end because that means we can start to optimize our inventories. And if anything, there should be a slight positive coming out of that, but we are not expecting any massive movements there.

Okay. Cool. And you talked about lower investment levels. Can you give like a guidance for 2026 CapEx?

So I think if you were to look at the Q3 number times 4, that's a fair estimate. We see in that we're back towards more of maintenance CapEx. This is where we should be. There are no big new investments on the horizon now for quite some time.

Cool. And then another question on -- you talked about competition, pricing and so forth. What can you do about it? And given that you have -- you're running some concept workshop chains, can you capitalize on that in some way or -- how is it working? What can you do about it?

Yes. But we can, of course, do a lot. And I think that -- and I mean a lot of the price competition comes from the situation with that everybody is fighting for volumes. And of course, that's important to us also to get some help in the gross margin. But the launch of new countries, that's way of competing with e-commerce. We launched private [indiscernible] brand. But I will also say that maybe a little bit more long term, but our to help the affiliated workshop with digital bookings with fleet sales and so on, that's also where we see and actually where we're not [indiscernible] price competition.

Okay. I think I lost you once in a while there, so but I can come back afterwards. I think you mentioned higher input costs in Sweden and Norway. What is that about?

I would say the primary change in the cost base in Sweden and Norway, if you look over a year, is the we are now [indiscernible] has been operating. So there's a little bit of cost coming out. Other than that, the development of cost in Sweden and Norway has been on the positive side. So we've been able to take out quite a bit of cost in support functions mostly. But there will be no other big -- maybe I don't know are you looking at specifically that we can...

Okay. Line is not very clear to me. But lastly then, can you update me on onetime or nonrecurring items? What remains?

So the two bigger items that we've had over the last few quarters are partly the investment into the ERP project. This is now being run at lower pace. That part has come down. You can see it's specified in one of the notes. The other part are costs related to the warehouse move. And as we said on the call, we're very close to being done with this. Some activity over into Q4, there will be a little bit of activity still in Q1, but we're close to the end of those. So with that items affecting comparability should be coming down. And it's also fair to point out that in the SEK 100 million cost savings program, we've not made any big accrual. And the staff reduction [indiscernible] through, I would say, normal negotiation with the unions. So it should not come with big cost.

The next question comes from Mats Liss from Kepler Cheuvreux.

Well, a couple of questions here as well. Coming back to Finland, I mean, you managed to turn around to positive numbers here in the third quarter. Is it sort of a sustainable changeover? Or are there any sort of one-offs included there, which explain the improvement?

No, I wouldn't say so. We have a good growth in Finland, a little bit helped by more stability in the market, but also that we are gaining market shares. And we are well -- I mean, we started already 1 year, 1.5 year ago with cost saving programs and which really starts to kind of hit the P&L. They are also a little bit earlier in the phase of -- with the automation. So they start to have a very good effect on -- with that automation part. So we have clearly ambition to continue to grow in Finland.

On the other hand, I mean, Poland, Baltics is soft, but you have the Elit Polska impact and you have -- then again, top line was pretty good. Is it -- when could we expect you to from breakeven there?

On Tuesday, 4:00.

No, Joe. There is still job to be done in the integration. We said that it will take 18 months, and we are well in progress. I think Christer mentioned that 14 of the approximately 20 branches that we aim to close is done, but it's still work in progress. And then we have a strong competition, of course. So I wouldn't say any timing, but we stick with the ambitions we had when we did the acquisitions that we should be in much better shape during next year.

And maybe what I can add there. So in 2025, we've also been moving the warehouse in the Warsaw region, a big one. which has been quite an extensive project and surely, operations has not been running completely smooth during that process, but there's also some effects in 2025 from things we've done to improve the run rate going forward.

Good. And then maybe could you -- I mean, Andreas asked about these items affecting comparability and so could you say something about the amount included in the third quarter overall, I mean, now?

So Q3 is not very different from the earlier quarters on this front. So the bigger items are the ERP project, which is now entering a slower pace. And then the other bigger part are the costs associated with warehouse projects. And that part should also be coming down because now, in fact, we are approaching the final stage of these projects. Then as you know, items affecting comparability, there could be things which you did not plan for. So I will not make any kind of projection for that item, but there's nothing big that we anticipate now.

And when I read quickly through the geographical -- well, business segment there, I found SEK 5 million in Poland Baltics, I think, and SEK 5 million on other. Is it sort of on that level, SEK 10 million, SEK 15 million of extra costs?