Earnings Call: Q2 2019

Aug 23, 2019

Good morning and welcome to Mekonomen's Quarter Two Presentation twenty nineteen. 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 this presentation, Call. I will now hand you over to CEO, Per Ostaffon, your host for this call. Thank you. Thank you. Good morning, welcome. Today, with me, I also have Ostrazenbys, CFO. And I will start the presentation with going directly into the first slide. The second quarter of twenty nineteen, we could report a stable organic sales. Of course, in total, we had an increase of 90% when we also include the acquisitions of hefteset and Intertiv. Were ongoing forward, we will continue to focus with profitable growth and cash flow. We have an ongoing cost saving program, which we have announced earlier, but that it's working according to plan and it will give us full effect of annually SEK65 million at the end of Q4. We're also acting on an unprofitable business, streamlining our organization and of course, high prioritization of the projects. And while talking about unprofitable businesses, I also mentioned in the CEO comments in this report that we are quite happy with the development in WECAS, workshop equipment company, and also in some of the loss making workshops which we had. We are still struggling with Finland, but we'll work on that as well in the future. When it comes to the integration of the acquisitions, that's happening in the team that goes according to plan. And then also, which I will come back to later, we had during the summer, we have made a customer survey asking world class customers, which is very interesting, but I will be back on that later on in the presentation. So then I will hand over to Orsal to take us through some financials. Yes. Good morning, everybody. Mekonomen Group second quarter, as Per said, we experienced the sales growth of 90%, of course, driven by the acquisition of SSS and Intertin, but we also had a stable sales in Oatmeka Norman Group with an organic growth of zero, but we also had one working day left in the quarter. EBIT amounted to $240,000,000 compared with $173,000,000 the same quarter last year and adjusted EBIT is up from two seventeen million to $218,000,000 As Per wrote in his CEO comment, it's better to look at first six months to get a more fair view of the sales and EBIT due to the Easter effect. Easter was in Q2 this year and in Q1 last year. So if we look at the development for the first six months, you can see that sales is up with 96% and we had an organic growth even though we had one workday less in the first six months. EBIT up from $233,000,000 to $410,000,000 and adjusted EBIT up from $316,000,000 to $4.94 So looking at the bridge for the Q2, we had an EBIT of $173.20 18 and this year we are up to $2.40. We added the EBIT from our acquired company Esperoza Interchange amounting to EUR102 million in the quarter. Looking at the Old Mekonomen Group and first Mekonomen, we were down with $41,000,000 but we had one working day left and lower demand during Eastern with minus $18,000,000 and minus 12,000,000 together with minus $30,000,000 and the rest is a consequence of the weak Swedish krona giving us higher purchasing prices and also the product customer mix in this quarter. We had a positive effect on central functions with 27 and that is of course that we last year had items affecting comparability of 2019 related to the acquisition of esteceptin in the gene, but we also have lower cost in the central functions compared to last year. And then we added the amortization of Efteset and Intergein acquisition, so from $173,000,000 to $240,000,000 in the quarter. So to the sales and results in the business areas. First, our EptiSet. EptiSet is now included ten months in the group. Net sales amounts to EUR $860,000,000 and it's slightly lower than last year due to Eastern and also to generate slow Danish market as in the rest of Europe, but we retained our market shares in Denmark. We had a very stable EBIT margin of 10% and EBIT amounted to $87,000,000 So to Interteam, in the second quarter, sales net sales amounted to $582,000,000 which was a very strong sales growth driven both by high demand within Poland and also high export to neighboring countries. In Poland, we gained market share. We improved EBIT, but we experienced high competition and price pressure on gross margin also of course impacting EBIT margin. EBIT margin was 3% in the quarter and Inter team is also included ten months in the group. So to make up economics in the second quarter, Sales amounted to $1.447 We had a favorite organic sales trend in line with the market growth of 1% to 2% annually adjusted for Eastern. Total sales is up to 2%, whereof 1% is organic. EBIT amounted to $175,000,000 compared to 186,000,000 last year and adjusted EBIT was $192,000,000 last year and $145,000,000 this year. EBIT is negatively affected by less workdays, the Easter effect and customer product mix and also increased prices due to the weak Swedish crown. We are as fair said acting on our unprofitable business as breakers and our own workshops, but we still see challenging situation in Meconomi in Finland, which we are focusing on right now. To have a more fair view of the net sales and EBIT, you should look at the first six months to even out the Easter effect. And then you can see we had an increase in sales of 5%, 5.2% is organic. EBIT amounted to $2.48 to compare to last year $2.58 adjusted EBIT $2.52 compared to $277 The EBIT, as I said before is affected by customer product mix and the strong the weak Swedish krona against the euro. But this shows also that the cost reduction program is necessary and we see that it's running like planned and we will see cost savings in this area later on this year. The merging of our central warehouse in Stringnav, Sweden is continuing as planned and we see that we will have cost savings of million with full effect on EBIT from 2020. During this year, we have seen positive effects from the new automation regarding the warehouse efficiency and delivery quality, which will gain sales. During this quarter, Q3, we will start to implement Mika in the warehouse in Stringes. We will start with some test pilots, a number of Mecca branches to ensure full delivery capacity without any disturbances in the Mecca ongoing operations. And then to Sorensen and Obalchion, our smallest business area. Sales amounted to $2.00 $7,000,000 compared to $2.00 9,000,000 with two working days left in Norway. Net sales decreased by 1% in the quarter. Furnace and Obasion has the largest part of business, the consumer sales within the group and is more exposed to the retail market than the rest of the group, which is most up to 90% business to business sales. But we are making actions in terms of inflation to increase the shares to business to business and it is proceeding well. And as you can see, we could keep our EBIT and strong EBIT margin even though we experienced a small decrease in sales and EBIT amounted to €38,000,000 compared to 39,000,000 last year and the same numbers in adjusted EBIT. Well, I think I'll leave it there. I'll leave it over to you, Per. Thank you. Yes. And for you who are following the presentation, we are now at Slide 12. I'll talk a little bit about the market and trends. We have put up some numbers of the different main markets where we are working in and also how we are performing in those markets according to market shares and how also we are exposed to the business to consumer versus business to business. The general trends in all markets is that the customer expectations is changing. We're meeting more digitalization. Online booking starts to be more and more asked for. And we also see that the car fleet itself will change in the future. We have next generation of cars, electrical, hybrids and of course, higher share of software in cars also, which make, let's say, the service and maintenance maybe a little bit more complex in the future. Then looking at a little bit longer perspective, we also see the impact of more connected cars, new actors selling cars, car sharing and so on. But also, there will be some future consolidation and integration as well. And as you see, we have high market shares in Denmark, Norway and Sweden and quite small one in Poland where we are at 4%. And Poland is also a very fragmented market compared to the others with a competitors in the same size. Moving on to our footprint. We I just want to we have, general, quite stable number of branches and affiliated workshops. Especially in Sweden, the focus is very much into recruiting workshops for the main concepts, mech and mech and mech Villaverista, where we also want to have workshops, which it's more important with capacity in terms of number of mechanics than actually number of workshops. But we have a stable development. It's every year, workshops leaving, and we also have recruiting. We have some increase a small increase in Norway, Denmark and a little bit higher increase in Poland. When it comes to the number of branches, it's also very much stable, and this is also what we expect in the future that it might be some where we try to merge two branches or we might close down if it's unprofitable and so on. But in general, the footprint will be stable in the future as well. Talking a little bit about group synergies. Since we almost doubled the size of the company, we have been working a lot with the purchasing synergies and that proceed according to plan. Now we also have started some collaboration between group business areas. The first best practice area, which is out is within training and technical support. It's very interesting to see that all four business areas have a good, let's say, are actually market leader when it comes to these areas. So we are very good, but we can still be even better. And Tiger will also, as the next best practice area, start the common development of future private label within the book. I'm on Slide 15. We are launching a new branch concept in Sweden called Beel Extra, and this is to attract new customer groups and broaden the target group in Sweden. And of course, the purpose is to gain market shares from the competitors. This is very efficient establishment strategy where we both can acquire small branches or do franchise corporations, but these branches has already a wide customer base, and that's what's important with it. The brand exists already in the group in Norway, where it's operated by Sandoz in Belgium. But in Sweden, these extra are operated by Mirka Sweden. Talking about attracting mechanics, we have usually most talk about Sweden, but now to widen the perspective a little bit, we also have some very good collaboration with technical upper secondary schools in Poland. We have in all the group and maybe after setting Denmark is the best one on this when it comes to kind of always on advertisement to ongoing advertisement to attract mechanics in traditional and social media and through organizations and authorities. Here, I would say that our strong brands in all the markets is what's really it's a good argument, and that also attracts mechanics, of course. The upper secondary school in Sweden, which we have run for a couple of years, starts in the third year. We still have full classes and full classes in first grade in Stockholm and London. And we have students on all three grade levels. We also started a mechanic training program for adults together with the Swedish public employment service. And that the purpose is in that is that within the thirty weeks, unemployed adults are retrained to become automotive mechanics. Yes. As I said from from the beginning, we made a very large customer survey during the summer. We have over 1,500 workshop who has been answering on this. We have generally high ratings within all the group companies. And of course, the result from this will be used to further develop and improve the customer experience in the group. And the most important areas for the customers is development of services and concept. It's central marketing and providing new clients to the workshops and also, which is very interesting, the contact with local store. This is also three areas where we are very high rated and get very good responses. And I think especially the contact with the local store is extremely important now and even in the future. We also ask about the most important reason for joining a concept of an affiliation. And the three top reasons is the brand and then deliveries and range of spare parts. This leads to some focus areas. We will continue digitalization and the booking process. We will continue to attract car owners to our affiliated workshop and of course, development of the concepts. And we also will continue development of private label and assortments in general. What maybe was the most interesting from this customer service is when we ask affiliated Workshop if they what they think about the future within the next five years. And more than 50% who believes in an increase of their business. And that's very encouraging. And we have always talked about that the affiliate workshop is a strategic, most important customer groups. And this is, again, one good argument for that. But it's very of course, very nice to see that there is a positive view on of the future among our customers. And then finally, focus for the rest of the year is profitability. Synergy is best practice. We have the cost saving program and as I said, act on the unprofitable business. We will continue to develop concepts to create even better customer value. And the growth, of course, is to leverage on the initiated strategic investments, which we have and, of course, focus on organic growth. So that will be the focus for the rest of the year. And that is the last slide. So then I will open up for questions. Thank you. And the first question comes from Helane Helzberg from Nordea. Please go ahead. Your line is now open. Thank you. First, I'd like to ask about the initiative to address unprofitable units here. And you say that situation has stabilized in some of the business. I guess, it was loss making, so stabilizing sounds like it's not really profitable yet. And also the situation has worsened in Finland. Just a little curious on if there's any deadline here when you expect to achieve profitability in these units and yes, that we should look forward to? I wouldn't say one deadline because it's several deadlines. We have made the kind of turnover plans for this, and it's very different. You have a workshop of equipment company and a very small garage in another view. So but I would say that and of course, there's always risk that delivery pop up units in this list. But we have a very strong commitment to act on it as fast as possible. But we don't want to make any stupid decisions either if we see some possible future. You said stabilized, yes, I would say that when we say stabilized in CareCast and some of the workshop, which was unprofitable, then we are in turnaround phase. We haven't so it has improved a lot compared to last year, but maybe still not on the positive side, but with very good trend. The only exceptions, I would say, is Mekorom and Finland, which I also mentioned, where we still haven't seen that, but we are acting on that argument at the moment. Okay, good. Maybe just so it is fully possible that everything is continuing according to your plans here and still they it could still be a loss in each of these units next year, for example? I hope not so, but that's too early to promise. All right. Then maybe just a little bit further update on the cost savings initiatives. I think you said before that you expect the run rate of the cost savings program to be SEK 30,000,000 by for Q3. Is that still valid? Yes. That's the plan and that's still valid. Are there any contributions from these initiatives at all in this quarter? And are there anything else that we could expect from maybe synergies or in the third quarter? In the second quarter, we had a very small impact from the cost savings. And as we said, Q3, Q4 will be the output from the program. And the energy project, is there a time when you would see start to see something there as well? Or is it just you're only committing to the very long term target? But I guess, at some point, you should start to see something a little bit earlier on. Yes, that's possible. But that's we have communicated the long term goal, and that's what we stick to. All right. Yes, maybe you can also comment on the economic mix a little bit further on the weak margin development. Obviously, we can see the calendar effect. But maybe you can elaborate a bit on what the unfavorable customer mix is about And also a little bit how FX is impacting you in this quarter. There has been currency movements, yes, but haven't you been able to compensate with pricing? Or is this a balance sheet effect? Perhaps we'll start with the last one. When it comes to the currency effect, we are struggling with that. So we have higher purchasing prices in Mekonoma, which we couldn't move on to the next trade level. We are all the time monitoring the prices and we do changes. We do increases in some of the product groups, but we also need to have a clear balance to be still be competitive. So there is a margin pressure, thanks to that. If it will be room for increasements, then we will, of course, do it further on as well. And the customer, the product mix is it's quite complicated, but the Easter effect itself, it also about seasonal variations. We have for example, we have increased sales our fleet sales, which is certainly very good. But then with that business is very low margin. So it's quite a complex material, but it has where we have the stable margins, I would say, it's also back to the affiliated workshops. That's an area which is not on the global, but also stable within terms of margins. All right. Thank you. The next question comes from Nicolas Ferm from SEB Equities. Please go ahead. Your line is now open. Thanks, operator, and good morning to everyone. A few questions on the quarter. I would like to start by asking you, you have previously communicated that you would have to charge your P and L with some costs relating to FTC and Interteam integration costs relating to potential synergy effects later on at about SEK 60,000,000 or so. You took $5,000,000 in such costs in Q1, but there were nothing in this quarter. And I was just wondering why and should we just move sort of our remaining cost assumptions this to Q3 and Q4 instead, please? Altogether, had €30,000,000 in cost for receiving synergies and we said 60,000,000 we had none in this quarter, but it could still be some costs for reaching synergies later on, but probably not to up to $60,000,000 but we will probably have some more in the coming quarters since we are continuously working with different projects within the group now to receive synergies in other areas. Second question, could you confirm that the net debt based on IFRS 16 is 5,956,000,000.000, please? That's in the report. I know it's I have to look up the exact figures, but it sounds like $2.05 $1.04 9. Yes. But net debt is $4.00 $4.02 excluding the IFRS 16 FX. Yeah. So 6.2. Yeah. Yep. Yeah. No. No. Absolutely. You said $5,149,000 did you? Yes. Yes. All right. Thank you. And my third question on the second quarter results. I would be very interested to learn about how the negative 40 bps in organic growth is actually breaking down into volume and prices, please. Can you repeat the question? I'm not sure if I understood you Yes. How does the organic growth rate in the quarter break down into volume versus price, please? Again, that's a little bit complicated because we have a trend with that spare parts in general are selling let me take an old example, a spark plug ten years ago costed SEK15, now it costs SEK80, but you don't change it that often again. Is that a price effect that FarFlag is more expensive? Or is it because of a product change? But that's one. And then you also have, of course, some price effect. And I would say that the volumes is quite stable. But when we talk about the market in general, the increase of 1% to 2%, that is included with price effects and all these effects. So when compared to markets, it really doesn't matter. Thanks for that. It's helpful. But is it fair then to say that generally speaking, the flat development in markets and in your organic growth rate is is basically reflecting flat volumes. So any growth is up to price and changes in mix. Is that a fair assumption? Yes, I would say that is fair assumption. But again, that's also when that's the general market. So if you compare to other companies in Europe or authorized, whatever, it's exactly the same trends, I would say. Yes. Let's look into the future, current trading. Was just wondering, last year in Q3, you had a pretty decent organic growth rate. So you have a bit of a difficult comparison year on year perhaps. And I was just wondering, just give us some idea of what will actually drive any organic growth in this quarter? And what are the main risks? Maybe it's an economics and then etcetera. Could you please elaborate? We're not doing a forecast like that. We're not disclosing, but we had a difficult summer last year. I wouldn't say that it was so much better this year, but that's one thing to look at. But again, it's for us, it's mostly to continue to be good in the market and be active on sales and so on. I don't see any general trends changing from Q2 to Q3, which would affect our business. But still, as we said, we are expecting the market to grow 1% to 2% organically as we are expecting ourselves to follow the market at least. Yes. All right. And final question on could you give us an update on your full year CapEx guidance and possibly also tax guidance, please? I don't think we made any guidance for CapEx or tax. We No, no, perhaps you haven't. But if you can share any thoughts on the tax rate for the full year would be most helpful. Yes, I think we will come back to that later on. Okay. And CapEx, please? I think we said before we will have CapEx in the one approximately 150,000,000. And that is still, I mean, now halfway through the year or actually more eight months into the year, that's still a decent estimate. Probably a little bit less, but I can't disclose anything at this moment. No. Alright. Very helpful. Thank you so much for taking all these questions. The next question comes from Matt Liss from Kepler Cheuvreux. Please go ahead. Your line is now open. Yes. Hi. Thank you for taking my question. First, well, looking at the report, the Polish improvement there, do you expect that to be sustainable? Or is it more like a strong second quarter with help from the export business, etcetera, that sort of made it look better? Could you say something there? I think we will need to go back to what we said when we did the acquisitions. Have, of course, long term going to increase the EBIT margin in Poland as well. And this was the good step on that journey, how fast it will take and when it will be next step, that's too early to say. Good. Okay. And secondly, I guess for you mentioned the integration of the warehouses in stainless steel, and you have million synergies there. When will this be sort of complete? Is it early twenty twenty? Or is it gradually during the year? I would leave that open because it's not that I want to hide anything, but it comes can come early in the year over late in the year. And why we keep that open is because we need to be extremely sure that we will not have any disturbances in the deliveries to Mexico. We're starting with pilots now. If that is very successful and when the ramp up is doing good, then it could be early. If we need to make adjustments, could be in IT systems or whatever, we need to do those adjustments and then it will take longer time. So I really don't want to put the date on it. I would rather be sure that we have efficient warehouse working. Yes, that sounds good. And then you have the well, synergies in the acquisitions, the $100,000,000 Could you say something about the, well, progress there? I mean, you are talking about 2021 that will be fully implemented, but have you seen some of them already or don't as I said before, we don't comment on that. It's still 2021 full effect. The project is working according to plan and we haven't met any, let's say, obstacles or something. But that's what we disclosed for the moment. What I meant was the FDA said and the inter team synergies. Yes. There is still very limited effect in the P and L for the first half year. When it will come again, that's when we pulled the back from 2021. Okay, great. And then I also got well, you mentioned the future private label for the whole group. Do that include all the business areas, including, as you said, then Interteam, I guess, also? But when could we expect this to be launched? Yes. The situation is like this, that we have the private label in both in Poland and Denmark. We would like to increase the number of categories. We will probably increase the number of brands or maybe consolidate the number of brands. But the biggest, let's say, good thing out of that is when we do this together, we can consolidate the purchasing for private label, mostly from Asia. We can consolidate transport costs and so on. But we have Proveneister in Sweden, Norway. We have Carwise in Sweden, Norway. We have a brand Kraft, which is used in Poland and some other brands as well. So now we're doing and put all those resources together to make something really good out of this. So that's the plan. You will keep the brands locally and you won't sort of make a single brand? I don't think we'll have single brand because it has different purposes in terms of what terms of what should be premium or price fighting and so on. And we will try to reduce the number of brands, but I wouldn't say that we definitely will change out something. That's more of a market perspective view. Do that include the LKQ brands also? Or is it more like Mekonomen brand owned? In the first phase, we're looking mostly in Mekonomen, but we also have some working groups together with LTQ, where we, of course, try to benefit if they have something which we can use as well. So we're working closely together with them also. Okay. Thanks a lot. Ladies and gentlemen, there is no question in the queue at the moment. So if you would like to ask a question, please press star one on your telephone keypad now. And we do have another question from Niklas Ferm from SEB Equities. Please go ahead. Your line is now open. Thanks again. Just one final question. We've discussed it over the past few quarters and it relates to your strategy in Intertek in the Polish markets. As you remember, we discussed the sort of the strategic choice between growth and margins. And I was just curious to understand if you've come to any new conclusions or you can give any update on that, please? No. We are working on that strategy at the moment as we speak. But you can also see that when you look at the number of branches in Poland, we haven't increased the number of branches this first six months. So what we did was to make a pause in that expansion. And now we are evaluating and trying to form new strategy for the future. If it will be more branches, less branches that we will come back to later. All right. All right. Thanks again. And we do have another question from Matt Liss from Kepler Cheuvreux. Please go ahead. Your line is now open. Yes. Hi. Just a follow-up. I guess you mentioned the third quarter last year was quite tough trading conditions or whatever you indicated. Should we see that as well, things have sort of started out better this year or if you can I'm sorry, can't comment on that. That was my question. So thanks. Okay. There is no questions coming through. So I will hand the call back to you again. Thank you. All right. Then thank you everybody for listening in and thank you for good questions. So that will be all from us. Goodbye. Thank you for joining today's conference. You may now replace your handsets to end this call. Thank you.