Hello, and welcome to the Mekonomen Group Telephone Conference Q3 Report 2021. For the duration of the call, your lines will be on listen only. However, later in the call, you will have the opportunity to ask questions, and this is done by pressing star one on your telephone keypad. If at any point you need assistance, please press star zero, and you'll be connected to the operator. I would now like to hand over to our host, Pehr Oscarson, to begin the call. Thank you.
Thank you. Good morning, and welcome to the presentation of the third quarter 2021. Åsa Källenius, our CFO, is with me and will guide you through the results. Once again, I'm very glad to say that we have delivered another record quarter. This is the best third quarter ever for the group, with further growth and improved profitability. Our solid financial position gives us the possibility to further expansion and growth, both organically and through larger acquisitions. During the year, we have had focus on developing our offer around electric cars, resulting in several steps forward within training, assortment, services, and concepts. I will be back later in the presentation. Thanks to our size, position, and strong concepts, we have managed to increase our shares in the independent part of the market.
We clearly see that our concepts and offerings are appreciated by partners and customers, and we are well-equipped for taking the next steps in our growth journey. Åsa, please take it from here and give us some more details around the results.
Yes. Thank you, Pehr, and hello, everyone. The best third quarter ever for the group, both when it comes to sales and EBIT. Of course, we are very pleased that we are well in line with our strategy plan and moving closer to reach our long-term financial targets. We continue to develop strongly with an organic growth of 4% in the third quarter. Adjusting for currency effects in the quarter, the growth was 5%, which is in line with our long-term financial goal. Adjusted EBIT margin in the quarter was 10%, also in line with our long-term financial target. Our cash flow continues to be strong, and our net debt to EBITDA is better than our long-term financial goal of 2x to 3x . As Pehr touched upon, and as we stated in February during our Capital Markets Day, we see several potential roads ahead.
For example, invest in future growth organically or through larger acquisition and paying dividend to shareholders in line with our long-term financial goal. Most likely, there will be a combination of above mentioned. Looking at Page 4, we report the highest EBIT for the third quarter ever, and an enormous improvement for Mekonomen, combined with strong and stable performance from FTZ, Sørensen og Balchen, and Inter-Team. Over to Page 5 and the gross margin for the first nine months of this year. We have a continued good trend where gross margin has increased further from already high levels. We are now at 45.5% this year. Then we move over to Page 7 and the result per business area, and first FTZ. We had another strong and stable quarter in FTZ with impressive margin.
The EBIT margin is stable at 11%, and this is the same as last year. We see a good underlying demand where we are benefited from our size and being the number one player in the Danish market. Over to Page 8, Inter-Team, where we report the best sales ever for a quarter. The trend of a stronger EBIT continues, and this quarter we report an EBIT margin of 5%. Last year, we were positively affected by governmental support. As in other markets, we experience a high underlying demand in Poland. We now have a favorable availability through our two new regional warehouses in strategic geographical areas, and we'll come back to that later in the presentation where we do a deep dive into the Polish market in Inter-Team.
We can conclude that we have turned Inter-Team around, and combined with a strong result in FTZ in Denmark, we are very successful in our acquisition. Moving over to page nine, in Mekonomen, we see that our initiatives have paid off. We have increased our sales without having to increase cost. The high gross margin is supported by supply, supplier bonuses and favorable currency effects. Primarily, we have delivered good results due to increased loyalty from customers and the structural measures and cost efficiency methods we implemented earlier. In Mekonomen, we increased our EBIT margin to 10% in the quarter compared to 7% last year. The organic growth rose to 4% compared to 1% last year. To summarize, Mekonomen shows a great development, and we estimate an increase in market share. Over to page ten and Sørensen og Balchen.
They continue to deliver very strong from very high levels previous year. EBIT margin is impressive, 22% in this quarter. The demand in Norway is slightly lower than the same quarter last year. All in all, we are very pleased to see that Sørensen og Balchen maintain its long-term strong position. Thanks to the fact that they are a sharp niche player. Sørensen og Balchen are one of the strongest player in the industry in Norway. That was the result in the quarter. Now I hand over to you, Pehr Oscarson.
Thank you, Åsa. Yeah, I'm very proud that we have delivered another quarter with record results for the group, and I feel confident that we'll benefit on our strong market and financial position going forward. On Page 12, we take a look at the strong footprint in the market. We see growth of workshops in almost all markets, though most important is our focus on larger quality workshops with larger amount of mechanics and concept compliance. Page 13 shows the total amount of cars on the roads in Sweden, Norway, Denmark, and Poland, as well as number of driven kilometers, the two large drivers in our industry. We see an increase of number of cars in all our markets over the past three years, and we expect to continue growth going forward. Moving on to Page 14.
The past year, we have had a large focus on developing our offer for electric cars, and we will be in the driver's seat in this area where we will both benefit and contribute to the transition to fossil-free vehicle fleets in our markets. As we see on Page 15, we have already reached our target of 1,500 electric car workshops in the group, much faster than expected when the target was set during our Capital Markets Day in February. On Page 16, I will elaborate some around the levels of our E+ standard. We have divided it into three levels, where we now have reached 1,500 workshops reaching at least Level 1. Level 1 includes work on high voltage vehicles without exchanging high voltage components. For example, scheduled maintenance, brakes, tires, and et cetera.
That is closer to 80% of the work done on electric cars driven on the roads today. Level 2 includes competence in exchanging high voltage components in the cars, for example, the battery. When we go to Level 3, it also includes repairing high voltage components, for example, opening the high voltage battery and replacing individual battery cells. We move on to Page 17. We have already started the training for E+ Level 2. In Sweden, for example, we start an E+ Level 2 tour a couple of weeks ago, where training or workshops will take place in 29 places all over the country, and this will be ongoing until next summer. Mechanics will be educated in E+ Level 2, which approves work on all electric cars, including replacing high voltage components.
The training is conducted in an 80-meter-long, highly equipped trailer, which also makes our training offers to the workshops very available. On Page 18, we present a sustainable transition concept developed for workshops in Denmark. This is an all-in-one solution which means that gathers parts and equipment, services, training, and business optimization in one concept that will be integrated in aftersales total concept offer to its affiliated workshops. Moving on to Page 19. We have conducted a gap analysis of spare parts stored in the group's warehouses for 30 most common electric car models. We can conclude that we are already number one player in the industry when it comes to the coverage of parts for electric vehicles.
We currently cover 62% of the spare parts for common EVs, and this is an increase of 50% over the past quarter and is well over the present market demand. We estimate that we'll have full coverage in the beginning of next year. The coverage of parts, training, and efforts in our branches will lead to Mekonomen being the number one go-to player. This is well in line with our enabling mobility strategy and vision. We enable mobility today, tomorrow, and in the future. On Page 21, we have gathered a few examples of what we have done so far regarding implementing the strategy. Among others, we have an efficient organizational structure. We launched E+ and increased electric car trainings or workshops. We have launched service agreements for car owners.
We signed collaboration agreements with new EV actors. We have increased loyalty from our workshops and, which have resulted in higher sales. Development has been done to our digital booking systems. We have launched click and collect, and we invested a part, or in a part of Danish company Vantage, which is the best in class in terms of lubricant oil, especially recommendations in, and cataloging in this area. We have many questions on the individual markets, and therefore we introduce a focus line into one of our markets. As we see on Page 22, we start with Poland. Poland is a rapid growing market with more than 17 million cars on the roads. The past quarters, we have noticed a strong underlying demand from the customers, a demand that we are now very able to meet.
We have implemented our strategy successfully in Poland. In the past year, we have established two new regional warehouses to increase the availability to our customers. We have prioritized the domestic Polish market and the export business that is profitable. This has led to an improved EBIT margin of 5.4%, compared to 0.7% in 2017. The electric car development in Poland are next to zero. We're still very comfortable that we will be the number one player on the market in Poland when it does happen, not least due to the knowledge, assortment, and competence we are developing in our other markets. The stable development quarter-to-quarter in Poland is a solid sign of a turnaround case, and we feel confident in growing our market shares in Poland in the coming years.
I will highlight this and end this presentation with highlighting the award we received last week during the Retail Awards. It was Logistics Initiative of the Year, and this is a receipt that we have one of the strongest logistics chains. We have run the project on merging two central warehouses in Sweden and building a fully automated part of the warehouse since 2016. According to plan, we completed the project in the end of 2020. Now, 70% of our items and 75% of our orders are efficiently handled by an automated warehouse solution. It's great work from the team behind the project. Again, another record quarter for the group. We continue to deliver profitable growth. We are well equipped for the future electric car fleet, and we have a good financial position to continue our journey of expansion.
This concludes our report for the third quarter, and we now look forward to your questions.
Thank you very much. Everybody, if you'd now like to ask a question on today's call, please now press star one on your telephone keypad, and please ensure your line remains unmuted locally. Star one if you'd now like to ask a question. Our first question comes from the line of Stefan Stjernholm from Nordea. Please go ahead.
Hi. Stefan here. Can you hear me?
Yes.
Yeah. Good. Well, I start off with the most discussed topic on the financial market currently, and it's the supply chain. Can you shed some more light on how you see the supply chain and if it's manageable and if it's getting worse or if it's easing relative to what you've seen in recent months?
We do have some disturbances in the supply chain. It's not full or whole categories. It's more of a single parts kind of problem. We have well managed this, I would say quite well. We usually very often have alternatives, alternative suppliers, and we can sometimes use private label or the other products. We still have a very good availability towards our customers. When we look at this going forward, we believe that it will continue to be the same amount of disturbances, at least for maybe half a year more. As I said, we manage it quite well, and we have good capacity in delivering to our customers.
It looks like that you are in a relatively better position. Is that right to competitors?
Yes, I would say.
Yeah. Regarding pricing, do you see a need of further price increases going forward?
We do price increases regularly, and that's also. It's on both single categories or single products. We adjust when it's needed. We don't see any big reasons, but we of course follow the market, and we also try to push back price increases to our suppliers when it's possible.
Okay. Another topic, potential acquisitions. I think you mentioned earlier that Finland or the Baltics could be potential markets. Is that still valid? And also how do you view the Polish market given that you only have a 4% market share there?
Yeah. I think we said that Finland, Baltics, and Poland is where we are most interested for acquisitions. It should be the right timing and the right kind of company. Those markets is of course interesting.
Yeah. Okay. Thanks.
Mm-hmm. Thanks.
Thank you very much. As a further reminder, if you are wishing to now ask a question, would you please press star one on your telephone keypad? Please stand by for a moment while we give everybody the opportunity to signal. Thank you for your patience. We have no further questions coming through, so I'll hand back to you. Our apologies, and we have some more coming through now. Our next question now comes from Matt Lees from Kepler Cheuvreux. Please go ahead.
Hi, thank you. Looking at the current market situation and the organic growth you experience currently, is it sort of a pent-up demand following the ease of the pandemic and so on, and you see that people drive more and we should expect the organic growth to continue throughout the year and into next year? Could you say something about that in that outlook, please?
Yeah. That's what we are fighting for, to increase our growth. Of course, I wouldn't do any outlooks in that way. I mean, the biggest driver for our industry is driven kilometers in total. Of course, when things now are back to more normal situation, I wouldn't say that it's a temporary effect, but we expect the market to be quite stable. Again, if we look at the driven kilometers, that will be the best guidance. Of course, we always try to gain market shares.
Yes. I mean, raw material costs and trade costs and everything is sort of increasing. I guess, how do you sort of manage price increases in your assortment going forward? Is there room to do more, or is it sort of still a competitive situation that makes that difficult for you to push cost increases forward?
We try to push it both ways. First of all, we try to push it back to the suppliers, of course, which we sometimes can be quite successful due to the fact that we are very, especially together with LKQ, we are a very big purchaser in Europe. This affects the whole industry. I would say that it's more of an inflation that we will see if needed. We will increase prices where it's possible, and especially when there's room for it.
Great. Regarding, I mean, you have sort of made the structure changes in the Swedish market and with the sort of integration of the two Sweden. Do you see more to come, or is it sort of a lean and mean Mekonomen now that sort of you can do much more?
No, we are continuously looking on improving the efficiency. I think that there is possibilities to do more. I wouldn't put any numbers with it, but there is still possibilities, definitely. Maybe not so much in Sweden, but in the other markets, definitely.
You mentioned Stefan's question there, that you see a lot of opportunity to grow through acquisitions, well, going forward. I mean, gearing is also in good order. How do you view dividends and so on? I guess you have the target to distribute out of the profit to shareholders. Could you say something about that?
We have our dividend policy, which we, of course, try to follow. I will leave it to the board to decide what's to be recommended when we have finished the year. That will be a later decision.
Good. Finally, just about, I mean, I think I've asked that before, but, I mean, some of the car producers or most of them try to sell more cars digitally and directly to consumers. Do you think that opens up for the multi-brand service providers like you, your customers, or is it sort of a substitution?
Yeah. It's not negative, definitely. However, any positive that the future will show. There is definitely possibilities for multi-brand and independent workshops in a more transparent and open market.
Okay. Thank you very much.
Okay. Thank you.
Thank you very much. As a final reminder, if you are wishing to ask a question, please press star one. Our next question comes from the line of Andreas Lundberg from SEB. Please go ahead.
Thank you and good morning, everyone. If I start with, you talked about some initiatives paying off in Mekonomen or perhaps in Sweden. Could you just tell me what those initiatives are, as my first question?
Yeah. It's a lot of different things. As you remember, during last summer we closed unprofitable stores and workshops, so that's maybe the most significant action. It's also increased availability in the local branches and a lot of different things.
Okay, cool. On Sørensen in Norway, would you say that you're on a structurally higher level now, or is it still a boost by some COVID-related stuff?
Difficult to predict, but I think in the third quarter we still had a very good 4,000 very good summer sales. We believe that they are in a strong position. There is still market shares to develop, but maybe a little bit uncertainty around the market. I will get to it so far.
Yeah. You don't think you're overly sort of boosted temporarily?
No.
Okay. Lastly, on the electrical side, what's your, you know, first indications of the sort of implications on your business?
Yeah. I mean, we can look at the Norwegian market where we start to have quite old electric cars now, and the implication is very, very little. There is other products that are selling, but those products are generally more expensive. In terms of value, we still don't see any that it should be any threat to our market in a way.
What other products are we talking about?
Sorry.
What other products are we talking about here?
Yeah, I think some other products, but it's more we send more steering components, more tires, more brake and some more chassis to EVs. They wears out faster and it's more a little bit more complex built. It's not so high volumes on the parts, which means that the prices are higher. That's some of the examples. It starts to be some new pure electric components like onboard chargers and other things that also needs repairs.
Okay. Thank you. Lastly, a quick one. Are all of your announced synergies from the warehouse merge now, let's say, capitalized or captured?
Yes, I would say so. It could be still some room for improvement in efficiency, but in total, we have gained those synergies.
Okay. Thank you so much.
Mm-hmm. Thank you.
Thank you very much. Our next question comes from the line of Maria Eriksson. Please go ahead, Maria.
Hi, Per. This is Maria from SSVF.
Hello.
I would like to ask, the market for electric cars mean a lot of new brands and models. What is a challenge to adopt your certification with the E+ Level 2, the circumstances with all these new models with the different batteries and different quality, et cetera?
We say that the challenge is about training the mechanics and, of course, some new equipment needed. In general, even if it's a lot of new models, the technology is pretty much the same. For a mechanic, it's a multi-brand training covers a lot of the new brands as well.
Mm-hmm.
It's training with the most important part.
Perfect. How do you work with security in the workshops regarding the damaged electric cars regarding the dangers of the damaged batteries, for example?
Yeah. That's why the training is so important because in the training it's very much focused on the security and there's very specific rules how you disconnect the high voltage system and what kind of security equipment you should use. It should be separated from other cars and so on. That's all included in the training for the mechanics.
Okay. Thank you so much.
You're welcome.
Thank you very much for your questions. All questions have now been answered, so I'd like to hand back to Per, if I may.
Okay. From then, thank you all for listening and, have a good day. Bye.
Thank you. Bye.
Thank you very much everyone for joining today's conference call. You may now disconnect your lines.