Good day, and thank you for standing by. Welcome to the MEKO AB Q2 Report 2023 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker today, Pehr Oscarson. Please go ahead.
Thank you, good morning, and welcome to the presentation of the 2nd quarter for 2023. I'm here together with our CFO, Åsa Källenius, and we will guide you through the key figures today. Let me start by summarize the highlights, and let's look at slide 2. In short, the 2nd quarter demonstrates that MEKO is steady, even as the economy slows down.
We increased our revenue, improved EBIT, and generated a higher cash flow. Also, we see a pent-up demand to repair and maintaining our cars. The market conditions improved in several markets, which is an evidence of a strong underlying demand for our products and services. That said, we face challenges. Among these are inflation and weak Scandinavian currencies against the euro.
This factor, mean that we are intensifying our efforts to improve our margins, and we'll talk more about this in just a moment. Particularly important during this quarter was a significant strength of our financial position. Thanks to the sale of properties in Finland, we now have a leverage clearly within our target range. Let's look at the key figures for the quarter, please, Åsa.
Thank you, Per. If we look at net, we are on page three now. If we look at net sales, we have a strong growth. We grew 28% in total and by 9% organically in the quarter. As you can see, EBIT is improving significantly, supported, of course, by the sales of the properties in Finland in May, as Per mentioned. Even without this effect, the result improved.
Adjusted EBIT increased with 12% compared to Q2 last year, and cash flow is also stronger than last year. However, the adjusted EBIT margin is lower. The main reason is the weaker gross margin, which we look at in a minute. Before that, I'd like to elaborate on our stronger financial position and the sales of properties in Finland. Let's move over to slide 4.
The agreement with Sagax was completed in line with our plan when we acquired Koivunen. Owning real estate is not in line with the MEKO strategy. The transaction valued the properties at EUR 36.5 million, and we made a capital gain of EUR 10 million. We booked half of the gain in the Q2 and distributed the rest over the next 10 years, which is the leasing period for the properties sold.
After the transaction, we will still have about half of the acquired properties within our books. In conclusion, this strengthen our financial position as our net debt is reduced significantly. This is also in line with our financial sustainable M&A strategy, as we will see in the next slide, slide 5.
The sale of the properties demonstrates our ability to identify value in larger acquisitions and our capacity to effectively reduce leverage when the acquisition has been completed. In Q2, our leverage is 2.61, clearly in line with our financial targets. We had a similar process when we acquired FTZ and Inter-Team back in 2018, shown here in the graph.
At that time, we were highly leveraged for a limited period, managed to reduce net debt effectively. Going forward, we will continue to reduce our net debt according to plan. In the beginning of Q3, we have amortized SEK 500 million on our long-term debt. Now, let's move over to page 6 and look more on our gross margin development.
As you can see, gross margin is 43.3% in the quarter. This is lower than last year. On the positive side, we have succeeded in making price adjustments. Weaker Swedish and Norwegian currency against the euro contributed negatively. As Pehr said, we are taking action to improve this effect. We also have structurally lower margin related to Koivunen acquisition. 1.3% is related to changes in product and customer mix.
We are taking action to raise this level, of course, and to increase our profitability. Now, we proceed to Adjusted EBIT on page 7. Adjusted EBIT is higher compared to the second quarter last year. This is mainly explained by improved EBIT in Finland, Poland, the Baltics, and Sweden, Norway.
The item other relates mainly to added resources for increased ambition in sustainability, investments in IT to improve our governance systems, and insurance costs related to cyber security. Let's move over to the business areas on page nine. Net, and starting with Denmark. Net sales in Denmark were strong in the quarter, an increase of 18% in total and 5% organically. EBIT was stable, but the margin was lower.
Our actions to improve profitability are having effects, visible effects, and we also see signs that the market condition will continue to improve from here. We turn to Finland on page 10. Finland, the operation is progressing in a good pace with a healthy growth of 34% in Mekonomen, and a positive development also in acquired Koivonen.
Synergies are also extracted as planned through several different activities, among them, the merger of our Finnish warehouses and synergies within purchasing. Moving over to Poland, the Baltics on page 11. Poland grow organically with 6% in the quarter, and we also see a positive development in the Baltics. As in Finland, we continue to extract synergies according to plan, which will have full effect in 2024. Turning to Sweden and Norway on page 12.
We are pleased to see Sweden, Norway delivering improved growth and EBIT in the quarter. This is partly an effect of our many activities to improve profitability, as presented in connection with our previous financial reports. We will continue with this effort, which will include activities across the business area and in both countries. Moving over to page 13, and Sørensen og Balchen.
We are pleased to see that Sørensen og Balchen is back in healthy organic growth. The pace is 12% in the quarter, a clear improvement compared to the same quarter last year. EBIT margin is at 19%, which is higher level than peers, however, slightly lower level than Q2 last year. In response, Sørensen og Balchen will continue with optimization and effort to gain market share in the big business-to-business sector, which is less affected by weaker immediate market than the retail segment. That was a brief overview of the development in our business areas. Per, I hand it over to you.
Thank you, Åsa. Yeah, let's move to slide 15 and look briefly on our market footprint. It's clear it shows that MEKO is a company with diverse net sales across Northern Europe, compared with the situation which we had a few years ago, when Sweden, Norway was dominant. This situation makes us more stable as a company and opens up for new growth opportunities.
It also demonstrates our strong market position. We are leading in several markets, but still with room to gain market shares and increase value creation. We move over to page 16. MEKO's business model is very well positioned for the future and the necessary ongoing green transition. Our business is all about extending the life of cars, making them last longer, instead of buying new cars, which in most cases is worse for the climate.
Our business is also about taking care about used parts instead of throwing them away. In other words, MEKO is about sustainability and circularity. This quarter, we increased our internal ambition regarding sustainability. As one of the first companies in our industry, we have linked our bank loans to sustainability targets. This will strengthen our internal focus on sustainability even more. Finally, turn to page 17. Today, we announced a new strategic collaboration within Heavy Trucks.
We will become a supplier to the largest independent truck workshop chain in Sweden, Malte Månsson Verkstäder. This will further strengthen our position in Sweden and enable Malte Månsson to continue to grow in a rapid pace in the coming years. This is a priority segment for MEKO, where we have grown 25% since 2018. Today, Heavy Trucks account for SEK 500 million in net sales. That was our presentation for today. Thank you for listening, and we are now open for questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, that's star one and one if you wish to ask a question. We will now take the first question. It comes from the line of Mats Liss from Kepler Cheuvreux. Please go ahead.
Yeah, hi. Thank you. Couple of questions. First, well, you mentioned that you're a bit behind with price increases. Could you, well, give some indication what will happen in the second half now, well, regarding that?
We, I think that we the ambition is to close the gap during the, the next, or the rest of the year, so to say. It's not only prices increases, it's also about choosing the right customers and selling the right products, but, I will also stress that we work intensively with our suppliers to also get some better conditions going forward.
Great. Secondly, you also, well, indicate that the gross margin, decline is partly due to, well, largely due to customer mix, and product mix. Could you say something more about that also?
Yeah, that's a little bit more difficult because it's, under that, it's a lot of different trends. We have that, let's say, kind of volatility that sometimes customer product mix makes the margin up and down, and now it was down this quarter. It can be more sales of tires, for example, could be one reason that lower the gross margin.
Okay, great. In Denmark, bit disappointing, I guess, but you also say that you have some measures to be implemented there, to improve profitability. Could you say something about what kind of measures you?
Yeah. That, that is, I mean, it's, it's a full spectrum of activities, and it is quite a big portion coming in within costs, and that is not-- Are we merging some, some branch, but it's mostly reducing people in all, all kind of levels. It's also other costs related to marketing and, and those kind of things.
There is a big effort in, in cost reduction, and it's also intensive work to kind of get back on track when it comes to the gross margin. The gross margin is then mostly pressured by tough competition, we are trying to find ways and also here to with the help of suppliers, to, to get that back on track. I would say that, during the second quarter, then it's some kind of, big, one way of saying it, the feeling is that of each.
Okay, great. Given the top line there, top line growth in Denmark, it seems that, well, you're, you're growing in line with the market or are you sort of even growing your market share?
We have a stable market share. I think it's been little bit deeper. We gain more customers than we lose, but if it's significant, wouldn't say. It has been a healthy development, and we our market share, and maybe nagging something from some of the competitors as well.
Okay, great. Thank you.
Thank you.
Thank you. As a reminder, if you wish to ask a question, please press star 1 and 1 on your telephone. That's star 1 and 1, if you wish to ask a question. We will now take the next question from the line of Andreas Lundberg from SEB. Please go ahead.
Thank you, good morning. I'll start with organic growth, the 9%. Is that mainly price effect, or what about volumes? You talked about big pent-up demand, for instance. Could you, could you give more color on, on the organic growth? Thank you.
Nation of quarters. The, the, probably higher amount of volume this time due to the pent-up demand, and, and, I mean, we see that in, in, in, we don't, we don't communicate the exact numbers, but we, we, of course, see it in, in, in the warehouses and, and, so, so it's, it's more volume this, this quarter, but still a mix.
You talked about pent-up demand. Why is that, and, and how do you see that, from here?
It's couple reasons. Yeah, or during end of last year and beginning of this year, that people, even if the service light was light up, they, they postponed the service and the maintenance, and if it wasn't really, really needed, they waited. Now during the spring, those car comes into the workshops, and we have normal waiting times in, in the workshops, usually fully booked 1 or 2 weeks and so on. That's definitely positive. There is also.
...
-quarters because we have, we had a very late spring, which means that the tire season came in more into Q4.
Right. I, I actually losing you once in a while, but I think I got the message. Pattern change to margins, gross margin. Is it fair to say that you have to offset the, let's call it, the underlying cost inflation, and it's more an FX issue right now? Is that a fair assumption?
That's the, that's the, but more due to currency in this quarter than actual inflation from price increases from suppliers. I, I, I, I think that the price from the suppliers is a little bit different product, but in most... That's also why we believe that we could get some help in the gross margin from the suppliers, because the production prices are stabilized now, so we don't see any more increases in the production.
Rotation costs, where are you for those items?
What? We lost you.
No, when it comes to energy and transportation costs, you talked a lot about that in the last year.
Uh.
Where, where are we now?
We are on a stable, I would say. There's no more increase in domestic. Probably there will be also some, some possible decreases in those costs, as we see it. We, we don't, we don't have any impact in, in the Q2 versus earlier quarters from those areas. I think transportation's inbound from suppliers is actually, but then we still have some increases when it comes outbound to customers.
What about currencies in general? If I recall it correctly, you had a pretty big negative effect in, in the comparable quarter last year. Is it fair to assume that the, the delta on FX has been negative also Q2 2023?
Probably. I don't have that, that, numbers here and in my head, but you are probably right, that it's-
I, I, yeah, probably it's, it's...
Cool. Cause maybe the slot is better than last year.
Yeah.
Euro versus SEK and NOK is definitely worse.
Yes, hopefully, Koivonen deal, how far are you there, and how much has been realized versus how much is remaining? Thank you.
In this negotiation with the suppliers has gone very well, so that we will start to see now, for the effect from next year, with where we either will see it in gross margin or increased sales because we are more competitive. Then we have the merge of the Mekonomen and Koivonen warehouse, and that is planned to be finalized now in September, October or something.
From next year, those costs should be completely out as well.
Thank you so much.
Thank you. We will now take the next question from the line of Stefan Stjernholm from Nordea. Please go ahead.
Yes. Hi, it's Stefan here. I have a question on the inventory. It remains at a quite, quite high level. I, I do understand that FX and also the acquisition made are part of the explanation, but do you see a room for, to lower the inventory level somewhat, given that, lead times in terms of sourcing are now back to more normal levels?
Yeah, I, I... Let me put it in this way: I don't see any need for increasing inventory, at least. Then, then, to decrease it is also, should be always balanced with availability, which is key, in our markets. That, that's the balance. Then, of course, with, with, with the inflation also in the inventory, it increases. It's more, I wouldn't, I wouldn't guide on that, but it's more room for decreasing than increasing.
Okay.
Put it in that way.
Another question, on, on the EBIT line and, and other, it was up SEK 10 million year-over-year. Is that, kind of one-off, or should we expect a higher level going forward?
Partly, one-off, items. I would say mostly it is a new level. I mean, we need more resources when it comes to sustainability. We need more resources in IT and cybersecurity. That is, we're gearing up for the both for future growth, but to take care about that. If it will be other or if in the future, this will be cost that will be covered by the business areas. that, that I can't-
Yeah
foresee at the moment, but, I think that the level we have to live with.
Yeah. Okay, thank you. The final question on interesting deal, collaboration within Heavy Trucks. Can you please comment on the profitability within that segment? I would guess that it's quite good margin. Is that right?
It's, the gross margin is, it's different in different markets, but it's a little bit lower than passenger cars, but it's still good. The, the gross profit is, very interesting because the, the, the parts is so much more expensive. I mean, the brake disk for a truck is 10, 15 times more expensive than a passenger car. There, there is a lot of. Then, we can utilize all the, the network and the, the logistic and everything. The, the, the EBIT margin, those, that business should, should be very good. We don't communicate the exact number, but it should be entirely good, due to, that we can utilize on, on the, the structure we have.
Okay. Thank you.
Thank you. There are no further questions at this time. I would like to hand back over to Pehr Oscarson for final remarks.
Yeah, if no more question, then, again, a very good quarter. We are happy for that. Still some, of course, some challenging times still ahead, but, I think MEKOlac has once again proven that we are very stable even in tougher times. With that said, thank you very much for listening and, goodbye.
Goodbye.
That does conclude our conference for today. Thank you for participating. You may now disconnect.