Earnings Call: Q1 2020

May 29, 2020

Good morning, and welcome to the MacNorman Group Quarter One Report 2020. My name is Anna, and I will be your operator to today's meeting. During this meeting, you are listening only. However, in the end of the presentation, you will have opportunity to have questions. I'm going to hand you over to CEO, Per Ostgerson, the host for this meeting. Thank you. Thank you. Very welcome, everyone. I'm glad you can join us today. I have Ostas Kyrenios, CFO, with me, and we're going to guide you through Mekonoma's first quarter in twenty twenty. We had a solid start in the quarter with growth and EBIT level in line with the same period last year. But then in March, we started to see clear effects from the COVID-nineteen pandemic. We acted thoughtfully and with a broad range of measures to mitigate the effects. Thanks to this, our EBIT level in the April is at comparable level at the same period last year. Equinor is an international company that enables mobility. We have done so for decades and we will do so in the future. We have a stable and proven business model and we are well positioned for the future. Then if we move on to Page three in the presentation, I'd like to talk a little bit more about the extraordinary events which we have had in March, where we experienced a significant impact on the pandemic in early March, foremost in Norway and Denmark, where the mobility restrictions were deployed very early from the government. In Sweden, we have had less restrictions resulting in less impact, but still noticeable. We believe that the negative development in the market will continue for some time before it gradually gets better as the mobility restrictions are being eased on all markets. We see now clear signs of mobility reliefs in all our markets, which has led to an increased demand, why we believe that the pandemic is not going to have a long term impact to our industry. At the same time, it's still unsure situation at this point and we will adapt our business as needed. Then in the March, we were exposed to a data breach affecting the business area, Mekka Mekka Norma and with businesses in Sweden and Norway. Overall, we were successful in handling the breach. We had a good backups and the system are restored and in full use since April 15. We estimate that the incident had a minor negative financial impact to our reported EBIT in Q1. We also expect a negative financial impact in Q2. Losses in both quarters are estimated to be covered by the terms and condition in our Saudi Cyber Insurance Agreement. Then move on to Page four, a little bit about our actions. We acted forcefully and implemented a broad range of contingency measures to mitigate the impact of on earnings and cash flows. The main priorities have always been the health and safety of our employees. We have continued to focus on the core business and to make sure that we have a high level of service to our customers. And we have taken I'm now on Slide five. We have taken measures to reduce costs to ensure a strong position going forward, such as secure logistics change and availability to improve our EBIT through thoughtful actions. We are reevaluating approved and planned investments and focusing on improving working capital and secured future financing through early discussions with the banks. And to compensate for the collapsed Norwegian kroner, we have sharply increased prices in Norway from early May, complemented by further adjustments to our pricing in other markets. Approximately 30% of our trust cuts will be permanent, which is positive for the future efficiency of Mekonomen Group. Then I will hand over to Orsa and some numbers. Hello and good morning everybody. Now I am at Page six. As we heard earlier in the presentation, we had a solid start in the quarter with a growth of 3% and an EBIT level in line with the same period last year. In March, as Per said, we started to see clear negative effects from the COVID-nineteen pandemic. In the quarter, sales declined with 1% and EBIT was million. So far in this pandemic, we have acted very fast and forcefully to safeguard EBIT levels. In April, we would see a decrease in sales, but due to the forceful actions, EBIT is on similar level as the same period last year when adjusted for expected reimbursement from the cybersecurity insurance. And in May, sales has recovered notable in most of our markets except for Poland. They are still more in the closed down mode than the Nordic countries. Over to Page six and some explanations how the results distribute over our business areas. Three of our four business areas are not very effective on EBIT level from the COVID-nineteen in Q1. Efteset is minus EUR 9,000,000 on EBIT, Interteam on the same level as last year and Sorensen and Balschen in Norway minus EUR 1,000,000. The ECA MECONOMEN was affected from COVID-nineteen in two ways, lost sales due to lower demand and heavily effect by FX, both on gross margin and FX in the balance sheet. FX is mostly related to the collapse of the Norwegian kroner during March. Over to gross margin on next page, we had gross margin amounting to 44% in this quarter. It is a decline compared to the same period last year. Compared to last year, we had positive effects from synergies and this is the same as additional synergies because we already had synergies at this point last year. And we have a positive impact from bonuses and synergies even though we had to decrease our forecast for supplier bonuses this year due to lower volume. So it impacts gross margin with plus 0.4%. We have this heavy effect from currencies as earlier described from Norwegian krone, Polish zloty and Swedish krona towards the euro, affecting gross margin negatively by almost 1% in the quarter. And in addition, we have a negative effect from market pressure, product mix, etcetera. And this is a combination of lower sales in the business area, Mekamekonomen, who normally have has higher margins. And we have also an unfavorable mix product mix due to the mild winter, we sold less winter related products with high margins. And also during the data breach in Mekonurvan, we had sales with lower margins due to the fact that the stores needed to purchase from local competition to a higher price than normal resulting in this margins. So yes, a combination of more than one thing. Now over to the business areas and how they performed in Q1. SKZ is the uncertain market leader in Denmark with over half of the market share in the independent market. Net sales grew 2% in the quarter with a slightly lower margin resulting in EBIT of minus 9% compared to 2019. Despite the slow market development and the comprehensive lockdown from early March due to the pandemic, we believe that we gained market shares in Denmark and will have advantage in the future. Forceful action has been taken to mitigate impact from COVID-nineteen going forward. Over to Page 11. FSS recently launched a certification for workshops within electric and hybrid technique, where the first 50 workshops will be certified shortly. The FSET Academy is expanding in size and are now way ahead of the competition in Denmark. The expansion of the Academy means that FSET will be in the forefront and the leading independent player in electric and hybrid training in Denmark. Independent workshops have not previously had access to this kind of extensive training opportunity. Over to next page, Interteam, our Polish company. Interteam is growing in a fast growing market in January and February, year to date February that is they grew by 10%. And in March, we see a negative effect of COVID-nineteen. Net sales ended at same level as 2019 and EBIT margin and EBIT was stable. Also here, we have taken forceful action to be to mitigate the impact from COVID-nineteen and the EBIT margin will be a strong focus going forward as it was during 2019. In Poland, we have over to Page 13. In Poland, we have increased our service level to customer in Southern Poland by successfully implementing a new warehouse management system in the recently opened regional warehouse in Kysyn close to Krakow. And apart from increasing service levels to customer, we will also gain increased efficiency and optimization of cost going forward. And then over to Mekam Economen. Mekam Econormen are by far market leaders as number one and two in both Sweden and Norway. In the quarter, net sales decreased by 3% and this is lower due to lower demand followed by COVID-nineteen and also data rates of course. EBIT was negatively affected by the lower sales and the unfavorable exchange rate mostly the collapsed Norwegian kroner. To mitigate that, we in early May increased our prices in Norway very sharply to compensate for a weak in Norwegian krone complemented by further price adjustments also in Sweden. Our recently implemented country based organization in Mekamikonomen will further contribute to better efficiency in the business area. Also here very forceful action throughout the operation has been taken and will be taken to mitigate the COVID-nineteen pandemic going forward. We have a very strong focus within the business area to receive permanent efficiency by cost reductions going forward. Over to Slide 15. The merging of the central warehouse is proceeding as planned, where a large part of the project will be finalized during next month. Deliveries to both Mirka Sweden and Norway are now made from Strenness instead of Eskistina. So by this time, we have no deliveries from Eskistina, both Mirka and Mekonomen in both Sweden and Norway have a distribution from Strenes. Over to Sorensen and Balshem. Sorensen and Balshem is, as you know, a very well maintained and very efficient business. Net sales did decrease by 6% in the quarter due to low demand due to COVID-nineteen. Forceful actions was taken very early and resulted in a stable EBIT margins and EBIT in line with same period last year. Page 17, during March, Sernes and Obalchin initiated Click and Collect to integrate e commerce with the BILL Extra stores. It was a very successful start where the initiative has increased numbers number of online orders in total and approximately 40% of online orders since April are now click and collect orders. That was some information regarding our business areas. And now over to Per regarding market and footprint. Thank you. We will move on to Slide 19, where we have updated with the numbers for 2019 on this slide. It's slowly changed over time. Most of the changes in Poland, which is the fastest growing market. But as you all are aware, many of these numbers when we talk about GDP and so on, which will, of course, change during this year. So I will move to Slide 20, where this is how we normally show our market shares, 15% in Sweden, 25 in Norway, 28% in Denmark and 4% in Poland. This is the market share when we reflect the whole market, both independent and branded authorized and other workshops. But I would say almost none of the other players are competing with us when it comes to size in any other markets. And Page 21, here we look at the competitors who are most comparable to our business. And as you can see, there is and I would also like to say that when it comes to the branded changes, very few who comes up to the same size as we are. But as you can see, we are very clearly market leaders and with good distance to our competitors in three or the four markets. Now we'll move on to Page 22. As a large play or 23 actually, as a large player, we will continue to drive the industry through innovations. We have a proven core business, which is stable on demand on mobility. Our size and expertise in the industry makes us market leaders. For example, we are the leading aftermarket player within automotive technical training and that's in all our markets. If we move on to Page twenty four, we are also the leading aftermarket player within electric and hybrid car competence. And as Ossam mentioned, we most recently launched electric and hybrid training in Denmark, and the confidence is very well appreciated. And it was I mean, the when we launched the training, it was fully booked for a long time, almost directly. So it's a very high interest in those trainings. I'm now at Page twenty five, where we would like to mention that we now also offer the first upper secondary school education for mechanics through distance learning. This is, of course, something which was invented or even faster invented due to this corona crisis. But this secure continued growth of MekhaniK despite the ongoing pandemic, and it creates possibilities for the future when distance is not an obstacle. So we are well positioned for the future. I'm on Page 26. As per set, strong sales culture and high availability We have Intertin, who is acting on a strong growing market and have the strong growth. Neka Necanonen, with an unbeatable logistic operation and market leaders in Sweden and Norway. And Sonos and Belgium, a very well maintained and efficient company. And we are also I would like to mention that we are in the forefront and very highly digitalized in this changing market landscape as we see now. Focus forward, as you can see on Page 27, is profitability, its growth. And with growth, I mean organic growth, we have a huge potential to gain market shares in all our markets, and we will succeed by creating the best value for the customers. So finally, Mekonorman Group enables mobility. We have done so for decades and we will do it in the future as the technology develops and creates new opportunities. Our strong position and stable business model makes us well positioned for the future. So with that, we'd like to open up for questions. Thank you. And the first question comes from Mikael Lovdahl from Carnegie. Please go ahead. Your line is now open. Yes. Thanks. Hope you can hear me. So I wondered if you could perhaps elaborate a little bit more on Mecca Metinomen and the huge year on year earnings drop that we that you experienced in Q1. I mean, I can see the EBIT bridge on Page seven and so on. But given that the data bridge as such was so late in March and then you also mentioned that the financial impact from that was rather limited. I think some of these items that you mentioned on Page seven is worth commenting. Also the other effects that you mentioned, they are combined from SEK 25,000,000 on a year on year basis. So what are they? And also given that a lot of these effects are related to FX, So apart from you raising prices in Norway, in particular, going into Q2, what I mean, the other items will remain on a year on year basis, I guess. So what how come you are so optimistic on earnings recovery in Q2, which you have in the outlook statement? Well, I can start. Good morning. Yes, you see the bridge and we are optimistic also for Mekam Economen going forward even though the gap towards Q1 last year is very large in Meka Meka Norman. But if we look at the bridge we made, you can see that lower volume that's both due to COVID-nineteen and it's due to the data breach. The data breach will be over going forward. We are up and running since April 15 and the COVID-nineteen effects from sales. We see April, yes, there is a decrease, but in May, it looks really good for Mekam Economen. And nobody knows what COVID-nineteen will mean going forward. But from what we see today, we see a recovery of the volumes in Meka Mekonomen. And then to the FX, we have FX related costs on gross margin. They are 19,000,000 in this bridge. And those that negative effect we mitigated with the price increases we've done in Norway. They are approximately 8%. So they are very sharply increased of sales price in Norway. So we expect the gross margin to also recover going forward. It's an effect we had from the exchange rates from Swedish krona to Norwegian and Norwegian krona to euro was exceptional during March, the March. And that's also we have a very large item on the OpEx from FX and then that's from regulating the balance sheet items, the accounts payable and receivable. And that's also to be considered as long as we do not see extremely drop again, that's to be seen as a one off item because it's just how it looked like in the March. And of course, when the Norwegian crown and also the Swedish crown were very weak, we have a great effect, but that effect is also to be seen as one of item because we won't have it again as long as the exchange rates stay as they are today and they had recovered. So in April and May, we have positive effects also from the reevaluating of balance sheet. So I guess explanation and overview per From a more operational point of view, we also changed the organization in Mekka Mekkahnomen in mid February to a country based organization, which will lead to possible synergies and cost savings. Some of that potential, we got a little bit delayed due to the corona crisis where we needed to focus on other things. But I would also like to say that the cost saving activities, which we have done since the crisis started, is very much of them is in the business area of Meknoemen. And it's also there where we see a large portion of them actually to be permanent and that the cost will not come back. So we'll have that in the future. That also contributes to the positive view, which we have. Yes. And I can add to that also. That's we say in the report that we in April, we have a decline in sales from both data breach, of course, and then COVID-nineteen. But with the forceful action we have taken, we are able to save EBIT and most of that is of course from the economic and business area taking actions to mitigate this drop we saw in March. So we are quite confident that we will deliver better in Nikkemeconomen going forward and March is very, very exceptional and it's very exceptional with the extremely movements in FX for our most essential currencies. Just a question there on April and also March. Is it fair to say that March typically is a rather big and important month for you in Q1? And if so, how would you describe April for Q2? Is that a bit of a smaller quarter? Or is it more evenly spread over Q2? It's a little bit that's usually it's a difficult question because it varies. It's to split the quarters in that way because we have Eastern, we have Spring and we have tire changes and so on. So there is a lot of, let's say, movement, especially between April and May due to, let's say, outer circumstances. So we usually tend to combine the two months to get a better grip on how we're performing. So it's I don't think we can be more clear on that. Okay. Thanks. Just one also to clarify, April. You're saying that you mentioned the data breach and also we what you expect to get from the cyber insurance. And but April, on a year on year basis, you expect to be unchanged before any payments coming from the cyber insurance or how should we interpret that? Well, we expect April to be the same level of sales drops, but forceful action take down costs. And together with the reimbursement we expect due to the terms and conditions in our insurance, we expect EBIT level to be on the same more or less than last year. So it's when it's when we That's including what you get from the insurance? Yes. Yes, it is. Okay. But excluding the actual operational impact or do you expect the insurance to cover the operational impact from the data breach in April? Yes. Okay. So what you're saying then is that April on a year on year basis, we can take the data bridge and then put that aside, then the business in April is expected to be unchanged on a year on year basis despite the drop in sales? Yes. And thanks to the poor selections in cost savings. And of course, in those markets where we can use help from the local governments, that's also something which we, of course, have used. So we compensate with lower costs. Okay. Just And one also on the synergies, the purchasing synergies with EptiZ and InteSiem. What do you where are they in terms of size? And how much is left? Well, during we said we will have all seen this, the 100,000,000 during 2021. And last year, we had about 70% of those in the results. And it's so we are perhaps now at EUR 75,000,000 or 80 or something like that. So we have the synergies, but each quarter we make a forecast for the year volume. And since volume drops, we also need to adjust the supplier bonuses percentage. And that's why you don't see more synergies in the bridge for gross margin because you reach certain spares in the supply bonus there and we needed to take that down a bit due to less sales forecasted for this year. And you can say like this that to reach the 100% of better conditions, that is a target which we still are very confident. If that will lead to EUR 100,000,000, as we said, it will be difficult because of the drop in the volume. But percentage wise, we it's working as planned. Yes. And when the volumes recover to what they were ahead of COVID need some, they will be in the result, of course. Okay. Just one final for me. Sorry for all the questions. But back to your guidance for Q2. And I'm rather amazed by I mean, fact that you if you say that it's unchanged EBIT in the Q in April so far and you say that in May, sales have actually then recovered from April, then one could interpret that as May earnings could even be up year on year. And now you have basically May in your books. So your comment on that. And I mean last year, you had an if you look at EBITDA level, had SEK292 million for the entire Q2 versus SEK 116,000,000 in this quarter. I mean, those SEK $292,000,000, are those are they representative for your Q2 then? If you're speaking about April unchanged and maybe May and June unchanged or even better, that implies more than a doubling of your results on a quarter on quarter basis. You say that earnings or profitability is expected to increase significantly quarter on quarter, but it's a doubling of earnings. Is that on the cards? We don't do guidance in that way. That would be your job to do that. Yes. No, exactly. And I think COVID-nineteen, it's too early to say that it's over. We do not know what will come later in even this quarter. But what we can say is that April is same level as last year. The pace in May has recovered for all markets except for Poland. They are still in lockdown situation and we do not know when they would ease up to Poland. But what we can say, so from the fact we have today is that Q2 will be looking better than Q1. Thank you very much. The next question comes from Andreas Lundberg from SEB. Please go ahead. Your line is now open. Thank you and good morning. Sorry, but I need to get back to your Q2 outlook because as you touched upon now, you expect EBIT including reimbursement to be rather flat in April. Doesn't that suggest a pretty sharp improvement of your EBIT margin? And if so, you also say that the second quarter, do you expect substantially lower sales and EBIT margin compared to comparable quarter last year? Thank you. Yes. You are absolutely right and we need to correct that because EBIT margin should increase when EBIT is on sales level and sales go down. So it's we need to correct that in the report, shouldn't be said like that. But it's the Q2 comment that is incorrect? Got it. Also your comments on no need for liquidity as of now, is that based on your Q2 outlook as well? Yes. We had good liquidity in ending Q1. We still have good liquidity today. So it's an outlook, yes. Okay. But you're going back now to your old covenants, is that fair to say after March 31? We have some financials and good liquidity, but we are in discussions with the banks for Q2 and onwards regarding additional amendments to adapt and update the loan agreement with change we see due to COVID-nineteen. We will make an amendment with the banks. We are in discussion right now. But there is no need for extra liquidity. Our liquidity is good. Okay. Thank you. And last one, on the demand side, have you seen so far any or what you think about going forward when it comes to pent up demand given that there's been a lockdown in some of your markets? Again, I lost No, mean, on the demand side, we've seen a pent up demand now. Have you already seen it? Or do you expect to see it now when well, at least some of your markets have been in lockdowns? Yes. I think it's little bit difficult to know exactly because there is I mean, markets like Denmark and Norway are still in partly lockdown. And so it's not fully open. But when as restrictions are lifted, then we see an increase in demand. Then it's all there was definitely an effect in, I would say, the April and May, where it was postponed services and postponed tire changes and so on, which made a bit higher demand than normal for a couple of weeks. Now that's probably more back to normal. But it's different in all the four markets. Poland is still very slow and it's still a very restricted society. And Sweden has been quite stable all the time, but it's not like 100% in anywhere. So there's still, I would say, possibilities to improve better when restrictions are opened up or lifted. But if you have no restrictions during the summer or easing of restrictions, do you expect that to help your demand? People also have more time and will stay at But there's a lot of speculation. To some, it's difficult to summarize. But for example, if there will be no restrictions in traveling domestic, but still very difficult to take the vacation abroad, then of course, people will use the car during July and August. That will definitely help us. On the other hand, if there will be a continued recession as a result of the pandemic, then we know that a lot of company cars may be standing still because offices are closed and so on. So there is a lot of a big mix of effects. But again, Macron and independent aftermarket usually in this kind of crisis, when it's financial crisis, is very seldom affected. We're not following much when it's up, but nothing not so much down either. So we expect that if it goes back more to normal, then we will have a very stable business going forward. Thank you so much. Next question comes from Matt Fris from Kepler Cheuvreux. Please go ahead. Your line is now open. Yeah. Hi. Can you hear me? Yes. Thank you. Yeah. A couple of follow ups, I guess. First, price increases there in Norway were quite substantial and I guess positively affected earnings going forward. But did you experience any pre buy impact from customers there trying to stop up on the old price level or you said something about that? No, because most of our customers I don't have the numbers, the very large portion of our customers is workshops and they don't stop themselves. They buy from us on the daily demand. So there could be some wholesaling business, but we didn't see any of that effect. Good. Secondly, coming back to this April earnings. I guess the reimbursement from the insurance was partly March related and also April related. I mean, there was not a monthly reimbursement if it covered a longer period. Have you adjusted for that in your sort of indication of the earnings level in April? Yes. When we say that April earnings will be in line with last year, then we have taken in the account of that according to the Tarshan Commission and the insurance, what that will give. So that includes the reimbursement from insurance, yes. And you expect to receive the reimbursement during the second quarter? Or is it sort of the final decision from the insurance companies already taken, please? It's an ongoing discussion with insurance companies. So I would like not to comment on that. But we could say that we it's not 100% certain we will have it in Q2. Could be Q3 as well. Full partly. Because it's part in the insurance, it covers extra cost we had due the data breach and it covers also loss of gross profit. So it's two part in the discussions we have. But it's only a matter of time. I mean, you have the sort of boxing, so to speak. Well, we are in discussions, but we We are very confident in what we are saying in the outlook of April. Yes. And finally, just about gearing and the covenants, I mean, adjusted them all of the bank adjusted them in the first quarter there and they are still there. And I guess, the cost of service, the debt have gone up a bit. Could you give some indication there for the second quarter going forward? No, we do not give any updates there. We are compliant with our covenants in Q1 and we are due to the extraordinary situation, we are discussing with the banks to update our loan agreement according to that. Okay. So given so far, so no, you haven't sort of changed the covenant They are still in place and you're basically all the liquidity is sufficient, so you don't need to make any to have any adjustments made. It could be the case given the QC pretty about after the second quarter also? Our liquidity is good as we speak and we are compliant with the covenants in Q1. But due to the extraordinary situations, we are in discussions with the banks to adjust our present loan agreement when it comes to the covenant. Okay. And just the same area there and you sort of suspend or you didn't make the amortization EUR 5,000,000 amortization at the end of the quarter. Do you expect to do the same in the second quarter? No, I will when we did that, we it was the situation with COVID-nineteen was very new and we had an amortization coming up just in one week's time. Nobody knows then what this would lead to. So that was taken to be certain to have liquidity, but we have very good liquidity. And we as we stated in the report, our financials are sound. So it's our intention to repay our debt as in the loan agreement. So I do not see that we will ask for not to repay the debt. We are following the bank agreement when it comes to The first quarter amortization will be made have been made or will be made in the second quarter? No, that will not be made in the second quarter, but we will make our ordinary repayments in the second quarter. Thank you very much. Next person is Micah Karbinnen from Handelsbanken. Please go ahead. Your line is now open. Yeah. Hi, this Micah. Can you hear me? Yeah. Yeah. So you you said that in the April sales were down 17%. Could you give us more details on how the sort of sales were developing in different your operating countries? So it's more equal on sales growth in Sweden, Norway, Denmark and Central Europe as well? We don't have that detailed in our report. But just to give a very high level, I would say that it's a large portion of that is due to the data breach in Mekka Mekka Norma in Sweden and Norway. Then it's Poland who also are still not recovered or still very restricted where the sales is down better in Denmark, I would say, or closer to a normal situation in Denmark. Okay. So the biggest hit is actually coming from this database and that is visible Okay, great. Thank you. The next question comes from Mikael Verdahl from Carnegie. Please go ahead. Your line is now open. Yes. Hi, guys again. Sorry for bothering you. But just to follow-up on the FX impact for you. I think if I'm not wrong, there is a lag of around three months from what you purchased for and when you sort of sell the products, which means that there's a lag in the impact on gross margins as well from any spikes or declines in FX rates. And if this is true, the spike we had in both or in the euro against both the NOK and the SEK was in March. And after that, it has declined sharply. So the just by looking at the FX rates in Q1, that effect should rather come in Q2 or late Q2. And the price increases that you have implemented now, the question is will those sort of have time to compensate for that? So could you elaborate a bit on the impact from FX, please? Yes. The large impact we have from FX comes from the margins in Norway and that will be compensated with the price increase. And we also because we buy in for me, for we buy goods into our central warehouse in Strenoz. And I do not see we didn't buy that much due with COVID-nineteen because we had bought a lot ahead due to the Chinese New Year, etcetera. So I do not see any large impact from the purchasing prices in Mica, Mekonorman and Warehouse going forward because we have had a euro fee for a long time to €10.6 and during the time it was almost 11%, now we didn't buy that much due to the COVID nineteen. Okay. Thank you. You. There is no further questions coming through. So I will hand the call back to you again. Thank you. Okay. Then thank you all for listening, and thank you for good questions. So that will be all for us. Thank you. Bye. Thank you. Thank you for joining today's conference. To end the call, you may now replace the handset. Thank you.