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

Welcome to the MEKO Q4 2024 Report. [Operator Instructions] Now I will hand the conference over to the speakers, President and CEO, Pehr Oscarson; and CFO, Christer Johansson. Please go ahead.

Thank you. Good morning, everyone, and welcome to MEKO's presentation of our year-end results for 2024. As said, I'm here with our CFO, Christer Johansson, and together, we will walk you through our performance and current position. 2024 was a year when we continued to build a stronger MEKO. We announced these initiatives in November '23 with a clear goal that we want to become more profitable by achieving more synergies, savings and optimizations. We approach this work from a position of strength. MEKO is the market leader in Northern Europe, and we strive to be the most comprehensive partner for everyone who drives, repairs and maintain vehicles. We rely on a stable business model adapted to all types of vehicles regardless of fuel type. Looking back at 2024, we can confirm that our efforts are paying off. We reached the highest adjusted EBIT in our history. Adjusted EBIT was up more than 13% compared to '23. The improvement has occurred despite costs related to integrating Elit Polska, a milestone in our geographic expansion. We have also secured a strong financial position. Our leverage stands at 2.6x, well within our target range. In addition, we improved cash flow, driven by strong results and good working capital development. And as planned, we have prioritized profitability over growth, yet we achieved a steady growth of 8%, of which 4% was organic. We have also reduced costs as a share of our sales and maintained our gross margin. This development enables the Board to propose a dividend of SEK 3.9 per share to be paid in 2 equal installments, half in May and half in November. Looking at Q4 in isolation, we conclude that the market conditions varied across the business areas. As I mentioned on the Q3 call a couple of months ago, Q4 tends to be a bit softer unless there is an unusually harsh winter. This time, we saw a more typical start to the winter season. And in the summer, this affected our organic growth, which was flat compared to Q4 2023. But in total, we grew 6%. We also note a robust EBIT development in the quarter, and our adjusted EBIT increased slightly, and Christer will go into more details just in a few minutes. But before that, I'd like to give you a short update on some of our key projects for 2025. So let's move on to Slide 3. And as you know, we are in the final stages of completing our new automated central warehouse in Denmark. This facility also houses our Danish headquarters and training centers. In short, it will streamline our goods handling and improve service levels for customers across Denmark. And just to give you a glimpse of the capacity, today, an employee can pick 20 to 30 order lines per hour, but a person at the automated picking station can process up to 10x as many. In addition, we are able to enhance our customer offering, for example, through later cutoff times for same-day deliveries. The facility is complete, and we will receive the keys in the end of this month, and we will then begin the move-in process and expect the warehouse to be fully operational in August. We are facing similar important steps in Norway. So let's have a closer look on Slide 4. Actually, tomorrow, we will receive the key to the building as you see with the building you see in this picture, our new automated central warehouse outside Oslo. Until now, our Swedish central warehouse in Strängnäs has supplied Norway, but this new logistics center will be dedicated for Norway and significantly improve both service levels and efficiency in the market. The investment into our out-of-store automation is, as far as we are aware, the largest new build in Norway. We expect approximately 100% overall warehouse productivity gain per warehouse worker with the new system. With this investment, we can house around 100,000 automatically retained storage locations. We are also well placed for future growth. Everything is progressing according to plan, and we expect the warehouse to be fully operational by June. And then let's move on to Slide 5. Our central warehouse in Helsinki has needed renovation. And with a new AutoStore system, we will significantly improve performance. The efficiency as measured by order line speed per warehouse worked in an hour and is expected to increase by 80%. We have loaded the automation with no less than 65,000 empty bins. Considering weight and space constraints, we foresee up to 70% of the SKUs could pass through the automated workflows. New consolidation area significantly reduces the use of packing materials and ensures services that better meet customer demands. The renovation has gone as planned, even slightly ahead of schedule, and the warehouse will start early operations now in Q1. In sum, we are heading into a eventful and intense 2025, and everything is progressing as expected, and we are well prepared for the next step. And then let's move on to Slide 6 and some positive news about our Board of Directors. And at our Extraordinary General Meeting in December, MEKO's Board was strengthened with 2 new members. Jörn Werner is an experienced leader with extensive expertise in the independent automotive aftermarket. He has previously served as CEO of major industrial and retail companies and holds several Board positions. And then we have Marie Björklund, who brings deep financial expertise and is currently the CFO of the publicly listed company, Knowit. She has held several similar roles in the past and has also worked as an auditor. We are very pleased to welcome Jörn and Marie to the Board and the great valued expertise they are bringing. With that, let's take a closer look at the financials. Christer?

Thank you. So as Pehr described, we saw a somewhat modest quarter closing out a strong year. And in our last earnings call, we mentioned that Q4 is, financially speaking, seldom the strongest quarter. That was true in 2023, where we had some help from proper winter, and it's also true for 2024, which has been warmer. In combination with many days off or partly off, Q4 was sales-wise an uphill battle. This comes through in the weak organic growth, which was well below our 5% target. In isolation, a single quarter is easily affected by specific items. In Q4 2023, we provisioned for large changes in Norway, explaining the low EBIT in that comparison period. This year, Q4 was burdened by updated assessment of full year tax, explaining the low EPS. Now on a full year basis, the effective tax rate was 25%, which is a bit above the 23% we expect going forward. There are signs of strength in Q4, as I will illustrate in more detail in a minute, gross margins improved, and we are also pleased to see healthy cash flow where working capital continued to be relatively helpful. Looking at the year as a whole, we see a development which is well aligned to our financial targets. Organic growth was close to 5% up. Adjusted EBIT increased by 13% versus our target of 10%. And this increase was also converting into cash flow, which was up by 10%. That in turn helped leverage and dividends, both matching the targets we have committed to. Turning to Page 8. Gross margins has had a positive development in 2024, and this is despite incorporating the business of Elit, which on its own correspond to a dilution of almost 1 percentage point. Mix and currency effects were modest and the improvement is stemming from price adjustments. I would want to add 2 observations here on this note. So firstly, price adjustments include benefits coming from improved purchasing and the improved purchasing is quite an important area, of course. And ultimately, it's an enabler of organic growth. Secondly, the average development hides significant variation by market. In fact, moving on to the next page, Page 9. This page shows the adjusted EBIT bridge and the development in Poland, which is a negative outlier is in part linked to pricing. I will get back to more details on Poland in a later page. Finland is mostly a matter of a weak comparison period. But for Sweden and Norway, the improvement is certainly both real and quite encouraging. And this is primarily the result of cost savings across both Norway and Sweden. Turning to Page 10 and leverage. The picture is similar to previous quarters. I mentioned earlier that Q4 is typically not the strongest quarter, and that seasonal trend is true also for cash flow, in fact. In addition, there too, it's worth noting that in Q4, we have paid dividends of SEK 104 million, and we have been running with a fairly high investment rate, SEK 84 million worth of CapEx in the quarter with SEK 27 million of noncapitalized investments into our ERP program on top. So this, when you add it together, is above what I would view as a normal level. Still, looking at the full year, we have reduced net debt by circa SEK 400 million. Leverage is now at 2.6x or a bit lower if you adopt the bank covenant definition, which exclude IFRS 16 lease liabilities. So naturally, reducing debt is lowers interest expense, but there are also other factors at play here, and this becomes visible on Page 11, which compares interest expense reduced by interest income between 2023 and '24. We spoke about net debt being reduced, and I believe no one will have missed interest rates coming down, although I should mention that we hedge a fair share of our financing to avoid any unpleasant swings. Finally, lease agreements as accounted for under IFRS 16 also come with an interest expense component. These have grown and they have offset reductions from the first 2 items. Looking ahead into 2025, one should, in simple terms, expect more of the same, lower net debt, somewhat lower net interest rates, which in turn will be offset by increased lease liabilities. As reiterated a few times, our facilities in Denmark and Norway are not CapEx on our balance sheet. But as we move in during the first half of 2025, we will recognize new lease liabilities. These are fairly long contracts, as you can imagine, and we will add up towards SEK 1 billion in lease liabilities. By extension, this will also increase the IFRS 16 interest component by approximately SEK 60 million on an annual basis. Let's now also have a quick look at key financials by business area, starting with Denmark on Page 12. The challenging seasonal effects already mentioned were clear in Denmark, and this contributed to a quarterly result, which was not quite up to our expectations. While it's slightly better on a full year basis, it's also clear that we need to pursue further efficiency improvements. Automation is one, but it's not the only avenue. On the bright side, gross margins improved noticeably in Denmark during the year. Turning to Finland on Page 13. I already mentioned that the comparison quarter is a special one, better than to look at the run rate in absolute terms. And this level is, of course, not an acceptable one, not even during the soft macro conditions like the ones we're currently seeing in Finland. This is also the reason why we have significant efficiency improvements underway. And I believe the photos Pehr shared earlier show that we have come a long way even though we are yet to reap any significant benefits. With regards to Poland on Page 14, the comparison is naturally affected by the inclusion of Elit Polska, which is running at a loss, as you know. This is as planned, and you may recall the massive discount, which materialized into a negative goodwill of SEK 176 million in Q3. Furthermore, we described in the Q3 earnings call how the integration work will continue throughout 2025 at a total cost of SEK 70 million to SEK 100 million. In Q4, we spent circa SEK 15 million of this, with 3/4 being CapEx, mostly related to IT, so servers, firewalls, things like that. The integration work continues at full speed, now focusing both at branch level and headquarter. Separately, as mentioned earlier in this call, conditions in Poland are tough. This includes price pressure, inflation and reduced exports. We see this also in our 3 existing business. All in all, these conditions also pave way for continued consolidation in Poland, and we will be part of that. Business area, Sweden and Norway on Page 15 was not immune to the broader market condition in the fourth quarter, but has nevertheless performed very well in 2024. As communicated, we have prioritized restoring profitability, and we are proud to deliver a 50-plus percent increase in adjusted EBIT, both in the quarter and the full year. Of course, with such a profitable business, we are keen to see continued growth in the years ahead, and this is why we now invest into the new warehouse in Norway. As Pehr mentioned, this will free up capacity also in Sweden since Strängnäs is currently serving both markets. Finally, on Page 16, we illustrate the strong performance of business area, Sørensen og Balchen. And unlike in some of the other business areas, 2024 has been a year with full focus on customers, operations and incremental improvement. And it's perhaps not surprising, but indeed encouraging to see this focus paying off. Healthy organic growth, sales exceeding SEK 1 billion for the first time and equally important, the strong margins have been maintained. So on that happy note, I leave it back to you, Pehr.

Thank you, Christer. Well, to sum it up, we reached the highest adjusted operating profit in our history in 2024. Adjusted EBIT was up more than 13% compared to '23. This improvement has occurred despite costs related to integrating Elit Polska, a milestone in our geographic expansion. We have also secured a strong financial position. Our leverage stands at 2.6x, well within our target range. In addition, we have improved our cash flow, driven by strong results and good working capital development. And as planned, we have prioritized profitability over growth, yet we have achieved a steady growth of 8%, of which 4% was organic. We have also reduced costs as a share of sales and maintain our gross margin. This development enables the Board to propose a dividend of SEK 3.9 per share to be paid in 2 installments during 2025. '25 will be an eventful and intense year, and we are well prepared. So that will be all for me. Thank you for listening, and now we will open up for questions.

The next question comes from Mats Liss from Kepler Cheuvreux.

A couple of questions. Well, first, I mean, you have all these measures that you implement moving from -- to a more sort of efficient logistical chain. And I guess Norway is on the way and Denmark and Finland is starting up now. What will the impact be sort of during the first half of the year? I mean they will be fully implemented the new warehouses midyear sort of? And will there be some extra costs here in the first half to move from one to the other?

Good question. So I think as we've mentioned in one of the previous calls, this process of moving into a new facility is, of course, not something that happens overnight. And in simplified terms, you can think of this as a 6-month process. So from starting one to leaving the other is like a 6-month period. During that period, we will have some double rent. We've not specified exactly how much. We will make sure that this is clear in the communication in quarters to come. There are also some costs associated with moving goods, but this is not massive. In terms of project cost, I mean, these are not very material. If you look at the previous quarters, you will see that we have identified some such costs, but these are single-digit million SEK. So that's not very material. Other than that, of course, I mean, we are planning for uninterrupted operations. So we're moving kind of slow in a sense in order to make sure that there are no disruptions to operations. Pehr, what do you want to add?

No, I think that covers the question.

Sounds good. And I guess you will have sort of opportunities going forward to reduce inventories when you are fully up and running and can sort of rely that you are able to supply your customers well with the new facilities.

You're completely right. And it's both when we will -- when it's all done, we will have a more optimized inventory, I would say. If it's lower, then that's another discussion, but it would be more optimized for each market. And with that, also, we can have a better availability and of course, converting to better sales.

And then secondly, on sales there. I mean you mentioned the impact of -- well, in Norway, where you have moved through to a more sort of more business-oriented distribution structure and you have some consumer-related sales there. Was that fully impacting you in the fourth quarter? Are there sort of more effects in the first quarter and second of this year?

Well, it's a good question. I don't think I have the exact answer when we -- because this project was gradually implemented during the year. So I think that you will see maybe some negative impact in the beginning of the year, maybe, but it shouldn't be much. So it's -- I mean the big hit you have seen in Q4. And there is also things now where we can improve -- start to get the benefits that we actually improve the availability. So we also expect some recovery in those projects.

And I mean, the consumer segment is quite limited. So I mean -- but would you say that you keep your market share in the business-to-business segment?

Yes, yes. And we -- the -- let's say, the decrease in sales is more that our customers buy a little bit less because we have been converting warehouses and new numbers and it's catalogs, but all those things start to be in place now. So we didn't lose any customers. So...

Okay. Great. And yes, and then -- well, pricing here, I mean, previously, you have been able to -- I mean, the Swedish krona is somewhat soft, have been for a while. And I guess that -- and most of your procurements are made in euros. Are there any sort of impact there for you starting 2025?

I think we have a gross margin which is stable now, and I think we are well priced to the current currency. Of course, if it will get much worse, then we will be in a situation that we might need to increase prices and so on. But we -- I would say that we are on a stable level at the moment.

And finally, just -- well, in the tax line there, you had some catch-up due to -- well, somewhat underestimated tax charges previously during the year. Could you give some sort of indication what the running level or what level we should expect for 2025?

Yes. No, of course, in this sense, Q4 is quite an outlier and there's been, as you know, a few, call it, odd transactions in the year with impairments and goodwill and whatnot. And this is why the kind of the prioritization of tax is not -- in the previous quarter has not been kind of at the level of the full year effective tax rate. So where we ended up for 2024 was an effective tax rate of 25%. That's obviously high. If we look into the future, we do not expect a level that high. We think a fair reflection of future periods would be closer to 23%.

Yes. And then we have some questions from the chat. in the coming quarter related as the new rent. The question is if we expect any extra cost in the coming quarters related to the new warehouses. And we don't -- not as we see at the moment because we are doing this according to plan and according to the business cases. So let's continue with that view as long as possible. We don't expect anything to pop up. And then there was another question also from Stefan. Do you expect the relatively mild winter in the Nordics this year to have a negative impact on sales also in Q1? Good question. As we saw in Q4, when it's extremely good winters, we have a boost in sales, which was the case last winter. We -- but we also try to mitigate that with other products and other services. So we're not guiding specifically for Q1.

The next question comes from Andreas Lundberg from SEB.

Starting with Sweden and Norway, where you've seen -- you touched upon that large efficiency gains. Can you update me or us on the status on the first, let's say, efforts? Where are we there? And what else do you see in Sweden and Norway when we move into 2025?

I mean we have done a lot -- it's mostly -- the effect is mostly so far in Sweden, where we have reduced costs is efficiency. Of course, with the new logistics setup, we will be able to grow more in both countries. We will have a possibility for Norway to have a better local assortment, which will be healthy for that business. And then we -- I mean, in Norway, it was the big project with merging or branches and that project is more or less closed. So I don't expect anything more. But we will continue. The idea of building a stronger MEKO is not to be ready to continue result. We will search for more and more business...

But would you say that if 2024 was mainly about efficiency gains, it's more about sales growth in Sweden and Norway when we move forward?

Yes. I think it will be a mix of both. There are still areas to look at cost and efficiency, but maybe a little bit more focus on the market.

Okay. Cool. And also, can you update me on the Polish business? I think you did that last quarter, 2 quarters ago and the effects from the acquisition. How we should see that into 2025?

Yes. But as we said, there will be costs related to the integration. And part of that with SEK 15 million or something we had in Q4, we said that it will cost in total SEK 70 million to SEK 100 million, and that is -- it is what we still expect and it will take at least this full year until we are complete with that integration.

But I think you also said that these are underlying development in the acquired units. Can you update me on that?

Yes. It's -- I mean it was loss-making and it still is, but that's also part of the integration is to close the branch which is not performing, merge with existing branches. So that is the part of the work is to profitable again. Then Poland has, at the moment, last year, at least has been tough due to competition. But I would say both our entities, Elit Polska and [ Automeister ] is more or less keeping the market shares locally. Then we have the export business be a little bit up and down from time to time.

Okay. And on Finland, you have done a lot there over the past years here. What remains to be done? Or should we see some kind of recovery over these?

Yes, definitely. And the first -- they are actually one of the first warehouse projects that will be live, at least starting the operation. We'll see if they are also fully operational, but they will start already now in the next coming weeks. So that is a very important part of increasing the efficiency. But because we still have all the people running it manually, but they will be released here during the spring. So that's one area. Then we also have worked with reorganization. And I would say this year also, we will increase the effort to gain market shares.

And lastly, on the warehouses, I think you touched upon it, but is it fair to assume that you will run double warehouses in 2025 basically, plus/minus a few months.

Not for the full year. But you could expect that there would be 6 months overlap. And during that period, there will be some double rent. We will do our best to be clear with these impacts in the quarters to come. But of course, the reason for moving quite slow is to not interrupt operations, which is priority #1 here.

Great. And then we have in the chat, we have a question from Johan on Mekonomen Finland. You have invested in one stop shop concept with tires and glass in addition to service and repairs. Are there any other areas you see value in focusing in the close future? Yes, we do that. And there is a big difference in the different business areas and in the markets. So we will try to use best practice in order to do that exactly which area and when I will keep that as a surprise for our competitors.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. Thank you all for listening, and have a great day. Thank you.

The host has ended this call. Goodbye.