Kesko Oyj

Welcome to the conference call. For the first part of the conference call, the participants will be in listen only mode. During the questions and answers session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now I will hand the conference over to the speakers. Please go ahead.

Dear all, Warmly welcome and thank you for tuning in for Kesko's full year and Q4 2023 release call. My name is Hanna Jaakkola. I work as IR Director at Kesko. We have a slightly enhanced agenda today, as this is the last time we had the honor of having President and CEO Mikko Hellander with us before his well-deserved retirement. Jorma Rauhala, currently Deputy CEO and President of Building and Technical Trade, has been appointed by the Board of Directors, President and CEO of Kesko as of 1 February 2024, as Mikko retires. We had the great pleasure of having our Chairman Esa Kiiskinen here with us today to introduce Jorma and to give some background thoughts behind the appointment. So first, Mikko will give the full year Q4 presentation. As always, we have here together with us our business division presidents, Jorma Rauhala, Ari Akseli and Sami Kiiski, as well as CFO Jukka Erlund. After the presentation, it is time for questions, both by phone and via chat. And after the Q&A session, the chairman of the board, Esa Kiiskinen, will give his presentation. But now Mikko, the virtual stage is yours, please.

Thank you, Hanna. Ladies and gentlemen, welcome also on my behalf to this release call. Today's headline is a good result from all divisions and it describes well our year. Now I will first give an overview of our business performance in 2023 and then the fourth quarter. After the presentation, we will be happy to take your questions. Kesko's profit-making ability is excellent. Operating profit 712 million euros is a good result in a week cycle. As you can see in the graph on the right, the result and profitability has risen to a new level. Key events in 2023. Very good profitability in grocery trade. Profitability in building and technical trade remained good despite weak construction cycle. Sales and profit improved clearly in all card rate business segments. During the year, we acquired Ereskandia in Norway, and in August, we announced that Kesku will acquire Danish builders Mersen & Davidsen and enter Denmark. In December, I announced that I would retire from Kesko's president and CEO position and soon after, Jorma Rauhala was appointed as new president and CEO as of February 1st. The number of domestic shareholders has increased during the year for more than 27% to above 105,000 owners. The Board proposes to the annual General Meeting a dividend of €1–€2 per share to be paid in four instalments. Net sales for 2023 totaled 11.8 billion euros and it decreased by 0.8%. Net sales increased in grocery trade as well as in card trade. Comparable operating profit for last year was 712 million euros. It decreased by 103 million. Operating margin was 6%. Operating profit increased in card trade. Return on capital employed, one of our strategy targets was 13.4%. Return on capital employed increased in car trade year on year and decreased in building and technical trade as well as grocery trade. Our financial position is strong. Cash flow from operating activities rose above 1 million euros. Cash flow strengthened on the comparison year thanks to further improvement in working capital management. Interest-bearing net debt increased year on year as a result of investments in store sites, logistics and acquisitions. Net debt to EBITDA was 0.7. We continued the investments in growth, capital expenditure grew due to acquisitions and logistics projects, especially the construction of Oninen and Kei Autos shared logistics center in Hyvinkää, Finland. In accordance with our growth strategy, last year we continued consolidating the Scandinavian building and technical trade market by acquiring two companies in Norway and one in Sweden. We have succeeded well in focusing on cost efficiency. We were able to reduce personal expenses despite significant wage inflation, also other expenses decreased. Depreciations increased due to investments and cost increases related to rental agreements. Now to Q4 results. Net sales in Q4 totaled over 2.9 billion euros. It was down by 3.7%. The net sales grew in grocery trade by 1.3% and car trade by 3.8%, but decreased in building and technical trade. In Q4, comparable operating profit was at 170.5 million euros and operating margin was 5.9%. Comparable operating profit increased in grocery trade and decreased in building and technical trade and in card trade. Grocery trade key topics in Q4. Improved purchasing power and slowing inflation impacted the market positively. Tight price competition continues in Finland grocery trade, as in the third quarter, also in the fourth quarter, decline in grocery retail market share continued to slow down further. Campaigns and other marketing efforts worked well, customer visits in K-stores increased, also the number of K-ruoka application users grew significantly. Grocery sales in our stores grew by 2.6% and online grocery sales grew by 17.9%. Gaspros sales grew by 4.9%, again clearly exceeding market growth. Gaspros comparable operating profit rose to 17.9 million euros and operating margin was 6.3. Price inflation for groceries continued to decline. Building and technical trade, Q4, key topics for building and home improvement trade. Construction activity has declined in Northern Europe due to inflation and rising interest rates. The biggest drop has been in residential construction. Q4 operating profit for building and home improvement was 5 million euros despite seasonal fluctuations and weak market. Our market share grew further in our biggest market, Finland. Net sales for building and home improvement trade decreased in all operating countries in both B2B and B2C trade. Share of results reported by Kesko from the Kesko Senukai joint venture was 13.5 million, up by 2.3 million euros. In Q4, we continued the successful cost and working capital management. Credit losses were low. And then to technical trade. Net sales for technical trade decreased by 0.7%, in comparable terms by 9.4% due to the weakening of the construction market. A significant part of the decrease in comparable sales came from solar power products. In solar power products, sales in the comparison period were exceptionally high due to a fast rise in electricity price at the time. In Q4 technical trade operating profit was 22.1 million. Market share continued to grow in the only biggest market in Finland and operating margin was 5%. Also in technical trade credit losses were low. Car trade key topics in Q4. New car deliveries were at the same level as the year before. Used car sales increased clearly. Market share in used cars continued to grow. Also, service sales development was good. Q4 profit for the division was at a good level, 10.6 million euros. Order book for new cars took an upturn in Q4. Net sales for sports trade were down by 15.1%, but profitability was good at 7.5%. And then outlook and guidance. outlook. In grocery trade, B2C trade and the food service market are expected to remain stable despite tightened price competition and inflation is expected to slow down in 2024. Profitability in grocery trade is estimated to remain good also in 2024. In building and technical trade, the market is expected to continue to decline in 2024. The economic cycle will have the biggest impact on new residential building, while the decline in other building construction, renovation building and infrastructure construction is expected to be smaller. The cycle is expected to turn in 2025. Profitability in building a technical trade is estimated to fall short of the 2023 level, but to still remain at a reasonably good level in 2024. In car trade, new car sales are expected to fall short of the 2023 level. Sales of used cars and services are expected to grow. Profitability in car trade is estimated to still remain good in 2024, but to fall short of the 2023 level. Guidance for the current year, the environment is estimated to remain challenging in 2024. Kesko's net sales and operating profit are estimated to remain at a good level in 2024 despite the challenges in the company's operating environment. Kesko estimates that its comparable operating profit in 2024 will be in the range of 620-720 million euros. The guidance is based on an estimate of a relatively short recession in Kesko's operating countries. Key uncertainties impacting Kesko's outlook are developments in inflation and industry levels and geopolitical crises and tensions. Dividend proposal. Board of Directors is proposing a dividend of one euro, two euro cents per share to the annual general meeting. It is proposed to be paid again in four installments. This proposed dividend represents 80 percent of the comparable EPS. And now, ladies and gentlemen, let's look at Kesko's transformation. The strategy has the key role in the company's transformation. We have experienced, I would say, an amazing transformation from traditional fragmented retailing company into one unified K. Earlier, the company did not have a unified identity from customer's point of view. Today, Kesko is a unified focus company where we also utilize the synergies between the businesses and divisions, and the customers recognize Orange K and appreciate it. The strategy works and the sales increase proves it. I can proudly report that we have been able to increase the sales of our core businesses by 6 billion euros since 2014. Also sales via digital channels have continued to increase steadily. Currently, digital sales exceed 2 billion euros. Digitalization is an important growth driver for Kesko, not only as a sales channel, but also more holistically in, for example, in improving efficiency and customer experience. Customer satisfaction has risen to a new level. Two million customers visit case stores every single day. In the field of sustainability, Kesko is a global leader. In the recent Global 100 listing, Kesko was ranked as the best company in its sector. We are the only company in the world to have made this list every year since its start in 2005. The sustainability work is in our DNA and we have put a lot of effort to improve it constantly in all our operations. This work has been noticed also in other ratings where Kesko has received excellent scores. Thanks to growth, thanks to successful implementation of our growth strategy, we can see a strong development in our comparable operating profit. Despite weak economy, we are able to report strong numbers. The profit guidance of 620-720 million in this year market environment is a strong message that Kesko's profit-making ability is excellent. The mission of a listed company is to create value to its owners. Since 2015, the total shareholder return paid dividends reinvested and the latest dividend proposal included is 8.3 billion euros. Hence, the excellent profit-making ability can be seen in total shareholder return. Our success is created by people. Performance bonus is paid to personnel since 2015, total 300 million euros. Thank you all for the great work. We published a book last December that makes a deep dive into Kesko's history. The author, well-known historian Anitra Komulainen said in the book, the success of Kesko and K-group is not a coincidence. Throughout its history, Kesko has been able to transform and adjust its operations and find success and will continue to do so also going forward. I have had the privilege of leading Kesko for over nine years. I wish the best of luck to my colleague and new successor Jorma Rauhala as the next president and CEO of Kesko. And as I now retire, I want to express my gratitude to all our customers, shareholders, the people of K Group and our partners for their trust and collaboration over these past nine years. Thank you so much.