Earnings Call: Q1 2019

May 2, 2019

Good afternoon and welcome to Mekonomen Quarter One 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 the presentation, you have an opportunity to ask questions. I will now hand you over to CEO, Per Ostgafon, your host for this call. Thank you. Thank you. Welcome, everybody, to this presentation of the first quarter of twenty nineteen. We have a record sales and improved EBIT and that's of course both due to the acquisitions, which was made last year, but also a good improvement in the coal 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 65,000,000 annually as from the fourth quarter this year, 30,000,000 of that will come already in the third quarter. And of course, we will act on profitable 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. But 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. And then we also have the two big projects, Central Warehouse and Fed Catalog, which is going according to plan and also the integration of the acquired companies, FTZ and Interteam are doing well according to plan. And with that, I will hand over to Orszka Skilenius, 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 structure. We have some new key figures and also of course the IFRS 16 implementation that affects balance sheet. First reporting segment, we will from the first quarter this year Q1 report in four business areas. And the reason is that we in Q1 in Neconorman Group implemented a new organization and governance structure. So to better reflect that, we are now also reporting in those four business areas. And those will be in the team, business area and and function. 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 our business unit and on group level. And with organic growth, we mean growth net sales adjusted for number of workdays, acquisition, divestments and currency effects. I will come back with that to that a little bit later. We are also adding a key figure adjusted EBIT and also adjusted EBIT margin. And by adjusted EBIT, we mean EBIT adjusted for any items affecting comparability and also amortization for material acquired intangible assets. In this case, SSF, Intuit, Mika and Sorensen and Oggbalsham to better reflect how Mecronorman 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 Mecca Norman by this. Our definition of net debt has always been without leasing liabilities. Looking at the P and L first, the effects the IFRS 16 has on the P and L. EBITDA is very much effective. We have a plus effect in EBITDA Excluding, we have EUR $245,000,000 and including EUR $375,000,000. Coming down to EBIT and adjusted EBIT, the effect is plus 4,000,000. So adjusted EBIT is $214,000,000 with IFRS 16 and $210,000,000 without. Then we have financial items, financial net affected by 11,000,000 negative making profit of the financial items minus seven. Cash flow is not affected at all, just movements between different flows. Net debt is not affected at all. Equity to assets is affected. Excluding we have 36% and including 31%. So to the next page, Page four, our first quarter in the group. As Per said, we had a very good faith in the quarter amounting to EUR 909,000,002,000 for exchange 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 of $214,000,000 to be compared with last year at 99,000,000 and EBIT 170,000,000 compared to 60,000,000 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 write down of debt stock making EBIT in Q1 last year amounting to EUR 60,000,000. This year, we added EBIT from F2C and Interchange amounting to EUR 92,000,000. Meka Meka Norman improved their EBIT with EUR 30,000,000 and also Sorensen and Ovulsion with EUR 10,000,000. And we added some amortization from the acquired Esticept and Inter team summing up to an EBIT of $170,000,000 this quarter. Next page, a simple explanation regarding adjusted EBIT. We have EBIT of EUR170 million. We have in this quarter EUR5 million in integration costs adjusting our organization to the new setup after the acquisitions we did last year and that amounts to EUR 5,000,000 and we also have amortization of EUR 39,000,000, summing up to an adjusted EBIT of EUR $2.14. Last year, we had EUR 60,000,000 in EBIT, we had EUR 20,000,000 in items affecting comparability and we had EUR 19,000,000 in amortization summing up to EUR 99,000,000. So to the sales and results in our business areas. First, FTSEF, our Spanish operation. FTSEF is now included seven months in the group since September. Net sales increased with approximately 5%, cost of trade driven by favorable sales growth as it growth to affiliate workshops and larger customer. EBIT is in line with last year. And as you know, we have no exact figures from quarter one in STZ last year since it is before we bought the company and they had different financial quarters than ExxonMobil has. But a good month for STZ, EBIT margin of 11% as we expect STZ to have. Yes. And then we move to Page number nine and Intertiem, that's our Polish business, also included six months seven months in this 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 develop 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 minus 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. On the next page, a bit more about the Polish market. We have a market which annually has a growth of around 4% to 5%. So I would say that this first quarter, we are 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 is this couple of months has been stronger, that I'm not in a position to say we don't have that kind of statistics. But we the EBIT margin also is an effect of, of course, of 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's also a lot of other things which we can do in order to improve the business efficiency. And 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 of the market. Private label is very important in Poland and that's it's one way to differentiate us from the competitors and be able to get some better margin. We have two private labels, Kraft and Sakura, who has who Interteam 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. And even though there is a huge market of old cars in Poland and even though it's very few electrical hybrids car, it's very interesting to see that our company and the team are already doing training for mechanics into electric and hybrid. So that means that we are very early in the Polish market when it comes to innovation around this the upcoming car fleet. And as I have said before, we have a lot of learnings from Norway, which is far ahead in this development, which we can use in the other markets. Business area, Mika Mekonomen had a good sales quarter, a favorable sales trend and that is of course to compare with the weak first quarter twenty eighteen. We had a very good sales to our affiliated workshops. As Per 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 and improved profitability in smaller operations that could, for instance, be pick up as an example. Net sales is up 9%. Adjusted EBIT is up from 86 to 106 in the quarter and EBIT is 103 and compared to 73 last year with an EBIT margin of seven. Yes. And then we move on to Samsung or Belgium. They actually had some gross sales of dub products last year, which we, of course, don't have this year. So they are negatively impacted by lower sales in dub products, but have made also one acquisition, which contributes positives and also thanks to lower DAB sales and another product mix, the gross margin has improved. And this is a company which has always had very efficient cost control, leading to a net sales, which is on pretty much on the same level as last year, an EBIT of SEK 24,000,000, which is much better, of course, and EBIT margin of 13% in this quarter. Then 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 market 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 things and then 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 onboard diagnose 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 to 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 continuously consolidation and integration. You can say that Sweden, Norway and Denmark is quite high consolidated, but there is still room for more consolidation. And then as I mentioned about Poland, there's almost everything still yet to be happen. I move on to the next page, which describes our footprint at the moment, where you can see that 47% of the business comes from Meka Meka Norman. The second largest is FTSE with 29% and then we have Interteam and so on as a Baluchen. 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 have the to recruit new ones which are bigger because we sometimes see that the smaller workshop has more difficulties in the challenges for the future. But of course, we have concept for and very good offers for small ones as well. But 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, but that's also a very strong part of the DNA for the acquired companies in Poland and in Denmark. So this is something where we are very well developed and are very good prepared for the future. And 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 all this in all the markets. And as I said before, Norway will since they also have such a high share of electrical and hybrids, they will be a good teaching market for other markets. And we're also proud that in Norway, we are launching training for second degree autonomous cars. Autonomous is degreed from one to five and the level two is actually the most advanced level which we have in regular traffic today, where they are doing training for that. And being still in Norway, we can talk about that Mecanover has been an exclusive distributor of Sharebox. Sharebox is a new system for leaving and picking up cars through a box with where you pick up the key, but this is also connected to the mobile payment systems which we have and it's connected to the ERP systems, which Workshop uses. So 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 already sent out a press release about B2B and car fleets. We have had very positive trends, signing agreements with a lot of company and companies. We have AES Lease, Danfoss Nord, Hallumstackommun. And we also have quite recently made a nationwide agreement with Uber in Sweden. And that is, of course, very good for our workshop because of the sales and services. But we believe that we with our very, 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. And as always, the workshop concept offers availability quality with maintained new car warranty, resale value and as well as all quality guarantee on work and parts. In Denmark, our Danish company, FSET, 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 plus which two selected workshop within the Automester. They offer extended focus on environment sustainability, recycling. We they are also specialized on service repairs on electric hybrid vehicles. And all every of these workshop has charging stations and so on. So that's also a concept which is well positioned in the for the future. And then lastly, focus for 2019, rest of the year. We will 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. And we are still acting on the unprofitable business to either to get them profitable or find some other solution for that. We will continue to focus on customer value, and that's how 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 markets they will operate on now and in future. And we will also focus on growth and to develop our core and venture businesses, mainly organic growth, but also to leverage on the initiated strategic investment, which we are doing. That was the last slide of the presentation, and then we will hand over for questions. Thank you. And the first question comes from Nikhaus Pham from SEB Equities. Please go ahead. Your line is now open. Thanks, operator, and 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 from changes of price mix. And a follow-up question would actually be, have you also changed pricing in Denmark? Obviously, the Danish kroner is more linked to the euro, but still have you actually changed pricing in Denmark and FTC 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. But there hasn't been any extra price increase in Denmark. And exactly as you say, the Danish kroner 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. And we it was done to compensate for higher purchasing prices from the suppliers where we buy in Europe. So I don't have that number. But 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 costs? 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 persistent prices, but not increased margins. And then my second question would be just on the final page. You in the presentation, you highlight, obviously, a few company specific factors that will drive earnings going forward. And I just note the sort of your comments on operating leverage throughout the summer now that you've increased the number of directly owned stores. Would you kind of elaborate a little bit of that? We so we changed sort of our operating leverage assumptions sort of as of now going forward or to 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 and onwards, please? No. We have not increased the number of company owned workshops since I would say that the last acquisition was in the end of last year. Now it's more, I would say, organically that we sell one and buy one. So it's nothing you should be taking it will look a bit much like last year in that perspective. Okay. That's very clear. Thank you so much. And final question, if I may. We discussed, you know, I think towards the end of last year that, you know, awaiting the strategy for Interteam, you would like to come back to us discussing sort of growth versus profitability in the team specifically. Have you sort of come to a sort of plan now that you would like to communicate on where focus would be? Will it be to sort of grow faster than the market and take market share? Or will you prioritize profitability and into team in 2019, please? It's too early to answer that question, but it's work which is ongoing. But I can 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? But that is nothing but we can increase sales in a lot of other ways. But if it will be that strategic focus, 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. We do have a person from whose name is Stellan Helstrom from Nordea. Please go ahead. Your line is now open. Thank you. Yes, I'd like to ask about the gross margin improvement in Mekkonomen and Mecca. 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 of the the weakening of the stake. Switch comment. I think the main reason for the improvement is product mix, which is better. And of course, we had in that business area also last year, we had the down sales with a lower margin, which we don't have now. So that's one factor, but it's I would say product mix in generally. We follow the currency development, of course, every day and every week. And as it is right now, it gives needs us to have some discussions about further price increases, but we haven't taken any decision about that at the moment. But this level, 10,650,000,000.00, 10,700,000,000.0, that's a little bit too high yet 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 mean, I understand that, but besides from that, is there is it seasonal for Q1 and winter related product? Or is it something that potentially could continue into coming quarters and improve mix? I don't want to speculate at that. But because just to give you hint of what it can be except for the 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. And so yes, if it will be cold, hot weather, it can change this also. So I would be 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 a question on another question on economic. The pre gas business has been very sort of cyclical in the past with certain quarters with the exhibitions, etcetera, have 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. But 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. But 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. And it seems to be on the right way at the moment. So that's good. All right. Very good. I saw that you also exclude the lease obligation that's from the net debt. And is this also how the banks view your indebtedness? And 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. Net debt is calculated towards the bank as we do without the leasing and IFRS 16, but it's also excluded in the EBITDA the way we reported the bank. All right. So that means that your indebtedness the way bank the bank use is hasn't changed really Hasn't. Yeah. Good. Is there would you at any could you explain where or how far we are from your covenants on the debt? We as you perhaps seen in the report, we are not writing the exact figures, but we are well under the MAX Yes. And the MAX, is that a number that is changing over time? Or is it something that you have agreed over the fixed number? It will change over time, but we are well under. All right. Good, thanks. And the next question comes from Micah Karpenen from Handelsbanken. Please go ahead. Your line is now open. Hi, this is Mikka from Handelsbanken. A small housekeeping question concerning this adjusted EBIT bridge reporting on Slide six. So is this amortization of 39,000,000 Swiss crown, is that the sort of normal amortization of intangible assets, which you have been booking also earlier in previous years, but now you are treating them as, how to say, non recurring item and excluding that from the adjusted EBIT. So is this figure going to be the same also in the coming quarters? Yes. You mean the 39,000,000 from the amortization? Yes. Yes. It will be the same. An additional 20,000,000 from the acquisition of SSF and Interteam and as we had before, 90,000,000 per quarter from Cerence and Opelsen and Mecca. So it will stay the same as long as we are having amortizations to do. We can will end in four or five years, think, but otherwise it's central. Okay. No, I get it. Good. Thank you. And 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 comes from Matt Pfleist from Kepler Cheuvreux. Please go ahead. Your line is now open. Yes. Hi, thank you and congrats on a good set of numbers this quarter. And just a question here regarding the synergies you mentioned when you acquired the two companies last autumn. And well, if you see them as more or less conservative today than you did last autumn, the 100,000,000, I was thinking about. I can confirm what we said last time that we are confident that we will deliver that €100,000,000 We still don't see it in the P and 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. But the negotiations with the supplier has been successful. So we are confident. And the other part of the potential synergies there with your main shareholder, Edu K2, is there anything to say about that? I would say pretty much the We within the purchasing agreement with LKQ, we it's also done as we expected and for some of the synergies, which we get on FT7 into two will be helped out that we have a good supplier relations through LTQ. Yes, good. And finally, just about the seasonality of the Feet. You said, I know we have been talking about that before, but I guess the first quarter compared to the well, 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 don't have we we want to have them seven months in our books. So and then I don't know how easy it's to compare. So we have actually we didn't do that calculation. But I don't see that after that should have any big difference in seasonality compared to Sweden and Norway. But we haven't done the math. They should be affected by the same as all the macroeconomic groups and that is number of workdays, the weather, holidays, etcetera. Okay. And 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, etcetera. And then again, we have the Easter impact now. And I guess in Norway, they celebrate a lot of Easter. So well, how should we see that is the well, should you say something about the two quarters there in the first half? Yes. I think it's important to as we said that we have a positive effect of the Easter in the first quarter. And of course, that will have a negative effect in second quarter. And back to you. Yes. Number of workdays is the same in Sweden, one more in Norway. But there is, as you said, much effect of eastern, especially Norway when they take day off the week before eastern. And we done some calculation and compared the week before Easter this year with 2018 and we can see that this is an effect of approximately half of the organic growth you can say comes from some kind of Easter effect. But it's very hard to say because it's dependent on so many things that weather, etcetera, etcetera. But there is an effect and as we see, you could see one half of the organic growth and that would be equal 15,000,000 to 20,000,000 in sales in Old Mekonong Group. Okay, great. Thanks a lot. There is nobody at the queue at the moment. So if you would like to ask a question, you'll be introduced straight away. And we do have another one from Nicolas Spam from SEB Equities. Please go ahead. Your line is now 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. Would it be fair is correct that the sort of actual net debt including IFRS 16 would be the same as not deducting what you deduct in that table? Is that is 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, very simple. I the way I understand it is that the 4,185,000,000.000 in net debt that's reported is not including the IFRS 16 adjustments. Is that correct? That's correct. Okay. And if you would include the IFRS 16 adjustments, what would the net debt debt be then? Yeah. You can check if you look at the balance sheet on page 12, you can see that we have added billion for full full line in long long lease liabilities, and we added $5.11 in short lease liabilities. So the additional liabilities from leasing is approximately 2,000,000,000. Perfect. Thank you so much. That's all. There is no questions coming through. So I will hand the call back to you again. Thank you. Thank you. Then we will end up here. We have an AGM in a couple of hours to attend to as well. So thank you very much for listening. Bye bye. Thank you. Thank you for joining today's conference. You may now replace your handsets to end this call. Thank you.