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

Good morning, and welcome to Mekonomen Group Quarter 2 Report 2020. My name is Anna, and I will be your coordinator for today's conference. [Operator Instructions] I will now hand you over to CEO, Pehr Oscarson, your host for this call. Thank you.

Thank you. Very welcome, everyone, and thank you for joining us today. Together here, I have also Åsa Källenius, CFO, and we're going to guide you through the second quarter 2020 and summarize of the first half of the year. Despite challenging condition, we made a strong result in the second quarter, thanks to our intense efforts to handle the effects of the COVID-19 pandemic and the data breach in the end of March. We have succeeded in adapting our operations towards respective market conditions when it comes to lowering our costs and continue cost focus and on our customers' needs. No one can say for how long this pandemic will continue, but my firm belief is that we are very well positioned for the future. We have a proven and a solid business model regardless of cycle. For you who have the presentation, I am now on Slide #3. And the ongoing pandemic still affects the demand in all markets, but we have noticed a gradual recovery in the second quarter. The speed of recovery varies between the markets. For example, we have seen somewhat slower recovery in Poland, while Norway experienced a much faster recovery rate, especially within Sørensen og Balchen, who made all-time high result in April, managed to exceed that result in May and then again in June, therefore, of course, reported the best result ever 3 months in a row. We have made it through the data breach. Even though our major systems were restored in mid-April, we did have a negative impact on our operations in April and May. The financial impact of the data breach will be limited by our cyber insurance. Switch to Page 4. Our main priorities in this situation has been and still are the health and safety of our employees and to continue to give high-level service to our customers. We have acted forcefully and implemented a broad range of measures during the second quarter to mitigate the effects from the extraordinary events. These actions include secure logistics change and availability, cost reduction actions, structural cost reduction initiatives, focusing on improved working capital and cash flow, a new bank agreement and sharply increased prices in Norway, followed by further adjustments in our other markets. Approximately 30% of our cost cuts will be permanent, which will be positive for our future efficiency. And then I will hand over to Åsa to guide us through some numbers.

Yes. Thank you, Pehr. Over to the numbers. I'm now on Page 5. Despite the challenging conditions we had, we delivered a strong result in the quarter. The strong performance builds on our forceful action and gradual recovery of the demand in our markets. During April alone, sales decreased by 17%, followed by a strong recovery in May and in June, which ended up in minus 7% for the quarter. We also managed to keep strong EBIT and EBIT margins despite the lower sales. Our strong cash flow is positively affected by governmental support, consisting of postponed payments and VAT and taxes by around SEK 300 million. Over to next page and EBIT. We report a continued strong development in FTZ, Inter-Team and Sørensen og Balchen. I will get back to them later in this presentation. But first, a few words around MECA/Mekonomen, where we have succeeded to balance the lower volumes affecting gross profit by cost reductions and governmental support. We have also implemented the structural cost reduction initiative, including closure of unprofitable branches and workshops. The result includes a negative item affecting comparability of SEK 31 million. #7, gross margin bridge. We report stable gross margin for the first 6 months, negatively affected by currency fluctuations in Q1. Actions to compensate for these effects include price changes primarily in Norway due to the weak Norwegian krona. Gross margin in Q2 alone has improved compared to last year. Now we will look closer into the business areas. I'll start with FTZ on Page 9. FTZ has managed to maintain a strong EBIT margin due to internal cost savings without any advantage from governmental reliefs. The unprecedented market leader position is also contributing -- is a contributing factor to the strong earnings for FTZ. We estimate market share gains from the independent part of the market in Denmark in the quarter despite the slow market. This is a sign of strength that is an advantage for the future. Over to our Polish company, Inter-Team. We continue to follow our long-term strategy plan around improving EBIT with forceful actions and focus on increasing gross margin in Inter-Team in Poland. This, combined with our short-term plan, with the purpose to reduce the COVID-19 effect by cost saving action, has resulted in continued improved EBIT margin despite sales decreasing by 16%. The Q2 result does not include any governmental relief. And then over to our largest business area, MECA/Mekonomen. We have seen a gradual improvement within MECA/Mekonomen in the quarter. As you all know, we had challenges in the business area, and this has led to forceful actions throughout the operations to mitigate impact from both data breach and COVID-19 going forward, including cost reduction and structural initiatives to improve our long-term profitability. This includes action on unprofitable branches and workshops. We have a strong focus of improving efficiency by cost reductions in MECA/Mekonomen business area. In early May, we sharply increased prices in Norway to compensate for the weak Norwegian krona, complemented by further adjustments to our pricing in Sweden. Around SEK 24 million is received from governmental relief in Sweden and Norway. The process -- the claim process around the insurance compensation regarding the data breach is still ongoing, and our financial impact will be limited. Adjusted EBIT margin was at the same level compared to previous year, thanks to our forceful actions. And last but not least, Sørensen og Balchen. As Pehr said, an all-time high result in Sørensen og Balchen in Q2, with the best result ever in the month of April, in May and in June, respectively, a successful quarter for the Norwegian business area who also had a great track record historically. And generally, we noticed a higher demand in the Norwegian market, where Sørensen og Balchen's business model benefits by a strong do-it-yourself market that has developed well during the lockdown and the fact that many worked from home. Sørensen og Balchen has received SEK 3 million in governmental support, which is included in the Q2 result. This excluded, it would still be the best result ever. Back to you, Pehr.

Thank you. I am now switching on to Slide 14, and these are some words about group footprint. We have an increase in number of affiliated workshops in all main markets, thanks to attractive concept and customer focus. We have a slightly decrease in number of branches in Sweden, and that is a result of the structural actions on unprofitable businesses. I'm moving on to Page 15, where we can see that we are #1 and 2 in Sweden. We have position 1, 2, 3 in Norway and the clear #1 in Denmark, strong positions that will benefit us going forward. In Poland, we are #4. Poland is still a fragmented market that we believe will be consolidated in the long-term perspective. And some words about the business development. We continue to drive the industry forward by creating solutions and customer services that will help us strengthen our position further and meet new trends. I'm on Page 17, and we see that now car dealer networks are shrinking as a general trend due to lack of profitability and efficiency, and new digital sales channel replaced the traditional physical showrooms. Car producers new to the European market are not interested in establishing car dealer networks and workshop. They are instead looking for efficient sales channels and established partners with wide networks within the independent aftermarket to solve the maintenance of the car. With our unbeatable availability, very strong competence and well-known brands with high credibility, we are an active partner for these new actors. During the second quarter, we initiated a dialogue with Chinese electric car producers ZEM around service and warranty partnership for the coming launch of the smart electric car Xpeng or Xiaopeng. Naturally, the existing car certification concept, which we have in Norway, were crucial for that collaboration. I'm moving to Page 19. We have continued successful development for Sørensen og Balchen's click and collect service since the start of March 2020. The customer order a product at BilXtra.no and receive a text message within 2 hours stating that the product is ready for pickup in the branch, creating additional sales opportunity while having the customers in the branch. Over 50% of Sørensen OG, Balchen's e-commerce orders consist of click and collect. Moving on to Page 20. The most common way to book a service or repair at workshop is still to pick up your phone and call the workshop for making an appointment. But we see largely increasing numbers of car owners using our digital booking solutions. Nearly double number of bookings in FTZ during the first 6 months compared with last -- same period last year. Impressive 76% increase in MECA Sweden, while Mekonomen Sweden have a more mature development from an already high level, but still an increase of 25% the first half year. Last page. Mekonomen Group enables mobility. We have done so for decades, and we will do it in the future. As the technology develops, it creates new opportunities. We will continue to focus on profitability, growth and create value for our customers. That, together with a strong position and stable business, will make us well positioned for the future. And with that said, we open up for questions.

[Operator Instructions] And we do have a couple of questions coming through. The first one is from Mikael Löfdahl from Carnegie.

Yes. So a few questions from me, if I may. First of all, looking at the chart showing the gross margin development, you're here looking at the 6-month basis. But if we were to look at a quarterly basis and the FX impact, is there a positive impact in Q2? And could you also speak a bit about the lag in that positive impact from a stronger Swedish krona and Norwegian krona?

Åsa here. Yes, if you would look at Q2 alone, there would be a positive FX effect. And of course, we have advantages now when we increase prices in Norway and also Sweden. And at the same time, the euro weakened towards both those currencies. So yes, we have a positive impact in the Q2 quarter.

And I guess, yes, and just the second part of your question was the lag. And of course, now when the currencies were still improving, there is somewhat a couple of months delay for getting that into the price of the product.

We will have -- it takes around 3 months for the spare parts to go in and out in the warehouses.

Yes. So at the beginning of Q2, I guess, you still had a negative FX impact, and then it gradually became better. So we will see a much, much more positive impact in the coming quarters given the current rates. Yes, and on that...

I'll just comment on that, Mikael. That will depend on very many things, and we are not confident that it's true, if all things stay the same. But currencies move every day, and we do not know what [ history we'll have ].

Yes, sure. And on that topic also then, you raised prices in Sweden already, I think it was late last year, and then in Norway in May. And where -- when will you -- are you forced sort of to reduce prices? Or as a market leader, can you hold prices up regardless of the FX currently?

I mean it's very clear ambition to try to keep the price level which we have, of course. That -- it's not only our decision, it depends on what our competitors are doing. But looking historically during this kind of situations, the industry has been quite good in keeping the price level and then have some good years when the currency is moving in the right direction. But that's historically. We don't know what will happen this time.

Okay. Another question then on the EBIT bridge. Looking at the cost reductions, you're mentioning in the report that roughly 1/3 of the cost savings are sustainable. But what are you calculating on? I guess some of the measures that you launched during Q2 has not gained effect yet, and -- especially the ones that you took charges for in the quarter. So where -- as we leave Q2, what is the sort of run rate in terms of cost savings and particularly for the sustainable part of the cost savings? Could you say something about that?

It's a little bit difficult because when we talk about 1/3 is from the total package, and the total package is kind of moving a little bit up and down because that's also adjusting due to the demand. So it was one number in June and another number in July. This should be seen more as an ambition. If we do something to, say, SEK 100 million, then 1/3 of that SEK 100 million should be, so to say, long-lasting. But we also need to react on demand. And I would say that in some areas, we have had -- if you look at Norway, quicker -- let's say, back to normal demand. And then that's still the cost saving, which is on one part is sustainable, but maybe the total is a little bit lower due to the high sales volumes.

Okay. So you can't give us a number of approximately where you are aiming at in terms of sustainable cost savings on a year-on-year basis?

Not at the moment and especially not due to the uncertainty going forward. Hopefully, after Q3, we'll have more stable ground to stay on, and I can communicate that.

But the run rate here, you mentioned SEK 25 million in support on a year-on-year basis. The run rate leaving Q2 is, I guess, higher than SEK 25 million on a year-on-year basis.

Yes. Yes. Yes, you mentioned we did meet the Mekonomen business area. Yes.

Yes. And just to be clear also, if those items affecting comparability, you haven't included the SEK 7 million of your compensation from the cyber insurance because that only compensates costs that you've had during the quarter, so it's a net...

Yes. That's correct.

Okay. And regarding that insurance compensation, I guess, that is an ongoing discussion or -- yes, with the insurance company. But you mentioned SEK 7 million of that, that was a small portion of the expected compensation. What are you hoping for here?

We are still in like a normal claim process towards the insurance company. So we are still in that process, so we can't communicate that externally. But we will come back on that as soon as we know more.

But can you say something about what kind of gross profit decline that you think that you experienced because of the data breach? Because it's difficult for us, given that we had COVID-19 at the same time. So what was what? I mean if you say a minor -- if SEK 7 million is a minor portion, people might think that the whole compensation is SEK 100 million or SEK 50 million or SEK 30 million or -- yes, it's quite -- it could be quite big number.

Yes. I know it is very difficult, and it's a complex quarter in many ways. But at this point, we cannot say the numbers.

Okay. But you -- do you think it will be settled in Q3? Or -- where are you in that process?

Normally, this kind of process is quite time-consuming. We don't have any own history. But from what we hear from our advisers, it can take quite a long time, and it's very important for us that it -- we don't want to rush it because we want this to be as good as possible. So yes, it may be something in Q3, but it can go on until beginning of next year as well. So that's an unknown area yet.

Okay. And the government reliefs that you received in this quarter, SEK 24 million, as you see it, and this is mainly then Sweden and, to some extent, Norway. But where are we now? And timing-wise, when will you cease receiving these grants? And will you -- I guess the net impact from COVID-19 has been negative in the quarter anyway. So as this runs out, you would probably benefit elsewhere. But timing-wise, what are your budgets based on in terms of government reliefs in Q3 and potentially Q4 as well?

We don't just kind of base anything on further support from governments. So I would say that we don't expect anything. If it will be a situation and if it will be a support that we can apply for, that's something positive. But especially, as you have heard in Sweden, the rules are changing all the time, so -- and we really don't see any possibilities to get any more support.

To complement that, I can say that we have a process ongoing in Poland. And Inter-Team has received PLN 2 million in the beginning of August, not included in Q2, but it's a part of compensation for lost sales in Q2. We have the possibility to apply for even more, and we have, but we have not received any more money than the PLN 2 million. And it's -- we do not know what we can get more. But possibly, there would be more.

And in Sweden, you didn't get anything in July?

No. Just the normal social security relief that everybody gets, but no one for layoffs, et cetera.

So there were no staff furloughed during July then?

No. The rules say that you can't go on vacation if you do that. So it was kind of a mission impossible to me to use it.

Okay. I see. Final question for me. Looking at the market as such -- well, it's actually a twofold question. But the market as such, do you -- I know you mentioned Denmark that you have gained market share, and I know that you had both workshops and stores open while competitors were closed down during the period and so on. But what about market share gains in general? In Norway, for instance, where you raised prices, did that have any impact on market shares? And also in Sweden, how has that developed as you think during this period? That's one question. The other question on the market as such. We are seeing a very strong used car sales and used car demand in, I guess, all countries now. And I guess that is positive for you, and we've seen that in numbers, both in Q2 and in the start of Q3. The strong used car sales is, I guess, positive for you.

Yes. First question about market share. That's a little bit also -- there are different areas. We gained some market shares in Poland and Denmark definitely due to high service level during this pandemic. In Norway, we -- I would say, stable, maybe a little bit increased market shares. The price increases, which we did, was followed by most of our competitors. So the price increase doesn't have any effect on share of market. And in Sweden, I should say that it has been stable also, the same situation with the smaller price increases, but still followed by the market in general. When it comes to the used car sales, I agree. And maybe that, in itself, is one interesting thing, but that is because of the lower sales of new cars. And that leads to an older car part, which -- and an older car part needs more service and reparation. So that is good for us. This is still a couple of months with very low. And we know that we have -- we are only in Sweden 4 million cars. So it's -- the numbers in the total -- affecting the total market, maybe not that much. But if that continues, it will be also big enough to have a clear visible positive effect for us. But there is definitely no negative things with this. So it's as it is or it's better, depending on how long it will continue.

[Operator Instructions] The next question comes from Mats Liss from Kepler Cheuvreux.

Yes. Good numbers there. I had a couple of questions here. First, about cash flow that you had some tailwind, I guess, from VAT, et cetera. And I just wonder how will that sort of balance out going forward. When did you sort of close that -- those VAT issues?

Yes. We have postponed payments of VAT taxes of approximately SEK 300 million in the quarter, and they are to be repaid in the coming quarters. And I think the last payment will be in Q2 next year. And that's the Swedish VAT and taxes, which would come during the coming quarters.

Yes. Great. And secondly, about -- I mean you have the renegotiated financial structure and increased headroom, I guess, to the covenants. Will that affect your interest payments going forward?

No. Not in any major way. It's -- no, no. It will a little bit, but not in the whole picture. No.

No. Then you mentioned -- well, markets have improved gradually during the quarter and demand, I guess. And I have thought, is that an indication that the third quarter has started out in the same way? Or how should we see your comment there?

Yes. As I said before, we -- the gradual increase in demand is an ongoing trend. It's still very uncertain how it will look if we have now find a new level or it will be coming back a little bit more or if it will bounce back. So difficult to guide about Q3 in that matter. We will just wait and see. The trend is we went out from Q2 with a positive trend.

Good. Then I guess there are things you talked about on Slide 17. They are about stronger interest from the independent aftermarket players seems to open up for business for you with the multi-brand service network. And I just wondered, is there any chance or possibility for you to close deals with -- well, not maybe Volvo, but with more smaller brands in Sweden and the other markets to do the service for them? Or is it more -- well, to get it more in a repetitive way? Or is it more sort of when customers need to service, they go to a multi-brand service outlet instead of the brand-specific?

I think it's an opportunity for those very small car brands maybe operating in Scandinavia or thinking about establishing them in Scandinavia. We could be a good alternative instead of building up all these organizations and taking those investments by themselves. So it's -- as I said, we -- the interest increases in that area, and we are very well positioned. And also, I think this is a very interesting part of the future.

Great. Then I guess -- well, it seems to be coming up some new competition there in -- especially in Sweden, with Amazon coming up. And how do you see -- or how do you view their entering Sweden? Do you see them as a complementary? Or -- could you say something about your views there?

First of all, Sweden is -- I can't tell the number, 25% of our total group sales. So I mean the other countries doesn't affect really by this. And then 90% of our sales is business-to-business to a workshop who adds services. So the product is not longer a part, it's a service which includes both labor and parts. And also we -- and that part of the business there, we have a delivery demand, which is daily or hourly even. So with our broad network of branches, we don't see any impact on that business. And that's also what we can see in other areas in Europe where Amazon has already established that they really don't touch that part of the business. So it is the direct consumer sales that can be affected. But there, I have to say that we already have had that for a couple of years with a lot of German e-commerce player with very low prices. So that's really nothing new in that perspective. So we will -- we -- it has possibly an impact on the small part of our business. But having that said, we, of course, want to do it better than Amazon even in that area. We will try to be better.

Okay. Great. Sounds convincing. And finally, about -- I mean you touched upon those savings measures and maybe going forward, the remaining savings measures you have on integrating the logistical entities in Eskilstuna and Strängnäs, I guess. And also, if you could update on the, well, procurement-related synergies with the FTZ and so on and maybe also LKQ.

I didn't hear the first part of the question, but let's start with the second part, with the purchasing synergies. That has also -- is going according to plan. We promised that it will be finalized in -- as from beginning of next year. And we are very well on that plan. Of course, with this drop in demand, that makes it challenging because then we have other, let's say, areas which goes in the other direction. So we get better deals. But since the volume is down, we don't reach the levels of bonuses and so on. So it has been challenging. But in terms of percentage, it's very well on plan, and it has been good to be working together with LKQ during this period because trying to also get some good support from the suppliers in these demanding situations. So it has been a good collaboration. But then again, your first question was...

Yes, the first part there. I mean Mikael asked about that -- those as well. But then in your savings measures going forward -- and I guess you have this integration of the logistical units in Strängnäs and Eskilstuna in the savings. Well, how much of it is in the numbers?

Yes. But yes, same answer as to Mikael before. But then, when it comes to the warehouses, that is -- I mean we actually forced -- due to the data breach, we speeded up the plan because we didn't have the time to kind of get Eskilstuna up and working, so we very quickly moved all deliveries to Strängnäs, demanding operation. But we managed that. Then after that, we have used the time and still are using the time to empty Eskilstuna, but we don't have any external deliveries from Eskilstuna, just taking down the products and moving them to Strängnäs. And that will continue for some other months. But as -- the plan was that we should be able to close down and shut off the light at the same time as we -- the lease contract is rolling out, and that is -- that's December this year. And so that's very well according to plan, which means that we will have those savings also coming next year. We have talked about SEK 50 million. I think I mentioned last time that some of them already are in the books, but still the absolute major part of that will come in 2021.

[Operator Instructions] The next question comes from Mika Karppinen from Handelsbanken Capital Markets.

One question. Kind of my understanding is in many countries, these kind of car inspections can help in -- postponed during the pandemic. Do you think that, that had a negative impact on your volumes in Q2? And then do you expect that sort of impact to be maybe even positive in the coming quarters?

Yes. It's -- I think the most biggest impact of that was in Norway, where they -- during 4 weeks, I think they completely closed the possibility to do this car inspection. In Norway, it is the workshop who is doing that inspection also, so that's also an income for the workshops. And of course, that drives also volumes for us because then they also change parts at the same time. That was -- then after a month, the government decided that it should be back again. And they just got maybe 1 month of trying to catch up, so to say, which means that we had very positive effect in Norway, I would say, in May, thanks to that inspection, which should have been done in April, was done in May, and that drives some volumes. In Sweden, it's more of a long term. So it's not like it's completely stopped, but it has been postponed in some level. And in Sweden, it's 2 different industries. We don't have the -- really the same correlation between car inspection and our sales. But it might be having some future positive effect when this starts to be normal again, but it's not significant.

[Operator Instructions] We do have another question from Mikael Löfdahl from Carnegie.

Yes, sorry. I -- my question was actually already asked, so sorry for that. Thank you.

[Operator Instructions] There are no further questions coming through, so I will hand the call back to you again. Thank you.

All right. Thank you for listening, and thank you for good interesting questions. So -- and hope that you will have a very good day all of you. Thank you.

Thank you for joining today's conference. You may now replace your handset to end this call. Thank you.