Earnings Call: Q4 2019

Feb 7, 2020

Hello, and welcome to the Macklemans Group Conference Call Year End Report January to December 2019. My name is Courtney, and I'll be your coordinator for Stowe's event. Please note that this conference is being recorded. And for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. And I will now hand you over to your host, Chief Executive Officer, Per Ochkerson, to begin today's conference. Thank you. Thank you. Welcome to this call, where we will present a little bit about our fourth quarter twenty nineteen. Together with me here is Orsan Celineus, our CFO, who will also take us through some numbers. But to start, I would say, we had a stable performance in the fourth quarter. And shortly, we talked about continued sales growth and the stable profitability. The ongoing EBIT improvement activities are according to plan. We have improved our cash flow generation. And the Board has decided to propose a dividend of SEK0.5 per share. And we still see that our attractive concepts and brands contribute to increased sales to affiliated workshops. But let's move on to some numbers, Osa. Yes. Good morning, everybody. I will take you through the Q4 numbers for Mekonomen Group. Starting with the big picture, we have a growth in the quarter of 3%. The organic growth is 1% in the quarter. Adjusted EBIT is on the same level as last the same quarter last year, SEK149 million and EBIT amounts to SEK104 million compared to SEK57 million last year. Earnings per share is SEK 1 in the quarter compared to SEK 18 last year. And we had a positive cash flow in the quarter and also for the full year in the quarter $156,000,000 and in the full year 146,000,000 EBIT margin 3% compared to 2% last year and adjusted EBIT 5% same as last year. Had nobody missed it. We had a mild winter season and it's affecting our sales negatively. We see it mostly in our business area, Meka Mekonomen with activities in Norway and Sweden. And I will show you on the coming pages the impact we estimate from the mild winter season. But some comments about the full year, we now had Intertin and Equifax the full year and we can see that we closed the year with a sale of almost $12,000,000,000 $11,842,000,000 and that's of course a great increase in sales from mostly from the acquisitions. But I'm also proud to see that our adjusted EBIT increased by $275,000,000 compared to last year and amounts to $874,000,000 and EBIT $7.00 $5,000,000 an increase of almost $300,000,000 compared to last year. And as I said, a positive cash flow for the year and an organic growth of 2%. We had an increase of earnings per share with 12% from SEK 6.56 earlier last year to SEK 7.34 earlier this year. So a positive development of earnings per share after the right issue we did 2018. So over to the waterfall for the quarter. And as I said, we increased EBIT from EUR 57,000,000 last year to EUR 104,000,000 this year. The EBIT is impacted by positively impacted by that we have not that much items affecting comparability this quarter. As you remember, we had a lot of items affecting comparability last year in this quarter related to the acquisition of also the frames in stock. But we had impact on gross profit from operation positive $7,000,000 We have an impact of adjustments in stock levels. We did buy 15,000,000 but it's not classified as item affecting comparability and we had a positive effect from high items affecting comparability twenty eighteen of thirty one. We see lower cost in the quarter positively affecting EBIT by eight and also positively affected by lower integration cost. We have $9,400,000 as integration costs for the new company group structure of the acquisition of 2018. So 104,000,000 and we estimate that the mild winter season in Sweden and Norway impact our sales negatively by approximately 30,000,000 affecting EBIT by 15,000,000 And we also have this adjustment in the stock related to different items pressing down EBIT in the quarter. Over to the next page, the waterfall on the gross margin, it looks very much the same as it did in Q3. We had a gross margin of 45.2 when recalculating the margins for Epticept Interteam as included the full year. And we land this year with 44.8. And as in Q3, we see a positive effect of the purchasing synergies and together with volumes, the synergies impact gross margin by 0.5%. As in Q3, we have a negative impact of the currency, mostly euro towards the NOK and SEK. And we still see market pressure and we see a negative impact of product and customer mix, meaning that we sell to larger customers for example. So over to our business areas starting with Efteset, our Danish company. We saw net sales growth of 5% in the quarter of which 2% was organic growth. EBIT improved compared to same quarter last year as a result of the purchasing synergies. We have cost selling activities ongoing and as mentioned less item affecting comparability. We have 9,000,000 items affecting comparability in SPSS related to integration cost. We estimate our market share in Denmark to be stable even though it's a tough market and we experienced tough competition in Denmark at the moment. Over to Interteam, our Polish company. They experienced as we did for the whole year 2019 a very strong growth sales driven by shares of the domestic sales resulting in an estimated market share gains. Interteam in Poland has as you know also net sales to neighboring countries as Ukraine, Germany, etcetera. But the strong sales growth was mostly in the Polish market with an higher EBIT resulting in higher EBIT margin and in improved EBIT as a total. The great improvement from the same quarter last year and EBIT amounts to $20,000,000 compared to zero the same quarter last year. And we were able to have increased margins Interteam. They amounted to 4% in the quarter and for the full year 2%. We continue to see high price pressure on the Polish market and aggressive activities from competition. We can now summarize in the team and asset set. For the full year 2019 was the first year we have those companies for the full year. And we can conclude that we are satisfied with the acquisition in total, the EBIT contribution in total from the acquired company amounts to $342,000,000 which we see as the same level as we had in the prospect. And now over to Micah McGlomer, our largest business area. We had net sales in line with last year, but the very mild winter season, as I said, pressed the growth down and we estimate that we should have had 2% higher sales organic sales without this effect. We had a zero organic growth in Meka Meka Norman in the quarter. High purchasing costs continues to press our cost of goods and thereby the margins. We did a price increase in Sweden and Norway during December, but we did not see any effects and we didn't expect to see any effect yet, but we expected to see that the coming quarters this year. We have a stable EBIT. EBIT amounts to $63,000,000 compared to 54,000,000 same quarter last year. And we have cost savings activities compensating for the continued price pressure and negative customer product mix. And we also had this inventory adjustment I mentioned of $15,000,000 in business area Mekam Economen. Some updates on our new branch concept, Bild Extra Sweden. So far we have eight branches in the concept where we own four ourselves and four is franchise. Turnover during last year 2019 was approximately $50,000,000 and we experienced a large interest from branches within completing concepts to join in our new Bill Extra concept. Over to the next slide, the merging of our central warehouses in Sweden. The project is proceeding as planned and we still see that we will have the cost savings we have communicated before of $50,000,000 from the end of this year. We have successfully concluded the pilot with five branches and also the regional Mirka warehouse in Jorvik in Norway. They now received their supply from Stringnaz. Next phase in this project is to gradually transfer the supply of all Mika brushes from the warehouse and S. Customer to the new in strength. Focus is to minimize the risk and ensure high service towards the customer. That must be our first priority. And so to our smallest our business and with our highest EBIT margin, we saw a very positive develop in sales in this quarter to the affiliated workshops and we also experienced a positive organic growth in the quarter. We had negative organic growth prior quarter in this year. EBIT continues to be high and we experienced that Sorensen and has a very good cost control ending up in high EBIT margins and also high margin high EBIT, of course. Searns and Abastion is our business area with high sales to business to consumer and are exposed to the tough retail market. I guess everybody sees what happens in the retail lately and both in Sweden and Norway are heavily affected. We have actions ongoing to increase the B2B sales and it's proceeding well. Per, over to you, so Malte can confirm. Yes. We are on Slide 14, and that's just an update on little figures about the markets where we are working. It's really nothing new here in the this quarter. We, of course, follow the sales of new cars even though we normally our normal customers have cars that is in the age of five to 12, 13 years old. So we still don't see any direct effect. And what is very important is to realize that in our markets, still more than 90% of the cars which are sold now is sold by old or let's say, diesel and the petrol technique, which we are very well known. Those cars sold now, we should at least be fifteen years out on the streets. So we have a good market for the future. Having that said, we are also very developing our concept to be able to service and repair any kind of car, kind of technique that they used. I'll move on to Slide 15 with a good footprint. Not so dramatic changes, but we are growing in the number of affiliated workshops in total. And that is our most priority, of course, so that's very good. I will keep on talking about digitalization. We have just launched in December a new booking solution in Macronom in Sweden with improved features of for instant quote and schedule functions. We had online booking already for since a couple of years, but this is a new system with better functions for the car owners. This solution will also be replace existing booking solutions in our in the other concepts during this year coming. In Denmark, we are in the end stage of developing DriveTable. That's a call center and digital portal that provides one point of contact to everything the vehicle owner needs. This is a link between the vehicle owners and independent workshop that provides the workshop with a stable flow of car owner customers. DriveLever is already working for companies and leasing fleets, and it will soon be available to all vehicle owners. We have also developed a learning management system within Plummeister and which are successfully also sold outside our group in countries around Europe. This is a portal where effectively take care of our booking of training and courses, e learning integration and so on. We have implemented this in Denmark. But in Denmark, it was also supplemented with the technical support module and where we have had very positive feedback from the customers with that solution. And talking about business development, this morning also announced that we have strengthened the group management with a Director of Business Development and Strategy, and that is Pietro Bendelin, who has been in the company for ten years in different positions and most recently as a Managing Director of Promaster Solutions. She joined the group management as of today. Focus forward, of course, core growth and profitability, customer value and business development. And finally, I would say that 2019 was a year where we integrated into the team and after set, we have been working with purchasing synergies. We have the project with the central warehouse and also the cost saving programs. We have had good development in cash flow and been able to reduce the debt. So I would say that we have a very solid platform and are ready for 2020, a year where we have continued focus on efficiency and cost control also, of course, but also to increase our ambitions within business development. So that will be my last words, and we will open for questions. Thank you. We do have a question coming through from the line of Michael Lofstad calling from Carnegie. Please go ahead. Yes. First of all, this maybe I missed something on at the beginning of the call, but this cleanup of stock that you mentioned having an impact of 15,000,000 or estimated impact of $15,000,000 What is that? Well, it's you can say it's three parts in that adjustment. One is that we have from Mekonomen was active in Denmark, we had returns to the warehouse in Fengness, which we have sold some of it and some of it we could not sell. And that is now booked in our books and we cleaned up all the returns we had from Denmark. The next part of this is that we have focused very much on working capital to reduce net debt. So we have a huge return of goods from the branches to the main warehouse in Mekamiko Norman resulting in some adjustments in the stock levels. And the third part is that we now finalize the MAX implementation in Meconorman branches and that has also ended up in some adjustments. So I would say those adjustments, they are some of them are earlier, should have been booked in 2016 and some part is for the total of 2019. But we chose now to very much work on to have optimized stock levels and has booked this in the books in the Q4. But it's related to quarters prior to Q4. So it's so one could say that you should have booked slightly lower revenues throughout the previous quarters. Yes. Previous years. And previous years. Yes. Okay. So it's been okay. Because you had a similar thing about a year ago, but that was another That was something else. This is mostly seen as an item affecting comparability. It's something that should have impacted our margins historically. Okay. But for Q1 isolated, is an item affecting comparability, you could say? For Q4, yes, yes, but it's not classified as item affecting comparability. Okay. Another thing also, when you specify the mild winter and the impact of 30,000,000 minus SEK 15,000,000 for EBIT, I mean, last year was a pretty mild winter as well. So how do you come up with that number? One could argue that it was fairly easy comparison. So although I guess this winter is even more mild but because in this slide you are comparing 2018 with 2019 So it's not compared to a normal winter, I guess. I mean, one could argue what is a normal winter nowadays. But first of all, it is a significant difference. November was quite similar. But in December and it's very difficult to just look at the how many degrees it's outside because this is something happened when it gets minus and zero But the method which we use is that we have checked on those products, which we know are strongly affected by winter conditions, could be batteries, it could be heating systems and so on. And compared just those product groups, what we have lost in those. So that's how we came up with the number So it's I would say that it's the best analyst which we can do. Should take it please. Yes. Go ahead. No. And and and I guess I mean, the the winter hasn't really become even though it's pretty cold today, but I guess this has continued in in January. So would you have you seen so far in January the same kind of negative year on year impact for these kind of products? We don't want to comment on the quarter which we are in. But there is mild weather still outside. That's true. And and how the the sale of these kind of products, I mean, it goes from from you to to customers and to the affiliated workshops and and and other stores and and gasoline shops and and stuff like that. It goes to the more very winter related products, when do you sell them typically? I mean, are they sold by the day or are they sort of purchased and put on stock among your customers? Or when do you see that there is a completely lost winter, so to say, for these kind of products? It's a mix. But because we some products, for example, when it gets really cold, minus 10 or something, then cars stops by the road. And that creates more job for the workshops. And they usually get delivery from our stores or which fills up overnight from the center warehouse. So that kind of sales that comes immediately. So we can see sometimes if it is very cold three or four days minus 10 in a big area like Stockholm, then we will see it directly after a couple of days. But then there is also other products, which when we sell to larger customers, which we may make one sale in the autumn and then hope that they will fill up their stock later, but they won't do it. So it's a little bit mixed, but we feel it quite directly, definitely. Okay. Another thing on you mentioned before these sort of problem areas. So we have Finland, for instance, and also part of your, what I call, noncore businesses Could you mention anything on how these businesses are doing if the losses are increasing or has stabilized or even improved? It's I would say, in general, it has been improved. And we still have some losses. And we still have some, let's say, costs for reducing risks and so on. But we don't have any more detailed information than that today. And you can't say anything else around Finn and you have opened up for dismantling or divesting Finn and if profits doesn't turn, how much long time do they have and where are you in that? I wouldn't comment on time. But as I have said before, we are looking for better solutions. Better solutions can be that we make it profitable ourselves or that we can sell it to someone so we can do something better about it like we did with Macron in Denmark a couple of years ago. And I would say we will probably not in the area of completely shutdown yet. It's not that bad. We're still working on the two other alternatives, but we're open for everything, of course. Okay. Also two questions on the two, call it, programs that are running. First of all, the purchasing synergies with FSD and Interteam and I guess the other units as well. So you're saying that SEK 60,000,000 has been realized of the 100,000,000. If we just is that on a full quarterly basis, did you experience those synergies fully in Q4, the SEK 60,000,000? That's the first question. And secondly, then the remaining SEK 40,000,000, when do you expect those to come through? At the time of the acquisition, you were quite long term in this sense, but now you have come a good way to the 100,000,000 already. So when can we expect the remaining 40,000,000 And again, was it a full run rate in Q4? Of the I would say, yes, I would say it was full run rate in Q4 or at least in the end of Q4. So we have those 60 are fully in the company as from this year, January 1. And to the second question, yes, we said that it will take some time to get our facilities, and that is because you always start with the low hanging fruits and the easy negotiations. So I would say to get the first 60,000,000 is the easy part and the last 40,000,000 is a bit more difficult. So I wouldn't change even though we are happy and it has been a successful project, I still have respect for the work to be done ahead. So it's still the same. We still have the same prognosis that it's from 2021 that will have the full effect. Okay. And the other cost saving program, the SEK 65,000,000 that you have completed. You I think you have said before that you expected a full run rate by the end of Q4 or sometime during Q4. So should we how should we interpret that? Is it the full sort of quarterly effect will come in Q1. Is that the right interpretation? Yes, that's right. Okay, good. And the price increases you've carried out in Sweden and Norway, they are accepted and so on and will impact the gross margins in Q1 then? Yes. They are accepted. And now it's always the challenge still about the purchasing prices and the euro. That's I mean, this is done mostly to balance up that and to keep the margin. And as we see the currency lead a little bit better, but we still have in our stock, we have a very high SEK Yes. I guess there's a lag of about one quarter or so if we look at the FX rate. Yeah. Yeah. Okay. You should get the full benefit from a lower euro by Q2 basically then in your gross margins. Yeah. Yeah. Depending on how the exchange rate will Yes, of course. The final question from me. You have this other income that you report in the P and L. And that declined quite significantly year on year. It was €59,000,000 in Q4 twenty eighteen and now it dropped to 40,000,000 Why is that? I need to come back from that one. I can't I do not have the answer right now. Probably in the area that it's something that has moved out to some business area or if it's something which we have just stopped doing. But let us come back to that. Okay. Thank you. We currently have no further questions The next question comes in from the line of Matt Lees calling from Kepler Cheuvreux. Please go ahead. Yes, hi. Two questions, please. First, I guess you talked about this mix change to larger customers and I guess it's been going on for quite some time, and it will probably go on for quite some time more. But could you say something about the momentum there? And how much we should expect going forward? Yes, the mix change there. Mean, the margin impact and yes. You're right that that was probably going on in the future. But I don't think we should expect any more any significant changes in the future because we also this has been, for example, some of the products groups which has changed selling pattern. But it has changed, so we don't see any further development. So difficult to give any guidance, but yes, it will continue. But I don't think in the same speed as we have had the last couple of years. Okay. And then about I mean, you had a mild winter and I guess you prepared for maybe a normal winter. Is there an excess inventories in some of these product groups that you need to sort of get rid of or is it a normal could you say something about the inventory level currently? No. That's we don't see that as a problem because these products has it's not like selling cash or something. So it will be sold somewhere and along the road. So we don't see any risk for in the inventory regarding that. Okay, great. And finally, just while looking at the tax charge. It was a bit on the high side. Could you say something about that also? Yes. We have higher tax paid tax and the tax in P and L, and it's related to a tax being paid in Denmark during the quarter of $80,000,000 which was in the balance sheet. It's quite normal with pay tax They had a different year end due to the acquisition from Equinor and making us pay tax in another period than we usually should have done. So it's nothing strange. It's temporary this year. Okay. So well, the tech charge for the full year is a good guidance for the future. Yeah. Yes. Okay. Thank you. Thanks. We have no further questions coming through. There are no further questions coming through. So I hand you back over to your host for any concluding remarks. Okay. Thank you, everybody, for listening, and have a good day. Thank you. Thank you. Thank you for joining today's call. 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