Earnings Call: Q3 2020

Nov 6, 2020

Good morning, and welcome to Mekon Armen Group Quarter 3 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 have opportunity to ask questions by pressing I will now hand you over to CEO, Bartos Cas on your hostess call. Thank you. Thank you, and welcome, everyone. Thank you for joining us today. I have Ursa Szelenia, CFO with me here and we're going to guide you through the Q3 2020. Despite challenging times, our Q3 was characterized by increased activity and stabilized demand. We reported positive organic growth and improved profitability on the back of a broad range of forceful actions and structural initiatives. At the end of the quarter, we have seen an uncertainty grow in our markets as the reported COVID-nineteen infection rates have increased. We're still confident that the underlying demand for our products and services is robust. And we therefore expect a limited effect from the pandemic as long as society in our market are not closed down completely. Our priority going forward is to continue to safeguard the health and safety of all our employees and customers. We will continue to focus on mitigating the effects on our operations and continue to offer high level service and availability to our customers. I will now hand over to Asa to take us through the result of the Q3. Yes, thank you. As Per said, we stand strong despite the challenging times and report positive organic growth and improved profitability in the quarter. This is thanks to the timeless demand of our services and products and our forceful actions and structural initiatives during the year. We had an organic net sales growth of 3% compared to last year. Due to currency effects, the reported growth was negative by 1% in the quarter. EBIT increased by 9% compared to the same quarter last year. The EBIT margin was in line with last year at 7%, where the adjusted EBIT margin increased compared to last year. EBIT includes item affecting comparability of SEK 24,000,000 this quarter related to structured initiatives in within primarily Meka Meka Nomen. Our financial position is robust. We have reduced our working capital. And together with our strong results, we reported strong cash flow during the quarter, and our net debt decreased. Let's have a closer look at EBIT on next page, and that is Page 4. As you can see, we had a positive result in all business areas. Mekemeconormen is negatively affected, as I said, from item affecting comparability of 24. We will have a closer look at the business areas shortly. Let's go to Page 5 to look at the gross margin. Purchasing synergies and our earlier price increases in most of our markets is compensating for a negative product mix and currency effect. We have stable margins. And in the quarter, the gross margin was 45.2%. Let's look closer to the sales and results per business area in the Q3 and move over to Page 7. FTSE had a very strong performance in the quarter. The EBIT margin rose to 11% compared with 9% last year. This is due to internal cost savings without any advantage from governmental reliefs. The sales are negatively affected by currency effects of 24,000,000 dollars We estimate that FVSET has increased its market share further on the independent part of this market despite the slow market development. Moving over to Page 8. In Interteam, we have successfully managed to follow our long term strategic plan around improving EBIT with 4 selections and focus on increasing gross margin in Poland. Combined with short term actions with a purpose to reduce the COVID-nineteen effect by cost saving actions, EBIT rose to €31,000,000 compared to €9,000,000 last year. The result include governmental support of $7,000,000 in the 3rd quarter. The EBIT margin of 6% is impressing compared to rest of the industry players in the Polish market. And then over to next page, Page number 9, Meka Mekonormen. We saw a stable development in Norway for the business area, Merkamekonomen, where price adjustments and market activities has led to organic growth compared to last year. In Sweden, we saw a slower development. There are 3 main factors to this. First, there is a strong competition in the market. 2nd, a weaker underlying market development. And in addition, we are taking forceful actions and structural initiative to improve our long term profitability and competitiveness that affect us negatively short term. The forceful actions and structural initiative throughout the operations is largely implemented and will have a positive effect going forward. EBIT in the quarter is negatively affected, as I said before, items affecting comparability, and that is closure of unprofitable branches and workshop and also cost for closing down our warehouse in Eskilstuna. Item affecting comparability is SEK 24,000,000. And we have SEK 2,000,000 of governmental support included in the results of the 3rd quarter. I move on to Page 10, Sorenson and Abalsen, a very strong once again performance from Sorenson and Abalsen in the quarter with an organic growth of impressing 22%. Sorenson and Nabalschen has a great track record history. Sorenson Ovalshen's business model benefits from the positive market development, and they are also gaining market share on top of that. The EBIT margin increased to 25% in the quarter, and there are no governmental support included in the results. Back to you, Per. Thank you, Asar. Yes, I'm very proud that we have delivered a strong quarter in Q3. We do not only have strong results, but also strong position in our main markets. Being the market leader in the 3 of out of the 4 markets enable us to continue to drive the industry forward and develop our core business in line with new trends and our surroundings. I will move skip to Page 15 and talk about the news from this morning. Our dialogue with the electric car producer Xiaoping has resulted in a signed agreement. Xiaoping has chosen us to be the exclusive wholesale partner for spare parts in Norway And we will also be the partner that our authorized workshops and service partners for XAUXANE cars. The launch on the new car model is initiated and the first cars will be delivered to Norwegian customers in the end of the month. This is a very exciting development in the car industry. New players see potential in using existing sales networks in the Nordic markets, where our position, unbeatable availability and strong competence makes us a very attractive partner. Apart from Xiaoping, we have ongoing dialogues with several new electric car producers planning to enter our markets, and I hope to get back to you soon with some more positive news around this. Slide 16, digitalization of the customer experience are prioritized, focused with a purpose to streamline and simplify for the customers. The customers appreciate our digital booking systems that continue to increase in number of bookings. The integration of e commerce is with stores and business areas in Solvencyn is progressing further and is something that will adapt also in the other business areas of the group. Our latest digital innovation is under development together with the start up company, EasyRide, and that is a new carpooling service targeting companies that want to help their employees to travel more sustainable. With the help of AI technology drivers will reduce climate effects, traveling costs and offer their colleagues sustainable alternative for job commuting. And this is of course a very good offer when we with our dialogues with companies when we also offer service and reparations. Going to Slide 17. We continue to develop our best in class electric car and hybrid training in all main markets. We are well equipped to take care about the newer generation vehicles regardless of which engine or fuel they run on. We're also expanding our efforts when it comes to the next generation of mechanics. Next fall, we will launch the 4th location of our upper secondary school and this one will be in Gothenburg, Sweden. And just before summer this year, our first students graduated in Stockholm and Lund. And I'm proud to conclude that 90% of the students now are working within the industry. This should compare with the fact that under 50% of students in traditional programs are employed in the industry after graduation. And we move to Page 18. And it makes me very happy that Mekronomain Group has been recognized as Sweden's Most Gender Equal Company by Old Bryte Foundation. Also in this area, we prove that we are in the forefront and have a leading position that will gain us going forward. And finally, the timeless need for mobility is a great opportunity for our group. We stand strong despite uncertain times. We will continue to fully focus on serving our customers, reducing costs and to increase efficiencies in all business areas. And thank you. And now we are looking forward to hear your questions. Thank And the first question comes from Mikael Loehrdant from Carnegie. Please go ahead. Your line is now open. 1st, a question on your purchasing costs and the impacts from FX. What I guess now with the stronger Swedish krona, the previous headwind should turn to tailwind when it comes to purchasing costs and then also for the gross margin. But you mentioned in this quarter that it was still negative. Is that correct? Yes. It's correct what you say. We should be gained by a lower euro SEK and euro NOK exchange rate going forward, but it takes some months to take all the goods through our warehouses. So going forward, if this stays, it should be positive. Yes. And right now, this is also has been is still very, I would say, different weeks actually, but we now the currency looks quite good in Sweden. But if you look at the Norwegian krona, we still have some and they're also purchasing some of the goods directly in euro. So the not euro is important and then that's still very weak. Yes, it's still very weak. We compensated with price increases in Norway to compensate on gross margin. What you see now is the translation cost when taking sales and EBIT to Sweden. It's a large difference between the SEK NOK and SEK today and 1 year ago. So that's the negative effect you see the currency effect you see on sales. But if anything, if you look at the gross margin, the 30 basis points negative effect from FX in this during the 1st 9 months now and I guess also in this quarter, that would be more flat or unchanged going forward, if anything? Yes. Yes. You remember what happened in the Q1 when the NOK collapsed. So most of the headwind in the 1st 9 months comes from March actually from Q1. Exactly. It was stable in the quarter. That was my follow-up then. If you would have shown this picture, the Slide 5, on a quarterly basis instead of the 1st 9 months, would it even have been positive then in Q3 alone, the currency effect? Not positive, a very small effect. Okay. And sticking to that slide, when it comes to the purchasing synergies, where are you in that process in relation to what you said in conjunction with the acquisitions of FTZ and Interteam? We will have some more quarters with improvement, thanks to synergies. But what we said that it should be full effect as from next year. So I will expect that we will but when it comes to the work negotiations and the change of suppliers that is you can say that the project is completed, but we're still waiting for some of the effects to come, 1 or more quarters to come. Okay. Okay. Good. On the COVID-nineteen impact here, I was trying to get a sense of the net impact of the companies. Obviously, you have received government grants. It was significantly lower in this quarter compared to Q2, but they are still there. If you would have if you look at the pure negative impact on you and then try to look at the net effect if you then take away the government brands. What where are we there? And also on government grants, will those diminish completely during Q4? Obviously, we don't know now with new lockdowns and so on. But yes, if you can say something about that. I'll start with the second question. We I mean, governmental support, again, if it will not be a complete lockdown, we don't expect to get anything more in Sweden, Norway, Denmark. Poland is a little bit other situation where we still have the possibilities to get some support. But I will not expect anything at least anything material within the other three countries unless there will be something completely different. But what the government has offered now on the table is very little of that that we can use. And about the net effect of the COVID, that's it's very difficult and I don't think we actually can answer very clearly on that. There is, of course, in the Q3, it's much more stabilized. It is in some markets a lower demand due to this, but we don't have these extreme situations with furloughs and costs in and out. So it's complicated when it's Q2, especially since we have the data breach in that quarter also. But from this quarter, I would say that it's not any major impact. And when it comes to the corona impact here, could you say something about the month on month trend during Q3? Obviously, you had a positive organic growth, so 3.3% in the quarter. And but how did you sort of leave the quarter in September? Was it a higher number in September? It was I would say it was quite stable throughout the quarter when you split it into the months. But again, it's also different in different markets. So it's not that logical just to put everything together because it's depending on development in the local markets. And especially Poland became worse during the end of quarter because of new restrictions and more kind of lockdowns in Poland. But in the other markets, I wouldn't say that it affected the 3rd quarter especially much. Okay. On Interteam, you mentioned that the margin in Interteam is very impressive related to the Polish industry and peers. And I guess now, obviously, in the quarter, you had a positive impact from relief programs and government grants, but still a negative impact from COVID-nineteen also, obviously. But where could you give some guidance going forward? What is to expect? I guess the 6% margin in Q3, it's a bit you shouldn't extrapolate that maybe going forward? I mean, we talked about already with the acquisition that we have a long term goal to be best in class in Poland. And that is on this level 5%, 6%, 7%. It's it would be stupid of me to try to give some guidance going forward with the uncertainty which we have in front of us. But a lot of things which we have done in Poland will have an effect going forward because we have done strategic changes in which kind of customer groups we approach, which kind of product we focus on and very much on efficiency and cost control. So I won't say any numbers, but the strategy which we had from the acquisition has we have delivered good on so far. So we're happy with the development. Okay. I guess, didn't you receive some government grants that maybe should have been paid already in Q2? Or am I wrong there? No. In Poland, it's a general support from the state to companies to cover personal expenses. And you get the support until November 30, and you promise to keep your employee until that date. So it's actually from I think it's from May to November, the support period. So we as Per said earlier, we will have some support also in Q4 from Poland. Okay. Final detail on the central functions in the EBIT bridge, the SEK 12,000,000 there on a year on year basis. Could you say something about that? And maybe some guidance on that level also because that cost was a bit higher, I think, than expected by the market. Yes. That is the cost that varies between the quarters. So when you look you can look historically on the quarterly cost and take some kind of average. It varies a little bit from quarter to quarter depending on what cost we took centrally and what management fee we sent out to the business area. So this is to be seen as temporary in this quarter. Okay. Okay. But of course, I mean, when all the cost saving programs, which we have done, some of it is, of course, on central functions as well. But as also said, you need to look at this after 12 months to see the full picture. Yes. But yes, the cost increased. You mean that there are some one offs in that number. Yes. Okay. But could you say perhaps quantify then the one offs because the only ones that you mentioned are related to mechanoma, the €24,000,000 in the quarter. So was there additional costs then throughout the group? No, not in that way. So you can it was we took some extra costs for some changes we did, but it's not considered item affecting comparability. And as I said, you can look at the average on central function cost going forward. Okay. It's very much internal positions also in this. That's why you need to have the full year see the picture. Is it possible to say something about the very, very recent current trading, I mean, the last week or 2 weeks. I guess we are just about to see the heightened restrictions. There are no lockdowns. But have you seen anything on your, perhaps, weekly or daily reports that suggest that you are being impacted already? No, we don't do that kind of guidance, but I can repeat what I said before. And that is if we go back and look how it was in the spring, this situation should not affect the sales that much as long as it's on this level. If it will be more lockdowns, then it will be affecting. That was what we learned in the spring. But since the spring, we also added a lot of knowledge about how to handle the situation and to perhaps be more careful in deliveries, etcetera, and be able to continue sales better. So I think we learned a lot during Q1, Q2 when the first wave of COVID-nineteen was here and hitting our markets. Okay. That's all for me. Thank you. Thank you. The next question comes from Matt Lussmann, Kepler Cheuvreux. Please go ahead. Your line is now open. Yes. Hi, good morning. Maybe I have another chart there on the trading conditions in the Q4. Do you see any sort of pent up demand following up maybe a bit more driving during the summer holidays and so on going into the Q4 that people are trying to get their car in order for the winter season and so on? No, I wouldn't say that. If it was some postponed demand, that is already covered in Q3. There was some delays, but that was mostly between Q2 and Q3 because as you remember, it was car inspection in Norway that was delayed for 1 month. So we got better effect on that in Q in the summer. But in, I would say going forward and can't see any of that. If it will be something, it will be spread out for a very long time. So I don't think you can find it in the month or in the quarter going forward. Then I guess you mentioned the competitive situation in Sweden as well, making things a bit tougher in economic phenomenon. But what is the difference compared to your other markets? We have experienced a bit more activity for from low price distributors than we have in the other markets. So that is probably the main reason. But then we have in Sweden is also a market where I would say the authorized workshops are fighting good. We also have maybe more e commerce in Sweden. So I would say it's the general competition landscape that is tougher, maybe not that specific area. And you also had some restructuring in Sweden, I guess, with the warehouses and so on. Is it more to come there in the Q4? Or is it sort of the same level or the same level there? We do not expect any item affecting comparability related to Mirkammerka Normans in the Q4. We had a program during Q2 and Q3 of closure of unprofitable workshops and stores and also the warehouse now in Q3. But we do not plan for any forward closure in Q4. Okay. And regarding sort of the one off there, I mean, you had the data break in the Q2. And is there any insurance compensation in the Q3? You're still waiting for them to come more, can you say something there? Yes. We have no compensation in the Q3. We are still in a claim process, a normal claim process towards the insurance company. And we cannot guide at this moment when we will get compensation. But we are it's a normal claim process, and it's proceeding well. Good. And the final one there. I mean, you mentioned electric vehicle, like, paying you are the supplier of authorized supplier of service to those cars. Do you see more opportunities in this area? I mean, there are a lot of Chinese electric vehicle producers out there and so on. Yes. We have several dialogues going on with other producers as well. So I expect that we will have more activities on this field going forward. Okay. Thank you very much. Thank you. Next question comes from Andreas Lundberg from SEB. Please go ahead. Your line is now open. Yes, good morning. Thank you for taking my questions. If I start to continue the last one, your new deal there with Chinese EV player, how many vehicles are we talking about that these guys will deliver here in the near term? We don't know because they just start selling. So it can be if it will be 500 or 5000 that's a little bit how successful they will be. But they of course have some visions, but we don't want to be commenting on their strategy. Will this deal mean that you also will prepare the cars before delivery? If it will be that kind of let's say the delivery service, yes, we will be the 1 or our workshops will be the one who will do that. But you don't know that yet or? I think they are so what I heard is that these cars are kind of very well prepared from the factory. So it's not like and this is I mean even on normal cars it's very different. Some car producers have a lot of local adaptions, which is done in the harbors and some manufacturers make it already from the factories. And we don't expect that to be any major business. So I'd say it can be some small adjustments on. Okay. And how long you think it would take to get in some kind of business from this agreement? We hope that we'll have starts to see something in the beginning of the year. And then again, it depends on how successful they would be in selling the cars. Okay. I think and then one question on the cash flow. Can you explain the change there in payables or the positive effects from payables? What was that related to? Let's have a look. Payables. Well, that's mostly related to we have decreased our stock levels. And Yes, we have a positive effect in payables, and that's it's actually normal it can varies between the quarters actually. So it's nothing special. It's just a variation between quarters. And that also relates to the fact that it was so much higher this year than last year? Sorry? And these quarterly fluctuations, that does also mean that or the reason for the deposit effect was so much larger this year than in Q3 of last year? Yes. It can vary between quarters when we have our payments from the companies. So it's normal fluctuation. And yes. So how does it look for the inventory here? What's the status of the level? We have lower inventory levels this quarter than the quarter same quarter last year. Any particular need to increase the inventory levels here out of these 4th quarters? We always buy some more during Q4, but it will be I expect it to be on the same level as normal. Okay. Thank you so much. We have a follow-up question from Michael Oudal from Carnegie. Sorry for all my questions. But on the centralizing of warehouses, you have mentioned before that if everything goes to plan, you can close down the factory and maybe get some savings already in Q4. But otherwise, the guidance was €50,000,000 on an annual basis from 2021. Given the charges you took now in this quarter that you have closed it down, does that mean that you will get some savings from a lower staff level already in Q4 and then the actual rental savings from next year? Both yes and no. There will be some actual savings when it comes to the closed warehouse in Eskilstuna. However, this operation was not what we wanted because what happened was that during the database, we decided to close much faster. So we have, let's say, some backlogs. And to be very transparent, we have a lot of from SKUsduna who now should be delivered in to Strennus. And that needs extra people to take care about that because it was a forced action instead of a planned one. So I would say that we yes, there is some savings, but the most of the effect will come next year. Okay. And it's still the SEK 50,000,000 you have said from the beginning that is still valid? Yes. But you can't take the €50,000,000 because we do have some part of that savings we have already gotten in during this year, but which is again then has been on the other hand extra costs due to the way we did it. So net on the in the P and L, we can't just put in €50,000,000 I don't know if you have mentioned exactly how much, but the sum of the effect is already in this year. Okay. But the majority comes next year, I guess? Yes. Yes. Yes. And you have also mentioned before that this centralization should release working capital by, I think you mentioned, €80,000,000 at some point. Is it the same timing of that? Or will that come in the next year? Has that already come through to some extent? Is it maybe shown in the inventory levels being lower? I think it is already shows now in Q3 in the inventory level, but there is still most of the goods will be transferred during the Q4. So it will be gradual effect on that as well. Okay. Then a follow-up on the cash flow. You talked payables and the current liabilities then. I guess some of that increase is due to deferred payments related to government relief programs. So you have some deferred tax payments, for instance, that are in that increased number and thereby boosting the cash flow. And you are you mentioned on the 9 month basis, I think, how much the savings was for these relief programs. And you will pay that back, I guess, during next year. But could you say something more on that? And maybe say how much it impacted Q3, if you have those numbers? And then again, how does the repayment schedule look like? Is it within 12 months or so? Or is it already during Q4? Because I think some of the deferred tax payments are due in already in Q4, if I'm not completely wrong. Yes. Well, when it comes to the payables in the cash flow, if you look at the 1st 9 months, you see we have a very positive effect. It's around SEK 300,000,000 better than the same period last year. So in the 1st 9 months, we have the positive effect on the support from the governments in different countries. So we have SEK 447,000,000 better in payables. And so all the relief is in it's not in Q3, it's in Q2 or Q1. So it's no relief actually in Q3 because we repaid €30,000,000 during this quarter. We had pushed payments of $300,000,000 when we ended Q2, and now we have $270,000,000 So we actually repaid SEK 30,000,000 during the quarter. The coming three quarters, we will repay rest of it, some of it already in Q4, but the majority will be paid back in Q1 and some in Q2 as well, depending on country. So the positive effect you see in Q3 is actually from we have very good control over our working capital. So it's an effect how we handle working capital in the quarter. And we put a lot of focus on working capital to be to have as low net debt as possible, but a big effect from governmental support you see in the 1st 9 months, not in the quarter. There is no further questions coming through. So I will hand the call back to you again. Thank you. Okay. Thank you all for listening and wish you a great day. Bye. Bye.