Ladies and gentlemen, welcome to Kesko's first quarter 2023 release call. I am Kesko CEO Mikko Helander. I have together with me our Business Division Presidents Jorma Rauhala, Ari Akseli, and Matti Virtanen, as well as CFO Jukka Erlund and Investor Relations Hanna Jaakkola. Today's headline is a good result in a weakened economic situation. Now, I will first give an overview of our business performance in the first quarter. After the presentation, we will be happy to take questions both by phone and via chat.
Key events in first quarter. In Grocery trade, sales grew and performance was particularly strong in Kespro. In Building and Technical trade, operating profit decreased clearly from the exceptional levels of the last year. In Car trade, first quarter result was a record, sales grew as availability improved. During the first quarter, Kesko acquired the technical wholesale operators Elektroskandia Norge AS and Zenitec Sweden AB. In March, Sami Kiiski was appointed as President of Kesko's Car Trade division and a member of Group Management Board as of June 1st.
Net sales growth continued in first quarter. The net sales totaled EUR 2.8 billion. It was up comparably by 4.4%. Net sales increased in Grocery trade as well as in Car trade. Rolling 12 months net sales was nearly EUR 12 billion. Comparable operating profit for first quarter was EUR 125.9 million. It decreased EUR 17.9 million. Operating margin for the quarter was 4.5%. Operating profit increased in Grocery trade as well as in Car trade, and decreased in Building and Technical trade. The rolling 12 months operating profit was nearly EUR 800 million and operating margin 6.7%.
Return on capital employed, one of our strategic targets, was on a good level, 16.1%. It was flat 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 weakened due to inventory growth. Inventories grew by some EUR 250 million this quarter. Nearly half of this growth is due to the fact that the new car availability has improved. Cars that are being delivered and are on the way tie our capital already at that early stage, and there are plenty of cars still to be delivered.
In Building and Technical trade, inventory grew due to efforts to ensure product availability, as well as price increases and acquisitions. In Grocery trade, inventories grew due to rising prices. Inventories will go down as car deliveries return to normal levels and building and home improvement sales increase once summer season begins. Growth in working capital and acquisition caused net debt to grow. If we look back to the previous first quarters, Kesko's first quarter result has risen to a new level despite a more difficult economy.
When comparing the recent first quarter to first quarter 2019, comparable operating profit has increased by EUR 68.4 million. It is good to remember that the year 2019 was the last normal year before the exceptional world events, pandemic, and ongoing war in Europe and their consequences, and in 2019, the economic cycle was good. Profit has risen to a new level as a result of our good strategy and its successful execution. In Grocery trade, good result in food trade. Net sales totaled EUR 1.5 billion and grew by EUR 113 million. It was up by 8.2%. Net sales for Kespro's food service business grew significantly and sales to K Group grocery store chains grew, too.
In Grocery trade, comparable operating profit for first quarter was EUR 83.9 million, and it increased by EUR 3.6 million. Profitability was 5.6%. Operating profit improved in particular thanks to strong growth in Kespro's food service sales. Grocery trade key facts in first quarter. Grocery sales in K Group stores grew by 2.1%, and Kesko sales to the grocery stores were up by 4.6%. Customer visits in K Group stores increased during the quarter. K-Citymarket's non-food sales increased by 3.8%. Good development in Kespro, sales were up by 28%. Grocery retail prices increased by 14.7%. In the picture, there is an example of recent advertising campaign featuring three different shopping baskets. The cheapest one with our price fighter brand, K-Menu. In the middle, well-priced prices, Pirkka basket, and then the delicacy basket with A brands. The choice is in customers' own hands.
In grocery trade, first quarter result risen to a new level. Compared to first quarter 2019, the quarter result has risen by nearly 50%. In 2019, consumer purchasing power was good and the popularity of eating out was growing. Rising interest rates and inflation have significantly weakened customer purchasing power since 2022. The importance of affordable prices and offers have grown. The shopping habits have normalized after pandemic, customers are visiting multiple stores, online shopping is down, and eating out is growing again. Our focus is on customer loyalty and good profitability. K Group grocery store market share was 36.1%. Last year, it was down by 1.3 percentage points in 2022. Of this, 0.8 percentage points resulted from competitors opening exceptionally many new large-scale stores in 2021 and 2022.
Other market-related factors affecting the market share were people seeking affordable options and shopping in multiple stores, and also eating out and travel has been growing. It is good to note that customer visits have increased, but average purchase is down. New store openings by competitors are estimated to continue to have an impact also in 2023, but to a lesser extent than in 2022. We continue the execution of our strategy that focuses on differentiation, and at the same time, we continue to further improve our price image.
Strong proactive measures together with a slowdown in food price inflation is expected to improve our success in the market. If we look at the food service business, Kespro's market share in 2022 was 46.1%, and it was up by 2 percentage points last year. Our customer base is wide. We saw a strong growth in all customer segments. Restaurant were up by nearly 40%, workplace cafeterias 54%, and public operators over 20%. Kespro is the only food service operator that can extensively serve all customer segments across the country.
We have extensive digital services and 70% of Kespro sales are already done via digital channels. It is good to bear in mind that eating out is a growing trend. In building and technical trade, good result in a weakening market. Net sales decreased comparably by 4% to EUR 1,075,000,000. Net sales for Onninen technical wholesale increased in comparable terms by 6.3%. In building and home improvement trade, net sales decreased in both B2B and B2C trade as the construction market was weaker than a year ago. Weakening Norwegian, Swedish, and Polish currencies against the euro impacted negatively net sales development in euro terms.
The comparable operating profit totaled EUR 32.6 million and decreased by EUR 29 million from exceptional levels of last year. In spring 2022, customers hoarded products due to availability concerns caused by Russia's offensive war and rapidly rising prices. Onninen's comparable operating profit grew in Finland and Sweden, decreased in Norway and Poland, and was flat in the Baltics. In building and home improvement trade, comparable operating profit decreased in all operating countries as a result of a decrease in net sales. Building and technical trade key facts in first quarter. Onninen's technical wholesale net sales grew in Finland, Sweden, Norway, and the Baltics, and decreased in Poland. Sales were down in building and home improvement trade in all operating countries due to decrease in construction activity. Demand was, and still is, especially strong in products related to the green transition and to improve energy efficiency.
Comparable operating profit was clearly down from the exceptionally high levels, as said. Sports trade sales and operating profit were down due to weakened consumer demand. The share of result reported by Kesko from the Kesko Senukai joint venture was down by EUR 3.4 million. Also, in building and technical trade, first quarter result is at a new level. It has multiplied compared to 2019.
This latest result is nearly EUR 30 million better than the first quarter result in 2019. In 2019, construction and renovation activity was at a good level across Northern Europe. In 2020, and during the first half of 2021, demand grew, especially in B2C trade, as a result of the pandemic. In March 2022, the start of the war caused customers to stockpile products at an exceptional level. This latest result is the second-highest first quarter result ever in building and technical trade.
If we look at the first quarter B2B and retail sales, building and technical trade sales are still at a good level. Economic recession is weakening demand. In technical trade, sales were clearly above the 2019 level, and also volumes were clearly above 2019. B2B sales in building and home improvement were also clearly above the 2019 levels, and volumes were at the same level. B2C sales were somewhat down from 2019, and also volumes were below 2019 levels. The green transition and the need to improve energy efficiency are holding up demand. Last year, products related to the green transition presented some 35% of sales in Building and Technical Trade division. These products include solar panels, heat pumps, electric vehicle charging, wind power and infrastructure construction products, water saving products, and insulation, to mention some.
In Car Trade, best result ever. In Car Trade, net sales for first quarter grew by 27.2% and was EUR 265 million. Net sales grew in all business segments. Rolling 12 months net sales was nearly EUR 970 million. The comparable operating profit totaled EUR 16.9 million and increased by EUR 7 million. Operating margin was 6.4%. Profitability improved thanks to strong sales growth and the division's recent transformation. Car Trade key facts in first quarter. Net sales grew by nearly 30%. The growth in new car sales was strong as availability improved. Sales also grew clearly in used cars and services. Profitability was at 6.4% thanks to sales growth and measures to transform and improve the efficiency of operations. Order book is strong, but in the market, new car orders are down.
First quarter result in Car Trade has risen to a record level. The transformation efforts, capability of all business units to generate good profits, and strong order book are yielding results. First quarter result in Car Trade has doubled since 2019, when the market was normal, and there were no availability issues with cars. in 2021 and 2022, we saw significant availability issues due to global component shortages. Availability issues are now easing, but at the same time, demand has weakened. Extensive transformation program carried out in 2021, 2022 has led to significant profitability improvement. Couple of words about sustainable Kesko. Kesko is one of the most sustainable trading sector companies in the world. In Dow Jones Sustainability Indices, Kesko is ranked the highest in the food and staples retailing category in Europe, and globally, number three highest in the same category.
In Global 100 listing, Kesko the only company in the world to have made the list every single year since its start in 2005. They assess over 6,000 large listed companies. Kesko's good result is benefiting both shareholders and employees. Kesko's annual general meeting made a decision to pay EUR 430 million in dividend to nearly 90,000 shareholders for the year 2022. Performance-based bonuses totaled EUR 53 million and were paid to Kesko personnel based on the good annual result. All Kesko employees are now eligible for performance bonuses.
Lastly, the guidance. Kesko repeats the outlook and guidance given in its financial statements release on February 2nd, 2023. Kesko estimates that its comparable operating profit in 2023 will be in the range of EUR 680 million-EUR 800 million. The guidance is based on an estimated relatively short recession in Kesko's operating countries. 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 your presentation. Now it's time for questions. I am Hanna Jaakkola, the IR of Kesko here, and we have perfect time for questions. First, we take questions from the conference call line, and thereafter, I will read the questions from the chat. 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 Magnus Råman from Kepler Cheuvreux. Please go ahead.
Thank you, and good morning. Yeah, that's Kepler Cheuvreux, Magnus here. I have one question firstly on the building and technical division here. You state that the demand is holding up for renovation and energy-saving projects, yet due to the overall demand being weaker, you have a margin coming down some 250 basis points year-on-year. You mentioned here exceptionally strong comparables, of course, but if we would assume the market conditions continued to be unchanged during the course of the year, would you reason in the same way if EBIT margins continue to be down some 2-3 percentage points throughout the year? Or is it anything particular in the comparisons of Q1 that you would like to highlight here? That's the first one.
Yes. First, all in all, we should remember our guidance. Guidance based on expectation that we will have relative short recession, and of course, that has impact also on our building and technical trade business and especially demand in that business. Another important matter to remember is that we have succeeded dramatically to improve our operational and financial performance compared to previous normal year, 2019. All in all, we should be satisfied how we did in first quarter.
Of course, profitability declined compared to previous year, but previous year, especially first quarter, due to Russian aggressive war in Ukraine, was very abnormal. V ery important is now to see how business will develop in the second quarter, but outlook relatively positive when we remember that we are now in the middle of a recession. Jorma, you are definitely even better prepared to comment this market situation and our outlook in building and technical trade. Please.
Yes. What comes to Q1, definitely it was very exceptional last year and our EBIT improved, doubled last year, some EUR 30 million. For example, if we compare Q2 last year, we improved with EUR 1 million EBIT level. It was exceptional. What comes to our markets, we do not see any change to what we last mentioned. For example, Forecon published their latest forecast last week, and for example, in Finland, they still see that the total construction volume will come down some 3.5% and not any change in Finland.
In Sweden, there is a deeper decrease, but opposite in Norway, the market situation is forecast to improve. The big picture is the same what we have seen earlier, and the total renovation will go down. Total construction, new buildings will come down, but renovation is still quite active, and of course, this green transition is still supporting our business.
Maybe important also to remind that when we look sales and volume development, despite recession, for sure building a technical trade, volumes even are still up, and in builders merchant, B2B side also, sales and volumes still up. Okay, B2C declining, but the situation from our point of view is not at all as dramatic as maybe some people are thinking. I remind you, we are in recession, and let us see how world's economy will develop. Of course, we hope that recession will remain relatively short, as we expect also in our guidance.
Excellent. When you say relatively short, at least I guess you do not expect a change just inside this year. Short would be if it would turn in 2024. Is that correct?
This short, as you know.
Yeah. Okay. That's really helpful, all of the replies to that question. I could just ask then on food price inflation, provided that we've seen over the course of essentially sequentially 12 months in a row of falling food commodity prices, as stated in FAO Index, and actually that index being down since even on year-on-year basis since December, and now when it's annualized in March, it was down, I think, some 20% year-over-year. Do you see, you're closest to the suppliers and so on. Do you see a changing picture when it comes to food price inflation going forward?
Yeah, maybe I start. Grocery business, we are extremely happy that despite the dramatically weakened purchasing power of consumers, despite the exceptional high price inflation, we succeeded again to report good result in grocery trade. It's clear and strong message that we have excellent strategy, and our people in grocery business follow and implement successfully our strategy. Of course, we are also very satisfied how is developing our food service business. Of course, big question again is this economy. Big question is inflation and interest rate development. We hope really that purchasing power will improve, and that will definitely support our situation.
Before I let Ari Akseli to continue, I stress that we have excellent strategy. We follow our strategy. K stores are different stores compared to competitors, but we are working also very systematically to improve further our price image. We don't have any plans to change our strategy, and of course, one important element of strategy is that we are growing, and we are also reporting good result in grocery trade. Ari, please continue.
Yes. We are currently gaining more customer visits in the stores, and that's very positive sign. The challenge is in the average shopping basket side. That's because of the customers, they are buying more private brands. They are buying more campaign-oriented products and so on. We still see that the competitors are gaining market shares because they have very many new store openings. In the store openings area, we are much more careful with the investment because we are looking the profitable growth, how to invest and how to do it.
In the future, we estimate that food inflation rates will go down, and especially important is, like Mikko underlined, is the consumer buying power. When it go ups, we can really see that we will gain more market share. At the same time, we have been seeing that customer shopping habits has been normalizing. They have been visiting more and more restaurants, and they have been doing more shoppings from abroad, especially alcohol and tobacco import to the Finnish market.
Any further questions, Magnus?
No, that's also helpful because if I look back, I think it's now we are at some seven or eight quarters in a row with losing market share. D uring the same period, your margin on average is actually up. I t seems to, yeah, just recently bought with how you state your priorities now. T hat's helpful. I f you look at historic patterns of weekly Finnish economy, we also see market share loss in those periods. W ould you say that that's also been due to competitors having had more aggressive store opening sort of rollout during these periods, or is it also impacted a shift in behavior in the consumer trading down?
Yeah, but when we discuss about market share in grocery trade, we need to take a longer period and remember that since 2014, we have heavily gained market share, and we have succeeded dramatically to improve our operational and financial performance. Another thing what we should remember that when Russia started this war, many things dramatically changed. Of course, we should also remember that previous years when we lived in the middle of pandemic time were also very abnormal. Now when pandemic is over, we have this war in Europe, and we are in recession situation temporarily has changed dramatically. That has, of course, now impact also on Finnish grocery market. We are not at all nervous about this development.
Once again, I repeat that in current situation for Kesko, K-Retailing entrepreneurs, I believe also Finnish consumers, extremely important that we don't lose our nerves and we continue implementation of our successful strategy. As Ari mentioned, some competitors have opened temporarily new stores, more than normally new stores, couple of new hypermarkets, and that temporarily now makes a little bit this situation. W e continue implementation our strategy. We protect also good profitability, and we are very confident when also economy will improve sooner or later. We are in good position also in future to increase our market share. I n current situation, very important that we don't lose our nerves.
That's very clear. Thank you very much, guys.
Thank you. Any further questions from the conference call line? No, I have a couple here while you are thinking of asking questions through the conference call. First, Jutta Rahikainen from SEB is asking, "How has your market share developed in Q1 2023 in grocery trade?" Talking about this year.
No, I repeat, but we have already mentioned in our presentation that we lost last year in grocery trade this market share, and we estimate that some market share we will lose also 2023, especially because those couple of store openings have still impact on 2023. M arket share, we will lose less this year what we lost previous year. Then we believe that the situation will more normalize, especially when at the same time we hope and we expect that economy will get more back to normal, and we can see already, as Ari mentioned, first signs that also consumers' purchasing habits are a little bit improving and their confidence is improving. That is, let's say, current situation.
I've heard that there's another question coming from the conference call line, please.
The next question comes from Calle Loikkanen from Danske Bank. Please go ahead.
Good morning, and thank you for taking my question. I was wondering if you can elaborate more on the margin development in grocery trade. I assume that Kespro's margins increased significantly as sales was up so much, but how did the margins develop in the segment if we exclude Kespro?
Maybe you can more open those numbers.
Yeah, sure. L ike you mentioned, Kespro was the main reason behind the good margin development, and it has improved consistently during the last two years when the top line has been improving. Otherwise, performance was good as well. The top line grew in other areas as well, and also the margin was good at other areas as well. Also the cost efficiency was good during the first quarter. Maybe you can remember that a year ago, the first quarter was a bit weaker than earlier and we made some corrective actions towards the rest of 2022, so that's good to bear in mind as well. Altogether, like I said, we are very happy with the performance of the whole division during the first quarter.
Okay. Do you expect the same kind of trends then to continue this year? Kespro obviously doing better in this kind of environment, I guess, that should be fair to assume that the things are going well on that side as well in terms of margins. The other parts of the business, do you feel that this environment is such that you actually can maintain the margins or even improve them? Or should we expect that there would be pressure downwards excluding Kespro?
Yes. As I mentioned already, that in current situation, extremely important that we keep our nerves, we don't lose nerves and we continue implementation of our strategy. I guarantee you, we will do that. Meaning that we are doing also this year our utmost to maintain good profitability in our grocery trade business.
All right. That's very clear. Thank you very much, that's all for me.
Thank you, Calle. Any further questions? Then I have one question here in the chat function. "How would you describe Onninen's business climate in April? Is the business in a free fall?" is the question.
I can start and definitely business is not in a free fall. It is not even in a fall. Onninen Technical Trade, as we explained already, situation is very well under control. Sales growing, volumes even growing. W hen we discuss about April, we should remember that spring is late, especially in Norway, Sweden, also still in middle northern Finland, we have snow more than normally. As well as we should remember that in April, all in all, we have much less working days as normally. Normally, we have sales days 21 per month. Previous year we had 19, and this year you got just 18. Of course, those things have some impact. Onninen Technical Trade situation is not at all bad. Jorma, please, you can continue and open maybe a little bit more those numbers and things.
Yes, I can maybe a little bit open the differences between building and home improvement and technical trade. First of all, we have to remember that Onninen doesn't have a kind of direct consumer customers. The second thing is that Onninen, of course, operate in same business as building and home improvement when it comes to new buildings and renovation. Onninen have also some other segments like infra business and industry. Of course, if we are thinking about the infra business and, for example, electric grid, there is a very high demand on that area. Also one thing what is different is that the share of this green transition, it's much higher in Onninen business. K ind of operating in similar business areas, but also a lot of differences, which is supporting now Onninen business.
No free fall there?
No.
Very good. Any further questions from conference call? I heard that there is one coming.
The next question comes from Miika Ihamäki from DNB Markets. Please go ahead.
Yes. Follow-up on Onninen and especially your strategy around those green transition products. If you could give some color on the market share development. I also sense that in this environment, many competitors may be struggling, so I would be very interested in hearing that. How do you see your performance against competition in this environment? Thank you.
Yes, very strong development, strong performance. Jorma, please, you can open more.
Yes, we are doing quite nicely in Onninen when it comes to market situation. From some countries, we have fact figures. For example, from Finland, our biggest market, we gained again market share when it comes to first quarter quite clearly. Also, we are doing quite nice in Norway, which we are a quite big leading market operator in electric side. All in all, we are gaining market share and gained also in first quarter of this year. A lot of new customers.
Cheers to London. Then question here from the chat. Grocery volumes have declined as the inflation is high. With the new lower volume levels, is the investment to a new logistic center at Nurmijärvi still needed? We are talking about grocery.
Yeah. Now, once again, I repeat that we have growth strategy, and extremely important that all three businesses will continue growth also in future. That is definitely name of the game also in grocery trade division. Of course, now we are in recession, and we expect that recession will remain relatively short. W e need to evaluate situation continuously, and investment decisions will be made later on related grocery trade logistic. Nobody needs to be worried and nervous about that. Later on we decide, and if new capacity is needed faster than expected, then investment decisions are made quicker than expected. If we need less new capacity in a short period, then no problem for us to postpone decisions. You don't need to be worried about that, not at all.
Very good. Thank you. Matti, this is your last quarterly call with us. What are your key takeaways and what is your legacy when your time at Kesko as a car division head is over?
Thank you for the question. First of all, I think the two years I have been running the division has been extremely interesting periods of time. First we had the COVID situation, then we had a dramatic transition in the car industry as a whole, electrifying cars, and as a result, having these supply issues. That, of course, all those things have had a major impact on everything we do. I think that in these circumstances, if you look at our numbers and the results, I think we have done pretty well. I think we are one of the first ones in the car industry, at least in Finland, who has really, in practical operation activities, changed the car business.
As a result, we can see the very nice growth in the new cars, a very nice growth in the used cars, and also a transition in the services. Take an example, K-Lataus Charging Network, where we are the leading charging network in Finland now, and also making profit with that as well. I do not know if there is a legacy. Two years we have been focusing on execution. W hat I can say is that the car division is in great shape and is really ready to take whatever comes up in the market over the next years, because the changes that we have seen here now are not really going to stop here. It is going to be many changes in the future as well.
Very good. Anything to add, Mikko?
Nothing. I n this occasion, I utilize fully this situation to thank Matti. Great job, and I believe that not just for me, but also for all fellow managers in Kesko Group Management Board, it has been big pleasure to work with you, and we give extremely high value all efforts and great development what you have done in our car division. Matti, thank you so much.
Thank you very much. Thank you.
Any last comments? We don't have any further questions here. Any last comments before wish everybody great Vappu? Anything?
Yeah. Sun is shining.
Very good.
We are expecting also sunshine in Vappu.
Yeah. Very good. Thank you, everybody.
Have a nice weekend. Thank you so much that you came.