Earnings Call: Q2 2018

Jul 27, 2018

Hello, and welcome to the Half Year Report. My name is Josh, and I will be your coordinator for today's event. For the duration of the call, you will be on listen only. However, at the end of the call, you will have the opportunity to ask questions by pressing I'm now handing you over to your host, Per Ostkarsson, to begin today's conference. Thank you. Thank you, and very welcome. It's nice that you can spend an hour of this lovely summer day to listen to our report. With me today, I have also Silenius, our CFO. And we have published a presentation, which we will try to follow. And I will start with some summary about the quarter and other activities. We had a favorable sales growth, and we have also improved our earnings. We had a seasonal effect when we compared the quarters between Q1 and Q2. So I think that early Easter and late spring was somewhat mixing up the quarters. But the second quarter is very good, and we are very satisfied with that. And when we look at the half year, we also think we have a very decent development. What sticks out when we look deeper into the number is the sales growth to the affiliated workshops, which is a very strategically important group. We'll go back to a little bit more on that later. We still have some effects of the DAB products, the detailed radio products in Norway. The second quarter, it was SEK 50,000,000, which affected negatively this quarter compared to last year. And then, of course, as we announced earlier this month, we are taking the company towards a doubling of the sales through the acquisitions of Eftheset and Interteam. We will also be back a little bit on that later. But then I will hand over to Ossa to take us through some numbers. Yes. Good morning, everybody. We see a very favorable sales growth in the second quarter as Per said. It rose by 7% up to EUR $1.673 Adjusted for currency and comparable number of workdays, the sales grew by 3%. We see EBIT on the same level as the second quarter last year, but we are affected by items affecting comparability with 25. I will explain that on the coming pages. So on the next page, you see the EBIT development for this quarter compared to the same quarter last year. And as you can see, we have actually a positive impact from work number of workdays and currency. This quarter, we have a positive growth by 7% coming from our core business. And we have also the items affecting comparability I talked about, and that relates to the ongoing acquisition in Poland and Denmark. Costs taken for the acquisition amounts to $90,000,000 and we also had a negative effect of the sale of Marine Shoppem of $6,000,000 altogether 25,000,000 And the decrease in dub sales affect us this quarter by $11,000,000 approximately. So altogether, we can say that the €7,000,000 in other is approximately 4% growth in EBIT if you exclude the items affecting comparability and the more or less one offs with currency number of workdays. So altogether, we see increased EBIT in our core businesses for the second quarter. We are very happy to say that. If we look at the next page, the situation is the same as I just explained for Q2. We have a little effect a negative effect from the number of workdays and currency, but not that high. We have a positive from the core business of 5% and the DAB effect us with $20,000,000 on EBIT if you look at the first and second quarter combined. And we have the items affecting comparability, as I just mentioned, plus the impairment on the inventory for the dub products we had in Q1. So altogether, I can say that we have a growth on EBIT of approximately 2% in the core business. I can also add that we now entering into the third quarter of this year, we see a limited effect on the decreased DUB sales. So now we will reach the levels we had last year in the third quarter. So the effect of DUB sales going forward will be limited. Over to Claire. Thank you. And we'll go into the different segments, and I will start with on Slide number seven. Increased sale to Mirka car service and other large customers is the main driver in the sales. We also have a strong Norwegian crown, which has affected the sales positively. And we also did some acquisition in Norway where we acquired some workshop, which has contributed positively. We have here also somewhat negatively affected by lower sales of DAB products. But all in all, stable operation and a good development in the quarter. Moving on to Neconormen. We have positive sales development and a very good cost control in Sweden. And here, I'm very happy to say that we have the old issue with Mekonoma Sweden starting in 2016, looks quite okay now. I'm very convinced that we have the right management in place and we have the right leaders and especially the right employees doing very committed and dedicated work all the days. So this is operation which has really improved in many ways. We have some nonrecurring costs in Norway, which affect us negatively. But I would say for Mekonomen as a segment, it's also very stable and looks very good in this quarter. Moving on to Sorensen and Belgium. That is the segment which has had the most of the effect of the low dub sales. So you can see that it's this sales went down 9% in and Belgium. However, if we exclude the effect of dub, there is a very good sales growth in Belgium as well. And they also are in the core business taking market shares on the Norwegian market. So I would say that there is still a very positive situation in Sorensen Saenz and Belgium. It's also a company which always has a very efficient cost control, so we don't never have any surprises in that area. Then we'll move on to what we will try to close here in the next couple of in the period in front of us at the expansion to the new markets, we announced it earlier this July. I would like to use a couple of minutes to again explain with Ian about the two companies which we are about to acquire. It's Efteset in Denmark, who is by far strongest market leader in Denmark. It's a very well run company who is performing very good in logistics and sales and their offers. They have some of 50 branches throughout Denmark, a little bit more than 1,000 employees. And the sales until May twelve months basis until May 2000 was a little bit more than 3,000,000,000. And also very strong earnings with an EBITDA margin of 11.1. This is a crown jewel in the Nordic market, which we are very happy to be able to acquire. And the second company, also from the same group, Hella and Nordipurm, is Interteam, and that is a company in the Polish market. Poland is interesting because that is one of the markets in Europe where we have a much higher market growth. So that's one reason why this is very interesting. Has a sales just under 2,000,000,000. As you see, much lower EBITDA margin, but that is a result from a very tough competition situation and also that they are growing very fast with greenfield startups, which consumes some margins. 80 branches, actually, 79 in Poland and one in Czech Republic. Also have an interesting export business selling to countries around Poland like Germany, Czech Republic, Ukraine and so on. They also have a very good, let's say, private label position, which is interesting for us as well. What will happen with the acquisition is that we now, we have filed an application to the Polish antitrust and we will expect that to take around a month. So we will have hopefully have an approval here in the August, September. And approximately two weeks after that, we can close the acquisition. And then we later on will have an AGM and where we hopefully will decide about the right issue, which will occur later in the autumn. Then I will go to market and growth. And on Slide number 14, you have the market trends. This some of you have seen this before. It's not any big changes in the car park as of the first quarter this year. So it's more or less the same situation. We still believe that there will be in coming years a bigger market when the high sales the last couple of years will also affect our sweet spot in the market, which is when the cars has been four, five years and older. Then I'm on Slide 15 and where we can see how the sales growth has been divided into our customer groups. And as I mentioned already in the beginning, I'm very satisfied to see that we have a good growth in affiliated workshop. And that is strategically very important because it is in those in this customer group where we have a close relation to the end consumer. We have control of the quality and we have the control of the, let's say, the offer to the consumers. So if we do this right, then we also are very good positioned for the future. The other customer groups, is quite stable. We have somewhat down in consumer and other B2B customers. I would say that most of this, is also comes from, the DAB sales. DAB sales is not affecting affiliated workshops, only the other, customer groups. Moving on to how the number of stores and affiliated workshops. The stores is pretty much stable, three thirty three. It's somewhat going down, but it's mostly that when we have merged some stores, nothing dramatic about that. We have compared to Q2 last year, we have an increase in number of workshops. However, this is also if you look at compared to Q1, we see a decline. And a very simple answer to that is that we are all the time looking into the workshop's ability to live up the expectations in the concepts. By that, mean quality, having the right equipment, doing the right education, have the right consumer offer and so on. And not everybody is fulfilling those requirements. That's why we need to reduce. However, since you saw that the sales is so much bigger, those who are leaving us in one or another way is usually the very small ones, and it's not affecting the sales in any matter. Some update on the warehouse project. We are now have taken over the formally ownership for the automation system. And we are testing with the equipment and we're also testing all the associated processes. And of course, the different software solutions which is used in this. During the autumn and winter, we will gradually move more articles into this new solution. We will ramp it up slowly and controlled. But it's working according to them. We also announced a supplier agreement earlier this summer where we will act like we'll be the new supplier of car accessories to ST1 and their Shell stores in Sweden. This is in terms of turnover, not a very big deal, but we still want to mention it because it's a strategic new business area, which we would like to increase our business within. So this is the first breakthrough in that area. This cooperation will begin in the autumn of this year. Some other interesting agreements, which we have done on Slide 19. Both MEKA and MEKATANOM together will become Trig Hansa's in the same segment of engine damages. This is collaboration which really was started in September 2018 and, of course, bringing new customer groups for Meerkan Mekamomni workshops. It's also I would say it's a pro of our quality to get such an agreement. We also like to mention that we have a fleet agreement with Lisplan, where both MEKA and MEKA Norman is some of the partners which Lisplan has. And that's also is, of course, also driving a lot of revenue to our workshops. In Norway, there has been a change in how the training system will work for the PKK inspectors. PKK is periodically control of cars, car inspection, we would say, other markets. It's in Norway, it's done by the workshops, but the workers need to have educated persons and that demand has increased. So now it's more than 10,000 inspectors who will need to undergo training during the next couple of years. Promizer Solution is one of four approved training suppliers for this. And we have already premises equipment and teachers who are already in place, and we will start up this already in the autumn. Finally, about our focus for this year. We have our strategic projects, spare parts catalog and the central warehouse. We are continuously working with workshop quality. And importance is the quality and of course, the number of mechanics. And we need to focus a lot on recruitment and education because we do have lack of mechanics. So that's somewhat holding us back a little bit. And then, of course, look forward into growth and innovation. In that, increase the organic growth in our core business. That should be done all the time by improved customer offerings. We should retain and develop entrepreneurship in the group. And of course, focus on new business and our acquisition ambition. And I think that the after settling into team acquisition proves that last part in very good way. That's pretty much it. So I think we will hand over to some questions. Okay. Our first question comes from the line of Sasha Seiler from K and R. Please go ahead. Your line is now unmuted. Hello, gentlemen. Thanks for the call. I'm a bit curious into your in your M and A. I think Denmark is very easy to understand as an investor why you pursue that opportunity. Poland for me at least a bit harder to understand. Maybe you can go a bit into how you bring the margins up of that business and why you think Poland is an interesting market for you despite the strong competition in the market, Intertheme being only number four and apparently the margins are far below your core geographies? Thank you. Yes. As I mentioned, Poland is into as a market because it's a growing market, which we don't have in our existing markets. That's one reason. We believe that the Polish market will be even better in the future since the we have let's say that the middle class has gets it better and better and we see that the cars in Poland starts to be more expensive, which means that they are the willingness to pay a little bit more for service and reparation will increase if your car is more expensive and have higher value. We also believe that there will be a consolidation. As we have seen in all markets, it's too many actors in Poland at the moment and it would be fewer and that will also make possible to increase the margins. We also, of course, believe in ourselves to take out some improvements in purchasing in our synergy projects, which should be also improving the margins. So I would say that find this opportunity to be the right time to enter Poland because as I think it can't be worse, it can only be better in all these So we are looking for however, of course, there is a lower EBIT margin. And to reach the 10%, which we have for the rest of the group will be challenging. But we definitely think that we can hire it from the level which is now. Okay. Thank you. Our next question comes from the line of Mikael from Carnegie. Please go ahead. Your line is now unmuted. Yes, thanks. I was first wondering about the gross margin and the improvement that we saw in this quarter. Could you is it possible to quantify how much that comes from price increases? And also how much is from purchasing agreements that you may have renegotiated together with LKQ, for instance? I would say that it's a combination of a lot of things, and we don't disclose exactly how it's built up. But as we mentioned, yes, we have some price increases, which is mostly just to cover the more expensive euro, which we have had during the year. But then it's also mix product mix, consumer mix. The lower dub sales is up the margin because the dub sales was with lower margins. And I also think that we have had some positive effects from supplier agreements. So it's a mix of everything. And is it possible just to say anything? Mean, in Q1, obviously, you had a lot of headwind from weather and calendar and so on. And you specified that quite explicitly in the report. Now you're only saying that you have tailwind coming from these things. Is it possible to sort of shave off any extraordinary sales and earnings effect in Q2 isolated? I think that you the closest to correct answer is when you look at the EBIT bridge, where we have €20,000,000 which is an impact of more working days, that's a firm number, which we can rely on. It's much more difficult here if we should evaluate how it affected the later spring effect, what sales came later, what sales didn't come at all. So that's much harder to specify. So I will stick to the 20%, yes, that's nice. Okay. But is it possible to say something about June or potentially July, if that is because I guess all the Easter effect and late spring and everything came in basically in May. It should have been a very good amount or even April, but so there's sort of current trading conditions. Yes. We can comment on June. And I think you are making the right assumption that April, good May, we had all the positive effect And June was a much normal month for us. So a normal is, in this term, quite good as well since we have a good quarter. Okay. Also, could you give a CapEx update on the warehouse investments, where how much you have taken and how much you expect to remain? And also if there will be any OpEx impact as we are now closing in on the actual start phase, so to say? Well, when it comes to the CapEx in the new warehouse in Stringless, we have now taken most of the CapEx related to that. And we also can say that we stand firm with the prior communication that we see savings of SEK 50,000,000 from 2020. Yes. But will there be any costs to reach those SEK 50,000,000 before that? I guess there's some timing there's some limitation as well Yes. That you do not have in will be cost, but there will also be gains. So we see that it's plusminus in cost and savings until we reach 2020, then we will have only the savings. Okay. Also on the affiliated workshops and how those developed with a number of workshops rather, I mean, did sort of a cleanup a few years ago where you increased quality control and so on. And you mentioned that as well that some workshops are excluded from time to time. But where do you see this from now? Do you expect growth coming from in this customer segment from more affiliated workshops or those workshops that exist will sort of grow or gain market share? Or where do you see how do you see that develop? Because it's obviously a very important customer group since the others are seems to be declining. Yes. We this cleanup process, I think we have had a couple of those if you look many years back. But that's I'm not saying that we are in such process now, but we are all the time evaluating. And I would say that the Workshop is evaluating us if they really are doing their best being a part of our chain. So it's from both ways. But we the standard is higher and higher for each year. So it will always be a need of changing. The strategy or let's say the wish is, of course, we want to increase the number of workshop, but we have a very good footprint. So I don't see that that is very good, of course. But the most important is that we get more mechanics into the change. And that could be either to have existing workshops to get more mechanics in place, most of them, lacks employees. But it can also be that we are shifting out very small workshop to and instead of recruiting larger workshop. So this is an ongoing process, which will continue in the future as well. And what about the store network? Is that optimal as it is right now, you think? Yes. I think we will see and we have seen and I think we will see in the future a small decline in number of stores. That's where we can find possibilities to merge stores and where we can find better way of distribute the parts, but it will be not any dramatical. It will be somewhat, from the other side, we still have some white spots, which needs to be covered. So it I would say that, that number will be quite stable in the future, maybe somewhat declining. But it's not the footprint is not anything that we it's more ongoing business when we evaluate good profitable and non profitable stores. Okay. I think that was it. Unless you can I mean, you mentioned SEK 50,000,000 on sales year on year from that, but also EBIT effect? And then you just say that there was a minor impact on the Mekonomen business area. Could you say more on how much that was so we know the exact figure for Sorensen and Balchon? You mentioned EUR 50,000,000 on sales and EUR 11 Yes. Million on the of the EUR 50,000,000 in the quarter, 32,000,000 comes from Sonos and Bolshevon. Okay. And the rest, is that divided between Mecca and Mekonomen or Yes, both are affected by reduced sales. Here, we're searching for the numbers. And Mirka, a little bit more than the economic. Mirka, minus 17% and Mirka, minus five Okay. And on is it possible to say anything on the EBIT effect as well, the $11,000,000 how that is divided? I think if you take the sales split, you can calculate. Okay. Good. Thank you. Thanks. Our next question comes from the line of Andreas Lundberg from ABG Sundal Collier. Andreas, please go ahead. Your line is now unmuted. Thank you, and good morning. Andreas here from ABG. If I start on the Mekonomen business, it seems that your sales were up just about EUR 20,000,000 year on year, while your EBIT grew more or less in line with that or also close to EUR 20,000,000. Can you explain that bridge for me, why you had so high or some drop through? Just a moment. Yes. Well, what we see in Mekonomen Sweden is very good cost control that comes from the savings program we implemented last year that now has full effect. That's the majority of the explanation. Great. Costs or underlying costs have come down in economic Yes. And That explains. And then that's not the case in Meaca for instance? They had another starting point than the Mekonomen and but Mekonomen came down according to the saving programs we implemented last year. But were there any incremental cost savings in the second quarter versus previous quarters? Or is it just the fact that it's affecting you on a year on year point of view? Yes. Yes, it's year on year effect, I would say, because it wasn't implemented in the second quarter last year. And when was the implementation fully completed? It was fully completed in Q4. Okay, got it. And then back to the topic on your own or branded Workshops affiliates. Obviously, you had a very strong growth there, close to 20%. Can you explain what drove that growth? I would say that this customer, our Affiliated Workshop, they are one of the winners in the market. In We the different concept, we attract the consumers in a good way. So they have increased their market share. I think they're doing it on behalf of or let's say that it's a smaller non branded completely independent workshop, which is, let's say, the losers in the market at the moment because they are some some of them are closing down and then the customers comes to our kind of workshop or the affiliated and they don't have the right education and equipment so on. So it's a it's a move. It's a market move. It's one explanation, which we, where we have a good concept for attracting the consumers. That is also that we there is when you look at the net numbers, you can see a decline. But we have there's much higher numbers which are our workshop which is leaving and joining. And there we have good trend that it's bigger workshops that are joining and it's smaller that are leaving. So that also means that we are getting some higher sales. And then we are working very much with loyalty. And let's say, loyalty means that to try to convince the workshops to buy as much as possible from us, but it's also our ability to deliver as much as possible into their needs. And that comes from how we organize our inventory structure, both in the central warehouse, but mostly here in the local branches to have the right stock at the right time. Cool. And lastly, on market trends, obviously, you got some support from calendar and FX and so forth. But anything else you can mention about the underlying market trends? Are you able to see some effect from a very strong UCOR market for several years? Or how do you view it? No, I think it's too early to count So I would say that the market if you look at the half year, then we believe that we have taken some market shares. Which means that but I would say that the market is pretty much in the same development as our sales, somewhat lower than that. And to see something else in the future at the moment, I'm not prepared to do that, yes. So we still believe in this 1%, 2% growth. Thank you. That concludes my questions. Thank you very much. Our next question comes from the line of Matt Liss from Kepler Cheuvreux. Matt, please go ahead. Your line is now unmuted. Hi, thank you. Congrats on the good numbers. First, I mean, you talked about pricing. And have you seen some sort of pre buying impact in these numbers? Could you give some flavor on that one? How can you explain pre buying in terms of that? No, I mean, if you implemented price increases, maybe July 1 and everyone needs some extra No, no. We don't have that effect. And I would say that most of our sales is done to, even if it's business book to business, they are not storing any inventory. So there is no it's only possibly the first of all, it's the customer group, which is affiliated stores, which is very small number. Let me just find it now. It's the 6% of partner stores, where they actually have some inventory by themselves. So it's only them who could do something. However, in this industry, it's not since it's spare parts, most of it, so it's nothing which you can buy a lot of just because it will come a price increase. We don't have any of these effects in our business. Sounds really reassuring. Then about the Affiliated Workshops, I guess it was impressive growth there. And could you just remind me on the target there? Or target or target, what would you see longer term? I don't we don't have disclosed any specific target in that. I would say from a personal point of view, we now have they stand for a little bit more than 40% of our sales. I would like that number to be somewhat higher and at least to be 50% of our sales in the future, but that should be reached by the development where we have as we have now that we are selling more of those, but still not affect the other customer groups. And the reason why is that this is a good way of distributing our parts and it's a way which is very safe for the future and we have a good control of the concepts and all the time. So it's much, let's say, safer sales to have that. That's why I wanted to increase the part of the total. But we don't have any clear goal, but it should be a bigger part of our total sales. And I guess, previously, there's been some margin dilution due to the increased, I mean, larger customers, etcetera. But have you sort of reached a balance there? I mean, you don't see any more impact. I I guess if it increased the part of the increase, it probably would be Yes. It can be. But then that's not so much if it's affiliated or not. It's more on the size of the customer because we usually the pricing is mostly this is the different strategies in the local companies. So it's a mix of everything. But usually, the pricing to the workshop is affected by the volume he buys, not if he affiliated or not. But since more of the affiliate workers also are bigger, there can be some of that effect. But I don't expect that to be big in the future. Okay. Finally, I didn't see any crew mics there. Market share. No, we removed that this quarter, but it's still 14%. It's the same. Yes. We have we will be back on another way of explaining our total share of private label further on. Yes. Yes, sure. There will be some more with the decision, I guess. But it didn't change. And and then about the 100,000,000 synergies you expect from the acquisition, I guess that's that's indicated mainly procurement related. So I guess it could be early on in the acquisition process if you do it right or It will come gradually because first you need to negotiate new purchasing prices and then you need to turn over in the in the warehouses, but it will start to ramp up already this year later this year after closing, but it will be fully implemented in I think we said 2020? We take a couple of years until the all the $100,000,000 is in books. But we and this we follow the very same successful process as we had with the acquisition of Mecca and also SorensenBalchen before that. So this is an area where we are we have the skills and we know the process of how to do it. And that's also why we know that it will take some time until we get the full effect. And just a final one there on the acquisition. I guess you have previous experiences in Denmark, and I guess it's a totally new business case now with FTSE. Could you say something about how you sort of see that difference compared to the old? Yes. But it's a huge difference. It's not even comparable at all. What MacNorman did in Denmark was, let's say, selling with the Swedish concept, trying to combine both retail and business to business, which is not working in Denmark with the Swedish brand and Swedish assortment and so on, that was not successful. I would say that Efteset was maybe the main reason why Mekonomen didn't succeed in Denmark. Learnings from that, of course, is that we will not do what we did last time. Eftesed is very good, well run company with a good management. We will only work together within that purchasing. But otherwise, they will be held very independently and continue to focus on their growth. So that's the very simple strategy. Okay, great. Thanks a lot. Okay. So we have no further questions on the line at the moment. So please be reminded if you would like to ask a question, it is star one on your telephone keypad now please. Okay. So we haven't had any questions come through. So I'll hand back over to you, Per. Okay. Then I'll thank you all for listening and hope that you will have a continually great summer Thank you very much. Bye. Thank you very much for joining today's call. You may now replace your handsets.