Ladies and gentlemen, welcome to our 2018 Financial Statements Release Call. I'm Kesko's President and CEO, Mikko Helander. Together with me, I have our CFO, Jukka Erlund, and Vice President, Investor Relations, Kia Aejmelaeus. I will first give an overview of our business performance, and after that, we will be happy to take questions. The cornerstones of Kesko's strategy are profitable growth and one unified game. Since the launch of our 2015 growth strategy, we have become a stronger, more focused retailing company. We have achieved growth in all core divisions, and operating profit has improved by over EUR 100 million from EUR 221 million to EUR 332 million. I'm pleased to state that our growth strategy is working. Successful strategy execution enabled us to achieve Kesko's all-time best result in 2018.
Net sales grew and operating profit rose to a record level, and return on capital employed reached the target level of 14%. In the grocery trade, we had further improvement in market share and profit. In the building and technical trade, profitability improved and the execution of country-specific strategies proceeded as planned. In the car trade, there was strong profitability and we introduced new services to the market. We continued acquisitions and divestments in line with our growth strategy. The board of directors proposes a growing dividend. Third quarter 2018 highlights included net sales growth of 3.1%. Operating profit grew by EUR 10.1 million to EUR 90.5 million. In the grocery trade, sales and market share strengthened and profitability improved. In the building and technical trade, sales grew and profit improved, especially in the Baltics and Finland.
In the car trade, profitability was good despite new car deliveries being delayed by the WLTP implementation. As a result of the net sales and operating profit growth just mentioned, earnings per share increased from EUR 0.65 to EUR 0.70 in fourth quarter and from EUR 2.29 to EUR 2.47 for the full year. Looking at 2018 net sales and operating profit by division, grocery trade remains the largest division in terms of sales and profit contribution. Excluding specialty goods trade, all core businesses improved profitability. Comparable sales grew 3.1% to EUR 2,655,000,000 in fourth quarter and 3.5% to EUR 10,383,000,000 in 2018. Operating profit improved by EUR 10 million to EUR 90.5 million in fourth quarter and by EUR 36 million to EUR 332 million in 2018. Correspondingly, margin improved from 3.1% to 3.4% in fourth quarter and from 2.8% to 3.2% for the full year.
Return on capital employed for the group improved from 13.3% to 14%, thus reaching our targeted level. A few comments about our financial position. At the end of the year, equity ratio strengthened from 50.4% to 51.4%. Liquid assets were EUR 250 million and interest-bearing net debt, EUR 162 million. The net debt to EBITDA ratio was 0.4. Cash flow from operating activities improved in the fourth quarter from EUR 111 million to EUR 127 million. Cash flow from investing activities was EUR -58 million, clearly lower than the EUR -99 million a year ago. In addition to good dividend capacity, our strong financial position enables also investments in growth. I will discuss next business development by division. First, grocery trade. Comparable sales grew 4.2% to EUR 1,430 million in fourth quarter and 5.1% to EUR 5,386 million in 2018.
Operating profit improved by EUR 5 million to EUR 71.8 million in fourth quarter and by EUR 25 million to EUR 228 million in 2018. Correspondingly, margin improved from 4.8% to 5% in fourth quarter and from 3.99% to 4.2% for the full year. In grocery trade, retail market growth was 3.5% in fourth quarter and approximately 4% in 2018. Price inflation was approximately 2.4%, of which slightly over one third was attributable to the increase in alcohol and tobacco taxes. The market has developed well with increased emphasis on quality and selections. Still, also price remains important. The growing trend of eating out increases demand for food service wholesale. 2018 highlights included growth in customer numbers and market share. Thanks to sales growth and successful integration of Suomen Lähikauppa, profitability improved clearly. We continued investments in store redesigns. Also, Kespro's competitiveness improved by the acquisitions we made.
Highlights in fourth quarter included continued growth in market share. K-Citymarket and K-Supermarket had record Christmas sales. The growth rate of our online grocery sales was nearly 100%. The retailer business model is a clear competitive advantage in our grocery trade. Together with the retailer entrepreneurs, we target to have the most customer-oriented food stores on the market. In already 1,109 stores out of 1,200, the operations, selections, and look have been redesigned. Store-specific business ideas have been implemented in 1,012 stores. Today, it is possible for a good retailer to operate multiple stores. Currently, 555 stores and 225 retailers operate under the multi-store model. At the end of last year, already 156 K food stores offered online sales of groceries. Lastly, we have extended opening hours to respond to customer needs. Next, building and technical trade.
Comparable sales grew 5.1% to EUR 953 million in fourth quarter and 2.6% to EUR 3.728 billion in 2018. Operating profit improved by EUR 7 million to EUR 20.7 million in fourth quarter, and by nearly EUR 13 million to EUR 92.4 million in 2018. Correspondingly, margin improved from 1.6% to 2.2% in fourth quarter, and from 2.2% to 2.5% for the full year. A few comments on the building and technical trade market. Despite slowing growth, the market situation in Northern Europe remained favorable. The need for renovation, building, and its share are growing. Construction is focused on growth centers. Furthermore, with the market being fragmented, we expect consolidation to continue. Importance of digital services continues to grow. 2018 highlights included good results from the new country-specific operating model.
In line with strategy, we continued with acquisitions and divestments. Comparable growth for the building and home improvement rate was 2.3% and for Onninen 1.7%. Operating profit for building and home improvement rate grew by EUR 6 million to EUR 51.9 million. Onninen's operating profit grew by EUR 8 million to EUR 40.5 million. Highlights in fourth quarter included net sales and operating profit growth, especially in the Baltics and Finland. In building and home improvement trade, comparable net sales grew also in Norway and Sweden.
We saw continued growth in Onninen. As mentioned on the previous page, the new country-specific focus has accelerated strategy execution. In Finland, K-Rauta and Onninen are both clear market leaders and their profitability improved. The successful redesigns of stores and selections in the Baltics has led to growth in sales and profit. In Norway, we made strategic acquisitions that increased the share of own retailing for the Byggmakker chain. A comprehensive transformation program is ongoing in Sweden. It was encouraging to note that comparable net sales were slightly up in fourth quarter.
In Poland, we achieved the targeted turnaround in profit. The Russian operations were successfully divested, which improved focus and return on capital employed. The divestments carried out in the first half of 2017 decreased expectedly the net sales and operating profit of the specialty goods trade. Profitability in leisure trade remained good despite tight competition. The announced divestment of Baltic Machinery Trade and Finnish Agricultural Machinery Trade is expected to be completed during the first half of 2019. Car trade. Due to implementation of WLTP emissions testing and change in car tax, net sales declined by 12.9% to EUR 190 million in fourth quarter, and by 1.8% to EUR 893 million in 2018. Operating profit at EUR 7 million remained at a good level in fourth quarter and improved slightly to EUR 34.5 million in 2018.
Margin improved from 3.1% to 3.7% in fourth quarter, and from 3.6% to 3.9% for the full year. A few comments on the car trade market. First registrations of passenger cars and vans were up by 1.3% in 2018, and down by 12.1% in fourth quarter. The new WLTP emissions testing implemented since the start of September has caused significant disturbances in the market. Also, there have been uncertainties related to taxation and technological transformation. 2018 highlights included a solid market share for Volkswagen, Audi, SEAT, and Porsche cars and vans at 18.5%. The Porsche business had a record year with registrations up by 65.7%. Our new mobility services were off to a good start. Also, car trade was incorporated more tightly under the K brand, with its name changed to K-Auto and K- Caara.
Highlights in fourth quarter included operating profit growing slightly despite the decrease in net sales. At year-end, the order book for new cars was -12%. We had approximately 550 new orders for K-Caara leasing services in 2018. Furthermore, K Charge had 194 charging points at year-end. Kesko and K-Auto have a long-standing partnership with the world's largest car maker, Volkswagen Group. More recently, in 2016, we expanded our brand portfolio by acquiring also the Porsche business in Finland. The expansion continues. A few comments on our outlook. Our outlook is based on IFRS in force on 31st December 2018 and does not take account for the impacts of IFRS 16 leases, which took effect on 1st January 2019.
In comparable terms, the net sales for continuing operations for the next 12 months are expected to exceed the level of the previous 12 months. The comparable operating profit for continuing operations for the next 12-month period is expected to exceed the level of the preceding 12 months. Briefly of our focus areas for 2019. In the grocery trade, we will grow sales and further improve customer experience. Focus is on further strengthening store-specific business ideas and retailer entrepreneurship. We also want to expand the food service wholesale business. Increasing sales and profitability is key for the building and technical trade. Of importance is improving profitability in Sweden. Additionally, selected acquisitions in Northern Europe would support organic growth. Growth and tightening strategic partnership with the Volkswagen Group is the focus in the car trade. Increasing sales and efficiency by operating as one unified K continues on our agenda.
The board of directors proposes a growing dividend to the annual general meeting. According to our updated dividend policy in the long term, Kesko aims to distribute a steadily growing dividend of sum from 60% to 100% of its comparable earnings per share, taking into account the company's financial position and strategy. Kesko plans to pay its dividends in two installments, starting with the dividend paid for the year 2018. The objective of our corporate responsibility work is to enable a sustainable lifestyle for our current and future generations of customers in the areas of food, mobility, and living. We were pleased that Kesko was recently again included on the Global 100 list as the most sustainable trading sector companies in the world. We will move to the new K-K ampus this spring.
This is a significant step forward in implementing our strategy as it brings all divisions and functions together in one location. This ends my prepared remarks. Thank you for your attention.
Ladies and gentlemen, if you have a question for the speaker, please press zero one on your telephone keypad. The first question comes from the line of Fredrik Ivarsson from Kepler Cheuvreux. Please go ahead.
Hi, can you hear me?
Yes, we can.
Super. Hey, guys. Congrats to a good year. First, I guess you mentioned a comprehensive transformation in Sweden, K-Rauta. I'm curious if you can give some color on that statement. What exactly have you changed in order to grow sales and improve profitability? That's my first question. The second one, I wonder if you can give an update on where you are in terms of the redesigns you mentioned of the store network in grocery trade. How much have you left? What do you plan for 2019 in particular? I stop there and might come back with a couple more later.
Yeah, let's start from Sweden. Once again, I would like to underline importance of new country-specific approach. We changed roughly 12 months ago our management approach. We put in place plenty of new managers, and I can confirm that this new country-specific approach has accelerated development in building and technical trade. Also we can see in Sweden today good progress, and we are extremely happy that we have in place completely new country management. Endre Espeseth, who did very successful job first in Norway, Onninen. After that, he did very successful turnaround in Poland. He's now country head in Sweden, and he has round of him completely new country management, and those guys are doing extremely good job. Jorma Rauhala personally supports this team. In fourth quarter, we could see already some progress, and our expectation is that more positive development in Sweden we will see in 2019.
About grocery, as you have seen, also on that side, the strategy works extremely well. Very important part of our grocery strategy is to modernize based on store-specific business idea, store-specific business strategy, all K- Food stores. Today, already major part of stores we have modernized, but still quite big amount of stores are under construction. Especially 2019, we will major part of those stores update and modernize. Probably still some stores will be modernized 2020, but we can confirm that the end of 2019, more or less all 1,200 stores we have modernized.
Thank you. Short follow-up on the first one, because I do appreciate the country-specific approach and the new management model in B&T Trade. I still don't really understand what measures have been taken in Sweden in order to change and improve.
I can start. Jukka can continue. Most important also in Sweden is that we have in place right selections, and we have put a lot of efforts by new country management to put in place also in Sweden country and store-specific selections based on store-specific strategies. That is one important element. Another important issue is that we have made, and we will continue also structural changes in store network. Third important issue is Onninen business. We succeeded already 2018 to improve commercial and financial performance of Onninen Sweden. Those measures will continue and especially heavy loss-making contractor side of Onninen business. On that side, we will continue heavy measures. Maybe you can continue if you have in your mind more of those measures.
Maybe just shortly regarding the K-Rauta side. We've done a lot of work, especially on the B2B side, and that has developed better during the last year. We had some sales decreases in the B2C side on that business, the actions we've done there too have been much more active towards the end of the year and the initiatives on that side and that was already fruitful during the last quarter when we saw a like-for-like growth also in the B2C sales in Sweden. In that sense, like Mikko said, there's a lot of things which we are doing, and it's groundwork that we have to do in all sides and in the stores, in the selections, in the logistics and efficiency and so on. That work will continue.
Like I said on the last quarter, like-for-like growth was positive, that's obviously a good thing.
Yeah. That's more clear. Thank you. I'll stop there. Might come back later.
The next question comes from the line of Harri Hakala from Nordea. Please go ahead.
Yes, hello. It's Harri from Nordea. I have a couple of questions. The first one, when do you expect the car trade to normalize? Have you seen any signs from the WLTP emission testing coming to an end, or how do you see the situation?
Yeah. First, situation is already today much better compared to situation what we had, let's say, some months ago. Still, in first quarter, some disturbances we have in car trade, but the situation is getting steadily better. Second quarter, I believe, is already quite close normal, and especially in the second half 2019, we are full of optimism that the business environment and all conditions to make great business in car trade will be there on place. Once again, I repeat that still some challenges in the first quarter, but much less compared to situation what we had in autumn and end of 2018.
Okay, the second one regarding the synergies from Onninen, have you already realized a major part of the planned EUR 30 million annual yearly synergies, or where is that standing?
As you remember, when Onninen was acquired, was stated many times that synergies are coming in much slower compared to situation what we had, for example, in Suomen Lähikauppa acquisition. All in all, I repeat, and I confirm that Onninen has fulfilled extremely well our expectations. All in all, Onninen's development is very well in line our expectations what we had when the acquisition was made. As well as we can see that also synergies what we calculated are progressing very well according to our expectations. Most important, from my point of view, is to review whole building and technical trade division. As you have seen, we have succeeded now in fourth quarter as well as in third quarter to improve profitability, thanks to strategy, thanks to extremely good implementation of strategy, thanks to new management, and country-specific management model.
Based on that, we are expecting that also in 2019, positive development continues in building and technical trade division, including also Onninen businesses.
Can we assume that you haven't yet reached even half of the planned annual synergies?
We have still homework to do. Once again, I repeat that already originally was expected that synergies are coming in much slower, what in acquisition, for example, Suomen Lähikauppa. We are progressing as we planned.
Okay, the last one. Have you considered divesting the Swedish building or K-Rauta operations as one possibility if you cannot turn them?
At the moment, we put all efforts to make our Swedish operations better. We are very optimistic that we will see more positive development also in the coming months and 2019. In last quarter 2018, we could see already a lot of progress. I remind again that Sweden is extremely important market for Kesko's building and technical trade division. Swedish market is bigger than Finnish, Norwegian market together. We can see also lot of opportunities to participate consolidation of Swedish market. Due to that reason, we put lot of efforts to put on place more solid platform to restructure successfully our current business in Sweden.
Okay, thanks. That's all for me.
The next question comes from the line of Nicklas Skogman from Handelsbanken, please go ahead.
Yes. Hi. Could you please start with, if you could explain the restructuring costs in Sweden this quarter, what do they relate to? I think it was EUR 2 million.
You mean in last, in fourth quarter?
Yeah.
Yep. Those mostly relate to some of the store network changes that have taken place during the last year. Those are parts of the also some restructurings in the operations as well. Mostly related to those ones.
Did you say the store network? There's the same amount of stores in Q4 as in Q3 and in Q2.
There has been some changes in the locations of those stores, some new ones and some closed old ones. It's not the same stores or network anymore.
Okay, perfect. Onninen's profit decline in the quarter year-on-year. Could you maybe, if you go through the different countries, which are the negative factors? Which countries are weighing down on profits in Onninen?
All in all, Onninen development again was very positive in 2018. In last quarter, we had some challenges in Norway. Norwegian market competition is at the moment very tough in Norway in technical trade. Due to that reason, we are also changing our sales approach. We are implementing measures to make whole Onninen organization in Norway more cost competitive. We believe that those measures will improve our competitiveness also in Norway, already in short and mid-term. Especially from Norway came that small negative impact, but the situation is very well under control. All in all, once again, I repeat that Onninen is progressing very well.
Yeah. Onninen in Sweden, where are you seeing the impact of softer new residential construction?
Yeah. Onninen Sweden improved already 2018, very successfully operational and financial performance. Still anyhow, we have lot of homework to do also on Onninen side in Sweden because Onninen Sweden reported still 2018 negative result. Anyhow, they succeeded heavily reduce losses. Measures continue, and we are full of optimism that 2019 we will see even bigger and even more positive development in Sweden on K-Rauta side as well as on Onninen side.
Okay. Your margins in the car trade business are holding up very well. What's behind this?
Jukka, maybe you can a little bit more open those numbers.
Yeah. We were happy with the profitability in the cars trade in the last quarter as well. I think it shows that we have a good situation in Finland overall with covering the whole value chain from importing to retailing, to aftersales, to leasing and services and so on. In that sense, the package is really good. In the last quarter, especially the importing and aftersales business was good. In that sense, that gave us good numbers. As we all know, aftersales is a very important part of the profit generation in car trade. In that sense, importing and aftersales were the really positive ones, even though the top line in retailing was somewhat negative.
Okay, thank you. The last question, I guess, is on the dividend now coming into installments. I understand it smooths out the cash flow, is that an indication that acquisitions could be coming pretty soon or?
No. No, it's not indication from that. Just a modern way to pay dividend.
Okay.
Getting more and more common. Anyhow, we are working very hard to maintain strong positive development and to increase our sales, supported also by acquisitions. When we remember that Kesko's financial position is extremely strong, also based on that we are in good shape and well prepared to make acquisitions if and when we will find good targets. Yeah, like you said, the cash flow generation profile is an important factor. The cash flow generation is much more higher during the latter part of the year and the second quarter compared to the first quarter. Obviously that had an impact.
Okay. Thank you very much.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. We have a follow-up question from Fredrik Ivarsson from Kepler Cheuvreux. Please go ahead.
Thank you, [Hege]. Coming back to Norway, but moving to the Byggmakker business. I guess you mentioned in the report that the acquisitions you carried out added some 30% in local currencies. But I guess there was also one retailer who expired his agreement, and I wonder what is the impact from that, please?
Yeah. You mean retailer in northern part of Norway or?
Yes.
Yeah. You can remember exact figures. Impact is not huge.
It's pretty much the same as in the early part of the year, during the first, second, and third quarter. Clearly it had a negative impact on the top line, but not too much to the profitability side.
Profitability. Exactly. Yeah.
It's not dramatic at all on the profitability side, but, yeah.
The strongest and best Byggmakker stores are in middle and southern part of Norway. Those stores which were in the northern part, they didn't have such a big impact on sales and especially on profitability.
Right. Is it fair to assume that, I guess comparable sales growth was low single digit negative in the quarter?
Well, we haven't published that kind of like for like numbers here, so maybe-
Time is flying. Very soon we will publish first quarter numbers and figures, and then you will see.
Thank you. One last from me. You mentioned 156, I believe, K stores offers online today. I wonder if you have a target for that by the end of 2019, and also I'm curious if you have or are ready to share your online sales and growth pace at this moment, or when we could expect to get those more, I guess, more detail on those numbers, please.
I would assume that the number will go higher from that, but I think it's also worth mentioning that the sort of centralized transportation, so-called K transportation for the e-commerce stores in the biggest cities, really brings the volume, the highest volume. There, like I said, the overall growth rate was close to 100% during the last quarter. This year, we have earlier said that it's around 50 million EUR that we could get from the e-commerce, the target level. That gives you a flavor that where we could be during this year.
Thank you. That's all from me.
As there are no further questions, I'll hand back to the speaker.
Hello. Yes, we do have a few questions that have been submitted over the website. First one, will you provide a new IFRS 16 based 12-month guidance in conjunction with the Q1 2019 report?
Yeah, we will. Sort of the base figures going forward from the first quarter will be IFRS 16 figures. In that sense, the guidance also will be in relation to the IFRS 16. In addition to that one, of course, we will be very transparent with the reporting so that also the sort of previous type of numbers on the key figures will be presented, and that also includes the cash flow generation. EBITDA and EBIT and cash flow generation will be presented in a way which is pre-IFRS 16 and post-IFRS 16. The main sort of outlook is more based than on or is based on IFRS 16 reporting as that is the official one.
Yes. Then another. Can you give a CapEx guidance going forward?
Yeah. During this year still, we will have quite a few store site investments and upgrades in our stores. In that sense the investment is fairly close to the level where we were during last year. Of course, last year in the investments, we had a lot of investments in relation to the acquisitions. If we take out of those acquisitions, we are pretty much on the same level as during 2018.
Then another one. You say that the building and technical trade has grown, particularly in Finland and the Baltics. Could you please open up on the comparable operating profit from the Senukai operations?
Well, Senukai operations are really working well. Like you all know, three years ago we made a change in Baltic countries where we put Estonia and Latvia also under the Kesko Senukai operations, and that has been really fruitful. We have always had a good profitability in Lithuania as well as in Estonia, but had some hard times in Latvia. Last year, we also turned Latvia into black figures and generated positive operating profit from Latvia as well. Sales growth has been really good there, and overall profitability in the whole Baltics is now at a really good level. Also Latvia as a country is catching up well. Strategy implementation in Kesko Senukai is going really well, and we are very happy with that one.
Lastly, on the building and technical trade, how do you see the renovation and DIY market in 2019?
All in all, we see and we feel that also in building and technical trade business environment market will remain positive. Everywhere in Northern Europe, we can see that the business environment is sound, and we have excellent platform to further develop our existing businesses. 2020, 2021, let's see. As everybody knows, there are some clouds, especially in world economy. Once again, I repeat that we are not worried, not at all, regarding our business environment in Northern Europe in 2019. Okay, guys. Ladies and gentlemen, that was all. Thank you for your active participation. Thank you for your questions. Kia, Jukka, myself, we wish you very pleasant afternoon, very pleasant evening. Have a nice day. Thank you. Bye-bye.