Ladies and gentlemen, welcome to Kesko's second quarter release call. I am Kesko's CEO, Mikko Helander. I have together with me our business area Presidents Jorma Rauhala, Ari Akseli, and Matti Virtanen, as well as CFO Jukka Erlund, and Investor Relations Hanna Jaakkola. Second quarter 2022 was the best second quarter in Kesko's history and record result in Building and Technical Trade. Today's agenda is the following. I will first give an overview of our business performance in second quarter and our updated guidance for 2022. After the presentation, we will be happy to take questions both by phone and via chat. Key events in second quarter. The best second quarter result in Kesko's history. Impact of the pandemic on Kesko's businesses has clearly declined. Building and Technical Trade division's result was a record. In Grocery Trade, sales grew and profitability stayed at a good level.
In Car Trade, profitability improved in a difficult operating environment. Net sales growth continued in second quarter. The net sales totaled EUR 3.1 billion. It was up comparably by 3.9% thanks to our strong strategy execution. Net sales increased in Building and Technical Trade, as well as in Grocery Trade. Comparable operating profit for second quarter was EUR 236 million, and profitability 7.6%. The rolling 12 months operating profit was nearly EUR 820 million and operating margin 7.1%. The growth was especially good in Grocery Trade. Return on capital employed continued to improve and was at the level of 17.9%. It improved in Grocery Trade and Building and Technical Trade divisions. Kesko's financial position is strong. Cash flow from operating activities was EUR 263 million. Cash flow was impacted by growth in working capital as we have strategically grown our inventories to ensure product availability.
Capital expenditure totaled EUR 125 million, including EUR 77 million capital expenditure on store sites. CapEx also included acquisitions of Kungälvs Trävaruaktiebolag in Sweden and Seljord Elektriske in Norway, both acquired during second quarter. One of our financial targets, net debt to EBITDA, was 0.2, well below the target level. In Grocery Trade, strong position in all areas of food trade helped our performance in a changing market. Net sales totaled over EUR 1.5 billion and grew by EUR 75 million. Net sales grew in Kespro. Also, sales to K grocery store chains grew. The rolling 12 months net sales exceeded EUR 6 billion for first time ever. Comparable operating profit for second quarter was EUR 124 million, and profitability was 8%. Profitability improved in particular thanks to strong growth in Kespro's food service business. In second quarter, profit improved thanks to good development in Kespro and K grocery stores. Kespro's performance continued strong.
Sales growth was nearly 30%. Sales to K grocery stores grew by 1%. Consumer online grocery sales were down by 8.8% from last year's exceptional levels. K-Citymarket's non-food sales were slightly down. We were able to improve operational efficiency further. Now let us look at the market and operating environment. Just less than 40 years ago, Finnish people spent some 20% of their disposable income in food, and 100 years ago it was 60%. Despite inflation, the share of food in Finnish people's consumption expenditure is expected to continue to stay at a low level. Shopping in K grocery stores is returning to normal levels and, at the same time, also food service market is returning to normal as restrictions have been lifted. Consumer online grocery sales are above pre-pandemic levels.
Rising food prices are causing the whole food trade market to grow, but it is also impacting consumer behavior. At the same time, demand on consumption of quality products are supported by good consumer purchasing power and improved employment rates. Kesko is a strong operator in all areas of food trade, and we are able to meet various different customer needs. Interest towards quality food has grown and the trend continues. Also, popularity of eating out and high-quality ready meals continues to grow. At the same time, price is increasingly important for many consumers. Only K grocery stores offer both premium and bargains under one roof. In the picture, there is an example of a K-Citymarket campaign of these characteristics. What comes to eating out, Kespro is the leading partner for private and public food service customers in Finland.
Not to forget that we offer growing wide online services for both B2B customers and consumers. In building and technical trade, our focus on B2B trade led to a record result. Net sales grew comparably by EUR 106 million to over EUR 1.3 billion. Net sales grew in comparable terms in Finland, Sweden, Poland, and the Baltics. Net sales in Norway decreased in comparable terms. The growth was supported by good market volume development, as well as rising prices in some product categories. The division's rolling 12 months net sales was nearly EUR 4.7 billion. Comparable operating profit grew by EUR 1.1 million to nearly EUR 110 million. The profitability improved and was high at 8.2%. Profit for the building and technical trade division continued to strengthen in technical wholesale. In building and home improvement trade, comparable operating profit grew in Finland, was flat in Sweden, and decreased in Norway.
The changes that we have carried out in recent years have a significant positive impact on the division's profitability. In second quarter, sales growth continued in B2B trade. Onninen's performance continued strong in all operating countries. B2B sales continued to grow also in building and home improvement trade, but the growth slowed down. B2C sales are still at a good level, but clearly down from the peak pandemic levels. In Finland, especially Onninen sales grew and profit improved. In Sweden, sales grew thanks to K-Bygg, which focuses on B2B trade. In Norway, Onninen's performance was good and Byggmakker sales and profit were down. Share of result of Kesko Senukai, which focuses on B2C trade, was down by EUR 5.9 million due to rapidly accelerating inflation. To the operating environment, construction and renovation activity has continued high in Northern Europe. The growth comes from B2B trade.
In B2C, volumes are down, but returning to normal pre-pandemic levels. Rising prices are causing the market to grow. Rising interest rates are expected to affect residential market and thereby construction activity. Prolonged war in Ukraine is resulting issues with energy prices and energy availability, and it increases uncertainty. Green transition supports demand. Construction is increasingly outsourced to professionals. 80% of Kesko's sales are B2B sales and 20% consumer sales. Construction and renovation have become increasingly technical and subject to tighter regulations. As a result, they are increasingly outsourced to professionals. Green transition is growing the market. To mention examples, there is an increasing need of energy production, e-mobility, and home energy efficiency. Building renovation continues to grow due to repair debt in buildings and infrastructure. Kesko's position in B2B trade is strong in all operating countries. Good extensive services for consumers are also important going forward.
In car trade, active measures in all car trade areas resulted in improved profitability. Net sales decreased by EUR 60 million due to availability problems and totaled EUR 230 million. In car trade, operating profit was EUR 13 million, despite the difficult operating environment and declined net sales. Profitability improved thanks to sales margin growth and cost savings, and operating margin was 5.6%. In second quarter, net sales were down due to availability issues with new cars. Sales continued strong despite the availability issues, and order book is at a record level. Profitability was boosted by sales margin growth and cost efficiency. Measures to grow the used car business is proceeding according to plan. Net sales for the service business grew and profitability improved. K Charge network is growing and charging has more than doubled in a year. To car trade operating environment.
Car trade registrations were down due to availability issues. Also, used car sales were down. Service business demand is stable and charging services are growing. Share of electric and hybrid car sales is growing fast. Tax benefits and rise in fuel prices are supporting the demand. Component shortages and the war in Ukraine is affecting car availability globally. Issues related to energy prices and energy availability in Europe are increasing uncertainty regarding new car production. Better profitability through transformation. There is a significant profit improvement potential once car availability returns to normal levels. We have turned all our car trade operations to profit, meaning new cars, used cars, and services. In new cars, we have the most extensive selection of low-emission electric, hybrid, and combustion engine vehicles by the Volkswagen Group. We are growing used car business profitability. In service business, we are renewing operations and improving customer experience.
All in all, better management of sales, customer service, and operations play a key role, as well as digitalization of sales and internal processes. Not to forget better utilization of synergies and customer relationships with Kesko's other divisions. Summary and guidance. Kesko's quarter result has improved on its comparison period for 13 quarters in a row. The impact of the pandemic on Kesko's businesses has clearly decreased. The record result is a strong indication that our strategy is working, and people in K Group are doing an excellent job under changing circumstances. Guidance for 2022. Kesko estimates that its 2022 comparable operating profit will be in the range of EUR 750 million-EUR 840 million. Previously, the company estimated that its comparable operating profit would be in the range of EUR 730 million-EUR 840 million. Last year, our comparable operating profit totaled EUR 776 million.
Outlook assessments are made more difficult by uncertainties related to our operating environment and the overall economy. Key issues include the ongoing war in Ukraine, problems in the European energy markets, accelerating inflation, rising interest rates, and developments in the COVID-19 pandemic. Ladies and gentlemen, thank you.
Thank you, Mikko, for your presentation. Now let's go to Q&A, and let's start from the conference call line. Operator.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Our first question comes from the line of Nicklas Skogman from Handelsbanken. Please go ahead.
Yes. Hello, good morning. I have a couple of questions, please. The first one is on the margin development within B&T. Could you just help us understand what's going on there with earnings just growing 1% on sales growing by 8%? Is it that we're annualizing these inventory price gains from last year?
Yeah, maybe Jukka, you can a little bit open those numbers.
Yeah, sure. Like we reported, maybe one thing which is worth mentioning is the profitability impact of Kesko Senukai operations, which had a negative effect on the second quarter numbers in building and technical trade. Then if you go a bit deeper on the numbers, you can see that in the technical trade side, the profitability came up from last year and there in the building and home improvement side the EBIT was a bit softer than last year, second quarter. The effect was mostly coming from our Norwegian operations. Overall, different kind of impacts there, mostly positive, but some negatives as well. Mostly the Kesko Senukai effect and the Norwegian operations.
Okay. On the Norwegian operations, I noticed both a weakness, if you will, in both the building and home improvement in Norway and in Onninen Norway. Are there changes in the market right now?
No, Onninen business all in all everywhere is still very strong. In Byggmakker business, we have seen already some decline. Not dramatic, but some decline. Maybe Jorma, you can a little bit more open situation in Norwegian business.
Yes. All in all, like Mikko mentioned, we are very satisfied. Our Onninen business in Norway, we have gained a lot of market share, more than one year now, and the business is doing very well. In Byggmakker, of course, this consumer season was weak in Norway as in also other countries, and it has effect our figures. Also we have some minor internal issues there, kind of assortment management and things like that. Kind of balancing with centralized assortment and local assortment. But we are doing with those issues. But like I mentioned, minor issues, but all in all, Onninen is very good and in Byggmakker we have something to improve.
Maybe we can also relate the Norwegian business to underline that also in Norway we have very strong B2B business.
Yes, that's true.
Onninen side as well as Byggmakker is very strongly focused on B2B and that is definitely a beauty of our Norwegian and all in all our building and technical trade operations.
Okay. Thank you very much. My last question, for now at least, is on the guidance. What is the key uncertainty would you argue in the guidance? Because I see that the implied development for H2 is between an earnings decline of 16% or an earnings improvement of 5% compared with last year.
All in all, our guidance indicates a very positive outlook. I think that we should remember this fact. Everybody knows that unfortunately we have war in Europe. Nobody knows how long time this war last. Energy of course is a concern. Energy related issues, especially in Germany, continental Europe. Inflation. We have quite many exciting matters and those are main reasons why we have still this range. Of course now range is a little bit smaller what we had last spring. All in all, I repeat that our guidance indicates positive outlook.
Okay. So it is more a general economic slowdown rather than any other sort of development that is behind the wide range if you will.
Absolutely. Yes.
Okay. Thank you. Thank you very much.
Thanks. Any further questions on conference call lines?
We have one more question from the line of Svante Krokfors from Nordea. Please go ahead.
Thank you and good morning. A couple of questions regarding grocery trade. Strong Q2 and obviously supported by foodservice, but what kind of signs have you seen of consumers trading down during Q2 and could you elaborate a bit around if that has happened, what are your measures?
Not yet so much change in Finnish grocery trade market. I think that the main issue is that the pandemic is now over. Of course, that is very positive especially when we look consumers and customers' behavior. That is one issue. But all in all, not so much changes. Some transition from B2C business to B2B business. I would like to say that this is main change on the market and that is very common European wide. Of course, beauty of Kesko is that we are such a strong player in all grocery trade fields. In B2C business, very strong market leader in B2B business and we provide excellent online services for companies and consumers. But not yet such a big change but, Ari, please you can open definitely even better this market situation.
Yeah. Mikko opened very well the big picture and at the same time when the customers are living difficult times, there is need to people to find happiness in life. So many customers are still looking the best quality. They are looking the quality pizzas, hamburgers and also sushi at the same time. We can see sales increase in ready meals and high quality meals but at the same moment there is some customers which are looking the better prices. We are also able to provide them. We have K-Menu, which is about -50 level prices comparing to A brands. But the share of these brands is very small. So the sales mix in the Kesko store is not typical with the grocery stores. We have more high-end customers which are looking the best quality and it's good also in this kind of economic situation.
Ari, I think that we can openly say that we are only one in Finnish market who can provide services and fulfill expectations of different consumers and customers because we have excellent services, we have excellent customer experience, we have widest assortment but consumers can find also high quality, low price goods from our stores.
Yes. It's very unique offering that we have these both ends of the offering under the same roof in the stores and customers like it.
Yes.
The Kespro business is boosting up very much because people are spending more time out and eating outside the home. In that field, we have very high market share and we have been gaining rapidly more market share.
Mm-hmm. I believe that this is the main reason why we saw also very strong development in our grocery division during the second quarter.
Okay, thank you for good answers. Do you want to comment anything about on the grocery side, the price hikes H1, H2 cycle?
No. Price and cost inflation is now the case and issue everywhere globally in grocery business and we have seen this inflation also in Finland. But due to our strong market position, we have to be very careful. We are not allowed to comment very much those inflation and price related issues. But maybe, Ari, you have more courage to say something.
It is exactly like you mentioned that we are in the dominant market position, so we cannot give any predicts by ourself about the coming prices. But it seems that if you look about the price level in Finland and price increases, they are a little bit lower than general European or American level currently.
For time being.
Okay, thank you. Then a question regarding BTT, at least 80% is business-to-business related. Has there been any change in your visibility into the future on business side within BTT?
Jorma can open that more, but before that, I want to stress that 2015 when we started our journey with current strategy, it was opposite. 75%, nearly 80% of Kesko sales in building and technical trade came from B2C, from consumers. Today it is opposite and it was very important strategic choice what we did 2015 when we decided to put efforts to make Kesko strong player in B2B segment. Today we are extremely happy that we did this strategic choice due to that our building and technical trade reported all time best numbers 2022 second quarter. But Jorma, maybe you can open that a little bit more.
Yes, you ask visibility about this B2B and especially technical trade. If we are talking about this year, I think this latter part of this year will be also strong in technical trade. The most important months are coming now, in fact, only in a business, the season is on September and October and we forecast that season will be strong. So this year very strong still in technical trade and consumer business is kind of normalized already.
Okay, thank you. That is all from me.
There are no further audio questions.
Thank you, conference call lines. Then I have questions from the chat. Many of them. First I will start with SEB's Jutta Rahikainen's questions. Her first question is, "With 1% sales to K grocery stores, it means that you have a quite big volume drop. Can you please tell us more what you see in the Finnish food consumptions? People buy less, people buy cheaper products, et cetera." You slightly discussed this matter already, but if anything you would like to add.
As we mentioned, the main issue is this volume transition from B2C to B2B. That is not such a big issue for Kesko because we are only one in Finnish market who operates and who has strong position in all different grocery business segments. Due to that reason, we are very optimistic that whatever happens on the market, we are in excellent position to succeed also in future. Thanks to strong position in online business, thanks to strong position in food service business, and thanks to strong position in consumer business.
Very good. She continues, "Can you help us understand how much visibility in number of months you have in building and technical trade? Are you seeing a cyclical slowdown already in demand?
I think that we have long visibility. We should remember again that we are so strongly dedicated in building and technical trade on B2B business. In B2B business, visibility is much better, much longer than in B2C business. Especially in B2B in technical trade, visibility is even longer. All in all, as we have also reported today, construction activities continue strong in Northern Europe, not just in Finland, but also other Northern European countries. Based on that also, I repeat that visibility we feel is quite long. Jukka, Jorma, do you want to add something?
Good question.
Maybe just to add that around 50% of the business is the renovation side, so in that sense that is very stable and growing part, so that is good to remember.
Renovation of apartments, but also a lot of renovations related to infrastructure.
Have you started any cost actions already in Building and Technical Trade in B2C as the demand has weakened?
No need for special cost actions. We should remember that one reason why Kesko's operational financial performance is strong is that we have steadily improved operational efficiency, not just in Building and Technical Trade, but also in all Kesko operations. I guarantee that we continue measures steadily to improve operational efficiency and quality of our processes also in future, all our operations and in all our businesses.
Very good. I have two questions regarding car trade. I will add these. Any thoughts on when car availability could normalize? When that happens, do you think there will be demand for new cars despite the weak consumer confidence? How is your used car efforts proceeding? Those were the questions.
Good question. I am also very eager to hear Matti Virtanen's answer when supply will normalize.
Yeah, exactly. This is the fundamental question, I would say, for our future development. Of course, the suppliers, including Volkswagen, are informing and have informed that the availability in the second part of the year should be better. This information has been given all the springtime, and new things have come, of course, with the Ukraine war and also the situation in China, which has really had an impact on the supply chain overall. It will be very interesting to see when it is going to cut. The feeling we have is that the improvement will be there for the second part of the year.
There were questions about demand for new cars despite the weak consumer confidence and also used car business.
Yeah, the interesting thing in the market has happened that at the same time when the new registrations have gone down in the market over 20% quarter-by-quarter, at the same time, the demand has been compared to last year +12%. So there is a really major mismatch between the actual demand of the cars and the actual capabilities of the suppliers to deliver. That has been this year, and we expect this to continue. Of course, now the recent developments in terms of the price of the diesel and benzene will have an impact maybe for the new car demand. But there is another dimension in there, and this is the big electrification of the cars at this point of time. So a huge demand for electric cars. In this respect, the interesting market situation will definitely continue this year.
Plus, Matti, of course, we should remember also massive tax benefits and those tax benefits, what Finnish state offers consumers, we believe will maintain also a strong demand, especially electric cars and hybrid cars.
Definitely, and this is the situation also all over Europe. So we expect this situation, that the demand of the cars in electric side will be bigger than the supply capability of the suppliers, and this will continue quite a long period of time.
Thank you. Thank you, Matti and Mikko. Fredrik Ivarsson asks three questions. The EBIT margin in grocery trade expanded by 60 basis points from already high levels. In your 2022 EBIT guidance range, do you assume a margin expansion in grocery trade during the second half of the year?
Well, we do not guide the divisional level guidances, so we do expect that the grocery trade will maintain its good profitability going forward as well. So that is pretty much what I can say.
I will read then the second question, even if I know you will not answer. Do you expect food price inflation to accelerate in coming months?
No, we gave already.
Yeah, exactly.
answer and-
I just
-no need to more speculate. But once again, I also repeat that also our grocery trade division is in excellent shape. Steadily, grocery division has improved business in all segments, online business, food service business, and business for consumers. Based on this exceptional setup, we feel strongly that we are in excellent shape to succeed whatever comes on the market. I would like to repeat that those numbers, what we have reported, I believe, are very strong message that our grocery division is in excellent shape.
Very good. Building and technical trade reporting strong underlying growth in June, have you seen any slowdown during the last weeks on the back of the falling purchasing power and consumer confidence?
Novi have reported today that in B2C business we have seen clearly some decline. We should remember that after that decline, we are more or less back to normal time and back to volumes what we had before pandemia. This is very important to remember because easily people get a very negative impression from B2C business. As many times also today, we have stated B2B business develops strongly and we are also in excellent position in B2B business in all operational countries where Kesko building a technical trade business operates.
Thank you. Olli Vilppo asks: What are the main reasons that explain the market share decline in food retail?
Food retail. Ari opened that already a little bit, but you can continue. Before that, I stress that also in food retail, we have seen some kind of return back to normal, and that is maybe one main driver. At the same time, our food service has increased heavily and all in all our total volumes, I see that we have not lost volumes on total level and that is of course main reason why our financial performance improved again in second quarter. Ari, maybe you can a little bit more open this.
I think the big picture is excellent. Exactly that we have been gaining market share in the food service side of the business, and that is growing fast, and we have good margins also in that area. At the same time, people are shifting to the restaurants from the stores. That is the main reason why the market is getting changing. At the same time, price is increasingly important for some of the customers.
We are able to provide good prices for these customers, and we have added a little bit more marketing activities for that side. At the same time, the most sales increase in the market is coming from the premium food, especially ready meals and so on. We think we have excellent position whatever is coming to the market because we are able to fight in all the fields and offering, at the same time, great prices for the customers who are looking for opportunities to save. At the same time, some of the customers are still looking and also looking into food premium quality.
Very good. Thank you. I have the last question. I heard that there are no more questions on conference call line, so I will ask. Last question from Jutta Rahikainen goes: What is the main reason that you upgraded your low end of your EBIT guidance range?
Main reason?
Main reason of the upgrade.
There are many reasons. Business, all in all, is running well as we have reported also today. Another, of course, important reason is that time is running. Some days I feel that even flying and we are day after day getting closer year-end. Also due to that reason, visibility somehow is improving, but those things don't change the fact what I mentioned already, that our outlook is positive, but there are still plenty of question marks and uncertainty on the market, not just in Finland, but also European wide and globally. Our guidance is a combination of all those things and matters.
Very good. Thank you. I would like to thank our audience for active discussion and a lot of questions, and thank you, gentlemen.
Me too. I want to thank you, and I want to thank audience, and I want to thank my fellow managers. Together with my colleagues, we wish you very pleasant day and very pleasant summer week. Thank you.