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

Pehr Oscarson is the President and CEO of Mekonomen Group. He has been in the group since 2001. It has since then had dealing positions within sales, marketing and business development. He has been one of the driving forces to develop the independent aftermarket. He has been the President and CEO for Mekonomen Group the past 4 years. Asa Kallenius is the CFO of Mekonomen Group. She has been in the group and the management team since 2017. He she has a broad experience from the CFO role in various larger companies and have had a key role in the group's current structure and integration of the acquisitions of FTZ and Inter-Team in 2018. Petra Bendelin is Director of Business Development & Strategy within Mekonomen Group. She has been in the group since 2010 as Managing Director for one of the subsidiary companies within the group with focus on business development. Petra have had a key role in a large portion of the group's service development within training, business systems and customer service. She has been in the management team of Mekonomen Group since February 2020. Tobias Narvinger is the COO of Mekonomen Group. We have been in the group since 2011 in leading positions within purchasing, category, sales and supply chain. Tobias have had a key role in extracting synergies from the group's larger acquisitions, not least the recent acquisitions of FTZ and Inter-Team. Tobias have been in the management team since 2018.

Hi, and welcome to Mekonomen Group Capital Markets Day 2021. My name is Anders Oxelström, and I am the moderator today. Today, we're going to look closer at Mekonomen Group's way forward. The new strategy, the revised financial targets, markets and trends. We are here today in Stockholm, and you are watching this online. And even if we can't meet in person due to the pandemic, we still want to interact with you. So in about 1.5 hours, we will start a Q&A session where you are more than welcome to call in and ask your questions. And if you want to, you can also send your question to us. You can use the form on the right side of the streaming window. And again, very welcome. And Pehr, per, very welcome to you.

Thank you.

So it's late February, almost exactly 1 year ago. The pandemic started to spread, and we were all starting to understand what was going on. How would you describe 2020 for Mekonomen Group?

There is no doubt that 2020 was a challenging year for the world and also for Mekonomen Group. But we handled the situation very well, showed the strong resilience. Our priorities have all along been the safety and the health for our employees and customers.

In what way?

By quickly taking actions on safety equipment on our facilities and offices, but also changing the way we work with distancing methods. Still, we were able to keep up working hard to improve efficiency and extract synergies.

Okay. So what about the financial situation?

We stand strong with an improved profitability. We also have decreased our net debt with over SEK 1 billion, and we have a strong cash flow. This comes as a result of a focused work with lowering our costs in combination with our digital capabilities and a strong market position. So in short, I'm proud of the commitment by all our employees within the economic group.

Okay. So you're saying it's quite good when you say you have strong financial position you have, decrease in net debt, you have increased your profitability. Honestly, Pehr, did you think this was the case, what was achievable, let's say, months ago?

I would be lying if I would say that the road ahead has been completely straight without challenges. But I think everybody, including me, has all the time, wondered about the development of the pandemic. Still, I had confidence in the fact that we have an optimal organization with very strong local management. And I would say that last year confirms two things: First, we have a flexible organization. We have proven that we are able to execute during tough times. And second, the time of mobility is timeless.

It's timeless you say. But what do you mean by that?

I mean that people and goods need transportation, and that's almost regardless of what is happening around us. The demand is stable. And that is, of course, a favor for us as a market leader. And looking back, I would say that I'm strengthening my belief after seeing everything falling into place.

Okay. And right now, as we speak, what is the situation out there?

There is still uncertainties about the pandemic and how long it's going to last. But as 2020 has shown, the impact on our business will probably be limited for us as long as societies are not completely shut down. But we will keep focusing on serving our customers in a safe way, continue to work with efficiency synergies. So despite difficult market conditions, I'm inspired and really optimistic.

Okay. So what is the most important message from you to the investors today?

We are a growth company with a proven history of creating value and that we will continue on that road. We have a strong position going into the future. The shift towards greener techniques and digitalization is a huge opportunity for us. The future is also about being ahead of the customers' expectations and expanding our business. We work intensively with new offerings and solutions resulting in new revenues.

Can you give us a few examples?

For example, we have the fleet service and partnership with electrical car manufacturers.

Excellent. We look forward to all this and also the Q&A session. And if you have questions, you want to ask the Mekonomen Group management team, feel free to send them to us or to call in at 3:30 when we start the Q&A session. But before we dive into markets and trends, Pehr, I think it would be great if you could give us an update on your current market position and also about your business model. Can you do that, please?

Yes. First of all, to give you Mekonomen Group in short. We consist of 4 business areas in Sweden, Norway, Denmark and Poland. We have 470 branches and over 3,500 workshops in these markets. We have 5,500 employees counting in everyone who works under our brands in the workshops. We have more than 20,000 persons and ambassadors. We have existed in this industry since early '70s, giving us half a century of experience. And today, we will tell you more about why we will be a relevant player also going forward. With our business model, we aim to be the best and most comprehensive partner for everyone that services and maintain cars. We meet the needs of our customers with unbeatable availability, competence and strong brands in a way that is convenient for them.

So how does this work?

Yes. Let's have a look at the screen. This illustrates our business model. We source parts from the suppliers, mostly European manufacturers. Then we have our wholesales operation, which is central warehouses in each country, the regional warehouses and the branches. And the branches are those who are locally delivering to all these workshops around in our markets and the workshop, of course, do the job for the car [ new ] owners.

Okay. So this is the parts but you also offer services. So what about the services?

Yes, the services offer is added in our workshops concepts. And that's also a very important part of the business. And that's -- things like ERPs for the workshops, it's technical support. It's training academies, mobile payment solutions. We have digital booking services, quality management systems, all these things that make us complete partner for the workshops.

Okay. So these branches and the workshops, do you own them?

Apart from a few franchise branches, we own that network. When it comes to the workshops in the -- it's the opposite way. There, we own around 90 workshop of that total of 3,600.

Okay. So I think Mekonomen Group might be perceived as a company that is mainly focusing on end consumers selling parts to consumers. Do you think that picture is somewhat wrong?

It is, but understandable due to the well-known brand we have in the company, not at least Mekonomen. But also MECA, BilXtra, AutoMester, O.K. Serwis and other brands are well-known among car owners in each market. And this is strategic for us. Attracting car owners to our workshop are important, part of the concept service offer to the workshops. We have developed a solid B2B business in order to be a holistic partner to the workshops. This includes a strong consumer insight, include all that we do together with the marketing activities.

You mentioned some of the brands. Is it necessary to have so many brands?

Yes. One perspective is that we don't want to have 3 or 4 workshops with the same brand beside each other in a single street. But that -- because that would actually be the consequence. But we also see the need for a different concept to attract a larger part of the market as possible. Workshops and car owners do have different needs. And this, we can offer by developing our cost concepts and solutions in different directions in each market. I still see that we actually have room for further concepts in almost all the markets.

Great. We are also seeing new trends out there when it comes to owning a car. People might feel that they don't need to own a car but they still want to have access to a car like carpooling and car leasing. How does this affect you?

When we talk about car owner, we don't -- we not only mean the private person owning car. Companies, associations, authorities and other constellations are also important customers for us. This, we refer as the fleet customers. Today, there are several hundred thousands of cars within this fleet agreements on our markets, cars that use our workshop concept for their maintenance continuously. That customer group is important for us for the future, and here we will develop new customized solutions.

Okay. So why don't we go to one of the fleet customers, here in Stockholm, [indiscernible] headquarters. Let's hear what they have to say. [Presentation]

So with us here now is Asa Kallenius, you are the CFO of Mekonomen Group. Welcome.

Thank you.

So it would be very interesting if you could please elaborate a bit on your track record, what you have achieved and the growth upside for the group?

Yes. We have had a strong history of sales growth, both organically, but largely through acquisitions. We acquired Sørensen og Balchen in 2011 and MECA in 2012. And then FTZ and Inter-Team in 2018. Since 2010, we had an average sales growth of over 13% per year.

And what about the margins?

Our adjusted EBIT margin dropped in the time of the acquisition in 2018 due to the lower profitability in the Polish market. But we are now on the right track, gaining synergies and closing 2020 with an improved margin and an all-time high sales. We have a proven history of successful acquisitions. And we know to integrate as well as how to extract and realize scale synergies from purchasing and operations.

So what are you most satisfied with when it comes to these acquisitions?

We had a good profitability improvement in FTZ and Inter-Team entity. Sørensen og Balchen have had a fantastic development, and we have succeeded in gaining the expected purchasing synergies, which also gained MECA/Mekonomen. This is, of course, something we are very proud of and have worked hard for.

Okay. So if we look at the challenges, what has been most challenging with these acquisitions?

Well, at the time of the acquisition, we had a challenging time with weak market development. And in the Nordics, we saw a very slow market and major variations in currencies and other factors that negatively affected us. The timing meant that the short-term upside was invisible. And then we, of course, had a pandemic. Today, we can see how successful the acquisitions have been.

Okay. So looking at the Polish market, it seems like the numbers are turning in the right direction, looking at Inter-Team. Have you completed the turnaround now?

We are on the right track in Poland with an underlying stable business, and that is very positive. But there is still some work to be done before we have a stable margin at this level.

Great. So one of the acquisitions that you have made in recent years are FTZ in Denmark. So why don't we go to Denmark, [indiscernible] have a look at what Mekonomen and FTZ has achieved together. [Presentation]

Interesting insight from Denmark. So, Pehr, the obvious question might be, are you planning any larger acquisitions?

We're open to acquire the right company if and when the opportunity arises. The main reason for the updated financial target is to be prepared for opportunities in three directions, I would say: growth through acquisitions, but it could also be investments in becoming more efficient and to grow our core business and/or reach our dividend targets.

Okay, three directions. You're talking about three directions. Will you choose just one of them? Or can you choose several at the same time?

No, there could, of course, be a combination of these directions as well.

Okay. So looking at one of the future directions is potential acquisitions. So, Asa, what kind of acquisitions are you looking for?

We have been clear about our interest for Eastern Europe, meaning Finland and the Baltic countries. These are still interesting for us. We also have a possibility to grow further in our existing markets, especially Poland, where we have a smaller share of the market today. Also, we do not exclude the possibility to grow further within the current business areas by broadening the business in new verticals or related areas.

Will you be able to reach your targets?

Yes, we will. Our strategy is based on actual initiatives and developments that we will execute on. We will look closer at the road to how to get there in just a moment.

Thank you. Now let's move on and we'll go further into the agenda and look at the markets and trends of the industry. There are indeed many interesting developments and trends out there happening as we speak. With us now is Petra Bendelin, you are the Director of Business Development & Strategy in Mekonomen Group. Welcome.

Thank you.

So you're about to tell us more about what is happening out there. But let me just ask you, if you look at the pace of change, is it higher pace now than, let's say, 5, 10 years ago?

I would say that there is a higher pace today, looking at new demands, new competitions, new expectations from customer, and there are sure are many possibilities for us to meet the endless need for mobility.

Okay. So -- great. So what are the clearest trends that you see?

We note that people are more positive towards mobility solutions, such as sharing, micro mobility or even robo taxis, all driven by sustainability and a greater trust in technology. We also know that people want to live their life online because it's convenient for me as a customer. And we have also seen an increase during the pandemic due to trying to keep a safe distance. And many of the solutions we have seen -- I believe that they are here to stay. And we also know that people still want to own their car. And that has been an increase during the pandemic as well. And of course, while choosing that car, more and more people choose electric cars.

Speaking of electric cars, and I know that you probably get this question all day long, all the time. But looking at the future where electric cars will be the only cars we have, how is that going to affect the Mekonomen Group?

Well, electric vehicles are expected to comprise around 10% of global vehicle sales in 2025 and up to 30% in 2030. And electric car consists of less spare parts than a combustion engine. So it's a relevant question to ask. And if you do not act, there will be a challenge in, let's say, 10 years. But we have serviced customers and their cars for 50 years. And we have lived through these kind of changes before, and we aim to serve the customers and the vehicles in the next 50 years, whatever is driving on our roads.

Can you elaborate a bit on that?

Yes. We have offered courses in hybrid technology, for example, since 2005 when the first Toyota Prius entered our roads. And more than half of our workshops have competence within electric and hybrid technology already today. So we have decided to take it one step further and raising the demands on our workshops.

Okay. So what is the next step?

We will intensify our rollout of our workshop standard E+ with demands regarding competence, tools, safety equipment and also charging possibilities.

E+. What is that?

That is our new own standard regarding demands on the workshop, making sure that we will be prepared to take on the next-generation of car fleet out there.

Okay. So how many of your workshops fulfill this standard today?

We have 250 workshops fulfilling all the requirements today. And we are intensifying the work, as I said. And during the next 12 months, we will be 1,500 E+ workshops.

1,500. That is quite an increase. Okay. So interesting, as you touched upon, Petra, it's crucial to have the right people with the right competence to serve and fix the new cars with a new modern green technology. Many of you might know that Mekonomen Group have their own training academies, but I'm not sure everybody knows how it looks like when you -- we have state of the art training in real life. So let's go over to one of the training academies in Bergen, Norway. [Presentation]

Interesting. So Petra, we understand that you have a solid plan for handling electric cars as we speak and in the future. But will the electric cars need as much service as traditional cars?

Well, their service need is a bit different, and it's basically focus on inspection and filter changes. But we also see new elements being included in the service that we haven't seen before, like change of battery fluids for one example. And we also know that the electric vehicles will still need repair and maintenance. So it might look like a completely new situation, but it's not. We have been able to grow historically, even though the demand has changed with the longer service intervals for one example and the spare parts last longer and longer.

So you see growth opportunities going forward then?

Absolutely. Because apart from what I've just said, we see a whole new landscape developing. Can I ask you one question, Anders?

If you must.

How many car brands do you know?

How many car brands do I know? I guess, around 15, 20 tops.

Yes. I think 10, 20 is quite easy to say. But if I ask you to say 50 or 100, it will be a whole lot harder. We see an interesting development in the auto industry. We're expected to see around 250 new electric vehicles in the next coming 2 years alone. And many of these are new brands without the existing network for logistics and service and maintenance. We have that kind of network.

Okay. So to conclude, you are confident that you will find a way forward where you can grow as you have done historically?

Absolutely. We are very well prepared. We have lived through the changes before. And now we also see new business opportunities for us.

Okay. Great. So we all know that the competition is getting tougher. Can you just elaborate a bit on that?

Absolutely. We see competition basically from three directions. We've got the OEMs competing with us on the aftermarket. We see quite a few new actors competing online with price pressuring. And we also have new kind of actors often with disruptive business models, forcing us to develop even faster. And to be in the forefront, we must focus on availability, sustainability and digitalization.

Speaking of digitalization, it's an increasingly important area in many industries and sectors, software data. How will that affect Mekonomen Group going forward?

It will affect us, and we will gain from it. All our development aims towards working smarter. We need to make it easier for our workshops, and we need to be more efficient.

Okay. Just to summarize then, there's a lot of things happening out there, and there's a lot of things for you to do. How will you handle this situation? How will you take advantage of this situation?

We are the market leader in 3 of our 4 main markets. So we have a very strong foundation. We are also profitable in all our markets. And we will use our size and profitability to lead the digital and sustainable development in our industry.

Thank you. So as we have heard, even if the technology might change, the need for mobility is timeless. And Pehr, your new strategy is called Enabling Mobility. So why a new strategy now?

Markets and technology are developing. We are in a shift with many things happening at the same time and where sustainability is a core. All this means great opportunities for us. We have a very strong position to build on. Our new strategy will make us more profitable and make us grow in a sustainable way going forward. In short, we are an enabler of mobility today, tomorrow and in the future.

Okay. So Petra, if you look at this new strategy, what are the major differences compared to the previous strategy?

We have doubled our size and have, therefore, further scales of economics to gain. We do many things well today, but we needed a clear common group strategy. We now enter the next chapter of synergy gaining. We run cross-functional and cross-border development projects to make sure that we will be best-in-class. We will also focus even more on sustainability and not only the environmental part, but also the social and long-term profitability aspects of sustainability. And with our new strategy, we will answer why we will be relevant for the future.

Interesting. And we will dive into the strategy in just a moment where you would guide us. But Pehr, it would be interesting to get a brief introduction of the strategy, the cornerstones -- what are the cornerstones of the new strategy?

Yes. And let's have a look. Our strategy is based on our vision. We enable mobility today, tomorrow and in the future. Our enabling mobility strategy consists of 4 focus areas: The first focus is operational excellence. That means we will increase focus on efficiency, synergies and collaboration in our core business. This is absolutely crucial. Second, we will accelerate our concept development for workshops to increase loyalty and revenues, an area where we have a large potential going forward. Third, we will create new customer solutions to make the customer journey easier. We will forcefully use all the opportunities that comes with digitalization, data and customer insights. And fourth, we will create new revenue streams through a broad range of actions. For example, by entering new segments, developing new business models. Everything we do within these 4 focus areas will be done with a sustainable mindset. This is important. We see that Mekonomen Group needs to be clear about this.

Okay. Pehr, so do you think there's a misunderstanding about your commitment to sustainability?

I hardly think so. We have been very clear about the importance of sustainability for many years. But now we accelerate our work. We do not only want to be best in industry, we aim to be best-in-class when -- as well as leading the industry forward. Sustainability is not only about the environment. For us, it also means that we need to have a sustainable business and to continue to be relevant and grow over time. In short, we will address sustainability to be about people, planet and profit. It's a cornerstone for all that we do in order to grow and increase profitability.

Thank you for this introduction, Pehr. Okay. We will continue soon, but we will first take a short break. [Break]

So we have had an introduction of the strategy, but we are more curious about what the strategy will lead to, namely Mekonomen group, reaching the revised financial targets no later than 2025. Asa, tell us more about this.

Yes. We have updated our financial targets, and we have a plan to reach them. Let me go through this in more detail. Starting with sales. We target to grow by 5% per year on average through a combination of organic growth and smaller acquisitions. We have an adjusted EBIT target of 10% for the group. Our leverage target is adjusted to keep net debt-to-EBITDA within the range of 2x to 3x. And our dividend policy is confirmed as the Board's intention is that we will pay dividend corresponding to not less than 50% of profit, unless there is a need to prioritize potential acquisitions or financial position, investment needs or other further future prospects.

Okay. So let's have a closer look at the EBIT target. The previous target was to reach an EBIT of at least 10%. And now you changed that, so the target is to reach an adjusted EBIT of 10%. So why this change? It might be perceived as a bit defensive? Or is it more like an adjustment to reality?

The adjustment is based on current organization, including the acquired FTZ and Inter-Team, the target is mainly a reflection of this.

So you want to reach sales of SEK 15 billion at 2025. So how are you going to reach this?

We have a proven track record of strong growth, with an average annual growth rate of 13% over the last 10 years. This is total growth, mainly driven by successful acquisitions. Looking ahead, we target to grow 5% per year on average through a combination of organic growth, our strategic initiatives and growth supported acquisitions. Given our strong position in the market, we expect to grow by 1% to 5% with different markets and verticals. Our 4 strategic focus areas presented earlier, is expected to generate a larger part of growth going forward, but the area operational excellence is expected to be the main driver. Then we turn to our adjusted EBIT margin. Historically, we have been touching the 10% mark back in 2017 when it comes to our adjusted EBIT margin, then margin dropped after the acquisition in 2018. Since then, we have improved profitability step by step. In 2020, we reached an adjusted EBIT margin of 8%, backed by strong cost focus.

So how did you manage this?

Purchasing synergies generated from our latest acquisition is one important part as well as the warehouse consolidation within MECA/Mekonomen. We have also done a great job with cost efficiency measures and initiatives.

Okay. So how will you reach the level of 10% in the future?

Our strategic focus areas will support further margin improvement and make us reach the 10% adjusted margin at 2025. And which corresponds to SEK 1.5 billion in adjusted EBIT. The focus area, operational excellence, will be the main driver of profitability and contribute through both efficiency and increased sales. Concept development, customer solution and new revenue streams will also add further to our margins and not least to the customer experience.

So are you sure that you will be able to continue in this direction?

We are confident in our strategy and the way forward. Our strategy is well-established within the organization and built from bottom-up, and we believe in it in 100%. During '19 and '20, we totally generated a cash flow from operation of SEK 2.5 billion. This has mainly been used to reduce debt. We now have a solid financial position going forward.

Okay. So let's look at the dividend. You have a strong financial position. You have a strong cash flow. You have increased profitability, decreased your net debt. Still, you have decided not to pay any dividend. What is the reasoning behind this?

Well, as I said, we have a solid financial position. We will create value for our shareholders, either by acquisitions, investment in our current operation and/or through dividend.

Okay. So maybe hard for you to say, but I think there might be shareholders that are wondering now when is Mekonomen Group starting to pay dividend again? Is it 1 year? Is it 3 years? What can you say about that?

We remain committed to the long-term dividend policy. However, the Board does not believe now is the right time to raise a dividend.

Okay. Thank you, Asa. Now we have seen the financial road map to 2025, and that's excellent. And now we are going to dive into the full focus area more in detail. Petra, as we have seen, you want to increase your revenues to SEK 15 billion in 2025 and also reach an adjusted EBIT of 10%. So we, of course, want to know more about the focus areas in the strategy and what you're going to do exactly to achieve this? Can you please enlighten us?

Absolutely. First of all, I would like to elaborate a little bit further about sustainability. That is an important part in everything we do. And our aim is clear. We want to lead our industry.

So how do you achieve that?

We need to keep up with the development in our surrounding and also outside the industry, of course. We will meet new technology, new expectations and demands. And sustainability is about creating a sustainable business for the future. And to do so, we need the right competence. We need the right people. And that is why sustainability, for us, is about people, planet and profits. And the initiatives we've got within our 4 focus area will take us to our sustainability goals.

You mentioned finding the right people with the right competence. And that is a challenge for many companies in many sectors. But Mekonomen Group, you have decided not just to talk about this challenge, but also to do something about it. So maybe not all of you know that Mekonomen has their own upper secondary schools. So let's go to [ ProMeister Fordon ], I should say, here in Stockholm. [Presentation]

That is inspiring. So let's move on to the first focus area, and that is operational excellence. Can you tell us more about this, Petra?

Yes. Operational excellence is about increasing profitability in our core business. That means reducing costs and increase sales. And this area will contribute the most while reaching our goals. We must do more to utilize scale opportunities and synergies within the group. We have a successful track record, and we have a clear agenda going forward.

Okay. Great. So let's dig deep into this area, operational excellence. And with us here, we have Tobias Narvinger, the COO of Mekonomen Group. Welcome.

Thank you.

Okay. So what do you think are the most important initiatives for Mekonomen Group within operational excellence going forward?

No, but we must do more to utilize our scale opportunities and find synergies and we see that we can really streamline this business area. And by that, we believe that we can have a cost cut of about 0.5 percentage every year as we have a growth with 5%, and that would mean that we -- by 2025 would have extra SEK 1 billion on turnover and generate another SEK 100 million on the last line here. And one may wonder what kind of -- how would you do this? And one example is, of course, for example, here in Sweden, the merger of the two warehouses we have done.

That is a famous topic for you in recent years. So why don't we go over to Strängnäs and have a look. [Presentation]

That is automation, indeed. You got a very high-tech feeling, at least I get that. So this is a finalized project, right?

Yes, it is. This is in full operation now. And we can say it has actually been in use [ already since ] 2019 [ and was ] taken into use and then supplying the Mekonomen branches. During 2019 and '20, we had moved over also the MECA branches and thereby realizing the lost synergies here. So that came actually now end of 2020 when the lease agreement was terminated on the old warehouse and also the last employees left the site. So this has really been a tremendous project where everybody put a huge effort into this. And a lot of engaged people has made this happen.

Okay. So what will you do next?