Meko AB (publ) (MEKO) Earnings Call Transcript & Summary

Hello, and welcome to the Mekonomen Group Conference Call Year-end Report January to December 2019. My name is Courtney, and I'll be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] And I will now hand you over to your host, Chief Executive Officer, Pehr Oscarson, to begin today's conference. Thank you.

Thank you, and welcome to this call where we will present a bit about our fourth quarter 2019. Together with me here is Åsa Källenius, our CFO, who will also take us through some numbers. But to start, I would say, we have a stable performance in the fourth quarter, and shortly, we'd talk about continued sales growth and a stable profitability. The ongoing EBIT improvement activities are according to plan. We have improved our cash flow generation. And the Board has decided to propose a dividend of SEK 0.5 per share. And we still see that our attractive concepts and brands contribute to increased sales to affiliated workshops. But let's move on to some numbers, Åsa.

Yes. Good morning, everybody. I will take you through the Q4 numbers for Mekonomen Group. Starting with the big picture, we have a growth in the quarter of 3%. The organic growth is 1% in the quarter. Adjusted EBIT is on the same level as last -- the same quarter last year, SEK 149 million. And EBIT amounts to SEK 104 million compared to SEK 57 million last year. Earnings per share is SEK 1 in the quarter compared to SEK 0.18 -- last year. And we had a positive cash flow in the quarter and also for the full year, in the quarter, SEK 156 million, and in the full year, SEK 146 million. EBIT margin 3% compared to 2% last year; and adjusted EBIT, 5%, same as last year. We had -- nobody missed it, we had a mild winter season, and it's affecting our sales negatively. We see it mostly in our business area, MECA/Mekonomen, with activities in Norway and Sweden. And I will show you on the coming pages the impact we estimate from the mild winter season. But some comments about the full year. We now had Inter-Team and FTZ the full year, and we can see that we closed the year with the sale of almost SEK 12 billion, SEK 11.842 billion. And that's, of course, a great increase in sales from -- mostly from the acquisitions. But I'm also proud to see that our adjusted EBIT increased by SEK 275 million compared to last year and amounts to SEK 834 million. And EBIT, SEK 705 million, an increase of almost SEK 300 million compared to last year. And as I said, a positive cash flow full year and an organic growth of 2%. We had an increase of earnings per share, with 12% from SEK 6.56 last year to SEK 7.34 this year. So a positive development of earnings per share after the right issue we did, 2018. So over to the waterfall for the quarter. And as I said, we increased EBIT from SEK 57 million last year to SEK 104 million this year. The EBIT is impacted by -- positively impacted by -- that we have not that much the items affecting comparability this quarter. As you remember, we had a lot of items affecting comparability last year in this quarter related to the acquisition or also the frames in stock. But we had impact on gross profit from operations, positive SEK 7 million. We have an impact of adjustments in stock levels, we did by SEK 15 million, but it's not classified as items affecting comparability. And we have a positive effect from high items affecting comparability 2018 of SEK 31 million. We see lower cost in the quarter, positively affecting EBIT by SEK 8 million, and also positively affected by lower integration cost. We had SEK 9.4 million as integration cost for the new company group structure after acquisition of 2018. So SEK 104 million, and we estimate that the mild winter season in Sweden and Norway impact our sales negatively by approximately SEK 30 million, affecting EBIT by SEK 15 million. And we also have this adjustment in the stock related to different items, pressing down EBIT in the quarter. Over to the next page, the waterfall on the gross margin. It looks very much the same as it did in Q3. We had a gross margin of 45.2%, when recalculating the margins for FTZ and Inter-Team as included in the full year, and we land this year with 44.8%. And as in Q3, we see a positive effect of the purchasing synergies, and together with volumes, the synergies impact gross margin by 0.5%. As in Q3, we have a negative impact of the currency, mostly euro towards NOK and SEK. And we still see market pressure, and we see a negative impact of product and customer mix, meaning that we sell -- to launch a customer, for example. And so over to our business areas, starting with FTZ, our Danish company. We saw a net sales growth of 5% in the quarter, of which 2% was organic growth. EBIT improved compared to same quarter last year as a result of the purchasing synergies, we have cost saving activities ongoing, and as mentioned, less item affecting comparability. We have SEK 9 million items affecting comparability in FTZ related to integration cost. We estimate our market share in Denmark to be stable, even though it's a tough market, and we experience tough competition in Denmark at the moment. Over to Inter-Team, our Polish company. They experienced, as we did for the whole year 2018 -- '19, a very strong growth in sales driven by shares of the domestic sales, resulting in an estimated market share gains. Inter-Team in Poland has, as you know, also net sales to neighboring countries as Ukraine, Germany, et cetera. But -- and the strong sales growth was mostly in the Polish market with an higher EBIT, resulting in higher EBIT margin and in approved EBIT as a total. A great improvement from the same quarter last year and EBIT amounted to SEK 20 million compared to 0 the same quarter last year. And we were able to have increased margins in Inter-Team. They amounted to 4% in the quarter, and for the full year, 2%. We continue to see high price pressures on the Polish market and aggressive activities from the competition. We can now summarize the Inter-Team and FTZ, for the full year 2019, was the first year we had those companies for the full year. And we can conclude that we are satisfied with the acquisition. In total -- the EBIT contribution in total from the acquired company amounts to SEK 342 million, which we see as the same level as we had in the prospect. And now over to MECA/Mekonomen, our largest business area. We had net sales in line with last year, but the very mild winter season, as I said, pressed the growth down, and we estimate that we should have had 2% higher sales -- organic sales without this effect. We had 0 organic growth in MECA/Mekonomen in the quarter. High purchasing cost continues to press our cost of goods, and thereby, the margins. We did price increase in Sweden and Norway during December, but we did not see any effect, and we didn't expect to see any effect yet, but we expect to see that the coming quarters this year. We have a stable EBIT. EBIT amounts to SEK 63 million compared to SEK 54 million the same quarter last year, and we have cost saving activities compensating for the continued price pressure and negative customer product mix. And we also had this inventory adjustment, I mentioned, of SEK 15 million in business area, MECA/Mekonomen. Some updates on our new branch concept, BilXtra, Sweden. So far, we have 8 branches in the concept, whereof we own 4 ourselves and 4 is franchise. Turnover during last year 2019 was approximately SEK 50 million. And we experienced a large interest from branches within competing concepts to join in our new BilXtra concept. Over to the next slide, the merging of our central warehouses in Sweden. The project is proceeding as planned, and we still see that we will have the cost savings we has -- have communicated before of SEK 50 million from the end of this year. We have successfully concluded a pilot with 5 branches and also the regional MECA warehouse in Gjøvik in Norway. They now receive their supply from Strängnäs. Next phase in this project is to gradually transfer the supply of all MECA branches from the warehouse in Eskilstuna to the new in Strängnäs. Our focus is to minimize the risk and ensure high service towards the customer. That must be our first priority. And so to our smallest and our business area with our highest EBIT margin. We saw a very positive develop in sales in this quarter to the affiliated workshops, and we also experienced a positive organic growth. In the quarter, we had negative organic growth -- prior quarter in this year. EBIT continues to be high, and we experienced that Sørensen og Balchen has a very good cost control, ending up in high EBIT margins and also high margin -- high EBIT, of course. Sørensen og Balchen is our business area with high sales to business-to-consumer and are exposed to the tough retail market. I guess, everybody has seen what happened in the retail lately, and both in Sweden and Norway are heavily affected. We have actions ongoing to increase the B2B sales, and it's proceeding well. Okay. Pehr, over to you for market and footprint.

Yes. And we are on Slide 14, and that's just an update on a little bit figures about the markets where we are working. It's really nothing new here in the -- this quarter. We, of course, follow the sales of new cars, even though we normally -- our normal customers have cars that is in the age of 5 to 12, 13 years old, so we still don't see any direct effect. And what is very important is to realize that in our markets, still more than 90% of the cars, which is sold now, is sold by old or, let's say, diesel and petrol technique, which we are very well known. Those cars stocks sold now should at least be 15 years out on the street, so we have a good market for the future. Having that said, we are also very -- developing our concept to be able to also service and repair any kind of car, whatever type of -- kind of techniques that were used. Move on to Slide 15 with the group footprint. Not so dramatic changes, but we are growing in the number of affiliated workshops in total. And that is our most priority, of course, so that's very good. I will keep on and talk a bit about digitalization. We have just launched in December, a new booking solution in Mekonomen Sweden with improved features of -- for instant quote and schedule functions. We had online booking ready for -- since a couple of years, but this is a new system with better and -- functions for the car owners. This solution will also be -- replace existing booking solutions in our -- in the other concepts during this year coming. In Denmark, we are in the end stage of developing Drive Clever. That's a call center and digital portal that provides a one point of contact to everything the vehicle owner needs. This is a link between the vehicle owners and independent workshop that provides the workshop with a stable flow of car owner customers. Drive Clever is already working for companies and leasing fleets, and it will soon be available to all vehicle owners. We have also developed a learning management system within ProMeister, and which are successfully also sold outside our group in countries around Europe. This is a portal where we can effectively take care about booking of training and courses, e-learning integration and so on. We have implemented this in Denmark, but in Denmark, it was also supplemented with the technical support module, and where we have had very positive feedback from the customers with that solution. And talking about business development. This morning also, I announced that we have strengthened the group management with a Director of Business Development and Strategy, and that is Petra Bendelin, who has been in the company for 10 years in different positions, and most recently, as a Managing Director of ProMeister Solutions. She joined the group management as of today. Focus forward, of course, core growth and profitability, customer value and business development. And finally, I would say that 2019 was a year where we integrated Inter-Team and FTZ. We have been working with the purchasing synergies. We have the project with the central warehouse and also the cost-saving programs. We have had a good development in cash flow and been able to reduce the debt. So I would say that we have a very solid platform and are ready for 2020, a year where we have continued focus on efficiency and cost control also, of course, but also to increase our ambitions within business development. So that will be my last words, and we will open for questions.

[Operator Instructions] We do have a question coming through from the line of Mikael Löfdahl, calling from Carnegie.

Yes. First of all, this -- maybe I missed something on at the beginning of the call, but this cleanup of stock that you mentioned having an impact of SEK 15 million -- or estimated impact of SEK 15 million, what is that?

Well, it's -- we can say it's 3 parts in that adjustments. One is that we have from -- when Mekonomen was active in Denmark, we had returns to the warehouse in Strängnäs, which we have sold some of it, and some of it we could not sale. And that is now booked in our books, and we cleaned up all the returns we had from Denmark. The next part of this is that we have focused very much on working capital to reduce net debt. So we have a huge return of goods from the branches to the main warehouse in MECA/Mekonomen, resulting in some adjustment in the stock levels. And the third part is that we now finalized the max implementation in Mekonomen branches, and that has also ended up in some adjustment. So I would say those adjustments, they are -- some of them are earlier -- should have been booked in 2016 and some part is for the total of 2019. But we chose now to very much work on to have optimized stock levels and have booked this in the books in the Q4. But is related to 2 quarters prior to Q4.

So it's -- so one could say that you should have booked slightly lower revenues throughout the previous quarters?

Yes.

And previous years.

And previous years.

Previous years. Okay. So it's -- okay. Because you had a similar thing about a year ago, but that was another issue.

Yes, that was something else. This is not seen as an item affecting comparability. It's something that should have impacted our margins historically.

Okay. But for Q1, isolated, it is an item affecting comparability, you could say?

So for Q4, yes, but it's not classified as an item affecting comparability.

Okay. Another thing also, when you specify the mild winter and the impact of SEK 30 million and minus SEK 15 million for EBIT, I mean, you -- last year was a pretty mild winter as well. So how do you come up with that number? One could argue that it was fairly easy comparisons, although, I guess, this winter, it's even more mild. But -- because in this slide, you are comparing '18 with '19, so it's not compared to a normal winter, I guess.

One could argue what is a normal winter nowadays. But -- no. But first of all, it is a significant difference. November was quite similar, but in December -- and it's very difficult to just look at the -- how many degrees it's outside because this is something happened when it gets minus and 0 is probably no effect. But the method which we use is that we have checked on those products which we know are strongly affected by winter conditions, it could be batteries, it could be heating systems and so on, and we compared just those product groups, what we have lost in those. So that's how we came up with the number of SEK 15 million. So it's -- I would say that it's the best analysis, which we can do.

We -- yes, go ahead.

No. And I guess, I mean, the winter hasn't really become -- even though it's pretty cold today, but I guess, this has continued in January. So would you -- have you seen so far in January, the same kind of negative year-on-year impact for these kind of products?

We don't want to comment on the quarter which we are in. But there is mild weather still outside, that's true.

And how -- the sale of these kind of products, I mean, it goes from you to customers and to the affiliated workshops and other stores and gasoline shops, and then stuff like that. So when it comes to the more very winter-related products, when do you sell them typically? I mean, are they sold by the day? Or are they sort of purchased and they're put on stock among your customers? Or when do you see that there is a completely lost winter, so to say, for these kind of products?

It's a mix, but -- because some products, for example, when it gets really cold, minus 10 or something, then the car stops by the road, and that creates more job for the workshops. And they usually get delivery from our stores or -- which fills up overnight from the central warehouse. So that kind of sales that comes immediately. So we can see sometimes if it is very cold 3 or 4 days, minus 10 in a big area like Stockholm, then we will see it directly after a couple of days. But then there is also other products, which when we sell to larger customers, which we may make one sale in Autumn and then hope that they will fill up their stock later, but they won't do it. So it's a little bit mixed, but we feel it quite directly, definitely.

Okay. Another thing. On -- you mentioned before these sort of problem areas, so we have Finland, for instance, and also part of your, what I call, noncore businesses like Preqas and so on. Could you mention anything on how these businesses are doing, if the losses are increasing or have stabilized or even improved?

It's -- I would say, in general, it has been improved. And we still have some losses, and we still have some, let's say, cost for reducing risks and so on. But we don't have any more detailed information than that today.

And you can't say anything else around Finland? You have opened up for dismantling or divesting Finland if profits doesn't turn, how much long time do they have? And where are you in that?

I wouldn't comment on time. But as I have said before, we are looking for better solutions. Better solutions can be that we make it profitable ourself or that we can sell it to someone who can do something better about it, like we did with Mekonomen Denmark a couple of years ago. And I would say we will probably not in the area of completely shut down yet, it's not that bad. We're still working on the 2 other alternatives. But we're open for everything, of course.

Okay. Also, 2 questions on the 2, call it, programs that are running. First of all, the purchasing synergies with FTZ and Inter-Team and, I guess, the other units as well. So you're saying that SEK 60 million has been realized of the SEK 100 million. If we just -- is that on a full quarterly basis? Did you experience those synergies fully in Q4, the SEK 60 million? That's the first question. And secondly, then the remaining SEK 40 million, when do you expect those to come through? At the time of the acquisition, you were quite long term in this sense, but now we have come a good way to the SEK 100 million already. So when can we expect the remaining SEK 40 million? And again, was it a full run rate in Q4?

I would say -- yes, I would say it was full run rate in the Q4 or at least in the end of Q4. So we have -- those SEK 60 million are fully in the company as from -- for this year, 1st of January. And to the second question, yes, we said that it will take some time to get out the synergies, and that is because you always start with the low-hanging fruits and the easy negotiations. So I would say, to get the first SEK 60 million is the easy part and the last SEK 40 million is a bit more difficult. So I wouldn't change -- even though we are happy and it has been a successful project, but I still have respect for the work to be done ahead. So it's still the same. We still have the same prognosis at least until 2021 that we will have the full effect.

And the other cost-saving program, the SEK 65 million that you have completed. You -- I think you have said before that you expected a full run rate by the end of Q4 or sometime during Q4. So should we -- how should we interpret that? Is it the full sort of quarterly effect will come in Q1, is that the right interpretation?