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

Hello, and welcome to the Mekonomen Group Telephone Conference Q3 Report 2021. [Operator Instructions] I would now like to hand over to our host, Pehr Oscarson, to begin the call.

Thank you. Good morning, and welcome to the presentation of the third quarter 2021. Asa Kallenius, our CFO, is with me, and will guide you through the results. Once again, I'm very glad to say that we have delivered another record quarter. This is the best third quarter ever for the group with further growth and improved profitability. Our solid financial position gives us the possibility to further expansion in the growth, both organically and through larger acquisitions. During the year, we have had focus on developing our offer around electric cars, resulting in several steps forward within training, assortment, services and concepts. I will be back later on this later in the presentation. Thanks to our size, position and strong concepts, we have managed to increase our shares in the independent part of the market. We clearly see that our concepts and offerings are appreciated by partners and customers, and we are well equipped for taking the next steps in our growth journey. So Asa, please take it from here and give us some more details around the results.

Yes. Thank you, Pehr, and hello, everyone. The best third quarter ever for the group, both when it comes to sales and EBIT. And of course, we are very pleased that we are well in line with our strategy plan and moving closer to reach our long-term financial targets. We continue to develop strongly with an organic growth of 4% in the third quarter. Adjusting for currency effects in the quarter, the growth was 5%, which is in line with our long-term financial growth. Adjusted EBIT margin in the quarter was 10%, also in line with our long-term financial target. Our cash flow continues to be strong, and our net debt-to-EBITDA is better than our long-term financial goal of 2 to 3x. As Pehr touched upon, and as we stated in February during our Capital Markets Day, we see several potential roads ahead. For example, invest in future growth organically or through larger acquisition and paying a dividend to shareholders in line with our long-term financial goal. Most likely, there will be a combination of above mentioned. Looking at Page 4, we report the highest EBIT for the third quarter ever. And an enormous improvement for MECA/Mekonomen, combined with strong and stable performance from FTZ, Sorensen og Balchen and Inter-Team. Over to Page 5 and the gross margin in the first 9 months of this year. We have a continued good trend where gross margin has increased further from already high levels. We are now at 45.5% this year. And then we move over to Page 7 and the results per business area, and first, FTZ. We had another strong and stable quarter in FTZ with impressive margin. The EBIT margin is stable at 11%, and this is the same as last year. We see a good underlying demand where we are benefited from our size and being the #1 player in the Danish market. Over to Page 8 and Inter-Team, where we report the best sales ever for a quarter. The trend of a stronger EBIT continues. And this quarter, we report an EBIT margin of 5%. And last year, we were positively affected by governmental support. As in other markets, we experienced a high underlying demand in Poland. We now have a favorably availability through our 2 new regional warehouses in strategic geographical areas. And we'll come back to that later in the presentation where we do a deep dive into the Polish market and Inter-Team. We can conclude that we have turned Inter-Team around, and combined with the strong result in FTZ in general, we are very successful in our acquisition. Moving over to Page 9. In MECA/Mekonomen, we see that our initiatives have paid off. We have increased our sales without having to increase cost. The high gross margin is supported by supply bonuses and favorable currency effects. But primarily, we have delivered good result due to increased loyalty from customers and the structural measures and cost efficiency methods we implemented earlier. In MECA/Mekonomen, we increased our EBIT margin to 10% in the quarter compared to 7% last year. And the organic growth rose to 4% compared to 1% last year. To summarize, MECA/Mekonomen shows a great development, and we estimate an increase in market share. Over to Page 10, and Sorensen og Balchen. They continue to deliver very strong from very high levels previous year. EBIT margin is impressive, 22% in this quarter. The demand in Norway is slightly lower than the same quarter last year. But all in all, we are very pleased to see that Sorensen og Balchen maintained its long-term strong position. Thanks to the fact that they are a sharp niche player. Sorensen og Balchen are one of the strongest player in the industry in Norway. And that was the result in the quarter. And now I hand over to you, Pehr.

Thank you, Asa. Yes, I'm very proud that we have delivered another quarter with record results for the group. And I feel confident that we will benefit on our strong market and financial position going forward. On Page 12, we take a look at the strong footprint in the market. We see growth of workshops in almost all markets, though most important is our focus on larger quality workshops with larger amount of mechanics and concepts compliance. Page 13 shows the total amount of cars on the road in Sweden, Norway, Denmark and Poland as well as number of driven kilometers, the 2 large drivers in our industry. We see an increase of number of cars in all our markets over the past 3 years, and we expect to continue growth going forward. Moving on to Page 14. In the past year, we had, had a large focus on developing our offer for electric cars. And we will be in the driver seat in this area where we will both benefit and contribute to the transition to fossil-free vehicle fleets in our markets. And as we see on Page 15, we have already reached our target of 1,500 electric car workshops in the group, much faster than expected when the target was set during our Capital Markets Day in February. On Page 16, I will elaborate some around the levels of our E+ standard. We have divided it into 3 levels, where we now have reached 1,500 workshop reaching at least Level 1. And Level 1 includes work on high voltage vehicles without changing high voltage components, for example, scheduled maintenance, brakes, tires and et cetera. And that is closer to 80% of the work done on the electric cars driven on the roads today. Level 2 includes competence in exchanging high voltage components in the cars, for example, the battery. And when we go to Level 3, it also includes repairing high voltage components, for example, opening the high voltage battery and replacing individual battery sets. We move on to Page 17. We have already started the training for E+ level 2. In Sweden, for example, we started an E+ level 2 tour a couple of weeks ago, where training and workshops will take place in 29 places all over the country, and this will be ongoing until next summer. Mechanics will be educated in E+ level 2, which approves work on all electric cars, including replacing high voltage components. The training is conducted in an 18 meter long highly equipped trailer, which also makes our training offers to the works very available. On Page 18, we present the sustainable transition concept developed for workshops in Denmark. This is an all-in-one solution, Gron Viden that gathers parts and equipments, services, training and business optimization in one concepts that will be integrated in FTZ's total concept offer to its affiliated workshops. Moving on to Page 19. We have conducted a gap analysis of spare parts stored in the group's warehouses for 30 most common electric car models. And we can conclude that we are already #1 player in the industry when it comes to the coverage of parts for electric vehicles. We currency covered 62% of the spare parts for common EVs. And this is an increase of 50% from the past quarter and it's well over the present market demand. We estimate that we'll have full coverage in the beginning of next year. The coverage of parts, training and efforts in our branches will lead to Mekonomen being the #1 to -- go to player. As we see in the next page, this is well in line with our enabling mobility strategy and vision we enable mobility today, tomorrow and in the future. At Page 21, we have gathered a few examples of what we have done so far regarding implementing the strategy. Among others, we have an efficient organizational structure. We launched E+ and increased electric car trainings of workshops. We have launched service agreements for car owners. We signed collaboration agreements with new EV actors. We have increased loyalty from our workshops and which have resulted in higher sales. Development has been done through our digital booking systems. We have launched click and collect. And we invested a part -- or in a part of Danish company Vantage, which is the best-in-class in terms of lubricant oil, especially recommendations and cataloging in this area. We have many questions around the individual markets. And therefore, we introduced a focus line into one of our markets. And as we see on Page 22, we start with Poland. Poland is a rapid growing market with more than 17 million cars on the roads. The past quarters, we have noticed a strong underlying demand from the customers, a demand that we are now were able to meet. We have implemented our strategy successfully in Poland. The past year, we have established 2 new regional warehouses to increase the availability to our customers. We have prioritized the domestic Polish market and the export business that is profitable. This has led to an improved EBIT margin of 5.4% compared to 0.7% in the 2017. The electric car development in Poland are next to 0. We're still very comfortable that we will be the #1 player on the market in Poland, when it does happen, not least due to the knowledge, assortment and competence we are developing in our other markets. The stable development quarter-to-quarter in Poland is a solid sign of a turnaround case, and we feel confident in growing our market shares in Poland in coming years. And I will highlight this, end this presentation with highlighting the award we received last week during the Retail Awards. It was the logistic initiative of the year. And this is a receipt that we have one of the strongest logistic change. We have run the project on merging 2 central warehouses in Sweden and building a fully automated part of the warehouse since 2016. According to plan, we completed the project in the end of 2020. Now 70% of our items and 75% of our orders are efficiently handled by an automated warehouse solution. It's a great work from the team behind the project. So again, another record quarter for the group. We continue to deliver profitable growth. We are well equipped for the future electric car fleet, and we have a good financial position to continue our [ earning ] of expansion. So this concludes our report for the third quarter, and we now look forward to your questions.

[Operator Instructions] Our first question comes from the line of Stefan Stjernholm from Nordea.

Well, I'll start off with the most discussed topic on the financial markets currently under the supply chain. Can you give us some more light how you see the supply chain? And if it's managed at all? And if it's getting worse or is it easing relative to what you've seen in recent months?

We do have some disturbances in the supply chain. It's not fully or whole categories. It's more of a single part kind of problem. We have managed this, I would say, quite well. We -- usually, we very often have alternatives, alternative suppliers, and we can sometimes use private label or the other products. So we still have a very good availability towards our customers. And then when we look at this going forward, we believe that it will continue to be the same amount of the services fees for maybe half a year more. But as I said, we manage it quite well. And we might have good capacity in delivering to our customers.

It looks like that you are in a relative better position. Is that right to [ compare there ]?

Yes, I would say.

Yes. And regarding pricing, do you see a need of further price increases going forward?

We do price increases regularly. And that's also -- it's on -- both on single categories or single products. So we adjust when it's needed. We don't see any big reasons, but we, of course, follow the market, and we also try to push back price increases to our suppliers when it's possible.

Okay. And another topic, potential acquisitions. I think you mentioned earlier that Finland or the Baltics could be potential markets. Is that still valid? And also, how do you view the Polish market, given that you only have a 4% market share there?

Yes. I think we said that Finland, Baltics and Poland is where we are most interested for acquisitions. But then again, we -- it should be the right timing and the right kind of company. So -- but those mortgages, of course, interesting.

[Operator Instructions] We have no further questions coming through, so I'll hand back to you. Apologies, we have some more coming through now. So our next question now comes from Mats Liss from Kepler Cheuvreux.

Looking at the current market situation and the organic growth you experienced currently, is it sort of a pent-up demand following the ease of the pandemic and so on? And you see that people drive more, and we should expect -- well, organic growth to continue, well throughout the year and into next year. Could you say something about that outlook, please?

Yes, that's what we are fighting for to increase our growth. Of course, I wouldn't do any outlooks in that way. But we -- I mean, the biggest driver for our industry is driven kilometers in total. So of course, when things now are back to more normal situation, I wouldn't say that it's a temporary effect. But we expect the market to be quite stable. And then, again, if we look at the driven kilometers that will be the best guidance. And then, of course, we always try to gain market shares.

Yes. And I mean the components costs are sort of -- or raw material costs and trade costs and everything sort of increasing. And I guess, how do you sort of manage price increases in your assortment going forward? Is it the room to do more? Or is it sort of still a competitive situation that make that difficult for you to push cost increases forward?

Yes. We try to push it both plays. First of all, trying to push it back to the suppliers, of course, which we sometimes can be quite successful due to the fact that we are -- especially together with LKQ, we are a very big purchaser in Europe, but this affects the whole industry. So if -- I would say that it's more of an inflation that we will see if needed. So we will increase prices where it's possible and especially when we -- there's a room for it.

Great. And regarding -- I mean you have sort of made the structure changes in the Swedish market and with the sort of integration of the 2 warehouses in Sweden. And do you see more to come? Or is it sort of a lean and mean Mekonomen now that you must do much more?

No, we are continuously looking on improving the efficiency. And I think that there are possibilities to do more. I wouldn't put any numbers. So we thought there are still possibilities, definitely. Maybe not so much in Sweden, but in the other markets, definitely.

Okay. And you mentioned Stefan's question there, that you would see a lot of opportunity to grow through acquisition, well, going forward. But I mean gearing is also in good order. But how do you view dividends and so on? I guess you have the target to [ be placed ], part of the profit to the shareholders. But could you...

We have our dividend policy, which we, of course, try to follow. But then I will leave it to the Board to decide what's to be recommended and that when we have finished the year. So that will be a later decision.

Good. And finally, just about -- I mean I think I've asked that before, but I mean some of the car producers or most of them try to sell more cars digitally and directly to consumers. Do you think that opens up for the multi-brand service providers like you, your customers? Or is it sort of a...

[ Opposite ]. Yes, but it's not negative definitely. How and if positive, that -- then that future will show. But there's definitely possibilities for multi-brand and independent workshops in a more transparent and open market.

[Operator Instructions] Our next question comes from the line of Andreas Lundberg from SEB.

If I start with -- you talked about some initiatives paying off in MECA/Mekonomen or perhaps in Sweden. Could you just tell me what those initiatives are? That's my first question.

Yes, it's a lot of different things. But as you remember, we -- during last summer, we closed unprofitable stores and workshops. So that's maybe the most significant action, but then it's also increased availability in the local branches and a lot of different things.

Okay. Cool. And then on Sorensen in Norway, would you say that you are on a sort of structurally higher level now? Or is it still the boost by some COVID-related stuff?

Difficult to predict. But I think in the third quarter, we still had a very good [force as well in ] good summer sales. So -- but we believe that they are a strong position. There are still market shares to develop, but maybe a little bit uncertainty around the market. But -- so I wouldn't -- it's up to [indiscernible] so far.

Yes. So you don't think you are overly to have boosted temporarily?

No, no.

Okay. And lastly, on the electrical side, what's your first indications of the implications on your business?

Yes. I mean, we can look at Norwegian market where we start to have quite old electric cars now, and the implication is very, very little. And there is other products that are selling, but those products are generally more expensive. So in terms of value, we still -- we don't see any, that it shouldn't be any threat to our market in a way.

And what other products are we talking about?

Sorry?

What other products are we talking about here?

Yes. But it's -- like other products, but it's more of a -- we send more steering components, more tires, more brake and some more [indiscernible] to EVs. They were result faster and it's more -- a little bit more complex built. And it's not so high volumes on the parts, which means that the prices are higher. That's some of the examples that it starts to be some new pure electric components like onboard charges and things that also needs to price.

Okay. And lastly, a quick one. Are all of your announced synergies from the warehouse much now, I'd say, capitalized or captured?

Yes, I would say. So it could be still some room for improvement in efficiency. But in total, we have gained those synergies.

Our next question comes from the line of [ Maria Eriksson ].

Pehr, this is Maria from [ FFVF ]. I would like to ask the market for electric cars mean a lot of new brands and models. What is the challenge to adopt your certification with the class to the circumstances with all these new models with the different batteries and different quality, et cetera?

It's -- look, I would say that the challenge is about training and training the mechanics. And some, of course, some new equipment is needed. But in generally, even if it's a lot of new models, but the technology is pretty much the same. So for a mechanic, it's a multi-brand training cars, a lot of new brands as well. So it's a -- I would say it's training which is the most important part.

Perfect. And how do you work with security in the workshops regarding damaged electric cars, regarding the dangers of the damaged batteries, for example?

Yes. That's why the training is so important because in the training, it's very much focus on the security. And there is very specific rules how you disconnect the high-voltage system and what kind of security equipment you should use, and it should be separated from other cars and so on. So there is -- but that's all included in the training for the mechanics.

All questions have now been answered. So I'd like to hand back to Pehr, if I may.

Okay. But I'm done. Yes, thank you all for listening, and have a good day. Bye.

Thank you. Bye.

Thank you very much, everyone, for joining today's conference call. You may now disconnect your lines.