Good morning. Welcome to Mekonomen Group quarter two report 2020. My name is Anna and I will be your coordinator for today's conference. During this call, you will be on listening only. However, in the end of the presentation, you'll have opportunity to ask question. If any time you need assistance, please press star zero and you will be connected to an operator. I will now hand you over to CEO Pehr Oscarson, your host for this call. Thank you.
Thank you. Very welcome, everyone, and thank you for joining us today. Together here I have also Åsa Källenius, CFO, and we're going to guide you through the second quarter 2020 and the summaries of the first half of the year. Despite challenging condition, we made a strong result in the second quarter thanks to our intense efforts to handle the effects of the COVID-19 pandemic and the data breach in the end of March. We have succeeded in adapting our operations towards respective market conditions when it comes to lowering our costs and continue cost focus and on our customers' needs. No one can say for how long this pandemic will continue. My firm belief is that we are very well-positioned for the future. We have a proven and solid business model regardless of cycle. For you who have the presentation, I am now on slide number three.
The ongoing pandemic still affects the demand in all markets, but we have noticed a gradual recovery in the second quarter. The speed of recovery varies between the markets. For example, we have seen slower recovery in Poland, while Norway experienced a much faster recovery rate, especially within Sørensen og Balchen, who made all-time high result in April, managed to exceed that result in May and then again in June, therefore, of course reported the best result ever three months in a row. We have made it through the data breach. Even though our major systems were restored in mid-April, we did have a negative impact on our operations in April and May. The financial impact of the data breach will be limited by our cyber insurance. Switch to page four.
Our main priorities in the situation has been and still are the health and safety of our employees and to continue to give a high level of service to our customers. We have acted forcefully and implemented a broad range of measures during the second quarter to mitigate the effects from the extraordinary events. These actions include secure logistics change and availability, cost reduction actions, structural cost reduction initiatives focusing on improved working capital and cash flow, a new bank agreement, and sharply increased prices in Norway, followed by further adjustments in our other markets. Approximately 30% our cost cuts will be permanent, which will be positive for our future efficiency. Then I will hand over to Åsa to guide us through some numbers.
Yes. Thank you, Pehr. Over to the numbers, and now on page five. Despite the challenging condition we had, we deliver a strong result in the quarter. The strong performance builds on our forceful action and gradual recovery of the demand in our markets. During April alone, sales decreased by 17%, followed by strong recovery in May and in June, which ended up in -7% for the quarter. We also managed to keep strong EBIT and EBIT margins despite the lower sales. Our strong cash flow is positively affected by governmental support consisting of postponed payments and VAT and taxes by around SEK 300 million. Over to next page and EBIT. We report a continued strong development in FTZ, Inter-Team, and Sørensen og Balchen. I will get back to them later in this presentation.
First, a few words around Mekonomen, where we have succeeded to balance the lower volumes affecting gross profit by cost reductions and governmental support. We have also implemented a structured cost reduction initiative, including closure of unprofitable branches and workshops. The results includes a negative item affecting comparability of SEK 31 million. Number seven, gross margin bridge. We report stable gross margin for the first six months, negatively affected by currency fluctuations in Q1. Actions to compensate for these effects include price changes, primarily in Norway, due to the weak Norwegian krone. Gross margin in Q2 alone has improved compared to last year. We will look closer into the business area. I start with FDS on page nine. FDS has managed to maintain a strong EBIT margin due to internal cost savings without any advantage from governmental relief.
The unfettered market leader position is a contributing factor to the strong earnings for after sales. We estimate market share gains from the independent part of the market in Denmark in the quarter, despite the slow market. This is a sign of strength that is an advantage for the future. Over to our Polish company, Inter-Team. We continue to follow our long-term strategy plan around improving EBIT with forceful actions and focus on increasing gross margin in Inter-Team and in Poland. This combined with our short-term plan with the purpose to reduce the COVID-19 effect by cost-saving action, has resulted in continued improved EBIT margin, despite sales decreasing by 16%. The Q2 result does not include any governmental relief. Over to our largest business area, MECA, Mekonomen. We have seen a gradual improvement within MECA, Mekonomen in the quarter.
As you all know, we had challenges in the business area, and this has led to forceful actions throughout operations to mitigate impact from both data breach and COVID-19 going forward, including cost reduction and structural initiatives to improve our long-term profitability. This includes action on unprofitable branches and workshops. We have a strong focus of improving efficiency by cost reduction in MECA, Mekonomen business area. In early May, we sharply increased prices in Norway to compensate for the weaker Norwegian krone, complemented by further adjustments to our pricing in Sweden. Around SEK 24 million is received from governmental relief in Sweden and Norway. The claim process around the insurance compensation regarding the data breach is still ongoing, and our financial impact will be limited. Adjusted EBIT margin was at the same level compared to previous year, thanks to our forceful action. Last but not least, Sørensen og Balchen.
As Pehr said, an all-time high result in Sørensen & Balchen in Q2, with the best result ever in the month of April, in May, and in June respectively. A successful quarter for the Norwegian business area, who also had a great track record historically. In generally, we notice a higher demand in the Norwegian market, where Sørensen & Balchen business model benefits by a strong do-it-yourself market that has developed well during the lockdown, and the fact that many worked from home. Sørensen & Balchen has received SEK 3 million in governmental support, which is included in the Q2 result. This excluded, it would still be the best result ever. Back to you, Pehr.
Thank you. I am now switching on to slide 14, just some words about the group footprint. We have an increase in number of affiliated workshops in all main markets, thanks to attractive concept and customer focus. We are slightly decreasing number of branches in Sweden, that is a result of the structural actions on unprofitable businesses. I'm moving on to page 15, where we can see that we are number one and two in Sweden. We have position one, two, three in Norway, the clear number one in Denmark. Strong positions that will benefit us going forward. In Poland, we are number four. Poland is still a fragmented market that we believe will be consolidated in the long-term perspective. Some words about the business development.
We continue to drive the industry forward by creating solutions and customer services that will help us strengthen our position further and meet new trends. I'm on page 17, and we see that now car dealer networks are shrinking as a general trend due to lack of profitability and efficiency, and new digital sales channels replace the traditional physical showrooms. Car producers new to the European market are not interested in establishing car dealer networks and workshops. They are instead looking for efficient sales channels and established partners with wide networks within the independent aftermarket to solve the maintenance of the car.
With our unbeatable availability, very strong competence, and well-known brands with high credibility, we are an attractive partner for these new actors. During the second quarter, we initiated a dialogue with Chinese electric car producers, Seres and around service and warranty partnership for the coming launch of the smart electric car, XPeng or Xiaopeng. Naturally, the existing car certification concept, which we have in Norway, were crucial for that collaboration. Moving to page 19. We have continued successful development for Sørensen og Balchen Click and Collect service since the start of March 2020. The customer order a product at bilXtra.no and receive a text message within two hours stating that the product is ready for pickup in the branch, creating additional sales opportunity while having the customers in the branch. Over 50% of Sørensen og Balchen e-commerce orders consist of Click and Collect. Moving on to page 20.
The most common way to book a service or repair at workshop is still to pick up your phone and call the workshop for making an appointment. We see largely increasing numbers of car owners using our digital booking solutions. Nearly double number of bookings in FDCEP during the first six months compared with last year. Impressive 76% increase in MECA Sweden, while MECA Norway Sweden have a more natural development from an already high level, but still an increase of 25% the first half year. Last page. Mekonomen Group enables mobility.
We have done so for decades, and we will do it in the future. As the technology develops, it creates new opportunities. We will continue to focus on profitability, growth, and create value for our customers. That, together with a strong position and stable business, will make us well-positioned for the future. With that said, we open up for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. We will then introduce you with your name when it's your turn to ask a question. If you would like to ask a question, please press star one now. We do have a couple of questions coming through. The first one is from Niklas Lyrhem from Carnegie. Please go ahead. Your line is now open.
Yes. Hi. A few questions from me, if I may. First of all, looking at the chart showing the gross margin development, you're here looking at the six months basis. If we were to look at a quarterly basis and the FX impact, is there a positive impact in Q2? Could you also speak a bit about the lag in that positive impact from a stronger Swedish krona, Norwegian krona?
Hello. Åsa here. Yes, if you would look at Q2 alone, there would be positive FX effect. Of course, we have a bonus tips now when we increase prices in Norway and also Sweden. At the same time, the Euro weaken towards both those currencies. Yes, we have a positive impact in the Q2 quarter.
And I guess-
Yeah. The second part of the question was the lag. Of course, now when the currency is while still improving, there is somewhat a couple of months delay for getting that into the price of the products.
It takes around three months for the spare parts to go in and out in the warehouses.
Yeah. At the beginning of Q2, I guess then you still had a negative FX impact, and then it gradually became better. We will see a much more positive impact in the coming quarters given the current rates.
Just to comment on that, Niklas.
Yeah.
That will depend on very many things, and we are not confident that it's true if all things stay the same, but currencies move every day. Where Q3 will end.
Yeah, sure. On that topic also, you raised prices in Sweden already, I think it was late last year, and in Norway in May. When are you forced to reduce prices? As a market leader, can you hold prices up regardless of the FX currency?
It's a very clear ambition to try to keep the price level which we have, of course. That is not only our decision, it depends on what our competitors are doing. Looking historically during this kind of situations, the industry has been quite good in keeping the price level and then have some good years when the currency is moving in the right direction. That's historically. We don't know what will happen this time.
Okay, thanks. Another question on the EBIT bridge. Looking at the cost reductions, you are mentioning in the report that roughly one-third of the cost savings are sustainable. What are you calculating on? I guess some of the measures that you launched during Q2 have not gained effect yet, and especially the ones that you took charges for in the quarter. As we leave Q2, what is the run rate in terms of cost savings, and particularly for the sustainable part of the cost savings? Could you say something about that?
It's a little bit difficult because when we talk about one-third, it's from the total package, and the total package is moving a little bit up and down because that's also adjusting due to the demand. It was one number in June and another number in July. This should be seen more as an ambition. If we do something to say 100, then one-third of that 100 should be, so to say, long-lasting. We also need to react on demand. I would say that in some areas we have had, if you have a look at Norway, quicker let's say back to normal demand and then that's still the cost saving, which is on one-third is sustainable, but maybe the total is a little bit lower due to the high save volumes.
Okay. You can't give us a number of approximately where you are aiming at in terms of sustainable cost savings on a yearly basis?
Not at the moment, and especially not due to the uncertainty going forward. Hopefully after Q3, we have more stable ground to stay on, and I can communicate that.
At the run rate, here you're mentioning SEK 25 million in support on a yearly basis. The run rate leaving Q2 is, I guess, higher than SEK 25 million on a year-on-year basis.
Yeah.
Yeah.
Okay.
You mentioned we did MECA and Mekonomen business area. Yeah.
Yeah. Just to be clear also, in those items affecting comparability, you haven't included the SEK 7 million of your compensation from the cyber insurance because that only compensates costs that you've had during the quarter. It's a net.
Yeah. That's correct.
Okay. Regarding that insurance compensation, I guess that it's an ongoing discussion or, yeah, with the insurance company. You mentioned SEK 7 million, that was a small portion of the expected compensation. What are you hoping for here?
We are still in the normal claim process towards the insurance company. We are still in that process, so we can't communicate that externally. We will come back on that as soon as we know more.
Can you say something about what kind of gross profit decline that you think that you experienced because of the data breach? It's difficult for us given that you had COVID-19 at the same time. What was what? If SEK 7 million is a minor portion, people might think that the whole compensation is SEK 100 million or SEK 50 million or SEK 30 million or it could be a quite big number.
Yeah, I know it's very difficult, and it's a complex quarter in many ways, but at this point, we cannot say the numbers.
Okay. Do you think it will be settled in Q3 or where are you in that process?
Normally, this kind of processes is quite time-consuming. We don't have any own history, but from what we hear from our advisors, it can take quite a long time. It's very important for us that we don't want to rush it because we want this to be as good as possible. Yeah, it may be something in Q3, but it can go on until beginning of next year as well. That's an unknown area. Yeah.
Okay. The government reliefs that you received in this quarter, SEK 24 million. As you see it, and this is mainly in Sweden and to some extent Norway, but where are we now? Timing-wise, when will you cease receiving these grants? I guess the net impact from COVID-19 has been negative in the quarter anyway. As this runs out, you will probably benefit elsewhere. Timing-wise, and what are your budgets based on in terms of government reliefs in Q3 and potentially Q4 as well?
We don't base anything on further support from governments. I would say that we don't expect anything. If it will be a situation and if it will be a support that we can apply for, that's something positive. Especially as you have heard, in Sweden, the rules are changing all the time. We really don't see any possibilities to get any more support.
To complement that, I can say that we have a process ongoing in Poland. Inter-Team has received PLN 2 million in the beginning of August, not included in Q2. It's a part of compensation for lost sales in Q2. We have the possibility to apply for even more. We have not received any more money than the PLN 2 million. We do not know if we can get more. Possibly there will be more.
In Sweden, you didn't get anything in July?
No.
So no.
Just the normal social security relief that everybody gets, but no one for layoffs, et c.
There were no staff furloughed during July then?
All the rules say that you can't go on vacation if you do that. It was kind of a mission impossible to use it.
Okay, that's it. Final question from me. Looking at the market as such, well, it's actually a two-fold question. The market as such, I know you mentioned Denmark, that you have gained market share, and I know that you have both workshops and stores open while competitors were closed down during the period and so on. What about market share gains in general? In Norway, for instance, where you raised prices, did that have any impact on market shares?
Also in Sweden, how has that developed as you think during this period? That's one question. The other question on the market as such, we are seeing a very strong used car sales and used car demand in, I guess, all countries now. I guess that is positive for you, and we've seen that in numbers both in Q2 and in the start of Q3. The strong used car sales, it's, I guess, positive for you.
First question about market share. That's a little bit also different areas. We gained some market shares in Poland and Denmark definitely due to high service level during this pandemic. In Norway, I would say stable, maybe a little bit increased market shares. The price increases which we did was followed by most of our competitors. The price increase doesn't have any effect on share of market. In Sweden, I should say that it has been stable, also the same situation with the smaller price increases, but still followed by the market in general. When it comes to the used car sales, I agree. Maybe that in itself is one interesting thing, but that is because of the lower sales on new cars, and that leads to an older car park. An older car park needs more service and reparations.
That is good for us. This is still a couple of months with very low, and we know that we have here only in Sweden 4 million cars. The numbers affecting the total market, maybe not that much. If that continue, it will be also big enough to have a clear, visible positive effect for us. There is definitely no negative things with this. It's as it is or it's better, depending on how long it will continue.
Okay, thanks.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from Mats Liss from Kepler Cheuvreux. Please go ahead, your line is now open.
Yeah, hi. Good morning. Thank you. Good numbers there. I had a couple of questions. I was about cash flow that you had some tailwind, I guess, from VAT, et cetera, and I just wonder how will that sort of balance out going forward when we do sort of close those VAT issues?
Yeah. We have postponed payment of VAT taxes of approximately SEK 300 million in the quarter. They are to be paid in the coming quarters. I think the last payment will be in Q2 next year. That's the Swedish VAT and taxes. It will come during the coming quarters.
Yeah. Great. Particularly about how the renegotiated financial structure and increased headroom, I guess, to the governance, will that affect your interest segment going forward?
No, not in any major way. No. It will a little bit, but not in the whole picture, no.
No. You mentioned that, well, markets have improved gradually during the quarter and demand, I guess. I hope so. Is that an indication that the third quarter has started out the same way, or how should we see your comments there?
As I said before, the gradual increase in demand is an ongoing trend. It's still very uncertain how it will look if we have now found a new level or it will be coming back a little bit more or if it will bounce back. Difficult to guide about Q3 in that matter. We will just wait and see. The trend is we went out from Q2 with a positive trend.
Great. I guess the things you talked about on slide 17 there about stronger interest from independent aftermarket players seems to, well, open up for business both for you as a multi-brand service network. I just wondered, is there any chance or possibility for you to close deals with, not maybe Volvo, but with the more smaller brands in Sweden and the other markets to do the service for them or to get it more in a repetitive way? Is it more sort of when customers need to service, they go to a multi-brand service outlet instead of the brand specifically?
I think it's an opportunity for those very small car brands, maybe operating in Scandinavia or thinking about establishing them in Scandinavia. We could be a good alternative instead of building up all these organizations and taking those investments by themselves. As I said, the interest increases in that area, and we are very well-positioned and also think this is very interesting part of the future.
Great. It seems to be coming up some new competition there, especially in Sweden with Amazon coming up. How do you view their entry in Sweden? Do you see them as a complementary or could you say something about the views there?
First of all, Sweden is, I don't have the number, 25% of our total group sales. The other countries don't affect really by this. 90% of our sales is business to business to a workshop who adds services. The product is no longer a part, it is a service which includes both labor and parts. That part of the business, there we have a delivery demand which is daily or hourly even. With our road network or branches, we don't see any impact on that business. That is also what we can see in other areas in Europe where Amazon has already established that they really don't touch that part of the business.
It is the direct consumer sales that can be affected, but there I have to say that we already have had that for a couple of years with a lot of German e-commerce player with very low prices. That's really nothing new in that perspective. It has possibly impact on a small part of our business. Having that said, we of course want to do it better than Amazon even in that area, and we will try to be better.
Okay, great. Sounds convincing. Finally, you touched upon those savings measures and maybe going forward with the remaining savings measures you have, I mean, integrating the logistical entities in that is then affecting us, I guess. Also if you could update on the procurement-related initiatives with the FTZ and so on and then maybe also LKQ.
I didn't hear the first part of the question. Let's start with the second part. With the purchasing synergies, that also is going according to plan. We promised that it would be finalized as from beginning next year. We are very well on that plan. Of course, with this drop in demand, that makes it challenging because then we have other, let's say, areas which goes in the other direction. We get better deals, but since the volume is down, we don't reach the levels of bonuses and so on. It has been challenging, but in terms of percentage, it's very well on plan and it has been good to be working together with LKQ during this period because trying to also get some good support from the suppliers in these demanding situations. It has been good partnership. Again, your first question was?
Yeah, the first part there, Michael asked about that too as well, in savings measures going forward, I guess you have this integration of the logistical units in Strängnäs and Eskilstuna and the savings. How much are these in the numbers?
Yeah. Same answer as to Michael before. When it comes to the warehouses, we are actually forced, due to the data breach, we speeded up the plan, because we didn't have the time to get Eskilstuna up working. We very quickly moved all deliveries to Strängnäs. Demanding operation, but we managed that. After that, we have used the time and still are using the time to empty Eskilstuna, but we don't have any external deliveries from Eskilstuna, just taking down the products and moving them to Strängnäs.
That will continue for some other months. The plan was that we should be able to close down and shut off the lights at the same time as the lease contract is going up, and that's in December this year. That's very well according to plan, which means that we will have those savings also coming next year. We have talked about SEK 50 million. I think I mentioned last time that some of them already are in the books, but still the absolute major part of that will come in 2021.
Okay, great. Thank you.
The next question comes from Mika Karppinen from Handelsbanken Capital Markets. Please go ahead, your line is now open.
Hi, this is Mika from Handelsbanken. One question. From my understanding, in many countries these annual car inspections can have been postponed during the pandemic. Do you think that had any impact on your volumes in Q2? Do you expect the sort of the impact to be maybe even positive in the coming quarters?
Yeah. I think the most biggest impact of that was in Norway, where they during four weeks, I think they completely closed the possibility to do this car inspection. In Norway, it is the workshop who is doing that inspection also, so that's also an income for the workshops and of course, that drives also volumes for us because then they also change parts at the same time. After a month, the government decided that it should be back again and they just got maybe one month of trying to catch up, so to say, which means that we've had a very positive effect in Norway, I would say in May, thanks to that inspection which should have been done in April, was done in May and that drives some volumes. In Sweden, it's more of a long term.
It's not like it's completely stopped, but it has been postponed in some level. Since in Sweden it's two different industries, we don't have really the same correlation between car inspection and our sales. It might be having some future positive effect when this starts to be normal again, but it's not significant.
Okay, good. Thank you.
We do have another question from Michael Lundblad from Carnegie. Please go ahead, your line is now open.
Yeah. Sorry. My question was actually already asked. Sorry for that. Thank you.
We do a quick reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Thank you. There are no further questions coming through, I will hand the call back to you again. Thank you.
All right. Thank you for listening and thank you for good interesting questions. Hope that you will have a very good day all of you. Thank you.
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