Ladies and gentlemen, welcome to our Q1 2020 release call. I'm Kesko's CEO, Mikko Helander. Together with me, I have our CFO, Jukka Erlund, and Vice President, Investor Relations, Hanna Jaakkola. We published again a record result for first quarter. The impact of COVID-19 coronavirus epidemic was seen from mid-March and onwards. I will first give a brief overview of our business performance in first quarter. Thereafter, I will go through the impact of the corona epidemic to Kesko and K Group. After the presentation, we will be happy to take questions both by phone and via chat. Key events in first quarter. Market shares have strengthened further. The market shares of K-food stores, K-Rauta, and Onninen are growing. Grocery sales in K-food stores grew by 7.8%. Online grocery sales grew significantly.
At their highest, our online grocery sales have grown at a pace of over 800% a week. In technical trade, I would like to highlight the performance of Onninen. Strong net sales and profit improvement continued in first quarter. Konekesko divestment was completed in March. The divestment was agreed already in summer 2018. During the period, we acquired a technical wholesale company, Miab, in Sweden. The impact of corona epidemic was seen in our business operations starting from March around the 12th and that weekend. The net sales for Kesko's continuing operations in first quarter 2020 totaled EUR 2.54 billion. It was up by 5.8%, comparably up by 4%. The growth equals approximately EUR 140 million. Rolling 12 months net sales were EUR 10.86 billion. Net sales increased in all our three divisions. Comparably, it fell in car trade.
Net sales grew in all food stores chains and building and technical trade, net sales continued to grow. Onninen's growth was especially strong. Comparable operating profit for first quarter was EUR 65.1 million, and it increased by EUR 7.6 million. It is a record operating profit for first quarter, which is typically the lowest quarter of the year. Profitability was 2.6%, and it increased due to good sales development. Rolling 12-month operating profit was nearly EUR 470 million.
Comparable operating profit for continuing operations grew in grocery trade and building and technical trade. Grocery trade grew by EUR 3.6 million. The growth was strongest in the building and technical trade, excluding specialty goods trade. It grew by EUR 5.4 million. Weakened demand pushed the car trade's comparable operating profit. Return on capital employed, one of our strategic targets, improved and was at the level of 9.6%.
It improved in the grocery trade. Kesko's financial position is strong. The operating cash flow improved by EUR 27 million and was EUR 135.7 million. Last year, first quarter was boosted by a return of surplus assets by Kesko Pension Fund. Our liquid assets were EUR 265.4 million, interest bearing net debt excluding lease liabilities was EUR 482.4 million, and the corresponding net debt to EBITDA ratio was 0.9.
Now to the COVID-19 epidemic and to the measures we have taken. The COVID-19 epidemic began to affect our operations significantly from mid-March onwards. Despite ongoing worldwide efforts to stop the epidemic, we must prepare for the possibility that exceptional circumstances will last for some time. In response, we have adjusted our management practices and operations as necessary. Impacts of the pandemic on the economy depend on the duration and success of containment measures. Finland and Norway have similar COVID-19 strategies.
Norway is now lifting the restrictions gradually, while in Finland, we are preparing to ease the restrictions. The Baltic countries and Poland have had very tight restrictions and now lifting gradually. In Sweden, the cases and mortality is higher than in the other Nordic countries. IMF currently estimates that the negative GDP impact in the region are between 4.6%-8.6%. What are the key measures we as Kesko and K Group have taken?
Number one is to ensure the safety of customers and personnel. We need to ensure the functioning purchasing and supply chains under all circumstances, and also we need to grow online sales services fast. It is important to postpone development projects that are not critical. The focus is on dealing with the current situation. To secure the strong financial position and secure cash flow, we are saving in personal costs, over 1,000 people currently laid off.
We are also cutting other fixed costs. In 2020, we are cutting cash flow from investing activities to be below EUR 200 million. Efficient management of credit risk and amounts due from customers are critical. One of the key measures is to ensure the availability and sufficiency of financing. In K Group, epidemic is well under control. Significant investments have been made in protection and constant efforts to improve safety. COVID-19 testing has begun, and it will be expanded.
In our company, there are currently some 30 confirmed COVID-19 cases. Preparations to safely return back to normal have begun. Impacts of the corona epidemic vary within grocery trade. We have seen strong sales growth on K food stores and online, while our B2B operator, Kespro's sales are down by approximately 50%. Sales of home and specialty goods in K Citymarkets are suffering due to lower customer footfall.
Reduced traffic has had a significant negative impact on Neste K service station sales. On market, there is a significant growth in food retail in general. Hoarding of some product categories was seen in mid-March, such as tissue paper, canned foods, bread, and meat. There are fewer customer visits and bigger average purchases. Also, in general, the demand for online sales of groceries have increased. Food service business is down due to the restrictions.
K-Ruoka.fi has become the biggest online grocery service in Finland. The highest growth rate was over 800% a week. We have been able to successfully respond a strong growth in online demand. Our K-Ruoka.fi network is expanding fast. Some 20 new stores have been added to the network every week. Currently, some 360 K-food stores offer online grocery sales services at K-Ruoka.fi all over Finland. Despite the strong growth, the customer satisfaction is very high.
NPS is 82. Online grocery sales now account for 5% of our retail sales. For building and technical trade sales, the impact has been moderate so far. B2C trade sales development in building and home improvement has been good in Finland and Sweden. Sales levels have also stayed good in B2B trade. Onninen sales development has been very good so far. In Lithuania, there was a steep drop in sales due to stores being closed until April 16th from March 16.
Leisure trade sales has declined significantly. On market, the activity on construction sites has continued without major disruptions. Home decoration and renovation have increased, there are fewer new construction starts. Currently, it is difficult to predict trends in demand in the longer term. It is possible that stimulus measures could accelerate economic turnaround and increase demand. In car trade, the demand has decreased significantly.
New car sales and orders are significantly below normal levels. Also, used car sales clearly down. On the other hand, servicing and spare parts service sales are almost at a normal level. There has been production shutdowns at Volkswagen Group plants, but we have plenty of previously imported cars available for sale. Due to the corona epidemic, we have expanded car pickup and return services. On market, overall orders for new passenger cars are down by approximately 60%, and orders for vans down by 40%. Demand has weakened significantly among both customer and corporate customers.
Also, used car sales down by significantly. Our growth strategy execution continues. Right now, I stress our focus is on crisis management. Kesko initiates a strategic review concerning business operations in the Baltic countries and Belarus. Kesko has many different businesses in the Baltic countries and Belarus.
The combined net sales is approximately EUR 960 million. The largest part is the building and home improvement and home and specialty goods trade in Estonia, Latvia, Lithuania and Belarus through Kesko Senukai. Kesko's ownership varies between businesses. Onninen is our technical wholesale operator in the Baltic countries. We also import SEAT cars in Estonia and Latvia. The starting point for this strategic review is the market and its size, which is the same size as Finland. The region consists of four different countries with different cultures. The economies are growing, and there is further potential for purchasing power growth in all the countries. Currently, economic growth has slowed down, and population development is negative in the Baltic countries. Kesko and UAB Investicija have different views on how to develop Kesko Senukai.
The objectives of this strategic review are the strategic choices in building and home improvement and home and specialty good trade in technical wholesale and also strategic choices in car trade. Our objective is to establish a common point of view with UAB Investicija on how to develop and manage Kesko Senukai. To the annual general meeting. The annual general meeting originally convened for 13th March 2020 was held today, 28th April 2020 at 10:30 A.M. On the agenda were, among other things, the dividend of EUR 2.52 per share. It is in line with the original board proposal. It will be paid in two installments. The share split 1 - 4, the new shares will be issued for each current one in line with the original board proposal. The guidance for 2020.
The guidance for Kesko groups continuing operations is given for 2020 in comparison with 2019. Due to the COVID-19 pandemic and global economic uncertainty, the company estimates that its comparable operating profit for continuing operations will amount to EUR 400 million-EUR 450 million in 2020, thus falling somewhat short of the 2019 comparable operating profit of EUR 461.6 million. The company does not issue a guidance regarding net sales. Thank you. Now it is time for questions from the conference call lines or via chat, please.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to ask the question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. Once again, that's zero one to ask a question or zero two if you need to cancel. Our first question comes from Fredrik Ivarsson of ABG. Please go ahead. Your line is open.
Sure. Hi, Mikko. Thanks for taking my questions. First one on the CapEx levels. Obviously, you're cutting CapEx below EUR 200, I think it said in the report. Can you tell us what kind of investments that relates to, and how should we also expect 2021 to develop? Are you sort of pushing investments towards the future or just more canceling them? That's my first question.
First, I repeat what I stated also in my presentation, that definitely after pandemia, we will continue implementation of our growth strategy, and definitely it means also that we will allocate after pandemia again more money on investments and allocate more resources on growth. At the moment when we are in the middle of epidemic, we have decided to curtail investments. Anyhow, I remind that money what we will spend will be below EUR 200 million, but it is still big amount of money, and mainly those investments we will make on our store network to modernize stores, to open some new grocery stores, as well as we continue also investments on e-com applications on grocery side, building and technical trade business, as well as we will further develop our IT systems.
Okay. Thanks. A question on B&T. You, I think you touched upon it, but we currently see very strong demand on the B2C side. Are you currently seeing a big shift in the mix of your sales from B2B towards more B2C? If yes, maybe how much approximately?
No. In building a technical trade, as we stated also today, development for time being has been very positive on B2C side as well as in B2B business. We can see that on builder's merchant DIY side, as well as Onninen what is 100% dedicated on B2B has had also very strong development.
Right. Thanks. Last one from me before I jump back in the queue. On the strong online sales within food retail, can you say anything about how that's been impacting your and maybe also your franchisees' profitability?
All in all, we are extremely happy that we have succeeded to meet so well fast-growing demand, especially in grocery e-com business. Based on that, we believe that we can maintain strong development also in future. Part of our success is that we have succeeded very well to combine e-com and store network. That is a beauty of our e-com concept. We will put definitely also in future more and effort to further develop our grocery e-com sales. Also we will look after that we can continue also profit improvements on that side.
Thanks. I'll jump back in the queue. Thanks for answering the questions.
Thank you. Our next question comes from the line of Magnus Råman of Kepler Cheuvreux. Please go ahead. Your line is open.
Hi. Thanks for the presentation. I'll begin to start to tie in on the questions on the online side. You mentioned here that you're up on a penetration of 5% in April, and you just stated here that you seek to maintain this momentum going forward in the future. Doesn't that imply that you should be looking for decisions on investments in centralizing the e-commerce deliveries at least in larger city regions, also to improve that profitability and then cost per handed unit that you mentioned? That's my first one.
All in all, once again, I repeat that we have very strong development in e-com on grocery side. Also I would like to remind that we are now also fast-growing in e-com business in building and technical trade. All in all, our beauty in e-com business is that we have 1,800 stores in Finland and in Nordic countries, and our strategy to combine excellent e-com services with our store network works very well. We believe that this concept offers a lot of opportunities for us in grocery business as well as in building and technical trade business.
All right. At this point, you see no need or you see no risk that other Nordic competitors are moving in the way of large size centralized investments in their e-commerce delivery to bring down cost per handed unit and improve efficiency and profitability when volumes are growing rapidly?
All in all, we have seen competition and we will definitely see more and more competition. Strongly we believe that, for example, in Finland, we are in good position thanks to excellent store network in DIY business as well as in grocery trade business. We launched two and a half, three years ago, current e-com platform, for example, in grocery business. When we look at current developments, when we look also our profitability we can say that we have succeeded very well. Based on this success, we believe strongly that we are in excellent position to further develop e-com services, for example, in Finland.
Maybe to add up a little bit on that one, that we've been adding some 20 stores per week to increase the capacity that the customers are asking for. In that sense, our sort of scalability of the e-commerce platform is still something that we can increase. That has worked really well during these times.
Yes. Perhaps when you add new stores that fulfill e-com services, the profitability dynamics, you will not leverage that volume increase profitability-wise perhaps.
Yeah.
I appreciate your answer. Anyhow, I have a second one on the weaker sales of the home and the specialty goods in K-Citymarkets. I guess you lead here to non-food sales. The setback that you witnessed in the second half of March, has that continued in April at the same pace, or has it deteriorated further, or can you say anything there?
Could you please repeat the question? Sorry, the line is not too good here.
Sorry. Yes, I hear you in echo as well. The question relates to the home and specialty goods sales that has weakened in K-Citymarket over the second half of March. If you can comment on how that has progressed throughout April, if the weakness has been sort of at a stable level, or if it has deteriorated further in April.
Yeah. Thank you. We will publish our April sales figures very soon. We are now end of April and normally second week of the next month, we will publish previous month sales figures. All in all, I can repeat what I mentioned already in my presentation, that specialty core trade has suffered due to epidemic. We believe that this trend will continue at least for time being.
All right. Just a final one for me. On the core trade side here, you mentioned significantly weaker sales of both new and used cars. However, the aftermarket or the spare parts and servicing is holding up well, as I get it. Do you have a view here for how long time the aftermarket sales can be sort of disconnected from new sales? Could that be the case for over several years? Do you see that the weak sales will spill over in the aftermarket at some point? Thank you.
Of course. Not easy question. We should remember that the climate warming is a big challenge. For example, in Finland, we have one of the oldest cars in Finland, meaning that also in Finland, we have big pressure to modernize cars, have more modern cars which have less emissions. Based on that, we believe strongly that in future we will see also positive development in car sales. Of course, now it depends on how long will continue this epidemic as well as how badly this epidemic hurts economy in Finland and overall in Europe. Also, I would like to remind that thanks to wonderful partnership between us and Volkswagen Group, we can offer excellent cars.
All brands what we represent have also very modern electric cars and when economy starts to improve, we are in excellent position also to offer Finnish consumers and companies new cars.
Maybe just to add up a little bit on that one. Obviously in the long term, there is a correlation between the new car sales and aftersales. That's obviously one of the key reasons why we have a good and high market share, but we also want to maintain that one in order to keep also the aftersales business at a good level. Obviously we have quite a bit of efforts in order to sell new cars as well in order to sort of secure the long-term profitability with aftersales.
I read that as a discounting pressure in the market at the moment. Thank you.
Thank you. Our next question comes from the line of Nicklas Skogman of Handelsbanken Capital Markets. Please go ahead. Your line is open.
Yes. Hi. I assume there were some hoarding effects seen in March. Do you have any estimate for sort of the two-week impact from hoarding that you saw in March?
Yeah-
sorry, within the grocery, within the food retail business.
Yes. As you mentioned, some hoarding was in March. In April, not anymore so much. Of course, it had some positive impact, but at the same time, of course, we should remember that in food service business, in Kespro, sales declined very dramatically, and that decline had definitely much bigger negative impact on our grocery business.
Yeah, of course. Are you seeing I guess what I'm getting at is, are you seeing a continued elevated volume demand in your food retail business also in April?
I can confirm that we are doing still very well in our grocery division, despite this epidemic. Also I would like to remind that again, in first quarter, we gained market share in grocery business.
It's quite clear that people have to eat somehow. When the restaurants are closed and schools are closed and workplaces are many times closed, then that affects positively on the food retailing, obviously.
Yep. Got that. A question on this strategic review for the Baltics and the Belarusian business. What are the possible outcomes from this review?
Definitely one very important outcome of this review is that we will have more clear picture how those countries and economies will develop in the future. Based on that, definitely we will have even sharper strategy how businesses will be further developed in Baltic countries and Belarus. I would like to remind that we have succeeded to implement very successfully also our growth strategy in those countries, but our business portfolio is quite fragmented. We have DIY home improvement business in all four countries. At the same time, we have separate technical trade business in those countries or in three Baltic countries, and also we have small scale car trade business in Latvia and Estonia. Due to those reasons, we feel very strongly that it is now perfect timing to clarify our strategy in that part of Europe.
As well as I remind that in Kesko Senukai, we have also some different opinions between Kesko and minority shareholder, how the company should be further developed. That will be definitely clarified in this review.
Okay. When do you expect this review to conclude?
I don't have any time schedule. I have learned that when you start a strategy exercise, strategy review, it is better that you don't hurry. We should also remember that businesses are running all in all very well in Baltic countries. Of course, epidemic has disturbed, but all in all, our position is very strong, and we don't see any need here to hurry in this review.
Okay. How have the Lithuanian stores performed since they reopened on April 16?
Stores are open, and we are extremely happy that we are now getting also back to normal in Lithuania, and business continues as planned.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Fredrik Ivarsson of ABG. Please go ahead. Your line is open.
Thank you. A few more questions from me. On K-Rauta in Sweden, you saw sort of flattish sales in the quarter, while I think some of your competitors have been reporting 20% sales growth in the quarter. How should we view this? Also, can you say anything about the timing over the quarter, in particular, what did you see over the last two, three weeks? That's my first question.
All in all, we are also very happy with our Swedish operations. Thanks to heavy measures what we have implemented, K-Rauta is now performing better and better. Of course, we should remember that still there are, in process, some corrective actions. All in all, also K-Rauta Sweden has had much better progress and performance in this year, but in many years earlier. Also, we are very happy our acquisition K-Bygg performing also very well. Very strong development as well as Onninen technical trade in Sweden. Also, I would like to underline our happiness with the management we have today on place in Sweden. Very strong, very capable, very professional management, and they are developing and managing our Swedish operations very well. Based on that, we are expecting also positive development in future.
Okay. One question on the cost adjustment. You're making adjustments to cost apart from the temporary layoffs as well. Can you do some or give some further insight on what kind of costs you are targeting and maybe also quantify it?
Yeah. As I mentioned in my presentation, very quickly when epidemic hit us and countries where we operate, we started very extensive measures. Thanks to those measures, situation all in all is now very well under control. Jukka Erlund, please, you can open more those measures.
Maybe just to tell that obviously when in certain businesses the sales decrease, obviously we have needed to respond to that one and with personal layoffs and reducing cost by that way. Obviously during these times when the focus is totally on the overall cash generating and cash flows. Obviously, we have gone all the sort of other cost lines through as well, and some are short-term, some are a bit longer term things that we are currently doing. We have gone through all the projects and so on and prioritized those and made some cuts there. Like I said earlier, capital expenditure has been reduced substantially as well, and so on. It's pretty much looking at the cash, all cost elements and cost lines and doing that work. That's pretty much what we're doing.
Those projects, what kind of projects are you talking about here?
Well, during these times, again, when you really have to focus on all the processes working well, continuous and that kind of things, and cash flows and really focusing on that side, obviously, there's a lot of development projects that then you have to think about how to postpone them and so on. That's really the thing that there are good projects which we'll do later on and so on, but currently we obviously have to focus that our supply chain and systems and everything works well so that we can serve our customers in the stores.
Okay. Thank you.
Our next question comes from Sami Crowfoot of Nordea. Please go ahead, your line is open.
Yes, thank you for taking my question. I only have one left, and it's regarding the food service business that you say that the decline is 50% in the last week. Should that be taken as an implied guidance for the coming months as long as the restaurants remain closed? Do you see there's a delta in either direction from that? Can you also elaborate a bit on the margin impact from the decline?
All in all, we have positive news in Finland. Epidemia is very well under control in Finland, thanks to also right measures implemented by the Finnish government. Of course, today we don't know yet, but if epidemic and if this positive development will continue in the coming days and weeks, it is possible that some restrictions and limitations will be canceled, and that might open slowly also restaurants. Of course, that would be good news for us. All in all, development in food service business, we believe will go to the right direction and coming weeks will give definitely us more information. All in all, in the second quarter, we are optimistic compared to development what we experienced, especially in the second half of March.
Okay, thank you. A follow-up. In which categories within food service have you seen least impact? Where is the business holding up well?
No. Especially public customers, still many schools and institutional customers and customers owned by the state and communities are still in operation, we are also main supplier for those customers. That is maintaining also Kespro's business pretty well. Once again, I repeat that at the moment, we are more and more optimistic thanks to positive development in epidemic in Finland, and based on that might be possible that restaurants will be slowly opened also in Finland in May.
Okay, thank you. That's all from me.
Thank you. Our next question comes from the line of Magnus Råman at Kepler Cheuvreux. Please go ahead, your line is open.
Thank you. I have two more questions. Firstly, on your work to secure the supply of goods, I am thinking now the grocery trade primarily, what type of goods are most affected? Are there any categories that are being left sort of empty, that you cannot find alternative sourcing routes or so forth?
Well, I could answer that one. Overall, our supply chain has worked well, and we have a good availability of our products overall. No major problems for us.
You write in the report that you've been working hard to secure the supply of goods. What we hear from other retailers is that there is problem in certain categories on the supply. I just wanted to check when you look forward now when you plan your purchases, if there's any extraordinary action that you have needed to take to secure supply of goods, or if you can provide any comments or colors of which type of goods that there might be constraints in the supply.
Yeah. Well, like I said, we don't have any major problems with our assortment at the moment. Just some products at some time, but nothing big problems there. Obviously, we have done a lot in our supply chain to secure that one, and a lot of work there and so on, and preparations. Like I said, altogether the selection is good and we can serve our customers well.
Okay. Then on the cost structure again or the costs, there's been questions about this previously, but perhaps I can put it this way. Has there been any discussions on rents, on rental terms or actual rent levels at this stage?
Yes. We have had. It's very clear that we are looking for cost savings in all areas.
Okay, that was a short answer. All right. Thank you.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. Once again, any more questions, please dial zero one.
Okay. Thank you so much for the active discussion. If you have any further questions, don't hesitate contacting me. Keep safe and have a great rest of the week. Thank you.