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

Good morning, and welcome to Mekonomen Group Quarter 3 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, and welcome, everyone. Thank you for joining us today. I have Asa Kallenius, CFO, with me here, and we're going to guide you through the third quarter 2020. Despite challenging times, our third quarter was characterized by increased activity and stabilized demand. We reported positive organic growth and improved profitability on the back of a broad range of forceful actions and structural initiatives. At the end of the quarter, we have seen uncertainty grow in our markets as the reported COVID-19 infection rates have increased. We're still confident that in that the underlying demand for our products and services is robust. And we, therefore, expect a limited effect from the pandemic as long as society and our market are not closed down completely. Our priority going forward is to continue to safeguard the health and safety of all our employees and customers. We will continue to focus on mitigating the effects on our operations and continue to offer high-level service and availability to our customers. I will now hand over to Asa to take us through the result of the third quarter.

Yes. Thank you. And as Pehr said, we stand strong despite the challenging times and report positive organic growth and improved profitability in the quarter. This is thanks to the timeless demand of our services and products and our forceful actions and structural initiatives during the year. We had an organic net sales growth of 3% compared to last year. Due to currency effects, the reported growth was negative by 1% in the quarter. EBIT increased by 9% compared to the same quarter last year. The EBIT margin was in line with last year at 7% where the adjusted EBIT margin increased compared to last year. The EBIT includes items affecting comparability of SEK 24 million this quarter related to structural initiatives in -- within primarily MECA/Mekonomen. Our financial position is robust. We have reduced our working capital. And together with our strong results, we reported strong cash flow during the quarter, and our net debt decreased. Let's have a closer look at EBIT on next page, and that is Page #4. As you can see, we had a positive result in all business areas. MECA/Mekonomen is negatively affected, as I said, from items affecting comparability of SEK 24 million. We will have a closer look at the business areas shortly. Let's go to Page 5 to look at gross margin. Purchasing synergies and our earlier price increases in most of our markets is compensating for a negative product mix and currency effect. We have stable margins. And in the quarter, the gross margin was 45.2%. Let's look closer to the sales and results per business area in the third quarter and move over to Page 7. FTZ had a very strong performance in the quarter. The EBIT margin rose to 11% compared with 9% last year. This is due to internal cost savings without any advantage from governmental relief. The sales are negatively affected by currency effects of SEK 24 million. We estimate that FTZ has increased its market share further on the independent part of this market despite a slow market development. Moving over to Page 8. In Inter-Team, we have successfully managed to follow our long-term strategic plan around improving EBIT with forceful actions and focus on increasing gross margin in Poland. Combined with short-term actions, with the purpose to reduce the COVID-19 effect by cost saving actions, EBIT rose to SEK 31 million compared to SEK 9 million last year. The results include governmental support of SEK 7 million in the third quarter. The EBIT margin of 6% is impressing (sic) [ impressive ] compared to rest of the industry players in the Polish market. And then over to next page, Page #9, in MECA/Mekonomen. We saw a stable development in Norway for the business area MECA/Mekonomen where price adjustments and market activities has led to organic growth compared to last year. In Sweden, we saw a slower development. There are 3 main factors to this: first, there is a strong competition in the market; second, a weaker underlying market development; and in addition, we are taking forceful actions and structural initiatives to improve our long-term profitability and competitiveness that affect us negatively short term. The forceful actions and structural initiative throughout the operations is largely implemented and will have a positive effect going forward. EBIT in the quarter is negatively affected, as I said before, items affecting comparability, and that is closure of unprofitable branches and workshop and also costs for closing down our warehouse in Eskilstuna, items affecting comparability is SEK 24 million. And we have SEK 2 million of governmental support included in the results of the third quarter. I move on to Page #10, Sørensen og Balchen. A very strong, once again, performance from Sørensen og Balchen in the quarter with an organic growth of impressing 22%. Sørensen og Balchen has a great track record history. Sørensen og Balchen's business model benefits from the positive market development, and they are also gaining market share on top of that. The EBIT margin increased to 25% in the quarter, and there are no governmental support included in the results. Back to you, Pehr.

Thank you, Asa. And yes, I'm very proud that we have delivered a strong quarter in Q3. We do not only have strong results but also strong positions in our main markets. Being the market leader in the 3 out of 4 markets enable us to continue to drive the industry forward and develop our core business in line with new trends and our surroundings. I will move -- skip to Page 15 and talk about the news from this morning. Our dialogue with the electric car producer, Xiaopeng, has resulted in a signed agreement. Xiaopeng has chosen us to be the exclusive wholesale partner for spare parts in Norway. And we will also be the partner that authorize workshops and service partners for Xiaopeng cars. The launch of the new car model is initiated, and the first cars will be delivered to Norwegian customers in the end of the month. This is a very exciting development in the car industry. New players see potential in using existing sales networks in Nordic markets where our position, unbeatable availability, and strong competence, makes us a very attractive partner. Apart from Xiaopeng, we have ongoing dialogues with several new electric car producers planning to enter our markets. And I hope to get back to you soon with some more positive news around this. Slide 16. Digitalization of the customer experience are a prioritized focus with the purpose to streamline and simplify for the customers. The customers appreciate our digital booking systems that continue to increase in number of bookings. The integration of e-commerce with stores and business area Sørensen og Balchen is progressing further and is something that we'll adapt also in the other business areas of the group. Our latest digital innovation is under development together with the start-up company, Ezeride. And that is a new carpooling service targeting companies that want to help their employees to travel more sustainable. With the help of AI technology, drivers will reduce climate effects, traveling costs and offer their colleagues a sustainable alternative for job commuting. And this is, of course, a very good offer when we -- with our dialogues with companies when we also offer service and reparations. Going to Slide 17. We continue to develop our best-in-class electric car and hybrid training in all main markets. We are well equipped to take care about newer-generation vehicles, regardless of which engine or fuel they run on. We are also expanding our efforts when it comes to the next generation of mechanics. Next fall, we will launch the fourth location of our upper secondary school, and that one will be in Gothenburg, Sweden. And just before summer this year, our first students graduated in Stockholm and Lund, and I'm proud to conclude that 90% of the students now are working within the industry. This should compare with the fact that under 50% of students in traditional programs are employed in the industry after graduation. And we move to Page 18. And it makes me very happy that Mekonomen Group has been recognized as Sweden's most gender-equal company by AllBright Foundation. Also in this area, we proved that we are on the forefront and have a leading position that will gain us going forward. And finally, the timeless need of -- for mobility is a great opportunity for our group. We stand strong despite uncertain times. We will continue to fully focus on serving our customers, reducing costs and to increase efficiencies in all business areas. And thank you, and now we are looking forward to hear your questions.

[Operator Instructions] The first question comes from Mikael Löfdahl from Carnegie.

Yes. First, a question on your purchasing costs and the impact from FX. What -- I guess now with the stronger Swedish krona, the previous headwind should turn to tailwind when it comes to your purchasing costs and then also for the gross margin. But you mentioned in this quarter that it was still negative, is that correct?

Yes. It's correct, what you say. We should see gains by a lower euro/SEK and euro/NOK exchange rate going forward, but it takes some months to take all the goods through our warehouses. So going forward, if it stays, it should be positive.

Yes. And right now, this is -- also has been -- is still a bit, I would say, different weeks, actually, but we -- now the currency looks quite good in Sweden. But if you look at the Norwegian krone, we still have some -- and they are also purchasing some of the goods directly in euro. So the NOK/euro is important, and then that's still very weak.

Yes, it's still very weak. We compensated with price increases in Norway to compensate on gross margin. What you see now is the translation cost when taking sales and EBIT to Sweden. It's a large difference between SEK/EUR -- SEK/NOK and SEK today and 1 year ago. So that's the negative effect you see, the currency effect you see on sales.

But if anything, if you look at the gross margin, the 30 basis points negative effect from FX in this -- during the first 9 months now and, I guess, also in this quarter, that would be more flat or unchanged going forward, if anything?

Yes. You remember that what happened in the Q1 when the NOK collapsed, so most of the headwind in the first 9 months comes from March actually from Q1. It was more stable in the quarter.

That was my follow-up then. If you would have shown this picture, the Slide 5, on a quarterly basis instead of the first 9 months, would it even have been positive then in Q3 alone, the currency effect?

Not positive, a very small effect.

Okay. And sticking to that slide, when it comes to the purchasing synergies, where are you in that process in relation to what you said in conjunction with the acquisitions of FTZ and Inter-Team?

We will have some more quarters with improvement, thanks to synergies. But what we said, that it should be full effect as from next year, so we'll expect that we -- but when it comes to the work negotiations and the change of suppliers, that is -- you can say that the project is completed, but we're still waiting for some of the effects to come, one or more quarters to come.

Okay. Okay, good. On the COVID-19 impact here, I was trying to get a sense of the net impact of the company. Obviously, you have received the government grants. It was significantly lower in this quarter compared to Q2, but they are still there. If you would have -- if you look at the pure negative impact on you and then try to look at the net effect, if you then take away the government grants, what -- where are we there? And also on government grants, will those diminish completely during Q4? Obviously, we don't know now with new lockdowns and so on, but yes, if you can say something about that.

I'll start with the second question. We -- on governmental support, again, if it will not be a complete lockdown, we don't expect to get anything more in Sweden, Norway, Denmark. Poland is a little bit other situation where we still have the possibilities to get some support. But I will not expect anything, at least anything material within the other 3 countries, unless there will be something completely different and -- but what the government has offered now on the table is very little of that, that we can use. And about the net effect of the COVID, that's -- it's very difficult. And I don't think we actually can answer very clearly on that. There is, of course -- in the third quarter, it's much more stabilized. It is, in some markets, lower demand due to this. But we don't have these extreme situations with furloughs and costs in and out. So it's complicated when it's Q2, especially since we have the data breach in that quarter also. But from this quarter, I would say that it's not any major impact.

And when it comes to the corona impact here, could you say something about the month-on-month trend during Q3? Obviously, you had a positive organic growth of 3.3% in the quarter, but how did you sort of leave the quarter in September? Was it a higher number in September?

It was -- I would say, it was quite stable throughout the quarter when you split it into the months. But again, it's also different in different markets. So it's not that logical just to put everything together because it's depending on development in the local markets, and especially Poland became worse during the end of quarter because of new restrictions and more kind of lockdown scene in Poland. But in the other markets, I wouldn't say that it affected the third quarter especially much.

Okay. On -- in Inter-Team, you mentioned that the margin in Inter-Team is very impressive related to the Polish industry and peers. And I guess now, obviously, in the quarter, you had a positive impact from relief programs and government grants but still a negative impact from COVID-19 also, obviously. But where -- could you give some guidance going forward what is to expect? I guess a 6% margin in Q3 is a bit -- you shouldn't extrapolate that maybe going forward.

I mean we talked about that with the acquisition that we have a long-term goal to be best-in-class in Poland, and that is, on this level, 5%, 6%, 7%. It's -- it would be stupid of me to try to give some guidance going forward with the uncertainty on which we have in front of us. But a lot of things which we have done in Poland will have an effect going forward because we have done strategic changes in which kind of customer groups we approach, which kind of product we focus on and very much on efficiency and cost control. So I won't say any numbers, but the strategy which we had from the acquisition has -- we have delivered good on so far, so we're happy with the development.

Okay. I guess didn't you receive some government grants that maybe should have been paid already in Q2? Or am I wrong there?

No. In Poland, there is a general support from the state to companies to cover personnel expenses. And you get the support until November 30, and you promise to keep your employee until that date. So it's actually from -- I think it's from May to November, the support period. So we -- as Pehr said earlier, we will have some support also in Q4 from Poland.

Okay. Final detail on the central functions in the EBIT bridge, the SEK 12 million there on a year-on-year basis, could you say something about that and maybe some guidance on that level also because that cost was a bit higher, I think, than expected by the market?

Yes. That is the cost that varies between the quarters. So when you look -- you can look historically on the quarterly costs and take some kind of average. It varies a little bit from the quarter-to-quarter depending on what cost we took centrally and what management fee we sent out to the business area. So this is to be seen as temporary in this quarter.

But of course, I mean when -- all the cost saving programs, which we have done, some of it is, of course, on central functions as well, but Asa also said you need to look at this after 12 months to see the full picture.

Yes. But yes, the cost increase, you mean that there are some one-offs then in that number, okay. But could you say, perhaps quantify, then the one-offs? Because the only ones that you mentioned are related to MECA/Mekonomen, the SEK 24 million in the quarter. So was there additional costs then throughout the group?

No, not in that way. So you can -- it was -- we took some extra costs for some changes we did, but it's not considered items affecting comparability. And as I said, you can look at the average on central function cost going forward.

It's very much internal, the decisions also in this. That's why you need to have the full year to see the picture.

Is it possible to say something about the very, very recent, current trading, I mean, the last week or 2 weeks? I guess we are just about to see the hike in restrictions, still no lockdowns, but have you seen anything on your perhaps weekly or daily reports that suggest that you are being impacted already?

No, we don't do that kind of guidance, but I can repeat what I said before and that is, if we go back and look how it was in the spring, this situation should not affect the sales that much as long as it's on this level. If it will be more lockdowns, then it will be affecting. That was what we learned in the spring.

Since the spring, we also added a lot of knowledge about how to handle the situation and to perhaps be more careful in deliveries, et cetera, and be able to continue sales better. But I think we learned a lot during Q1, Q2, when the first wave of COVID-19 was here and hitting our markets.

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

Maybe I have another try there on the trading conditions in the fourth quarter. Do you see any sort of pent-up demand following maybe a bit more driving during the summer holidays and so on going into the fourth quarter that people are trying to get their car in order for the winter season and so on?

No, I wouldn't say that. If it was some postponed demand, that is already covered in Q3. There was some delays, but that was mostly between Q2 and Q3 because, as you remember, it was car inspection in Norway that was delayed for 1 month, so we got a better effect on that in Q -- in the summer. But in -- I would say, going forward, I can't see any of that. If it will be something, it will be spread out for a very long time. So I don't think you can find it in the month or in the quarter going forward.

Then I guess you mentioned the competitive situation in Sweden as well, making things a bit tough for MECA/Mekonomen. But what is the difference compared to, well, your other markets?

We have experienced a little bit more activity from low-priced distributors than we have in the other markets, so that is probably the main reason. But then we have, in Sweden, it's also a market where I would say the authorized workshops are fighting good. We also have maybe more e-commerce in Sweden. So I would say it's a general complication landscape that is tougher and not -- maybe not that specific area.

And you also had some restructuring in Sweden, I guess, with the warehouses and so on. Is it more to come there in the fourth quarter? Or is it sort of the same level? Or just say something there.

We do not expect any items affecting comparability related to MECA/Mekonomen in the fourth quarter. We had a program during Q2 and Q3 of closure of unprofitable workshops and stores and also the warehouse now in Q3. But we do not plan for any more closure in Q4.