Ladies and gentlemen, welcome to Kesko's second quarter 2023 release call. I am Kesko CEO Mikko Helander. I have together with me our business division Presidents Jorma Rauhala, Ari Akseli, and Sami Kiiski, as well as CFO Jukka Erlund and investor relations Hanna Jaakkola. Today's headline is strong performance on a challenging market, and it describes well our second quarter overall. I will first give an overview of our business performance in the first quarter. Excuse me, in the second quarter. After the presentation, we will be happy to take questions both by phone and via chat.
Key events in the second quarter. In Grocery Trade, sales improved compared to earlier this year. Kespro continued to perform well. In Building and Technical Trade, results were down due to weakened construction volumes. In Car Trade, sales and profit were at a record level, thanks to deliveries of cars that have been ordered earlier. During the second quarter, cost efficiency improved, thanks to implemented efficiency improvement measures. Cash flow from operating activities was strong. Net sales were at the same level as the year before, and in comparable terms, net sales were down by 0.8%.
The net sales total EUR 3.1 billion. Net sales increased in Grocery Trade as well as in Car Trade. Rolling 12 months net sales were nearly EUR 12 billion. Comparable operating profit for second quarter was EUR 207.6 million. It decreased EUR 28.4 million. Operating margin for the quarter was 6.7%. Operating profit increased in Car Trade. The rolling 12 months operating profit was nearly EUR 770 million and operating margin 6.4%. Return on capital employed, one of our strategic targets, was on a good level 15.1%.
It decreased, but was well above our strategic target level of over 14.5%. Return on capital employed increased in Car Trade year-on-year and decreased in Building and Technical Trade as well as Grocery Trade. Our financial position is strong. Cash flow strengthened year-on-year as working capital management improved in all three divisions. Interest-bearing net debt increased as a result of investments in store sites and logistics acquisitions and growth in working capital. Net debt to EBITDA was 0.7x.
This key figure was also well below our strategic target of at maximum 2.5x. In Grocery Trade, good result in food trade. Net sales totaled EUR 1.6 billion and grew by EUR 73 million. It was up by 4.7%. Net sales for Kespro's food service business grew strongly, and sales to K Group grocery store chains grew, too. In Grocery Trade, comparable operating profit for second quarter was EUR 118.4 million, and it decreased by EUR 5.4 million. Profitability was 7.3%. Profitability in Grocery Trade was boosted by the strong sales growth in Kespro's food service business, but weakened as a result of price competition and cost increases due to inflation. Rolling 12 months operating profit was nearly EUR 460 million.
Grocery Trade key topics in second quarter. Market is still price-driven. Price inflation for groceries was 10.9%. Campaigns and other marketing efforts went well. Customer visits and sales in K Group grocery stores increased. Grocery sales in K Group stores grew by 4.6%. This fell short of the market, but less than in the first months of the year. Kespro sales were up by 9.8% and exceeded the market development. K-Citymarket's non-food sales increased by 1.3%. Online grocery sales was up by 3.8%.
During the quarter, Norwegian online grocery operator Oda announced that they will exit the Finnish market. In Building and Technical Trade, profitability weakened but remains still good. Net sales decreased by 10.8% to EUR 1,146,000,000 . Net sales for technical wholesale increased by 3.8%. Net sales for building and home improvement trade decreased for both B2B and B2C trade. Net sales development in euro terms was impacted by currencies, especially by the weakening of the Swedish and the Norwegian currencies against the euro. The comparable operating profit totaled EUR 72 million and decreased by EUR 35.2 million.
The comparable operating profit decreased in all operating countries as a result of a decline in net sales. Net sales in building and home improvement trade decreased in both B2B and B2C trade as the construction market was down compared to second quarter last year. The profitability in technical wholesales was also impacted by Elektroskandia acquired this spring, where profitability was below that of the rest of the business. Elektroskandia's result was also impacted by a one-time expense of EUR 1.6 million related to fair value of inventories.
I would like to underline that EUR 72 million in result and 6.3% operating margin in this current operating environment is a strong result. Building and Technical Trade second quarter key topics for building and home improvement trade. Rising inflation and interest rates have affected the overall construction activities, and it has clearly decreased in Northern Europe, especially in new building construction. Building and home improvement net sales and profit decreased in all operating countries. Sales decreased in both B2B and B2C trade. Operating margin for building and home improvement trade was at a good level of 6.1% despite the weakened market.
Operating margin in the biggest market, Finland, was at a good level at 8.3%. Market share continued to strengthen further. Key topics for technical wholesale. Net sales were up by 3.8%, but in comparable terms, net sales were down by 5.3%. Sales grew in Norway, but were down in the other operating countries. Operating margin declined to 5.5%. The most significant reason behind the operating margin decline was, as said, the fact that the profitability of Elektroskandia in Norway was lower than the margin of the rest of the business.
However, integration is proceeding according to plan. Acquisition is expected to bring significant synergies and strengthen Onninen's profitability in Norway in upcoming years. Operating margin in Onninen's biggest market, Finland, is at a good level at 8.2%, and market share continued to grow further in second quarter. Strong result in Car Trade. In Car Trade, net sales for second quarter grew by 25% and was EUR 338 million. Net sales grew in all car businesses but declined in sports trade. Rolling 12 months net sales was over EUR 1.2 billion.
These figures include also sports trade starting from the beginning of second quarter. The comparable operating profit totaled EUR 24.3 million and decreased by EUR 9.2 million. Operating margin was 7.2%. Profitability improved thanks to strong sales growth and division's recent transformation. Car Trade key topics. New car deliveries increased significantly year-on-year, and thanks to that, net sales and operating profit increased. Sales development was good also in used car sales and services. Order book for new cars remained above normal levels, but due to weakening market, new car orders have decreased clearly compared to second quarter last year.
Sports trade is part of the Car Trade division as of April 1st. Sales in sports trade decreased due to weakened consumer demand. EBIT of EUR 208 million can be considered as strong performance in a challenging market. As you know, current operating environment is challenging companies. Inflation is high. Interest rates have risen, resulting in a weakened purchasing power. On the other hand, employment is high, and there is a shortage of skilled labor. The whole energy market has faced a transformation, not to forget Russia's offensive war in Ukraine and geopolitical tensions. The importance of good strategy grows in a challenging market.
Kesko is in a good shape to generate profits also in the current situation. We have a good strategy focusing on our own strengths. Strong customer relationships, some 2 million daily customer visits, as well as ability to respond quickly to changes in operating environment. We are continuously improving our efficiency and managing cost ratio. Our balance sheet is strong, and we use efficiently our capital. We continue the investments in growth and efficiency as well as also acquisitions and their successful integration continue to be important also in future.
Also in this stage, I would like to underline we have succeeded well in improving efficiency and managing our cost ratio. Fixed costs are down by EUR 5.5 million despite high inflation. We have cut costs and carried out saving measures in all divisions and group common operations. There is a 2.6% reduction in personal expenses despite significant wage inflation. We have also realized significant savings with improved management and decision-making practices.
Foreign exchange rates have had some positive impact on our cost development. As a result of all of that, and as a result of our strategy execution, profit generation is strong also in a weak market. Lastly, outlook and guidance for 2023. Outlook. In the Grocery Trade division, B2C trade is estimated to remain stable and the food service market to grow. Inflation will increase sales but also causes cost to rise. Operating profit is expected to remain at a good level. In the Building and Technical Trade division, the market is expected to decline compared to 2022.
New building construction is estimated to decrease, but renovation building to grow slightly. Operating profit is expected to remain at a good level. In the Car Trade division, car availability has improved, but orders for new cars are expected to remain below last year's level. Demand for used cars and services is estimated to remain at a good level. Profitability is expected to remain good also in Car Trade. Guidance for 2023.
Kesko estimates that its comparable operating profit in 2023 will be EUR 680 million-EUR 760 million. Before, the company estimated that its comparable operating profit would be in the range of EUR 680 million-EUR 800 million. The specified guidance is based on developments in the first half of the year, as well as updated estimates on weakened development in the construction market. Key uncertainties impacting Kesko's outlook are developments in inflation and interest rate levels and Russia's ongoing offensive war in Ukraine. Ladies and gentlemen, thank you.
Thank you, Mikko, for the presentation. Now it's time for questions. You can either use the conference call line or the chat function, but we will first turn to the conference call line for the questions. Please.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Anna Schumacher from BNP Paribas Exane. Please go ahead.
Hi. Good morning, everyone. Thank you for taking my questions today. I have a couple if that's okay. First one, although food inflation is still high, we are starting to see reports that food inflation is coming down. Is this something you are starting to experience with your suppliers? If so, is it being passed on to your customers? My second question is, you've shortened your guidance range for underlying operating profit for 2023. Are you able to comment more on the specific drivers that made you realize you should shorten it? Thank you.
Good morning, Anna. Lovely to get your question. Could you please repeat the first question? The line was a bit bad. You talked about the OpEx, or please repeat.
Sorry. My first question was on food inflation, and that although it is still high, we are starting to see reports that food inflation is coming down. Is that something you are starting to experience and discuss with suppliers? If so, is that being passed on to customers?
Yeah.
Food inflation.
Let us start first from first question. You are right, absolutely right, that finally, we can see some positive development in food inflation. Anyhow, we should remember that still inflation is unusually high, but we can see now some positive development. All in all, when inflation will go down, it is definitely very positive development for Kesko, for our B2C business as well as for B2B business. We are extremely happy that even in current situation when inflation has been unusually high, we have succeeded so well, and we have succeeded to grow and maintain high profitability in our grocery division. Ari, maybe you can continue and open more detailed this outlook and development from your business point of view.
Yes, good morning. It is exactly like Mikko mentioned earlier, that food inflation is clearly coming down. It is always positive sign for the point of view of the Kesko. Because when market is very much price-driven, when it is usually the case when it is high inflation, it is more difficult for Kesko to gain market share. Now it is getting better, and all the estimates coming from Europe is that it will keep on going down, the prices. Good examples is, for example, toilet papers have gone down already about 15% of the price of them.
Exactly.
Very good. Anna was asking about the guidance for 2023, a little bit more about the drivers behind the guidance.
No. As we mentioned, we have updated our guidance especially because outlook in construction industry is now more negative. All in all, we are extremely happy that in current circumstances, we are maintaining such a high profitability in all our three divisions. We believe and we feel that this is extremely strong message that Kesko is on the right track and we have rock solid strategy and strategy work in all divisions. Due to that, we can maintain, as I mentioned, good profitability. Our updated guidance, I see and I feel, is very strong message from that.
That is great. Thank you. Sorry for the bad line. It is very clear. Thank you.
The next question comes from Jutta Rahikainen from SEB. Please go ahead.
Hello. Good morning. I have two questions, if I may. The first one is on the Building and Technical Trade. Now we are seeing the cyclicality hitting the top line and also the bottom line, the earnings. Could you enlighten us a bit about your actions, mainly now on costs to battle this new and buffer business landscape?
That's the first one. Then maybe I take the second one also now. On the Grocery Trade EBIT, it remains still very good and just slightly below last year. I am reading your report here, and it says that Kespro was still doing well. Should I read it that Kespro actually improved EBIT still in this quarter, year-on-year? Also on the Grocery Trade EBIT, how is the K-retailer doing these days on the profitability? Thank you.
Yeah, let's start from the first question. As you know, market in Building and Technical Trade is challenging. But despite challenging market, despite declining demand everywhere, we are performing extremely well, especially because we have such a good business platform. We have strong position in building and home improvement business, as well as we are one of the leading players in Northern Europe in technical trade, as well as we operate strongly in Finland, Sweden, Norway. Those are wonderful countries and markets.
As well as we should remember that steadily year-after-year, also this year, we have succeeded improve our internal operations, operational performance, cost efficiency, and that helps us also to maintain a good profitability in current circumstances. We can see and we feel strongly that we are in excellent position to expand and make even better profit in future when one day market will come back to normal and recover. Of course, sooner or later, we will see also this positive development.
Before Jorma's comments, I would like also to stress that the current situation offers us also great opportunities to maintain growth in Building and Technical Trade. We are seeking all options to maintain organic growth, to increase our market shares as we did also in the first half of this year, as well as, of course, acquisitions are very interesting opportunities for us also in current circumstances, especially in Scandinavia. But Jorma, please continue.
Yes, what we are doing on those circumstances, I would say that we continue to implement our strategy, and we have two main topics. First, with customer, we have to be very active and very proactive with customer sales and sales management because someone will get also gain market share also in these circumstances. We have managed to gain all of those big market market share. The second thing is expenses. We have also managed to reduce our expenses second quarter quite nicely despite this quite high inflation. Those two topics are in our agenda.
Exactly. The second question was grocery related. Before Ari, I would like to stress once again that we are extremely happy. Personally, I am even impressed how well our grocery division has succeeded in current difficult market situation. As we mentioned already, this climate is probably worst climate what we could have in our business and despite those challenges, we have maintained high profitability. My understanding is that still today we are most profitable Grocery Trade company in Europe.
We have extremely well maintained this high profitability. We are doing extremely good job with consumers, but also our B2B business is growing and gaining market share. Again, we can see clearly that when climate will get better, as first signs we can see already today, we are in excellent position also in Grocery Trade business to expand and improve further profitability. But, Ari, please open more details.
As first, whole Finnish grocery market, we estimate that it will continue in both sides of the businesses. Also for the customer side, it will continue to grow and also in the food service side. In the food service side, there is strong mega trend, but that people eat more and more outside the home. That is very good for us because we have very high market share in B2B side of the businesses. At the same time, you also asked about the profitability of the K-retailers, if I remember right. It was hurt because of the difficult market environment during the last year because the generally gross margins come down and all the costs go up.
But now situation is much better. We have been able to execute lots of savings, especially with the energy cost, also with the labor cost and in several areas. At the same time, also the sales mix is getting better. Customers are not any more so worried than before. They also buy more premium products now and, for example, the berry season has been quite good currently and we see a lot of positive signs in the market.
Like Mikko mentioned earlier, that when market is getting more stable and people are still looking some happiness to the life, they buy more premium. We can see better in sales mix and also we can see strong development in the visits in the stores. More and more customers are visiting, numbers are increasing. So it is getting better. Also we are losing little bit market share. Situation is much better than before.
Jukka add something.
Yes. Regarding the question regarding Kespro's profitability, as you noticed the numbers, Kespro improved its top line close to 10%. That also impacted the profitability which improved during the second quarter.
Exactly.
Okay, excellent. Thank you.
I think there's no more questions on the conference call line, so I will go to the questions that we have received through the chat function. First, Calle Loikkanen from Danske Bank is asking, how much lower are the margins in Elektroskandia compared to the overall Building and Technical Trade division? When do you think the margins could be at the same level as the rest of the business?
I can start much lower because when we acquired Elektroskandia, we knew, and it was obvious that Elektroskandia was quite badly underperforming in Norwegian market. Jorma, you can continue. Anyhow, Elektroskandia will be fully integrated to Onninen Norway.
Yes. First, all in all, I think acquisition of Elektroskandia was very good move because now we are clear market leader when it comes to Norway electric market. Also we are very strong in all segments, contractor, utility and industry. As Mikko mentioned, Elektroskandia was performing much lower than Onninen, but now we have started the full integration process. We will integrate all actions when it comes to IT, when it comes to organization and sourcing everything. Next year we will have only one company. We will have Onninen, and we will gain that nice synergy from that acquisition.
Very well. Thank you. Svante Krokfors for Nordea asking, food inflation is coming down, but what is the price picture within Building and Technical Trade, building and home improvement and technical trade?
All in all, we can see already first signs that the inflation coming down, and of course that is extremely positive news, especially if and when this development will continue and that we need all in all in economy. Jorma, my understanding is that also in Building and Technical Trade, we can see first signs that prices are coming down, but how you see this development?
Yes. We can see that second quarter, the prices were kind of flat, maybe some 1% increase or something like that. I think that will continue that situation.
In some categories we have-
Some categories there are increases and some, yes, some negativity. For example, timber, there was quite a big decrease in prices.
Yeah.
Very well. Svante continues. Can you please elaborate on volume development in Building and Technical Trade product categories, including green transition products?
All in all, as mentioned, the price was kind of flat. The volume is very similar, but this is our sales. Still this green transition is doing better than average our sales. For example, solar panels and heat pumps, there is still a nice increase on those product groups.
Very good. I am getting information to my microphone that there is a question on conference call line. Please, conference call line.
The next question comes from Miika Ihamäki from DNB Markets. Please go ahead.
Hi, this is Miika from DNB. Could you elaborate your Car Trade outlook? You still have order book above average, but maybe a bit on the mix. The profitability drivers there, are we seeing a lot of growth in your aftermarket activity? Is the charging contributing to your profits? How should we think about the profit outlook for the division for the remainder of the year?
I can start and then definitely Sami will open more details. But all in all, our situation is good in car trading, especially because today we are in a strong position in all businesses. New car, secondhand car, services, and all businesses are expanding and improving operational financial performance. Order backlog is unusually big, also in new cars. But of course, order intakes are now low everywhere, not just in Finland, but everywhere in Europe in Car Trade.
As long as order intakes are low, order backlog is shrinking. But once again, I remind that we have very strong development in used car business as well as in services, and that will help us also in case if new car order intakes will remain longer time lower level. Sami, please open, and I believe that especially people are very eager to hear from you how you can see this new car business outlook in the mid and longer term.
Yeah. Good morning, and thank you, Miika. Yes, of course, new car business, like Mikko also said, according to industry, the market, new orders intake is soft. It is low, it is minus 50% according to Association of Automobile Finland. That is clearly what we can see also in other countries in Europe. But we still have a good, strong order book, and that will last until end of the year, until end of Q3 at least.
But like Mikko said, we have strong business areas like used car business, and there the demand is good level, and we are outperforming the market, clearly, there in the used car market. When it comes to service, I believe you asked also the service business. There we have also made a lot of investments and improvements. There, for example, the charging stations we are investing in, and the network is nationwide, and we see there also strong development and good profitability.
Yeah, exactly.
Thank you. Any further questions, Miika?
Yeah. Is the K-Charging contributing to your profits, let's say, still this year, and what's the outlook for that?
Yeah. K-Charging is already a profit-making business. We should remember that K-Charging is a relatively small business still today, despite the fact that business is now expanding and we are today one of the leading charging network operator in Finland. All in all, services, K-Charging, but also all other spare part services and repairs and all that kind of things are extremely important part of our Car Trade division. Those businesses are also developing very well and generating also nice profit for Kesko.
Okay, thank you.
No more questions from the conference call line, I suppose. There is a similar question from Joonas Häyhä from OP regarding Car Trade. Order intake has been weaker for some time, but the backlog has provided support recently. How long is the order book, and when do you expect that to be cleared? Actually, you guys already kind of answered the question.
No.
Would you like to elaborate something else?
As we mentioned already, the backlog is unusually big and maintains high invoicing up to end of third quarter, still invoicing coming from backlog in the last quarter. Of course, new orders we need to maintain good profitability in 2024. Once again, I remind you that part of the profit coming from new cars, but extremely important profit generators are services and used car business, and those businesses performing also very well. All in all, we can enjoy this high backlog almost full year 2023.
Very good. Thank you all. I do not have any further questions. Do you have any other comments for upcoming summer weekend or any other thoughts and feelings?
The weather is nice in Helsinki, almost sunny day. The economy, we hope and we believe, slowly going to the right direction. Maybe most important to wish you a pleasant summer day, and thank you very much for your active participation. Thank you