Ladies and gentlemen, welcome to our 2018 first quarter results call. I'm Kesko's President and CEO, Mikko Helander. Together with me, I have our CFO, Jukka Erlund, and Vice President, Investor Relations, Hanna Jaakkola. After that, we will be happy to take questions. I will start with a brief introduction of K Group, formed by Kesko and the K retailer entrepreneurs. With close to EUR 13 billion in retail sales last year, K Group is the biggest retail operator in Finland and the third biggest in Northern Europe. We employed around 42,000 trading sector professionals. Taxes paid and remitted accounted for EUR 1.2 billion. Our local purchases accounted for some EUR 4.5 billion. We are ranked as the most sustainable trading sector company in the world on the Global 100 list.
First quarter highlights: Our net sales, operating profit, and return on capital employed were all up. Especially in grocery trade, the beginning of the year was excellent. building and technical trade performed as planned. Additionally, operations in Russia were divested. Car trade continued strong performance. Briefly on the numbers. First quarter net sales grew comparably by 3.4% to over EUR 2.4 billion. Operating profit increased from EUR 31.5 million to EUR 40 million. Return on capital employed increased to 13.5% and return on equity to 10.9%. On group net sales, the first quarter net sales declined by 5.7% to EUR 2.413 billion, significantly impacted by the divestments carried out in the first half of 2017. In comparable terms, net sales grew by 3.4%. Looking at the group's quarterly operating profit, operating profit increased by 27% from EUR 31.5 million to EUR 40 million. The corresponding margin grew from 1.2% to 1.7%.
First quarter 2017 included EUR 4.6 million in operating profit from divestments. If taking this into account, operating profit improved by 49%. Moving on to return on capital employed. Return on capital employed was 13.5% for the group, especially in building and technical trade, there is still room for improvements. A few comments on our further strengthened financial position. At the end of first quarter, equity ratio was 49.3%, liquid assets were almost EUR 600 million, and we were debt-free with a negative net debt to EBITDA ratio. Cash flow from operating activities was EUR 39 million, strengthened by improved profitability, the return of surplus assets paid by Kesko Pension Fund, as well as the Russian divestment. Capital expenditure was EUR 55 million, 2.3% of net sales. We are in a strong position to develop and grow our business going forward. Next, I will discuss business development by division.
Starting with grocery trade. Market-wise, overall sector growth was approximately 5.5% being affected by the timing of Easter and the increase in alcohol and tobacco taxes. While the importance of quality and premium products are rising, price competition has remained tight. First quarter highlights for grocery trade, we ensured good progress in chain redesigns. The sales and customer flows have grown in all K food store chains. Thanks to the new neighborhood market approach and acquisition of Suomen Lähikauppa, profitability improved significantly. Kespro's growth and profitability strengthened further. In comparable terms, grocery trade grew 7.4% to EUR 1.276 billion in the first quarter. Grocery trade operating profit increased from EUR 26.4 million to EUR 38.7 million. The corresponding margin grew from 2.1% to 3%. Our share of the quickly developing neighborhood market is close to 60%. This is driven by the acquisition and successful integration of Suomen Lähikauppa.
The total investment amounts to approximately EUR 120 million. The 400 Siwa and Valintatalo stores were converted to new K-Markets, representing additional sales of almost EUR 700 million. Customer feedback has been positive and sales have grown approximately 15%. We have gained significant synergies. By this summer, all stores will have been transferred to retailers. In total, there are some 800 K-Market stores. Of those, over 700 stores have been rebranded and remodeled. High-quality neighborhood market services have also strengthened the sales and market position of K-Citymarket. We are investing strongly in the new online food store and online food sales are growing forcefully. Last year, we piloted our new online food store service successfully in two K-Citymarkets in the greater Helsinki region. The new concept offers K-Citymarkets extensive selections with efficient deliveries using concentrated K-Logistiikka.
During this spring, the service will expand to Tampere, Turku, Oulu, and Kerava. K Group's online food sale services already reach over 3 million Finns. Next, building and technical trade. Market price development is supported by economic growth and outlook continues favorable. That said, cold winter weather in Europe impacted the market negatively in the beginning of the year. First quarter highlights for building and technical trade: we performed according to plans in the traditionally softest quarter. Divestments in specialty goods trade decreased sales and profitability as expected. We were happy with the good sales performance of K-Rauta and Onninen in Finland and Kesko Senukai in the Baltics. Meanwhile, sales were burdened by restructuring in Sweden and by changes to store network in Norway. Next, first quarter net sales in building and technical trade. Net sales decreased by 18.2% to EUR 877 million.
The decline was mainly impacted by the divestments carried out in the first half of 2017, with specialty goods sales down from EUR 232 million to EUR 75 million. In comparable terms, net sales decreased by 2.4%. The comparable operating profit for the building and technical trade was minus EUR 2.2 million, representing a decrease of EUR 8 million. This is explained in the next slide. As mentioned, first quarter comparable operating profit for the building and technical trade was minus EUR 2.2 million versus EUR 5.8 million the year before. As can be seen from the graph, operating profit is impacted negatively, primarily due to divestments in specialty goods and the divested Baltic real estate, as well as Easter, and the number of selling days. The operative result was solid. We are reshaping the building and technical trade business in order to reach a new level of profitability.
We have a new customer-oriented organization with strong geographical focus. We have made and will continue with good progress in improving Onninen's profitability. In Sweden, we are restructuring and making the operations more efficient. The recent divestment of the Russian building and home improvement business will improve the return on capital employed. We have ongoing measures to improve overall cost efficiency of operations and achieve synergies. Moving on to car trade. Market-wise, the first registrations of passenger cars and vans were up by 3.3%. There will be a new WLTP emissions testing system affecting the whole industry. We too are preparing for this to be implemented next autumn. In first quarter, our car trade continued with strong sales growth and good profit performance. Growth in Volkswagen, Audi, SEAT, and Porsche registrations outpaced market growth. Thanks to this, our market share in passenger cars and vans increased from 17.8%-19%.
Our new cars order book is strong at +21%. In the first quarter, car trade grew 5.8% to EUR 259 million. Car trade operating profit increased from EUR 10 million to EUR 11 million. The corresponding margin grew from 4.1%-4.2%. We will rename our car business. The import company, VV-Auto Group, will become K-Auto. The retail company, VV-Autotalot, will become K- Caara. This change will move car trade more tightly under the one unified K brand and tighten cooperation across business divisions. The rebranding will also increase awareness of Kesko's car trade division and offer a strong brand presence in new mobility services. Lastly, a few comments on our outlook. In comparable terms, our net sales for continuing operations for the next 12 months are expected to exceed the level of the previous 12 months.
Due to divestments and restructuring, the group's net sales for the next 12 months are expected to fall below 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. Investments in store openings and redesigns in the expansion of logistic operations and in digital services will burden profitability during the period. It should also be noted that the operating profit for the comparison period includes EUR 5.8 million in operating profit from divestments and most of the synergies obtained from the acquisition of Suomen Lähikauppa. This ends my prepared remarks. Thank you for your attention. We will now be happy to answer any questions you may have.
Thank you. Ladies and gentlemen, if you'd like to ask a question today, please press star one now on your telephone keypad. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one now to ask a question. And our first question today comes from Maria Wikström from IH. Please go ahead.
Hello, this is Maria Wikström from Danske Bank. I actually have three questions, but maybe I'll take one at a time. First, I wanted to ask on the food price inflation, as you mentioned that your estimate of food prices grew 2.6% in Q1, which is a clear step up from the figure 0.5% in Q4. Do you think this is a sustainable level for the food price inflation, and what are your thoughts there going forward from here? Thanks.
We believe, once again, we repeat that we can see food price inflation, of course, quite a big part of inflation coming from higher taxes of alcohol and tobacco, also Finnish economy and improving purchasing power of Finnish consumers as well as the fact that consumers are seeking more and more high-quality products and services have certain impact on food price inflation. Expectation is that this positive trend will continue.
Okay. I had another question regarding the guidance where you added a line stating that the disposals accounted for EUR 5.8 million in the EBIT in 2017. The EBIT growth in the Q1 without the divestments, according to my calculation, was 11%, and the consensus ahead of the results, we're looking at 13% growth in the EBIT for the full year without these divestments. Do you see the consensus estimate for the full year too high that you wanted to guide the consensus down, you're adding this more conservative statement here is that then you didn't want to see consensus move up back off the better-than-expected Q1 results. Little bit of color there would be great.
Good question, as you know, we don't comment the consensus. I repeat that we have started strongly this year. We are very happy how all business divisions are performing of course, grocery Trade, excellent start-up, strong development continues in Car Trade and also Building and Technical Trade has started as planned. Based on that, of course, outlook is extremely and very positive. Jukka maybe can open a little bit more those things.
Yeah, we would sort of wanted to be transparent here also just noting and commenting that there is the impact coming from the divestment, that there has been quite a few transactions during the last two years and also during the last 12 months. Just to give a sort of more color on that side and also on Suomen Lähikauppa situation because obviously the first quarter 2017 was fairly low profitability there due to all the restructurings we had at that point with the stores hub network and so on. Now when that's sort of behind us, we just wanted to highlight that most of the synergies have been sort of obtained and sort of there is still part of the synergies still left, which are, of course, relating to the fact that not all the stores are sort of at the retailer format yet.
Of course, we seek for further growth in the stores like we have had also looking back, the sales growth has been good in Suomen Lähikauppa stores. Obviously we want to continue on that one as well.
Maybe I can once again repeat that the outlook is crystal clear. Our outlook says clearly that profitability will improve.
If I may just to follow up on the synergies on Suomen Lähikauppa. I think you earlier said that the EUR 10 million out of the EUR 30 million synergies were still to be recorded in 2018. Could you give any color like how much is now left for the remaining of the year?
Let's say it this way that we have now a very close situation that we have successfully completed integration of Suomen Lähikauppa to Kesko. Still some minor actions will be done and complete, especially in the second quarter. On commercial side, we can see still lot of potential, but definitely major part of synergies we have achieved and original target setting we have exceeded. Let's say some synergies we will still achieve, but I repeat major part of synergies we have already collected.
Just to sort of open up the situation a bit more. In 2015 when the business was acquired, the sort of pro forma operating profit was around minus EUR 18 million at that point. Now if you look back the last 12 months, we are around plus EUR 11 million, plus EUR 12 million, quite close to EUR 30 million. Of course, obviously part of that has come due to the good sales growth as well. There is still some synergies to come, but like Mikko said, most of it has been obtained.
Once again, I repeat that we have still lot of business potential and hard work continues and hard systematic business development continue in all grocery trade chain, including also K-Market chain.
My final question comes from the Norwegian DIY business as part of the sales lost were due to the expiry of some of the retail contracts in the northern part of Norway. My question is that, is there a fear that the concept is not competitive enough that we are going to see more of these departures in the future? How is the expiry date now within the foreseeable future that should we have some impact from there or could we have?
First, we should remember that the Norwegian market is very attractive, and we can see plenty of potential in Norwegian building and technical trade market. End of last year in Northern Europe one big Byggmakker retailer left Byggmakker chain and he divested his business, and that's the reason why we lost some revenue in Norway, and I underline it was just one retailing entrepreneur in Northern Norway. We are confident that we are in good shape, and we will further develop Onninen as well as Byggmakker chain, and we will do our utmost to strengthen even Byggmakker chain in Norway. That is our vision in Norwegian market.
Okay, thank you. No further questions from my side. Thank you very much.
Thank you. As a reminder, please press star one to ask a question. Our next question today comes from Niclas Skogsvik from Handelsbanken. Please go ahead.
Yes. Hi, I have a couple of questions, if I may. You have talked about the synergies coming in from Suomen Lähikauppa and that you have reaped most of them. Where are you on the Onninen synergies?
Onninen all in all we have succeeded also to integrate as planned to Kesko. Of course, we should remember that already originally it was reported that Onninen integration will take much longer time. We have good progress, and we can see also that Onninen all in all performance financial as well as operational performance is steadily improving, meaning that Onninen is moving ahead as planned. Synergies are coming in much longer time period as we have seen in Suomen Lähikauppa.
The basic sort of reason behind that is one that unlike in Suomen Lähikauppa case where we sort of had a extremely fast 12 months sort of time when we put the Suomen Lähikauppa operations into our supply chain and used the platform that we had in our current operations in grocery. Onninen case we are not sort of doing that in that kind of pace that we would sort of switch the supply chain. We have a separate logistical model and an IT system currently in Onninen and want to do the integration in a very careful way in order to avoid any kind of sort of problems in the customer service and so on.
Definitely we have started the synergies and we have a lot of operations which are already common but like Mikko said, it will take time before we are more integrated when it comes to the supply chain and IT systems.
All right, thank you. Then the charge you took for Onninen Sweden in the quarter, what does that relate to? Is it store closures or staff reduction or inventory write-downs or?
Yeah. When we acquired Onninen we knew already that Onninen Sweden was badly underperforming, and it had been already long time in difficulties. That was not at all surprise. We did already some corrective measures last year, but not heavy measures enough. Now Jorma Rauhala and his management they implement now heavier measures to improve also operational and financial performance of Onninen in Sweden. At the same time we do also lot of actions in Sweden to further improve commercial performance of K-Rauta. All in all we are in the middle of big turnaround in Swedish operations.
The sort of costs relating to the booking we had relate to some of the store closures around four stores were closed and on those rental liabilities and other costs relating to those closures and some sort of efficiency measures that we have done in relation to these closures. That's sort of the part where it's coming from.
Closing stores will be a key part in it to achieve at least break even there.
At this short-term level these stores were not profitable and that is the reason behind in this case.
First reach break even, have solid platform, and from solid platform definitely we will continue strong business development also in Sweden. First foundation must be solid and that is our short-term target to establish a strong solid platform also in Sweden.
With these store closures and so on, will you be break-even in Sweden now for Onninen?
Sorry. Could you repeat?
With these store closures, will you be break-even for Onninen Sweden now?
That is our direction and how fast, when we will achieve break-even, I don't want to present any guesses. Target setting is very clear. We have in process heavy measures.
Okay. A quick one on your common costs, which were down year-on-year. What's the outlook for the rest of the year for those?
Well, I could say that last year we had a fairly heavy load on the common costs, the clear target for this year was to decrease that cost base somewhat. I'm not sort of expecting very big changes on that one, but still to come up with a lower level of cost than last year when it was pretty much the highest level that we had and especially on first quarter 2017. This was something that we expected that we would come during the first quarter down somewhat. Going further, maybe somewhat lower cost level also going further, but nothing really big changes.
Okay. Thank you. You have a very strong balance sheet now, especially after selling the Russia properties. I think your net cash as of Q1 now. What's the plan with the balance sheet? Is it M&A or could you consider share buybacks or what's the plan?
Yeah, you are right. Absolutely right. Okay. Of course, successful divestment of Russian operations one reason. I remind that of course it is also a consequence of successful and well running daily business. All businesses are generating better operational cash flow. That is also one reason behind of that nice and good development. Balance sheet is very strong. We are debt-free company, meaning that we are in extremely good shape to further continue implementation of our 2015 published business strategy. Meaning that we are seeking organic growth as well as we are seeking acquisition opportunities to accelerate growth in all three divisions in grocery trade, in building and technical trade as well as in car trade.
Okay, fair enough. Thank you.
Thank you very much. As a reminder, please press star one now to ask a question. Thank you. Coming from online, if we wait for other questions. Coming from the line of Kepler Cheuvreux, Fredrik Ivarsson. He is asking that in building and technical trade, weather had a negative impact in Q1, but are there any comments in market turning around as spring has finally arrived? Secondly, on building and technical trade, yes.
Well, that was the first question. There are still two.
First, weather, actually we didn't highlight the weather conditions was mentioned that winter was very cold everywhere in Europe. I repeat that our building and technical trade started as planned. When budgeting was made, we knew already that Easter is in the first quarter. We knew also that in first quarter, few days less those commercial days. Those two facts had major negative impact compared to year 2017, first quarter. Anyhow, we can see in April a positive development. We have had already plenty of sunny spring days, and those days immediately have had positive impact on sales performance. As well as the fact that Easter is not in the second quarter has definitely positive impact. Still, and again, it looks that our building and technical trade has good progress, and they are progressing as planned and budgeted.
A second question on building and technical trade coming from Fredrik Ivarsson. If we exclude Onninen and all the divestments, it seems that losses doubled in the quarter. How much is related to K-Rauta Sweden, given that revenues are down more than 20%? Can you open up a little bit the development in the.
Yeah. We can open up a little bit. Yeah. It was true that during the first quarter we had three stores less than the previous quarter 2017. That was the biggest impact actually to the top line. The top line came down mostly due to that fact and then due to the cold weather fact, which affected especially the B2C sales there. Obviously, when we had three stores less, we also were able to save our OpEx in Sweden during the first quarter. Somewhat Sweden was negative, and that was mostly affected by the cold weather affecting the B2C sales. Like said, Onninen improved its profitability.
A third question from Fredrik Ivarsson on grocery trade and regarding the Suomen Lähikauppa stores that have been converted into the franchise model. He assumes that eventually it is aimed for similar profitability from these franchisees as the legacy business. How long do you expect this to take? Any comments on the current level and where we aim at?
All in all, we can confirm that at the same time when Kesko has succeeded steadily improve own operational and financial performance in grocery trade, we can confirm that also K-Market entrepreneurs have steadily improved own financial and operational performance, including also K-Market entrepreneurs, meaning that our commercial and financial performance in K Group is very solid and very strong.
Maybe it is also good to mention that these Suomen Lähikauppa stores that have been converted through K-retailers, it is actually in many cases, retailers that are already operating the stores. They are sort of adding up their sort of operations mostly from two to four stores per retailer, for example. In that sense, there is a sort of base for building on top of the businesses that they have already had. In that sense, on a longer-term perspective, we expect the same kind of profitability from these stores than the stores that we already have.
This is also big change compared to situation in the past, because earlier one entrepreneur could have just one store. Thanks to new strategy today, good entrepreneurs they have chance to operate more than one store. This is also one reason why our system is performing much better today compared to situation some years ago. Okay, that was last question. Ladies and gentlemen, thank you very much for your active participation. Hanna, Jukka, myself, we wish you very pleasant afternoon and evening. Thank you. Bye-bye.
We hope to see many of you at our capital market day.
Yes
June 19th here in Helsinki in the afternoon.
Sunny Helsinki, hopefully. You are very warmly welcome.
If you haven't received an invitation yet, please drop me a line by email and we will take care of it. Thank you.
Thank you. Bye-bye.