Good afternoon, and welcome to Mekonomen Quarter 1 Presentation 2019. 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 have an opportunity to ask questions. If any time you need assistance, please press star zero and you will be connected to an operator. I want to hand you over to CEO, Pehr Oscarson, your host for this call. Thank you.
Thank you. Welcome everybody to this presentation of the first quarter of 2019. We have a record sales and improved EBIT, and that's of course, both due to the acquisition which was made last year, but also a good improvement in the old business, so to say. We have been, the last quarter, and will be in the future as well, focused very much on profitable growth. We have an ongoing cost-saving program, which will give a saving of SEK 65 million annually as from the fourth quarter this year, SEK 30 million of that will come already in the third quarter. Of course, we will act on unprofitable businesses, streamlining our organization, and very high prioritization of our projects. We felt that during the first quarter, the market was stabilized. We did not have that cold winter as last year, of course, but still a stable market.
We also have a positive effect that the Easter holiday did not take place in the first quarter, and will be in the second quarter this year. We also have the two big projects, Central Warehouse, and Fretkatalogen which is going according to plan, and also the integration of the acquired companies, FTZ and Inter-Team are doing well according to plan. With that, I will hand over to Åsa Källenius, CFO, who will start on page three.
Yes. Hello, everybody. On page three, we have some changes in our reporting from Q1. We have new business area structure, we have some new key figures, and also, of course, the IFRS 16 implementation that affects and balance sheet. First, reporting segment. We will, from the first quarter this year, Q1, report in four business areas. The reason is that we in Q1 in Mekonomen Group implemented a new organization and governance structure. To better reflect that, we are now also reporting in those four business areas. Those will be FTZ, Inter-Team, MECA Mekonomen business area, and Sørensen og Balchen. We also have some new key figures in our reporting to be more transparent and better reflect our figures. The first one is organic growth, that will be presented both per business unit and on group level.
With organic growth, we mean growth, net sales adjusted for number of workdays, acquisitions, divestments, and currency effects. I will come back to that a little bit later. We are also adding a key figure, adjusted EBIT and also adjusted EBIT margin. By adjusted EBIT, we mean EBIT adjusted for any items affecting comparability and also amortization for material acquired intangible assets. In this case, FTZ, Inter-Team, MECA, and Sørensen og Balchen to better reflect how Mekonomen really is performing. I will come back to that as well. Looking at IFRS 16, primarily affecting leasing contracts pertaining to premises and vehicles. Net debt is not affected at Mekonomen by this. Our definition of net debt has always been without leasing liabilities. Looking at the P&L first, the effect IFRS 16 has on the P&L. EBITDA is very much affected.
We have a plus effect in EBITDA of about SEK 30 million. Excluding, we have SEK 235 million and including SEK 375 million. Coming down to EBIT and adjusted EBIT, the effect is plus SEK 4 million. Adjusted EBIT is SEK 214 million with IFRS 16 and SEK 210 million without. We have financial items, financial net affected by SEK 11 million negative, making profit of the financial items minus SEK 7 million. Cash flow is not affected at all, just movements between different rows. Net debt is not affected at all. Equity to assets is affected. Excluding, we have 36% and including 31%. Go to the next page four, our first quarter in the group. As Pehr said, we had a very good pace in the quarter, amounting to SEK 2,909 million, so a growth of 103%. 103% of that acquisition and divestments is 98.5%, organic growth 2%, currency 1.5%, or number of workdays 0.8%.
It was the same number of workdays in the group, except for Norway, that had one more due to Easter last year. Adjusted EBIT SEK 214 million, to be compared with last year, SEK 99 million, and EBIT SEK 170 million compared to SEK 60 million last year. I will now go to the next page showing our EBIT development by business area. We had a bad quarter last year. As you remember, we had a write-down for DAB stock, making EBIT in Q1 last year amounting to SEK 60 million. This year we added EBIT from FTZ and Inter-Team amounting to SEK 92 million, MECA Mekonomen improved their EBIT with SEK 30 million, and also Söderberg & Partners with SEK 10 million. We added some amortization from the acquired FTZ and Inter-Team summing up to an EBIT of SEK 170 million this quarter. Next page, a simple explanation regarding adjusted EBIT. We have EBIT of SEK 170 million.
We have in this quarter SEK 5 million in integration costs, adjusting our organization to the new setup after the acquisitions we did last year, and that amounts to SEK 5 million, and we also have amortization of SEK 39 million, summing up to an adjusted EBIT of SEK 214 million. Last year we had SEK 60 million in EBIT. We had SEK 20 million in items affecting comparability, and we had SEK 19 million in amortization, summing up to SEK 99 million. To the sales and results in our business areas. First, FTZ, our Danish operation. FTZ is now included seven months in the group since September last year. Net sales increased with approximately 5%, constituted even by favorable sales growth to affiliate workshops and larger customers.
EBIT is in line with last year, and as you know we have no exact figures from Q1 in FTZ last year since it was before we bought the company and they had different financial quarters than Mekonomen had. A good month for FTZ. EBIT margin of 11% as we expect FTZ to have.
We move to page nine and Inter-Team, that's our Polish business, also included seven months in the group. Very strong sales development. It was up 19%. That's both export sales to neighboring countries, but it's also a good sales development in the Polish market. However, as we had said, Poland is a very high competition market and an extremely price pressure, and they are doing an EBIT of -1%, which is of course not satisfying, but I would say that this is also in line with our expectations for this business, so it's not a surprise in that way. The next page is a bit more about the Polish market. We have a market which annually has a growth around 4%-5%. I would say that this first quarter, even on the domestic Polish market, we are better than the yearly market growth.
If that is thanks to market shares or if the market these couple of months has been stronger, that I'm not in a position to say. We don't have that kind of statistics. The EBIT margin also is an effect, of course, of the investments done to be able to grow more in the future. There is a very interesting long-term potential in this market, because we believe in a consolidation to be happening in the next coming years. There is also a lot of other things which we can do in order to improve the business efficiency. Of course also, we have some of the purchasing synergies which we announced earlier will help the Polish market as well when that starts to be coming into the products and into the stock and out to the market.
Private label is very important in Poland because it's one way to differentiate us from the competitors and being able to get some better margin. We have two private labels, Kraft and Sakura, who Inter-Team has been working with for some years now which is very successful in the world market. We also just recently launched a new private label when it comes to products within workshop equipment. Even though there is a huge market of old cars in Poland, and even though it's very few electric hybrid cars, it's very interesting to see that our company, Inter-Team, are already doing training for mechanics into electric and hybrid. That means that we are very early in the Polish market when it comes to innovation around the upcoming car fleet.
As I have said before, we have a lot of learnings from Norway for having this development which we can use in the other markets.
Business area Mekonomen had a good sales quarter, a favorable sales trend, and that is of course to compare with the weak first quarter 2018. We had a very good sales through our affiliated workshops. As Pehr said in the beginning, our Central Warehouse project is proceeding as planned. EBIT is positively affected by the higher sales. We have an increase in gross margin in improved profitability in smaller operations. That could, for instance, be ProMeister as an example. Net sales is up 9%. Adjusted EBIT is up from SEK 86 to SEK 106 in the quarter, and EBIT is SEK 103 compared to SEK 73 last year with an EBIT margin of 7%.
Sørensen og Balchen actually had some gross sales of DUB products last year, which we of course don't have this year. They are negatively impacted by lower sales in DUB products. Had made also one acquisition which contributes positives, and also thanks to lower DUB sales and another product mix, the gross margin has improved. It is a company which has always had very efficient cost control, leading to a net sales which is pretty much on the same level as last year, an EBIT of SEK 24 million which is much better of course, and an EBIT margin of 13% in this quarter. We'll move on to the market and the footprint. The first slide is page 14, where we try to explain a little bit about the main market and trends.
I will not go through all the figures, but the trends is of course that we have a change in customer expectation that goes to digitalization. It's online booking and other future things, also a trend with another car fleet running on the roads. The next generation of cars, of course, electric cars, and also higher share of software and more electronics and more On-Board Diagnostics and so on, which makes the cars continue to be more and more advanced. When it comes to competitiveness, we see, of course, connected cars as one thing which is important for all the actors in the market to be able to use that data. We believe that there's still room for new actors to move into this area in different levels, but also a continuous consolidation and integration.
Can say that Sweden, Norway and Denmark is quite highly consolidated, but there is still room for more consolidation. As I mentioned about Poland, there's almost everything still yet to happen. I'll move on to the next page, which describes our footprint at the moment, where you can see that 47% of the business comes from MECA, Mekonomen. The second largest is FTZ with 29%, and then we have Inter-Team and so on and so forth. We have no bigger changes in number of stores or number of workshops. Focus when it comes to number of stores or branches is that we should have a good footprint to be able to distribute to the workshops locally at least a couple of times a day. That's the main purpose of that network.
When it comes to affiliate workshops, it's most important to recruit new ones which are bigger, because we sometimes see that a smaller workshop has more difficulties in the challenges for the future. Of course, we have concept for and very good offers for the small ones as well. When it comes to this footprint, it's most important that we have the right number of mechanics to be able to serve our consumers. We have some strategic market positions, and one which I think that we maybe don't talk enough about is the advanced training academies, which we have in all the four main markets. We had it by tradition and history in Sweden and Norway. That's also a very strong part of the DNA for the acquired companies in Poland and in Denmark.
This is something where we are very well developed and are very well prepared for the future. Of course, there is also potential synergies when it comes to best practice and so on. There is already a lot of projects which is going on cross-border between in all the markets. As I said before, Norway will since they also had such a high share of electric and hybrids, they will be a good teaching market for the other markets. We are also proud that in Norway we are launching a training for second degree autonomous course. Autonomous is degreed from one to five, and the level 2 is actually the most advanced level, which we have in regular traffic today where they are ready or doing training for that.
Being still in Norway, we can talk about that Mekonomen has been an exclusive distributor of Sharebox. Sharebox is a new system for leaving and picking up cars through a box where you pick up the key. This is also connected to the mobile payment systems which we have, and it's connected to the ERP systems which workshop uses. This is a very convenient way for the consumer to leave the car, but especially to pick up the car whenever it's suitable during the day or night. We just recently have now sent out a press release about B2B and car fleets. We have had a very positive trend signing agreements with a lot of company and fleet companies. We have Avis, LeastPlan , PostNord, Halmstad kommun , and we also have quite recently made a nationwide agreement with Uber in Sweden.
That is of course very good for our workshop because of the sales and services. We believe that with our very wide and big network, we are actually a very good partner for these companies because we are located in very many places and that gives very high flexibility. As always, the workshop concept offers availability quality with maintain new car warranty, resale value, and as well as all quality guarantee on work and parts. In Denmark, our Danish company, FTZ, they have launched a new workshop concept, which is the first sustainability workshop concept. AutoMester is an already existing concept, but now they are launching AutoMester E+, which two selected workshop within the AutoMester they offer extended focus on environment, system sustainability, recycling. They are also specialized on service repairs on electric hybrid vehicles. Every of these workshop has charging stations and so on.
That's also a concept which is well-positioned for the future. Then lastly, focus for 2019, rest of the year. We continue with the focus on profitability, improved sales efficiency and cost control. We have the cost-saving program, which we announced in February, which we are working on, and that will give effect in the third and fourth quarter. We are still acting on the unprofitable business to either get them profitable or find some other solution for that. We will continue to focus on customer value, and that's where we develop our concepts to affiliated workshops and other B2B customers, but always with a consistent consumer insight, so we know what kind of market they will operate on now and in future. We will also focus on growth and to develop our core and venture businesses.
Mainly organic growth, also to leverage on the initiated strategic investment, which we are doing. That was the last slide for presentation, then we will hand over for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question in this meeting, please press star one on your telephone keypad. You will be introduced with your name when it's your turn to ask your question. Please press star one now. The first question comes from Niklas Palm from SEB Equities. Please go ahead. Your line is now open.
Thanks, operator, good afternoon, everyone. My first question would be on the price adjustments that you made. It would just be very interesting to understand how much of the organic growth is actually being generated through changes of price mix. A follow-up question would actually be, have you also changed pricing in Denmark? Obviously, the Danish krone is more linked to the EUR, but still, have you actually changed pricing in Denmark and FTZ as well, please?
Well, I can start with Denmark. They are doing price adjustments more on a regular basis, and it's mostly to compensate for higher costs for personnel and such things. There hasn't been any extra price increase in Denmark. Exactly as you say, the Danish krone is not affected by the currency problem which we have in Sweden. We don't have the numbers from how much of the organic growth comes from the price adjustment that was done in the beginning of the year. It was done to compensate for higher purchasing prices from the suppliers where we buy in EUR. I don't have that number.
As a fair assumption, would it be correct to say that you tried at least to increase prices by just as much as you lost on the sourcing cost, or have you actually tried to add some more to your own margins?
It's not to increase the margins. Of course, we would like it to be that way, but we have a quite strong competition as well, so we can compensate for purchasing prices, but not increase margins.
My second question would be just on the final page. In the presentation, you highlight obviously a few company-specific factors that will drive earnings going forward. I just note your comments on operating leverage throughout the summer now that you've increased the number of directly owned stores. Would you care to elaborate a little of that? Should we change our operating leverage assumptions as of now going forward, or can we still look at Q2 and Q3 last year? Or have you actually increased your own number of workshops that much that we really need to take a second look at how we're forecasting the summer period this year onwards, please?
No, we have not increased the number of company-owned workshops since I would say that the last acquisitions was in the end of last year. Now it's more, I would say, organically that we sell one and buy one. It will look here pretty much like last year in that perspective.
Okay. That's very clear. Thank you so much. Final question, if I may. We discussed, I think towards the end of last year that, awaiting the strategy for Inter-Team, you would like to come back to us discussing growth versus profitability in Inter-Team specifically. Have you come to a plan now that you would like to communicate on where focus will be? Will it be to grow faster than the market and take market share, or will you prioritize profitability in Inter-Team in 2019, please?
It's too early to answer that question, but it's work which is ongoing. I don't think that we will, as we said already when we made the acquisition, I don't think that we will do a rapid growth plan, which includes opening a lot of new branches in greenfield, which was part of their strategy before. We can increase sales in a lot of other ways. If it will be that strategy focus, I would like to come back when we have finished the work which we need to do.
Yes. All right. Thank you so much for taking all these questions. I may come back later in the call. Thanks.
Thank you. Ladies and gentlemen, just a reminder before I let the next person through. If you would like to ask a question, please press star one. We do have a person from, good name is Stellan Hellström from Nordea. Please go ahead, your line is now open.
Thank you. Yes, I'd like to ask about the gross margin improvement in Mekonomen MECA, what this was due to, and also if you can comment maybe on how we should think about this going forward, given also that we've seen some strengthening on the, or the weakening of the Swedish krona?
I think the main reason for the improvement is product mix, which is better. Of course, we had in that business area, also last year, we had down sales with a lower margin, which we don't have now, so that's one factor. I would say product mix in general. We follow the currency development, of course, every day and every week. As it is right now, it needs us to have some discussions about further price increases, but we haven't taken any decision about that at the moment. This level, 10.65, 10.70, that's a little bit too high just not to act on it.
Maybe a follow-up just on the improved mix. Is that something that is sustainable or is it? I understand the DAB, but besides from that, is it seasonal for Q1 and winter-related product, or is it something that potentially could continue into coming quarters, an improved mix?
I don't want to speculate at that, because just to give you a hint of what it can be except for DAB, for example, when it's a colder winter, we sell more batteries, and batteries have a little bit lower margin than if we sell other products. Yes, if it will be a cold/hot weather, it can change this also. I don't think I would like to speculate how this will develop in the future, but, yes, it's a lot of different components.
All right. Also another question on Mekonomen MECA. The ProMeister business has been very cyclical in the past with certain quarters with exhibitions, et cetera, selling a lot and then quite calm for a long period. Is this quarter in any way unusual in that respect?
No, it's not unusual. I would say compared to last year, they have made a huge improvement when it comes to both sales and EBIT, which has nothing to do with fluctuations depending on exhibitions and so on. It has been, during the last year, it was more or less of a turnaround case, where we have changed a lot of things, both in the assortments, in the distribution, in the sales organization, and so on. It seems to be on the right way at the moment. That's good.
All right. Very good. I saw that you also exclude the lease obligation that's from the net debt. Is this also how the banks view your indebtedness? Should we compare then that to the sort of new way of accounting for EBITDA, or do you make an adjusted EBITDA as well?
Yes. The net debt is calculated towards the bank as we do without the leasing and IFRS 16. It's also excluded in the EBITDA the way we report to the bank.
All right. That means that your indebtedness, the way the banks view it, hasn't changed really.
Hasn't.
Yes. Good. Could you explain where or how far we are from your covenants on the debt?
As you perhaps seen in the report, we are not writing the exact figures, but we are well under the max covenant.
Yes. The max, is that a number that is changing over time, or is it something that you have agreed of a fixed number?
It will change over time, but we are well under.
All right. Good. Thanks.
The next questions come from Mika Karppinen from Handelsbanken. Please go ahead, your line is now open.
Hi, this is Mika from Handelsbanken. A small housekeeping question concerning this adjusted EBIT bridge reporting on slide six. Is this amortization SEK 39 million, is that the sort of normal amortization of intangible assets, which you have been booking also earlier in the previous years, but now you are treating them as a, how to say, non-recurring item and excluding that from the adjusted EBIT. Is this figure going to be the same also in the coming quarters?
Yes. You mean the 39 from the amortization?
Yeah.
Yeah. It will be the same.
Yeah.
An additional SEK 20 million from the acquisition of FDC and Inter-Team, and as we had before, SEK 90 million per quarter from Sørensen og Balchen and MECA. It will stay the same as long as we are having amortizations to do. MECA and Sørensen og Balchen will end in four or five years, I think, but otherwise it is stable.
Okay. Now I get it. Good. Thank you.
Before we let the next person through, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. The next question come from Mats Liss from Kepler Cheuvreux. Please go ahead, your line is now open.
Hi, thank you, congrats on a good set of numbers this quarter. Just a question here regarding the synergies you mentioned when you acquired the two companies last autumn, if you see them as more or less conservative today than you did last autumn, the SEK 100 million I was thinking about.
I can confirm what we said last time, that we are confident that we will deliver that SEK 100 million. We still don't see it in the P&L because it's bonuses which will be recalculated when we are closer to the year-end, and it's also better prices, which should be transferred to the stock or the inventory until we get to full margin. The negotiations with the supplier has been successful. We are confident.
The other part of the potential synergies there with your main shareholder, LKQ, is there anything to say about that?
I would say pretty much the same thing. Within the purchasing agreement with LKQ, it's also done as we expected. For some of the synergies which we get on FTZ and Inter-Team will be helped out, that we have a good supplier relations through LKQ.
Yeah. Good. Finally, just about the seasonality of FTZ. I know we have been talking about that before. I guess the first quarter compared to the remaining quarters of the year, is there any sort of seasonality? Is the first quarter slowest of the year or one of the better?
Since we only have them seven months in our books, and then I don't know how easy it is to compare it. We didn't do that calculation, but I don't see that FDC should have any big difference in seasonality compared to Sweden and Norway. We haven't done the math. No.
They should be affected by the same as old Mekonomen Group, and that is number of workdays, the weather, holidays, et cetera.
Okay. Well, finally, just about the first and second quarter, I guess normally the second quarter is a pretty good quarter ahead of the earnings seasons, et cetera. Again, we have the Easter impact now, and I guess in Norway they celebrate a lot of Easter.
Yeah.
Well, how should we see that well, could you say something about the two quarters there in the first half?
Yeah. I think it's important to, as we said, that we have a positive effect of the Easter in the first quarter. Of course, that will have a negative effect in the second quarter. Åsa, up to you.
Yes. The number of workdays is the same in Sweden, one more in Norway. There is, as you said, much effect of Easter, especially in Norway, when they take day off the week before Easter. We've done some calculation and compared the week before Easter this year with 2018, and we can see that it's an effect of approximately half of the organic growth, you can say, comes from some kind of Easter effect. It's very hard to say because it's dependent on so many things, the weather et cetera. There is an effect, and as you could see, it's one half of the organic growth, and that would equal SEK 15 million-SEK 20 million in sales in old MEKO Group.
Okay, great. Thanks a lot.
Ladies and gentlemen, if you would like to ask a question in this meeting, please press star one on your telephone now. There is nobody at the queue at the moment, so if you would like to ask a question, you'll be introduced straight away. We do have another one from Niklas Palm from SEB Equities. To go ahead, your line is open.
Thanks again. Just a follow-up question just to make sure on the net debt calculation. I'm referring to the table on page 20 in the interim report. Is it correct that the actual net debt, including IFRS 16, would be the same as not deducting what you deduct in that table? Is that the IFRS net debt?
I'm not sure. This is the way our net debt is calculated, so I'm not sure I understand what you mean.
Okay. Let me make it very simple. The way I understand it is that the SEK 4.185 billion in net debt as reported is not including the IFRS 16 adjustments. Is that correct?
That's correct.
Okay. If you would include the IFRS 16 adjustments, what would the net debt be then?
If you look at the balance sheet on page 12, you can see that we have added SEK 1 billion 4.9 in long lease liabilities, and we added SEK 511 in short lease liabilities. The additional liabilities from leasing is approximately SEK 2 billion.
Perfect. Thank you so much.
Yeah.
That's all.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We do one more reminder, ladies and gentlemen. If you would like to ask a question, please press star one now. There is no questions coming through, I will hand the call back to you again. Thank you.
Thank you. We will end up here. We have an AGM in a couple of hours to attend to as well. Thank you very much for listening. Bye.
Thank you.
Thank you for joining today's conference. You may now replace your handsets to end this call. Thank you.