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

Good morning and welcome to Mekonomen Group quarter 4 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. Hello, everyone, and welcome to the presentation of the fourth quarter 2020. With me, I have our CFO, Asa Kallenius, and we're going to guide you through the presentation. As we all know, the pandemic is still affecting many countries and markets, and there are heavy restrictions, and these are challenging time. But despite this, Mekonomen group stand strong. We're taking forceful actions to adapt during 2020 and the fourth quarter is a clear proof of our resilience. It's also an evidence of a stable underlying demand of our product and services. We ended the year with sharply improved profitability and strong cash flow. The focus for the group going forward is to strengthen our financial position even further and to achieve sustainable and profitable growth, organically and through acquisitions according to our long-term strategy. This is why the Board's proposal to the AGM is that no dividend shall be paid for 2020. Still, as we have stated in our updated financial goals, the company's and the Board's ambition is that dividend shall resume in line with our dividend policy over time. The update of the financial goals in December 2020 was made to maximize our possibilities for future value creation. This is something we will talk more about on our detailed Capital Markets Day later this month. Then we will also elaborate on our updated strategy and our favorable position in the market. Our Capital Markets Day takes place on February 25 and I welcome you all to join. As we have seen, we stand strong and efficient even if circumstances are difficult. We, therefore, expect a limited impact from the pandemic going forward as long as society in our markets are not completely closed down. We will focus -- we will continue to serve our customers and always in the secure way. Health and safety for our customers and employees has been a priority since the start of the pandemic and it will continue to be until the pandemic is over. Asa, please take us through the results of the fourth quarter.

Thank you, Pehr. As you see on Page 3, we report a large increased profitability during Q4. This is a final thing and in short, we are strengthened by 3 factors: stable revenues, improved efficiency and better gross margins. This proves that we have a solid business model and an ability to handle changes. EBIT is more than doubled compared to the same quarter last year. The EBIT margin rose to 9% compared to 3% last year and adjusted EBIT margin increased to 10% compared to 5% last year. Now we also had the full synergies from the acquisitions after certain [ interchange ] in the result. The acquisitions have successfully and very clearly contributed to profitability for us. That makes us confident about our strategy going forward. We will continue to grow both organically and by acquisitions. We are glad to see that we gain synergies according to plan, but there is also additional potential to streamline and take advantage of our size. We will continue in full force to work with supplier negotiations and best practice in the group. Looking at Page 4, we can see that we sharply increased profitability in all our business areas, thanks to strong margins and good cost efficiency. I move over to Page 5. We have increased gross margins in the quarter and we have increased slightly for the full year. Here, we see proof of that the synergies have affected the result positively. Looking at next page. On Page 6, we see an overview of our updated financial goals that we have communicated to the market about in December 2020. The adjustment of the long-term goal is about creating even more shareholder value. They were made in order to reflect the company's current operating structure and to enable higher growth rate in the future. We are continuing according to plan with our successful traction work to increase profitability in our existing business areas as well as our focus on reducing debt and strengthen our financial position even further. As stated, this is why Board proposes no dividend for 2020. Still, it is our ambition that dividend shall resume in line with our dividend policy over time. And as Pehr said, we will talk more about the financial target and our updated strategy on our Capital Market Day on February 25. Okay. We move over to sales and result per business area. And on page, we see FTZ in Denmark. FTZ had a continued strong performance in the quarter. The EBIT margin rose to 9% compared to 6% last year. This is due to internal cost control without any advantage from governmental relief. We estimate that FTZ has increased their market shares further on the independent part of the market, despite a slow market development in Denmark. Over to Inter-Team, our Polish business. In Inter-Team, we are on the right track with underlying stable business, which is very positive. Our EBIT margin is impressive compared to our competitors in the Polish market. We have successfully managed to follow our long-term strategy plan around improving EBIT. We have also taken forceful actions and kept focus on increasing margins -- gross margins. EBIT rose to impressive SEK 38 million compared to SEK 20 million last year. This was also possible, thanks to short-term cost-saving actions with the purpose to reduce the COVID-19 effect. The result does, however, include governmental support of SEK 7 million in the fourth quarter and we have been -- and also supported by a one-off in supply bonus. We are delivering according to plan in Poland, but there is still work to be done here. We believe it will take a little more time before we reach our long-term goal and have a stable margin at this level. Over to MECA/Mekonomen. In MECA/Mekonomen, we have positive trend with stable demand and organic growth in line with last year. The EBIT rose to 11% compared with 5% last year. We are definitely moving in the right direction here, where our forceful actions to cut cost and improve efficiency have given results. But there are some uncertainties going forward where COVID-19 is one, currencies are another. The result does not include any governmental relief in the fourth quarter, but includes the rest of the insurance compensation from the data bridge last year, which was SEK 56 million. SEK 7 million were paid to us already in Q2 2020. So altogether, we have SEK 63 million from the insurance compensation in the full year results. In the full year, we had also taken cost of SEK 50 million for the long-term structural actions we communicated around earlier quarters, which will benefit us going forward. Over to Sorensen og Balchen. We are glad to see a very strong performance from Sorensen og Balchen also in the fourth quarter with an organic growth of 15%. The EBIT margin increased 18% in the quarter compared to 16% last year. Sorensen og Balchen's business model is unique with a broad focus of B2B and B2C in combination with a very structured cost control. We are benefiting from being a sharp niche player in the continued high activity in Norwegian market. By utilizing this position in the market, we have gained lots -- we have gained market shares. There is no governmental support included in Sorensen og Balchen's result. I now hand over to you, Pehr.

Thank you, Asa. Yes. I'm very proud that we have delivered another strong result and this is really a proof of our leading position. Moving on to Page 13, shortly about our footprint. We will continue to optimize the network of stores and branches to secure profitability. Regarding the workshop, we aim for larger workshop with higher number of mechanics because this is more important than the actual number of workshops. It's also important for us that the concept compliance is at a high level to ensure quality towards the end consumer, the car owners. The numbers will change from time to time with little effect on the group's result. On Page 14, there is an our overview of the sales in the industry. We are, as you can see, #1 and 2 in Sweden. In Norway, we had positions 1, 2 and 3, and we are by far the #1 in Denmark, strong positions that will benefit us going forward. In Poland, we have -- are at the fourth place. This Polish -- the Polish market is still very fragmented, but we believe that that will be consolidated in a long-term perspective. Moving over to next page. We have a continued ambition to develop new solutions, services and offers to our customers. The purpose is clear to always be relevant and to meet the future customer needs. This enable us to grow and broaden our business. Next on Page 16 is one example of this. In Norway, we have established an independent workshop concept for heavy vehicles under the brand MECA Tungbil or MECA heavy vehicle in English. MECA Norway owns the workshop concepts and works as the spare parts supplier to the workshops in the same way as we do in the core business. We have 10 affiliated workshops in the concept since 1st of February. The first workshop is a collaboration with the Norwegian workshop company Bulder, who owns and operates the workshops. By the end of 2023, we aim for 50 workshop under the name of MECA Tungbil chain concept. Moving on, we also scale up in this area in Sweden. MECA Sweden has been a supplier for heavy vehicles with a wide local assortment for 5 of MECA Sweden's local branches. Since this has developed successfully during 2020, we now expand to include 30 branches with local warehousing. This will result in fast deliveries, national wide. And with this initiative, MECA Sweden will offer the greatest availability in Sweden in terms of number of distribution points. Now on Page 18. In Western Poland, we recently opened our second regional warehouse in order to strengthen availability further for our workshop customers in that region. Availability, efficiency, competence and quality is our most important competitive advantage against existing and new few -- new players entering into our industry. This, together with our warehouse project in Sweden, is a proof of our continued initiatives towards availability and efficiency in this area. And talking about the Swedish project, we -- as we can see on Page 19, the margin of MECA and Mekonomen warehouses is now completed. This has been a successful project and as developed according to plan, giving gradual increases synergies yearly since start. The last piece in the synergies was the rent for MECA's former central warehouse, which has been terminated since the end of 2020. Finally, I'm very much looking forward to the 25th of February and our Digital Capital Markets Day. Together with my management team, I will present our updated strategy, enabling mobility, which stretches to 2025. We -- with our updated strategy, we will focus further on operational excellence and are on creating sustainable business. More details about our focus areas and how we will succeed with our strategy, you will hear on that Capital Markets Day. So please join us then. Thank you for listening. And we will now move forward to some questions.

[Operator Instructions] And we have a question from Mats Liss from Kepler Cheuvreux.

Couple of questions. I mean we have heard there are some problems with payment conductors and so on and the supply change of car produces are stop. And do you expect to see some sort of issues with that about the sourcing of spare part? Do you think it will affect your ability to supply as well?

We don't see any indications of any disturbances in the supply in the independent aftermarket in the same area, as you mentioned, that the car manufacturers has. The last year was demanding when it comes to supply. And I think that was the first thing we started to be worried about when the pandemic started in March last year, but we have had a good supply during the year and of course, as long as the society works as it is and we don't see any risks or any big impact on our business. But again, as it is right now.

And -- well, the year has started somewhat cold and snowy. Have you seen any sort of impact of that? I mean it's good for the big-ticket items like batteries and so on, I guess, could be anyway. Do you have any comment there?

No. We don't comment and do prognosis. But you're right, of course, when it's cold, we sell more winter products. On the other hand, we -- there is slightly slower demand due to less miles driven due to the pandemic situation, but cold weather is better than mild weather. So it's good.

Okay. And finally, just about the close down of the warehouse in Eskilstuna and Strangnas. Did you say that all those costs are out now? And have you also seen the positive impact of reduced inventories due to that?

Not yet because we -- that will -- the inventory will go down, but it's -- that needs to be sold out, so to say. So we -- I would say that we, at the moment, are overstocked in Strangnas. But during the year, we -- that will -- the inventory will go down in that. But then, as you heard I'm speaking a lot about availability. So we also increased our inventories in different places in the market.

The next question comes from Andreas Lundberg from SEB.

Can you hear me?

Yes.

You talk about in the report valid see visible signs of strength and position in the marketplace. Could you perhaps expand a little bit on this? How do you view that?

There is -- I would say it's from 2 dimensions. When it comes to the business here and now, we definitely see that -- I mean, as I said, there is a stable demand for our products and services, but there is also, of course, market shares, which are moving. And our strong concepts and strong brands is proven to attract a lot of the car owners. So that's where I would say we have a strong position in the core business as it is now. But we have also -- I would say, we are well prepared and have a high level of innovation in order to also be positioned for the future. And the future will not be the same as it is now. So we are in a good phase and we are also well prepared for change behaviors in the future. So it's both good position now, but maybe also even more important, good position for the future.

And where do you think you stand out versus competition?

As I said, we have -- our concept is, I would say, the one of the reasons. We have strong brands, which means that we can attract the car owners through our network of affiliated workshops. We have very high availability. That's another area. And we have locations. So we have coverage and both -- and we also have this multi-brand strategy, which means that we have several brands to attract several segments of the market. But -- and we also -- we are everywhere, which is also very important in terms of availability.

But has that changed versus before or...

No, we're getting better. So...

Okay. I think...

Even better next year. Yes.

And then maybe also on cash flows, which obviously was strong in 2020. You mentioned inventory a little bit. But can you give us more color on the status on working capital in general, moving into 2021? And also what payments remain or the things you were pulling forward last year and also on the -- what do you expect for CapEx?

Yes. As you noticed, we have a very good cash flow for both the quarter and the year. And in working capital, there is SEK 208 million from state support regarding taxes, et cetera, that we will pay in Q1 and Q2. So that is out of the SEK 300 million in better working capital, SEK 208 comes from state support. And when it comes to investing activities, we see more or less the same for this year as for 2020, between EUR 170 million and SEK 200 million, perhaps something like that. So no increased investing activity for this year.

Okay. And the net effect of the inventory, you talked about you were slightly overstocked, but also you will see some opportunities. What you expect going forward?

Yes, we have both the same -- when you look at the balance sheet, you can see that we have a reduction in stock values, but that comes mostly from currency when we revived the stock in different currencies. But as Pehr said, we have not seen the reduction in stock in strain as yet. We are overstocked there and we will see positive effect from the merger of the warehouses as one item. And on other locations, we can see a slightly increased stock due to the new -- to bill, for instance, in Norway, but our goal is to keep an optimal stock level, so we can serve our customers in the best way.