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

Welcome to the MEKO Q1 Report 2025 presentation. [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 results for the first quarter 2025. As said, I'm here with the CFO, Christer Johansson, and together, we'll walk you through our performance and current position. Unlike many other industries, we see stable underlying demand driven by the constant need to service and repair vehicles. The car remains an essential part of the daily life of most people. And when car -- when repairs are needed, they tend to prioritize them. MEKO's aim is to meet this need. We want to be the most comprehensive partner for all who drive, repair and maintain vehicles in Northern Europe. And today, we are the market leader. However, we're not entirely unaffected by international turbulence. In Q1, our market was cautious with concerns about a prolonged economic downturn. Total growth was 6% and the organic growth was slightly negative. Despite this, we managed to defend our gross margin through price adjustments and improved procurement. We also managed to improve our EBIT, although we saw a slight decrease in our adjusted EBIT margin. Importantly, we continued the implementation of our high-tech warehouses according to plan. And in response to the more cautious market environment, we also accelerated our cost control efforts within the Building a Stronger MEKO initiative. At the same time, we are taking long-term actions to drive growth. Several strategic initiatives are launched during this first quarter. Let me go through a few of them starting at the next slide. To start with, we're accelerating our efforts within the tire segment, a key area for future growth. Tires are a crucial component of a car today and will remain so in the future. Vehicles are getting heavier and electric cars wears out tire faster. This increases the demand for higher quality tires at higher prices. Our ambition is to increase tire sales with more than 30% within the next 2 years, and I'm pleased that we have established a strategic partnership with Goodyear in Q1, one of the world's leading tire manufacturers. Let's move on to another long-term growth initiatives on Slide 4. Commercial vehicles are typically defined as the trucks, buses, pickups and similar. These vehicles are heavily dependent on reliable spare part deliveries wherever they might be. With our extensive network, we are the ideal partner for those who repair, owns and operates these vehicles. In Q1, we established a new division under the leadership of Nils Hollmann, an experienced leader in the commercial vehicle sector. Our long-term ambition is clear. We want to achieve the same leading position in commercial vehicles as we already hold in passenger cars. Let's look at the similar growth initiatives on Slide 5. We not only have a vast network, we also have a leading expertise in electrical vehicles. This includes more than 1,000 workshops certified for high-voltage systems. This was a key reason why General Motors chose MEKO as their strategic partner for all aftermarket needs for their new electrical vehicles in Sweden. We're proud to collaborate with Cadillac, one of the world's most iconic brands, and to add another manufacturer to our growing list of partners. Let's move on to Slide 6 and a significant step in strengthening MEKO's position for the future. Our high-tech warehouse projects are progressing according to plan. The construction phases are complete, and we are now moving in. We're already live in Finland and currently testing the technology in Denmark and Norway, aiming to be fully operational across all sites in the autumn. In short, this will elevate our logistics to an entirely new level and open up for new growth opportunities. I look forward to sharing more details at our Capital Markets Day on September 10 in Rørup, which is outside Odense in Denmark. Now let's turn to something else worth highlighting our expanded annual sustainability report, and I will hand over to Christer.

Thanks, Pehr. So as market leader, we set standards for the industry in [indiscernible] and not only for [indiscernible] also for other important areas. One such area is sustainability, where we do a lot, and we are glad to share an update on this work through our annual and sustainability report, which we published on March 27. And as I'm sure you know, reporting requirements have evolved, and we are well on track to meet them. In fact, we believe that the industry as a whole will benefit from a greater transparency, and we are ready to lead the way. To give 2 examples of tangible progress in 2024, we increased the percentage of female managers from 15% to 17%, and we increased the proportion of renewable electricity from 11% to 80%. Turning to financials on Page 8. We did, as Pehr mentioned, see a resilient performance in a slow market. Net sales increased to 6% -- by 6% to SEK 4.6 billion, with organic growth being slightly negative at minus 1%. The organic growth metric is after adjusting for FX and working days, both of which contributed negatively in the quarter. Nevertheless, with help from maintained gross margins and a controlled cost development, we were able to generate an adjusted EBIT of SEK 231 million. This is an increase versus the comparison period, both on the adjusted and the reported level. The difference between EBIT and adjusted EBIT referred to as items affecting comparability amounted to SEK 70 million, of which half related to ERP project cost. The remaining half include SEK 9 million of costs associated with the warehouse projects, and this is mostly double rents. The overlap on lease contracts is between 6 and 9 months. And for the full year, I expect items affecting comparability related to warehouse projects to amount to circa SEK 40 million. When it comes to cash flow from operating activities, Q1 is typically a weak quarter, although the comparison figure from 2024 was a bit of an exception. The level in Q1 2025 is a result of increases in the non-inventory component of working capital, so payables, receivables. It's not so that the payment terms or similar things have actually changed to any significant degree. So one should really read this as a fluctuation rather than a structural change. I mentioned stable gross margins illustrated on Page 9, and there are no surprises on this front. We have already pointed out that growing in a lower-margin market like Poland is dilutive to gross margin. And in the graph, this is included in the other category. I also wish to make a few comments on FX. So in a sense, the tide has turned. Currency effects are now helping. In simple terms, our purchasing is mostly in euro, whereas sales are in a mix of currencies. So all else equal, margins will benefit from a weaker euro. At the same time, we also note that in many markets, not least the competitive market in Poland, such effects tend to be passed on to customers through negative price adjustments. Finally, we should note that growth in Denmark, Finland, Poland and The Baltics over the last few years mean that MEKO's FX mix is less one-sided than it used to be. As usual, I will, in a minute, comment on key developments by market. But before going to that level of detail, we note that Sweden, Norway and Denmark performed well. These markets represent 60% of our business. We have strong markets in all of those countries, and we do continue to invest to protect them. Our financial position, as illustrated on Page 11, remains strong. Our leverage at 2.4x is well within our target range. Available funds amounted to SEK 1.7 billion at the end of Q1, and we are tending to the maturity profile of debt with a first step in Q1 through the renewal and extension of our RCF. Next on our list is to look at the bond, which matures in 2026. Now with regards to the recent uptick in net debt, there are 3 comments worth making. So firstly, I mentioned that operating cash flow in Q1 is often seasonally weak. That was the case also in 2025. Secondly, separate from operations, we are working our way through a phase with larger investments. CapEx in the quarter was almost twice the historic level. And this is mostly linked to the new warehouses. When those are completed later this year, we expect to stay there for at least 10, 15, maybe 20 years. So hence, clearly, the higher CapEx level is not a new normal. Looking beyond what is capitalized, we are, as you know, also investing into the ERP program at the pace of circa SEK 100 million a year, and this program will continue throughout '25 and '26. Finally, then looking into Q2 and Q3 as well, we are undertaking 3 parallel warehouse moves. And in that, maintaining a good service level to customer is, of course, key. We are taking actions to mitigate risks even if it, in the short term, goes against our longer-term drive to rationalize inventory and working capital. So to sum up this page, we have a number of initiatives going, but we do operate from a position of strength. Moving into our business area by business area review. We start with Denmark on Page 12. So in Denmark, adjusted EBIT increased by 16% to SEK 77 million despite a slow top line. And this strong development came about through a combination of pricing efforts and cost control. Denmark is a very competitive market, and efficiency will continue to be in focus throughout 2025 as we ramp up and fine-tune operations in the brand-new and modern central warehouse in Odense. And as you heard Pehr saying, this is also where we, on September 10, opened the door to show investors our capabilities up close. Turning to Finland on Page 13. The development is less satisfactory. So despite improving gross margins and costs coming down also in absolute terms, we are, in a sense, outpaced by a market, which has been slower than anticipated. Like many of our business areas, a warm winter kept sales down. And in Finland, we are also noticing a less helpful macroeconomic development. As previously announced, we have taken actions to improve efficiency, and these are progressing. For example, the AutoStore automation is in early phase operation. Ultimately, this will enable staff reductions, and we are now in a 6-month phase to ramp up and complete changes in the related workflows. In Poland and The Baltics, as shown on Page 14, we see top line growth of 43%, both through the full year effect of earlier acquisitions, but also in terms of organic growth. And the difference in growth dynamics was and is one of the strategic reasons why we have invested in a larger footprint here. Considering that Elit was loss-making at the time of acquisition in August '24, the year-over-year EBIT comparison is perhaps less meaningful. On the integration of Elit, we did pass a few milestones, one of them being that we exited the transition service agreement on IT and the integration continues. The estimated total cost of SEK 70 million to SEK 100 million still stand, even though only limited amounts ended up being incurred in this particular quarter. In Sweden/Norway on Slide 15, profit generation continues at a healthy level with adjusted EBIT increasing to SEK 143 million, corresponding to an adjusted EBIT margin of 8.3% in the quarter. So as noted before, this is a result of cost measures taken in '23 and '24. Market headwinds have not gone unnoticed as seen in the negative 2% organic growth, but this is also not changing our plans. And our current focus business area is simplification of the Swedish branch network in parallel to running capacity validations on the new Norwegian central warehouse. Finally, then Sørensen og Balchen on Page 16. We note a slight reduction in sales and adjusted EBIT following many consecutive quarters of solid development. So with sales coming in a bit below our expectations, we also saw lower adjusted EBIT margins compared to the very attractive levels seen in recent periods. And I have to say that this operation is quite lean. So hence, our priority here is top line growth, be it through refining the assortment or smaller selective acquisitions. Looking beyond 2025, there should also be synergies to extract in logistics on the back of the investments that we are now doing in Norway. So with that, I'd like to hand back to you, Pehr.

Thank you, Christer. To summarize the first quarter, we delivered a solid EBIT and maintained our gross margin through price adjustments and better procurement. Total growth was 6% organically. The pace was slower. We took several long-term actions to drive growth. We launched a new division for commercial vehicles and entered new partnerships to accelerate our tire business. Importantly, we continued the implementation of our high-tech warehouses according to plan. These new facilities will not only increase efficiency and customer service, they will also take our logistics to a completely new level. I'm really looking forward to our Capital Markets Day on September 10, where we'll talk more about this and showcase our brand-new warehouse in Odense. That day, we will also provide more information about our other growth initiatives and the efforts we are making to build a stronger MEKO. So you're all very welcome. That's all for me. Thank you for listening, and we will now open up for questions.

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

A couple of questions. First, I guess, relating to the -- well, somewhat mild winter and so on, do you see that -- I mean, is there sort of a pent-up demand still regarding service? Or is it more sort of winter conditions haven't been too mild and the measures normally affecting during a harsh winter, it's not going to be that? And now we are more in for a normal, hopefully, second quarter with pent-up demand ahead of the driving season and so on.

I would say it's a combination. I mean when compared to the quarter last year, it's a lot of effect from the very cold winter. But then at least some of the markets, there is, let's say, very cautious market and the demand is not fully up. And yes, it might be a pent-up. But when that occurs, I will pass on because that's still unknown. For example, Finland is a very slow market. And at some point, that will recover, but I can't promise.

The Finnish operation, as you mentioned, is a bit soft, I guess. But how much is sort of due to company-specific reasons? I mean, you make this integration of warehouse, upgrading the logistics structure. And is it -- well, what's the bottom line there?

Yes, we are -- we do -- did do a lot during the last year and during the quarter. But those -- so we have actually reduced cost, and we have improved the efficiency and everything. But then there is a strong headwind due to the very low demand. So [indiscernible] can get. The warehouse project is looking good. The automation is actually up and running, but that's step 1 out of 2. We also need to rebuild the manual warehouse. So full effect from that initiative, that will be in the second half of the year. So it's still more to come from the initiative. What we also have done quite late is that we are strengthening the sales organization in order to also get more market share.

And secondly, just about the coming quarter now. I mean, the Easter was more of a first quarter event last year, the Easter holiday, I mean, and now it's more a second quarter. Should we expect some extra impact there, especially in Norway, I guess? Or is it -- could you say something there? I mean it's probably something to get a feel for how things are developing in the second quarter also.

It would be -- maybe it's a bit -- we don't guide in that way. But you're right that the Easter was in April this year. It has a little bit both positive and negative effects. It's positive for us in Belgium because they have a lot of extra sales before Easter because of the accessories and that kind of things. But most of the markets has a negative effect. So one would expect that there will be an effect from that in the Q2. And then, of course, it's the working days.

Maybe I can add. So if you look for all the markets on a combined basis, there is 1 less working day in Q2 '25 compared to Q2 '24. And that was also the case actually for Q1. So Q1 was 1 working day short compared to the previous year.

Okay. Yes. And then, well, Christer mentioned the currency impact there and stronger krona towards the euro has some positives there under your procurement in euro. Have you seen the full impact of that in the first quarter? Or is there sort of a filter through more in the second? Could you say something about that?

But you have the onetime effects, of course, in Q1, which is in Sweden positive, then I'm talking about the balance sheet. But then the gross margin effect that will be delayed, let's say, 4 to 6 months before we have sold out what we buy for cheaper. Unfortunately, the Norwegian krone is -- didn't follow the Swedish krona this time. So we -- what we win in Sweden, we kind of lost in Norway. So it's not that big effect any longer as it was some years ago.

[Operator Instructions] The next question comes from Andreas Lundberg from SEB.

Andreas Lundberg with SEB. On the heavy truck initiative, first of all, why you are doing this? And what's your edge? And how will you utilize your strength in passenger cars on the heavy truck side, if you can talk about the strategic reasons and so forth.

It's a big market and very depending on [ fast ] logistics because it's [indiscernible] so to say, which is the reason why we want to enter it. We think that with our network, we can utilize on that. We also have some customers for the passenger cars -- there are synergies in all aspects. We did [indiscernible] already a couple of years ago in Sweden and Norway, where we ramp up, but [ needs ] a new area for the other countries.

I think I lost you a little bit, but did you say that you want some synergies when it comes to purchasing and distribution or...

Yes. Logistics and distribution, also when it comes to the customers, some of our customers are doing both. So we can [ have lean ] products to the same customer. Then of course, the works for heavy vehicles usually also have some passenger parts. Within supplier, a lot of new suppliers, that's why we need to get the volume to get the right condition [indiscernible] also suppliers where we already are big customers because they have assortment for both places.

Okay. I think I got you. And then perhaps, Christer, can you help me understand the financial net and how we should see it in 2025?

Yes. So on the financial net, as we elaborated a little bit on in Q1, you, of course, have interest expense on the financing, but you also have a component related to the lease contract. Now in Q1, we entered into -- we took to the properties in Denmark and Norway, means that we are now starting to recognize the lease liabilities on the balance sheet. You can see it's SEK 1.2 billion. That also has an interest component, which is contributing to a little bit of an increase on the financial net. I believe on the last call, I gave a range of [indiscernible] SEK 60 million on an annual basis related to the interest component of the lease liabilities. Other than that, there are no big kind of movements on the financial net. And as I mentioned on the call earlier here, we are -- we have prolonged the debt. So that's all good. And we are now looking at the bond maturity in [ 2026 ].

Right. And then when you're fully up and running in the new warehouses, will it be reduced leasing debt from units you potentially will close? Or how will that be?

Correct. So we are -- currently, you could say we are operating the central warehouses to service the 3 markets with the reason being that the shift, of course, is overnight. So there is an overlap, call it, 6 to 9 months during which we move the inventory and all operations up and running. So currently, we are incurring rent for warehouses. The impact on Q1 was SEK 9 [ million ] and that will continue then in Q2 and Q3. I guess, by early Q4, we [indiscernible] then this temporary impact [indiscernible]. Does that make sense?

Yes. And last one, you mentioned a little bit about working capital Q1 seasonality. But given that you are doing these warehouses this year, how do you see working capital in 2025?

I think if you look at the end point of '25, there can be no big [indiscernible] but I did operate as we go through [indiscernible] the inventory, we are to make sure that there are no -- we end up not being -- in the short term, we would be willing to absorb...

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

Well, thank you, and thank you all for listening. And again, put in the calendar September 10, when we have a Capital Markets update, and you're welcome to Denmark, Odense. And with that, yes, thank you for listening, and have a great day.

Thank you.