Earnings Call: Q4 2020

Feb 12, 2021

Good morning, and welcome to Mekinomen Group Quarter 4 Report 2020. 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 will have opportunity to ask a question. I will now hand you over to CEO, Per Oskarsen, your host for this call. Thank you. Thank you. Hello, everyone, and welcome to the presentation of the Q4 2020. With me, I have our CFO, Ursa Sjylenius, and we're going to guide you through the presentation. As we all know, the pandemic is still affecting many countries and markets, There are heavy restrictions, and these are challenging time. But despite this, Mecanalmen Group stands strong. We're taking forwardful actions to adapt during 2020, and the Q4 is clear proof of our resilience. It's also an evidence of a stable underlying demand of our product and services. We ended the year with sharply improved profitability and a strong cash flow. The focus for the group going forward is to strengthen our financial position even further and to achieve sustainable and profitable growth organically and through acquisitions according to our long term strategy. This is why the Board's proposal to the AGM is that no dividend shall be paid for 2020. Still, as we have stated in our updated financial goals, the company's and the Board's ambition is that dividend shall resume in line with our dividend policy Group. The update of the financial goals in December 2020 was made to maximize our possibilities for future value creation. This is something we will talk more about on our detailed Capital Markets Day later this month. Then we will also elaborate on our updated strategy and our favorable position in the market. Our Capital Markets Day takes place on February 25, and I welcome you all to join. As we have seen, We stand strong and efficient even if circumstances are difficult. We therefore expect a limited impact from the pandemic going forward as long as society in our markets are not completely closed down. We will focus we will continue to serve our customers And always in a secure way. Health and safety for our customers and employees has been a priority since the start of the pandemic, and It will continue to be until the pandemic is over. Asa, please take us through the results of the Q4. Thank you, Per. As you see on Page 3, we report a larger increased profitability during Q4. This is a sign of strength. And in short, we are strengthened by 3 factors: stable revenues, improved efficiency and better growth margins. This proves that we have a solid business model and ability to handle changes. EBIT is more than doubled compared to the same quarter last year. The EBIT margin rose to 9% compared to 3% last year, and adjusted EBIT margin increased to 10% compared to 5% last year. Now we also have the full synergies from the acquisitions Ester said in the team, in the results, the acquisitions have successfully and very clearly contributed to profitability for us. That makes us confident about our strategy going forward. We will continue to grow both organically and by Relations. We are glad to see that we gained synergies according to plan, but there is also additional potential to streamline and take advantage of our size. We will continue in full force to work with supplier negotiations and best practice in the group. Looking at Page 4, We can see that we sharply increased profitability in all our business areas, thanks to strong margins and good cost Efficiency. I move over to Page 5. We have increased gross margins in the quarter, and we have increased slightly for the full year. Here we see proof of that synergies have affected the result positively. Looking at next page. On Page 6, we see an overview of our updated financial goals that we have communicated to the market about in December 2020. The adjustment of the long term goal is about creating even more shareholder value. They were made in order to reflect the company's current operating structure and to enable higher growth rate in the future. We are continuing according to plan with our successful structural work to increase profitability in our existing business areas as well as our focus on reducing debt and strengthen our financial position even further. As stated, this is why Board proposes no dividend for 2020. Well, it is our ambition that dividends shall resume in line with our dividend policy over time. And as Per said, we will talk more about the financial target and our updated strategy on our Capital Market Day on February 25. Okay. We move over to sales and result per business area. And on page, with the FSS in Denmark. FSS had a continued strong performance in the quarter. The EBIT margin rose to 9% compared to 6% last year. This is due to internal cost control without any advantage from governmental relief. We estimate that FTSET has increased their market shares further on the independent part of the market despite a slow market development in Denmark. Over to Interteam, our Polish Business. In Intertek, we are on the right track with the underlying stable business, which is very positive. Our EBIT margin is impressing compared to our competitors in the Polish market. We have successfully managed to follow our long term strategy plan around improving EBIT. We have also Taken forceful actions and kept focus on increasing margins gross margins. EBIT rose to impressive €38,000,000 Compared to €20,000,000 last year, this was also possible thanks to short term cost saving actions with the purpose to reduce COVID-nineteen effect. The result does, however, include governmental support of 7,000,000 in the Q4. And we have been and also supported by one off in supply bonus. We are delivering according to plan in Poland, but there is still work to be done here. We believe it will take a little more time before we reach our long term goal and have a stable margin at this level. Over to Mecanomen. In Mecanomen, we have positive trend with stable demand and organic growth in line with last year. The EBIT rose to 11 percent compared with 5% last year. We are definitely moving in the right direction here where our forceful actions to cut costs and improve efficiency have given results. But there are some uncertainties going forward where COVID-nineteen is 1, currencies are another. The result does not include any governmental release in the Q4, but includes the rest of the insurance compensation From the data breach last year, which was €56,000,000 €7,000,000 were paid to us already in Q2 2 2020. So altogether, we have €63,000,000 from the insurance compensation in the full year results. In the full year, we have also taken cost of €50,000,000 for the long term structural actions We communicated around earlier quarters, which will benefit us going forward. Over to Svensson of Valjean. We are glad to see a very strong performance from Sorenson and Balchem also in the Q4 with an organic growth of 15%. EBIT margin increased 18% in the quarter compared to 16% last year. So Novalschamps business model is unique with a broad focus on B B2B and B2C in combination with a very structured cost control. We are benefited from being a sharp niche player in the continued high activity in North Indian markets. By utilizing this position in the market, we We have gained market shares. There is no governmental support included in Science and Operations. I now hand over to you, Per. Thank you, Mohsen. Yes, I'm very proud that we have delivered another strong result, and this is really a proof of our leading position. Moving on to Page 13, shortly about our footprint. We will continue to optimize the network of stores and branches to secure profitability. Regarding the workshop, we aim for larger workshop with higher number of mechanics because this is more important than the actual number of workshops. It's also important for us that the concept compliance is at a high level to ensure quality towards the end consumer, the car owners. The numbers will change from time to time with little effect on the group's result. On Page 14. There is an overview of the sales in the industry. We are, as you can see, number 1 and 2 in Sweden. In Norway, we had positions 1, 2 and 3. And we are by far the number 1 in Denmark. Strong positions that will benefit us going forward. In Poland, We have are at the 4th place. This Polish the Polish market is still very fragmented, But we believe that, that will be consolidated in a long term perspective. Moving over to next page, we have continued ambition to develop new solutions, services and offers to our customers. The purpose is clear, to always be relevant and to meet the future customer needs. This enabled us to grow and broaden our business. Next on Page 16 is one example of this. In Norway, we have established an independent workshop concept for heavy vehicles under the brand Meka Tungbyl, or Mecan Heavy Vehicle in English. Mecanalvens owns the workshop concepts and works as the spare parts supply you to the workshops in the same way as we do in the core business. We have 10 affiliated workshops in the concept since 1st February. The first workshops is a collaboration with the Norwegian workshop company, Bilder, who owns and operates the workshops. By the end of 2023, we aim for 50 workshops under the name of Meketong build chain concept. Moving on, we also scaled up in this area in Sweden. Merckenalmenger Sweden has been a supplier for heavy vehicles with a wide local assortment for 5 of Merckenalmenger Sweden's local branches. Since this has developed successfully during 2020, we now expand to include 30 branches with local warehousing. This will result in fast deliveries, national wine. And with this initiative, Mecan Sweden will offer the greatest availability in Sweden in terms of number of distribution Points. Now on Page 18, in Western Poland, we recently Open our 2nd regional warehouse in order to strengthen availability further for our workshop customers in that region. Availability, efficiency, competence and quality is our most important competitive advantage against existing and new players entering into our industry. This, together with our warehouse Project in Sweden is a proof of our continued initiatives towards availability and efficiency in this area. And talking about the Swedish project, we as we can see on Page 19, the margin of Mecanalmen warehouses is now completed. This has been a successful project and has developed according to plan, giving gradually increases synergies yearly since start. The last piece in the synergies was the rent for Mercken's former central warehouse, which has been terminated since the end of 2020. Finally, I'm very much looking forward to the 25th February and our Digital Capital Markets Day. Together with my management team, I will present our updated strategy, enabling mobility, which stretches to 2025. With our updated strategy, we will focus further on operational excellence and on creating sustainable business. More details about our focus areas and how we will succeed with our strategy, you will hear on that Capital Markets Day. So please join us then. Thank you for listening. And we will now move forward to some questions. Thank you. And we have a question from Mats Liss from Kepler Cheuvreux. Please go ahead. Your line is now open. Hi. Thank you. A couple of questions. I mean, we have heard some Well, problems with semiconductors and so on and the supply chains of Power producers are really well tough. And do you expect to see some sort of issues with that Well, this is sourcing all spare parts. Do you think it will affect your ability to supply as well? We don't see any indications of any disturbances in the supply in the independent aftermarket In the same area, as you mentioned, that the car manufacturers has. The last year was demanding when it comes to supply, and I think that was the first thing we started to be worried about when the pandemic started in March last year, but we have had a good supply during the year. And of course, As long as the society works as it is, and we don't see any risks for any big impact on our business, But again, as it is right now. And well, the year has started Somewhat cold and snowy. Have you seen any sort of impact of that? I mean, it's Group. Good for the big ticket items like batteries and so on, I guess, could be anyway. Do you have any comment there? No, we don't comment and do prognosis, but you're right, of course, when it's cold, we sell more winter products. On the other hand, we there is slightly slower demand due to less miles driven due to the pandemic situation, but Cold weather is better than mild weather. So it's good. Okay. And finally, just about the close some of the warehouse in the Vittuna Trainers. Did you say that all those Costs are out now. And have you also seen the positive impact of reduced inventories due to that? Not yet, because we that will the inventory will go down, but it's That needs to be sold out, so to say. So we I would say that we at the moment are overstocked in Spain. But during the year, We that will the inventory will go down in that. But then as you heard, I'm speaking a lot about availability. So we also Increase our inventories in different places in the market. Okay, good. I think that's it. Thank you very much. Okay. Thank you. Next question comes from Andreas Lundberg from SEB. Please go ahead. Your line is now open. Good morning. Can you hear me? Yes. Thank you. You talked about in the report, I wonder if you see visible signs of the strength and position in the marketplace. Could you Perhaps expand a little bit on this, how you view that. Yes. There is I would say it's from 2 dimensions. When it comes to The business here and now, we definitely see that I mean, as I said, there is a stable demand for our products and Services. But there is also, of course, market shares, which are moving. And our strong concepts And strong brands is proven to attract a lot of the car owners. So that's Well, I would say we have a strong position in the core business as it is now. But we have also, I would say we are well prepared and have a high level of innovation in order to Also be positioned for the future, and the future will not be the same as it is now. So we are in a good phase, and we are Also well prepared for changed behaviors in the future. So it's both Good position now, but maybe also even more important, good position for the future. And where do you think you Standout versus competition. As I said, we have our concept is, I would say, one of the reasons. We have strong brands, which means that we can attract the car owners Through our network of affiliated workshops, we have very high availability. That's another area. And we have locations. So we have coverage and both, and we also have this multi brand strategy, which means that We have several brands to attract several segments of the market. But and we also we are everywhere, Which is also very important in terms of availability. But has that changed versus before or? We're getting better. Okay. Even better next year, yes. And then maybe for us on cash flows, which obviously was strong in 2020. You mentioned inventory a little bit, but could you give us more color on the status on working capital in general moving into 20 21 and also what payments remain or the things you were pulling forward last year and also on what you expect for CapEx? Thank you. Yes. As you noticed, we have very good cash flow for both the quarter and the year. In working capital, there is NOK 208,000,000 from state support regarding taxes, etcetera, that we will pay in Q1 and Q2. So that is Out of the NOK 300,000,000 in better working capital, NOK 208,000,000 comes from state support. And when it comes to investing activities, we see more or less the same For this year as for 2020, between 100 and $70,000,000 and what, dollars 200,000,000 perhaps, something like that. So no increased investing activity for this year. Okay. And the net effect of the inventory, I think you Talked about you were slightly overstock, but also that you see some opportunities. What is that? Yes. We have about the same when you look at the balance sheet, you can see that we have a reduction in stock year values. But that comes mostly from currency when we revalued the stock in different currencies. But as Per said, we have not seen the reduction in stock yield strength as yet. We are overstocked there. And we will see positive effect from the merger of the warehouses As one item, on other locations, we can see a Slightly increased stock due to the new Tung build, for instance, in Norway. But our goal is to keep an optimal stock level so we can serve our customers in the best way. Okay. Yes. And then maybe for Per, you also talk about the Business opportunities you see in the light of more green vehicles and new customer behavior. I guess we Talk about this on the CMD, but could you give some examples on what you see on these kind of opportunities? Thank you. I think one example is what we announced already last quarter with this collaboration with Xiaoping in Norway. And there is more possibilities in that area definitely. But then it's also, I would say, how to be a part of the full value chain. But we'll Keep that secret until the CMD. So we'll have something to talk about that day as well. Thank you. And maybe a last one. You talked about some structural initiatives within Mirke Nummer, and I think you talked Group. But can you say what you have implemented during the year when it comes to structural changes within the part of the group? Thank you. We did and we had one offs in Q2 and Q3 of approximately €50,000,000 and that is costs for closing unprofitable branches and some unprofitable workshops. We Follow this closely and we can see also that, that has improved the EBIT in Q4 that we took those measures. And of course, next year, we will have full effect of that. So that was the primarily it was some other actions, but the big ones was the closing on the unprofitable business. We do have a follow-up question from Mats Lies from Kepler Cheuvreux. Please go ahead. Your line is now open. Yes. Hi. Thank you. Well, just a question there about your intentions to move into about more into heavy vehicle service In Norway, especially, and if you could just give some more indication there. I guess you do it with a partner and it Seems or I don't know. The investments needed to grow in this area. I think the investments is more or less already taken and it has been increased inventory because this is Products which we didn't have, but that has been going on for a couple of years. So we now have the products in regional warehouse in Jorvik, but we also have it out in the branches. So what we're doing now is that we do exactly what we did with Passenger cars 15 years ago that we conceptualized the workshops, giving them help with education, marketing and signing and hopefully also with fleet customers and so on. So to create a concept, which will make The life easier for the workshops and of course, create some loyalty back to us when it comes to the parts purchasing. Okay. I guess it's not Sweden, which is more like more of us gone now, and I guess. So but in Norway, Also a lot of bolus cognia. But are you sort of addressing other brands than bolus cognia? Or how do you sort of play this? Yes. It's all the same thought as with passenger cars. So we think multi brand in those terms. And Norway is a little bit different to Sweden because it's not that dominated by Volvo and Scania. So there is Some more brands of vehicles in Norway. But we still Believe that there is a possibility in Sweden and in the other markets as well in this area. But maybe Norway is It's logic that we start there. Okay. And Do you see any sort of difference in profitability between the light and the heavier vehicles in terms of spare parts? No. There is approximately the same level of gross margins and so on. It's Maybe one could think that these parts was a bit more expensive to The logistics change because it's more heavy and higher freight costs, but on the other hand, each item has much higher price and value. So I think in general, it doesn't differ that much towards what we have in the core business. And well, longer term, how much of sales in Norway do you expect these segments to Maybe we will talk about that on the CMD, but I don't have any numbers today. Okay. Thank you. Thank you very much. There is nobody in the queue at the moment, so I will connect you straight away. Thank you. And the next questions comes from Stefan Scharnholme from Nordea. This is Stefan Scharnholme from Nordea. Just a question on sourcing. There are much talk about container frights being up quite a bit recently, and also we have raw materials rallied, at least some of them. If the combined impact from sourcing, what can we expect for 2021? Well, if you can tell me the price of containers, I will how that will Development. Now there is a pressure Group. In that area, we all know that freight costs from Asia has increased dramatically. We don't source that much from Asia that it will have a significant impact. But we need to follow this very closely. And our ambition is to Either we need to talk to the suppliers and get them some lower prices to compensate or we need to be more efficient or we will need to increase the prices to the customers. But we've the only thing I can say that we've followed this closely, and we will make sure that it will not affect us Very much. And so far, you have not done any price increases? Sorry? You haven't done any price adjustments as of now? No, we do price corrections all the time. In some markets, it's annually. In some markets, it's quarterly. And in some markets, it's done by Product line by product line. And of course, if there is higher costs, that will reflect that price revisions, I hope to say. I see. And regarding closing low performing workshops, is the work Bandau or if there's more to come. I think that we It shouldn't be more to come in that perspective, but this is also something which we work with continuously. Okay. Thanks. There is no further questions coming through. So I will hand the call back to you. Thank you. All right. Thank you all for listening, And I wish you a good day. Take care, and stay safe. Thank you. Thank you. See you February 25 on the Capital Market Day. Thank you.