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

Welcome to the MEKO Q2 Report 2025 Presentation. [Operator Instructions] I now hand the conference over to the speakers, President and CEO, Pehr Oscarson; and CFO, Christer Johansson. Please go ahead.

Thank you. Good morning, and welcome to MEKO's presentation of our results for the second quarter 2025. I'm here with our CFO, Christer Johansson, and together, we will walk you through our performance and current position. Already in the first quarter, the market slowed somewhat affected by international turbulence and uncertainty about the economy. This situation continued into the second quarter with lower demand. This also intensified competition, particularly in Denmark and Poland. All in all, this impacted our Q2 sales and our organic growth declined compared to the same quarter last year, which actually was the strongest in our history. For some time now, we have stepped up our efforts to build a stronger and more profitable MEKO. This has included extensive savings and optimization initiatives, which have shown clear effect. But the slower market have affected both our sales and results in Q2 despite our focus on efficiency, and we are responding to this immediately. So we're now launching a new cost reduction program that will lower our costs by SEK 100 million annually with full effect going into '26. Beyond reducing costs, we're also working with more focus to increase our sales. Several activities are underway both locally and at group level. We are renewing our focus on exclusive brands and have continued to bring our upgraded central warehouses into operation in Q2. In addition, we'll launch our new ERP in Poland as the first market. So let me show you a brief status on the efficiency improvements and let's turn to next slide. We launched the initiative, Building a stronger MEKO, in late 2023. The aim is clear: to improve profitability and long-term growth. In short, Building a stronger MEKO focuses on these three areas: first, cost reductions and increased efficiency through consolidating our branch network, cutting costs and leveraging our new warehouses; second, supplier optimization, making sure we work more effectively with our suppliers; and third, our new business system for enabling greater synergies across the group. And as of today, we are approaching the final stages of consolidation of our branch network and driving down costs. We have also seen significant benefit from these efforts. We have almost completed the implementation of our new upgraded warehouses. However, the benefit is still ahead of us. Right now we're still burdened by costs from the old manual solutions and paying double rent. This will no longer be the case in 2026. We are also about halfway through the implementation and realization of benefits from our supplier optimizations. And as for the ERP, we have already taken significant implementation costs while the benefits are still to come. All in all, we have already achieved EBIT improvement of SEK 200 million thanks to these initiatives, and there are substantial gains still to be realized. And now to address the weaker market, we're launching a new cost reduction, adding another SEK 100 million in savings. So let's take a look where we stand with our warehouse projects and go to the next slide. All our high-tech warehouses in Denmark, Finland and Norway were completed on time. And in Q2, we were able to go live in Norway as well. We still expect all warehouses to be fully operational during the autumn. These projects has demanded a lot of focus from us, and we have been careful to minimize the operational risks. The project has not been without their challenges, but we are now very close to completing an important strategic upgrade of MEKO's logistics. This will be key in our efforts to drive long-term growth. So let's take a look at another of our growth initiatives on Slide 5. During the quarter, we announced accelerated efforts within exclusive brands. This has been a priority for us some time, but we see clear demand for more affordable products alongside our premium range under the ProMeister brand. To meet this need, we are creating a new division led by Henrik Pettersson. He will take full responsibility for our exclusive brands portfolio across the group. This will provide us with a sharper focus, allowing us to expand the product offering and create tailored solutions for every situation our customers face. So let's move to Slide 6. Sustainability is a core part of everything we do at MEKO and, in that area, our key priority is reducing our climate footprint. That's why we're pleased to say that in May, our Science-Based Climate targets were approved. Our long-term ambition is net zero emissions by 2050, and we now have clear milestones on the way there. This approval is an endorsement of our strategy, and we're proud to be among the first in our industry to reach this point. You can find a detailed description of our near-term and long-term targets at meko.com. Now let's turn to our successful bond issue in June. So I'll hand over to Christer.

Thanks, Pehr, and good morning to those of you who are on call. So to put the transaction into context, we did refinance our revolving credit facility in Q1 of this year and we mentioned then that we would also explore a refinancing of the SEK 1.25 billion bond maturing over in early '26. So sticking to our proactive approach in managing the maturity profile, we opened books on June 4, and we were pleased to see strong demand, especially for a 5-year tenure. Pricing closed at 3-month STIBOR plus 215 basis points with books being 1.4x oversubscribed. So the proceeds are used to repurchase the equally sized existing bond, and we saw a 60% participation in the tender offer with the remaining 40% being called here later in Q3. The transaction also came with SEK 5 million in financial cost in the quarter, but we are, of course, very pleased both with securing a 35 basis point rate improvement and with the next maturity now being over in July 2027. Turning to financials for the quarter as a whole on Page 8. Q2 did indeed turn out to be a challenging quarter, especially when comparing to Q2 '24, which is an all-time high. To start, we have a revenue development characterized by negative organic growth amounting to minus 5%. This is after adjusting for FX variation in working days, both of which also contributed negatively in the quarter. This negative organic growth was driven primarily by lower volumes. And despite the geographical diversification, this trend was largely uniform across business areas. We identify end customer confidence and behavior as one factor with repairs and service being delayed and, in some cases, migrating towards lower-cost offerings products. With regards to margins, we see how the lack of underlying market growth contributed to a sharpening of the competitive dynamics. I will come back with more details on the following pages. But as is evident, we were not able to offset the shortfall in gross profit. Consequently, it translated into a steep decline in adjusted EBIT, which came in at SEK 175 million. The shortfall in gross profit also contributed to a lower cash flow from operations, which nevertheless amounted to almost SEK 500 million. And in those SEK 500 million, we have absorbed an initial stocking up of the new warehouse in Norway, which amounted to a bit more than SEK 100 million in additional inventory. Separate from operations, Q2 was, as expected, an intense quarter in terms of investment, and this is reflected also in the items affecting comparability, which include SEK 33 million of costs linked to our ERP program and SEK 22 million of cost linked to temporary double rents in connection with the large warehouse projects. And while some of those will fall away fairly soon, the underlying development is certainly not one which we can accept. And we are, as Pehr mentioned, taking firm actions. Moving to Page 9. I mentioned sharpening competitive dynamics. And this was especially evident in Denmark and Poland, where we directed significant attention to monitor and mitigate movements in the market. On a slightly more technical note, it's also so that product margin is affected by the level of supplier bonuses. And these are typically annual, but our accruals and the projections that underpin them are updated quarterly. So with volumes being lower than earlier trend, this explained about 1/3 of the year-over-year compression in margin. As a final remark, similar to the last 3 quarters, the fact that we have grown in a low-margin market like Poland will in itself dilute margins, and this alone represent about a percentage point reduction here included in Other. On Page 10, I mentioned already that many of the underlying factors were actually common across markets in Q2. This included soft demand and margin pressure. Another common factor in Q2 was far-reaching changes in our internal logistics, which applied to Denmark, Norway, Poland and Finland. It did involve some challenges, as Pehr mentioned, and I guess it often does. But thanks to the dedication of our respective teams, much of this is now behind us. Consequently, it is with confidence that we now continue to ramp up towards full efficiency and the ramp down towards new staffing levels, and that activity will extend throughout Q3 and Q4. Before we look at the individual markets, I wish to comment briefly on our financial position on Page 11. So the development in leverage, which increased in Q2 to 2.7x, is the net result of two opposing factors. So on the one hand, we have in the quarter reduced net debt by SEK 150 million. On the other hand, we've seen a larger reduction in EBITDA. So that said, 2.5 is still well within our 2 to 3 target range. And for the sake of clarity, I want to repeat that we define leverage excluding IFRS 16, and I also want to mention that EBITDA is measured on a rolling 12-month basis, where the strong Q3 last year will work against us in the short term. With regards to outlook, there are, however, two more fundamental things to highlight. Firstly, one should note that CapEx investment has been exceptionally high in recent quarters. This is, of course, due to the ongoing projects. It's not a new normal, and it will revert to normalized levels now that we are approaching completion. Secondly, we do, from time to time, get questions around M&A. And as I'm sure you will understand, our focus now is on completing all the things we have going and on reducing debt, and we don't see that changing anytime soon. Leaving the topic of leverage and turning to liquidity. We note that MEKO's available cash and unutilized credit facilities exceed SEK 2 billion and, in combination with an improved maturity profile, our financial position remains strong. On Page 12, briefly on Denmark. So I've already mentioned that this is one of the markets where competition is tangible. Fewer working days and the stronger SEK also added to the organic growth of negative 7%. As one part of mitigating this, we have been tuning our pricing with promising initial signs, and this goes down to customer-specific products with adaptation being surgical rather than broad-based. On the warehouse project in Denmark, just to give you a sense, I can mention that at the end of June, we had moved circa 85% of the inventory. We're approaching 100% fast because we are handing back the keys to the old premises here in August. Moving on to Finland. The macroeconomic backdrop remains unhelpful, probably more so than in our other markets. Cost efficiency has been a focus for some time but will remain so. In Q2, we have, however, added resources on the sales side, and we have also opened a new regional distribution center in Oulu. Similar to the warehouse automation, this is about positioning ourselves for the long term in Finland. Looking at Poland on Page 14. There are quite a few moving parts. As in recent quarters, the year-over-year comparison is affected by the acquisition of Elit in Q3 2024. Now stripping out that, together with FX and variations in working days, this business area is exhibiting better organic growth than our other markets. The bigger challenge in the short term is, however, the combination of salary inflation and price pressure, and that applies, of course, both to MEKO's preexisting Polish business and to Elit. So consequently, the year-over-year reduction in EBIT is coming partly from the consolidation of Elit, but also partly from tougher conditions in our pre-existing business where, not least, the export business has suffered in 2025. As Pehr mentioned, the quarter also included moving the regional warehouse in Warsaw and going live with the first parts of our new ERP. So quite an impressive effort by the Polish team, well beyond what the Q2 numbers themselves suggest. With regards to integration of Elit, we said in '24 that this would be an ongoing activity up to the end of '25. That still seems about right, and we're making good progress. To give a few examples, we had, by the end of Q2, eliminated half of the overlap in branch networks with the outcome so far lining up well to the business case. Other examples of progress from this quarter include unifying the fleet offer and optimizing parts of logistics. So in getting the first half of the integration done, we've actually spent less than expected. But then again, we are obviously not done until this is a fully integrated and profitable part of the business area. Sweden, Norway on Page 15, has been performing well in recent years but did not escape the market slowdown. We saw organic growth coming in at negative 6%. What is encouraging is the extent to which our previous cost-cutting efforts are coming through. And these are actions that we took in '24, and they explain why adjusted EBIT margin is still close to 10% despite the weak top line. Also here, the quarter includes a certain level of project cost and duplication related to the central warehouse in Norway. Within Sørensen og Balchen on Page 16, both volumes and margins were holding up relatively well. Adjusted EBIT margin is still north of 18%. On the operational side here, the new warehouse in Norway is designed to support all our business in the country, including that of Sørensen og Balchen. And as we come back here after summer, we will pick up pace ahead of that move, which will take place late 2025. And I can just mention that the related lease agreements have been canceled and, hence, also here, it's only a matter of time until this duplication comes to an end. So with that, I would like to hand back to you, Pehr.

Okay. Thanks. Well, to summarize, we continue to see a slower market affected by international turbulence and economic uncertainty. This impacted our Q2 organic growth and results. We are acting immediately and have launched a forceful cost reduction program, adding to the Building a stronger MEKO initiative. And as we have seen, we are near completion in several of the key areas in these initiatives and are burdened by implementation costs. However, many of the benefits are still to come. This is also true for the strategic upgrade of our logistics. It has demanded a lot of focus from us so far in '25, but we are now very close to the finish line. This will strengthen us over time and enable future growth, just like the other initiatives we are undertaking to continue building a stronger company even in a challenging market. So that will be all for me. So thank you for listening, and we are now open up for questions.

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

A couple of questions. First, I mean, you have this cost -- well, savings program implemented or about to be implemented of SEK 100 million. Could you give some more color there in what geographical areas and where you are sort of implementing these measures?

Well, I can't give you details and that is respect to the different processes in different countries and, firstly, thinking about the negotiations with the unions and so on. But it is spread over all 8 countries, a little bit in different places, of course. And it is mostly related to personnel costs. A little part of it is other operating costs also, but the main part is people. But it's in all levels and in all countries.

And should we expect these measures to be implemented by the end of the year, by and large? Or is it...

Yes. Starting from next year, these costs will be out.

And the extra costs, you will sort of -- what's the payback, I guess?

Mats, Christer here as well. We have not yet disclosed that and we're kind of working out some of the details in those plans, so it will be a little bit too early to say. But I would say typically, I mean, we're not expecting to see a big net benefit in this year, of course, because even though some of the cost savings will start, there is also a cost associated, as you alluded to. But going into next year, we should see the full benefits.

And then sort of, well, starting with Finland there. I mean, it's tough market conditions as it sounds. And have you sort of -- well, you have made some measures already, integrating your previous operation in Finland with Koivunen, and it seems to be unsufficient. What can you do to sort of adapt to this weaker market conditions if they sort of remain? I mean it's, well, still a loss there.

Yes. But it's -- Finland is also, of course, including in the cost saving programs. So there will be low costs and, by that, higher efficiency in Finland. And they have done a lot of things already. There is still effects to gain with the new warehouse because that is not completed. So we are a little bit overstaffed in the warehouse with people that will be released during the autumn. So there's a lot on the cost side. But we also, as Christer mentioned, we also started up regional warehouse to increase the availability. We're working on the assortment to make sure that we have the right products for that kind of market and also actually doing some sales initiatives, we actually have strengthened the sales organization just the last couple of months. So there is a lot of activities ongoing.

Great. Moving to Denmark. I mean, it seems that you have met some tougher competition there. Are these sort of -- well, and then you also mentioned that you implemented some price and, well, customer changes or address -- could -- this new competition, is it sort of something that will remain? Or is it sort of temporary that competitors try to reduce inventories on the back of softer demand? Or could you say something more about that?

I don't think it is very temporary. So I think it's -- I mean, Denmark has always been a competitive market. It goes in waves, and it's probably due to that competitors want to try to gain some market shares in different efforts. And to be very honest, I would suspect that we have people listening to this call. So exactly what we are doing to mitigate is more of a competition secret.

Okay. Great. In Denmark, you also have this new balance structure implemented and you mentioned that 85% of the inventory have been moved. And so will there be sort of, due to this -- I mean, you do this in other markets as well, but can you release some working capital supporting cash flow going forward also besides the SEK 200 million of cost savings, I mean?

Yes. No, let me give you a little bit of color to that. So I think in the quarter, as I mentioned, we did see an impact on working capital, and this is specifically in Norway, where we did not have a central warehouse. So we've been stocking up. On the other hand, as we approach the end of '25, then we will merge the operations of Sørensen og Balchen into this new warehouse. So I think by that time, we will sort of be able to get some of that back in terms of efficiency. But overall, we are not expecting a big benefit or a big negative effect in working capital from these initiatives. On the other hand, when it comes to staffing, of course, there's a different -- it's a totally different level of staffing required in an automated setup. So that's the main sort of angle to these business cases.

Great. Okay. Yes. And finally, I mean, it seems that this rather subdued market conditions have continued in the third quarter. Is that to be expected? I mean, you're moving here into the third quarter and it's sort of no big difference. I mean the year-over-year comparison is still quite tough.

We don't guide in the future. But we do these measures with the cost savings because we can't hope that it will suddenly change. So we -- the uncertainty around us is probably more than I can control, and we need to do what we can do simply to improve our...

And if I can add there. So I think in the factors that we can influence, for example, the progress in our projects, we are confident. As we've said on this call, a lot of the challenges are actually behind us. So we're moving forward at a good pace on that front. At the same time, of course, there are external factors, which we may not be able to influence.

[Operator Instructions] There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Well, yes, thank you very much for listening, and I hope you will continue to have a great summer. Thanks.

Thank you.