Kesko Oyj Unsp/Adr

Dear all, warmly welcome and thank you for tuning in for Kesko's Q1 2024 release call. Our agenda today is the following. Jorma Rauhala, President and CEO of Kesko since the 1st of February this year, will give the Q1 presentation. We have here together with us our business division presidents, Ari Akseli for grocery trade, Sami Kiiski for building and technical trade, and acting division president for car trade, Johanna Ali, as well as CFO Jukka Erlund. After Jorma's presentation, it's time for questions both by phone and via chat function. All the materials related to Q1 can be found at our webpage kesko.fi under Investors. My name is Hanna Jaakkola. I work as IR Director at Kesko. I will be at your service after the presentation for your questions and discussions. But now, Jorma, the virtual stage is yours. Please.

Thank you, Hanna. Ladies and gentlemen, welcome also on my behalf to this release call. I am Jorma Rauhala and I have now the pleasure to present Keskos Q1 results. Today's headline is a good result in a challenging market and it describes the first quarter well. Now I will first give an overview of our business performance and open up elements behind the results. Key events in the first quarter. Result was in line with expectations in a challenging market. Cost efficiency was good and cash flow from operating activities strong. In grocery trade, net sales increased and profit was stable. In building and technical trade, profitability weakened as expected due to the weak construction cycle. In car trade, net sales and profit were at good level. Danish David Chain became a part of Kesko's building and technical trade as of 1st of February. And there were changes in group management board. I started as new president and CEO, Sami Kiiski as new president of building and technical trade division, and Johan Ali as new acting president of car trade division. Net sales in Q1 totaled close to 2.8 billion euros. It was down by 69 million euros. Net sales increased in grocery trade. Rolling 12 months net sales were over 11.7 billion euros. In Q1, comparable operating profit was 99.5 million euros, and operating margin was 3.6%. Comparable operating profit decreased in all three divisions. Rolling 12 months, operating profit was 686 million euros, and operating margin was 5.9%. Return on capital employed, one of our financial targets, was 12.5%. Return on capital employed decreased in all divisions as earnings declined. Financial position. Cash flow from operating activities rose clearly to 113 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 investment in logistics, acquisitions, and store site in grocery trade. Net debt to EBITDA was 1.1%. Capital expenditure was up due to investments in store sites and acquisitions. We continued investments in the network of grocery store sites. In March, we acquired two properties, the Sinikallio Shopping Center in Mankkaa, Espoo, where we have a K-supermarket and the property for K-City Market Salo in southwestern Finland. As mentioned earlier, Kesko acquired Davidsen in Denmark and the transaction was completed in January. Other investments include Onninen and Kei Autos SEED logistics center in Hyvinkää, Finland, where construction is expected to be completed in 2025. Expenses. We have succeeded well in focusing on cost efficiency despite high inflation during the year. Expenses excluding acquisition, especially Davitzen and Electroskandia, were stable year on year. Fixed costs were 507 million euros and cost ratio 18.4%. Now to the grocery trade. Good performance in Q1. Net sales totaled 1.5 billion euros and grew by 20 million euros and increased by 1.3%. At the same time, retail sales grew by 2.7%. In grocery trade, comparable operating profit for Q1 was 82.5 million euros and it decreased by 1.4 million euros. Profitability was 5.4%. Rolling 12 months, operating profit was 443.4 million euros and operating margin was 7.0%. In the grocery trade division, net sales grew and operating profit was stable despite our actions to strengthen price competitiveness. K-Group's grocery sales grew by 3.3%, online grocery sales grew by 20%, and were some 4.1% of K-Group's grocery sales. Total grocery market growth approximately 3.9%. K Group's market share decline continued to slow down in Q1. Actually, our market share development was pretty much in line with market development. Sales for the food service business grew by 0.7%, outpacing the market. Price inflation for groceries in Finland slowed down clearly and stood at 0.6%. Consumption has become more polarized. On the other hand, price continues to be important. But on the other hand, consumers also emphasize quality and convenience. For example, the growth in ready-made meals and other restaurant quality takeaway products increased. Also, online fast deliveries have increased strongly, and typically the shopping baskets in fast deliveries consist of impulse categories and delicacies. Customer flows continue to grow thanks to campaigns. In filling a technical trade, result was in line with expectation in a weak cycle. Net sales decreased by 59 million euros to 964 million euros as the construction market was down compared to the comparison period. Comparable operating profit for the building and technical trade division totaled 6.8 million euros and operating margin 0.7%. Rolling 12 months operating profit was 189.3 million euros and operating margin was 4.6%. Overall, the net sales and operating profit development were in line with expectations. Construction cycle is weak in all operating countries. Net sales and operating profit were also impacted by the fact that the number of delivery days were down year on year due to the timing of Easter. Negative impact of calendar was over 3 million euros on operating profits. In particular, net sales and gross margin for solar power products were lower than the exceptional levels seen in the comparison period. During winter 2023, the energy prices were at a very high level. In the next page, I will open up Oninen Finland's result and the solar power products a bit more. In Norway, the integration of the technical trade operator Elektroskandia, which we acquired a year ago, will be completed this spring. A positive profit impact will be seen in the numbers from the second half of the year onwards. In Sweden, the conversion of K-rata stores into K-bygg stores is proceeding as planned. Five loss-making K-rata stores have been closed. All the conversions will be completed by the end. In Denmark, Davidsen was incorporated to Kesko as of 1st of February. The comparable operating profit was impacted by 2.7 million euro expense related to Davidsen's inventories. We announced that there will be an expense when we bought the company. This is customary in acquisitions. Share of results from Kesko Senukai was minus 0.4 million euros. Times are more difficult now, but it is good to bear in mind that cycles turn at some point and we are in good position. Going forward, our objective is to be among the leading operators in building and technical trade, not only in Finland and Norway, but also in Sweden and Denmark. Now I will open up the solar power products more by looking at Oninen Finland's result. Oninen Finland's operating profit was down year on year. Solar power product sales were exceptionally strong in the comparison period. All in all, the technical trade market in Finland continued to weaken, especially due to heavy decline in new constructions. Net sales for Ordine Finland were down by 16.8% year-on-year, totaling 261 million euros. Ordine's market shares in Finland continue to strengthen further. Oninen Finland's comparable operating profit were 10.4 million euros and declined by 12.6 million euros. Some 40% of the decrease was due to decline in the net sales and gross margin for solar power products. If we look at the last year's solar power product sales, the majority of the products were sold during the first half. Gross margin split in 2023 from solar power products were 41% in Q1, 42% in Q2, 13% in Q3, and only 4% in Q4. In Q1, solar power products margins were down due to excess supply of solar power products on the market. Inventories are expected to return to normal levels this summer. In car trade, profitability was at a good level. In car trade, net sales for Q1 decreased by 30 million euros and were 286 million euros. Net sales decreased in new cars and increased in used cars and services. In the comparison period, net sales for new cars increased by the cleaning of order books as the availability of cars improved. The comparable operating profit totalled 16.4 million euros and decreased by 3 million euros year on year. Operating margin was 5.7%. Rolling 12 months, operating profit was 79.5 million euros and operating margin was 6.5%. In the car trade division, net sales and profit were at a good level in the first quarter. K-auto's order book for new cars grew compared to the end of 2023. New car orders exceeded to market development. Also used car sales grew and market share continued to strengthen. There was also positive development in service sales, growth in servicing, demands, repairs and spare parts. Also, strong growth continued in the K-Lataus EV charging business. In sports trade, net sales were down by 21.4%, retail sales down by 7%. Market share in sports trade increased. The structure of car trades has changed over the years. Used car business and service sales have clearly increased in the business portfolio. Just three years ago, new car sales were some 60% of division sales. Currently, used cars and services are almost half of the sales. Our strategy is to grow all these businesses. Profit guidance and outlook. There are actually no changes to the outlook compared to what we said in January. 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 and 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 card trade is estimated to still remain good in 2024, but to forethought of the 2023 level. Profit guidance for 2024. Kesko's operating 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 amount to 620 to 700 million euros. Previously, the comparable operating profit was estimated to amount to 620 to 720 million euros. The operating profit guidance adjustment is related to the weaker than anticipated outlook for construction in 2024. And then to the topical themes. Priorities in grocery trade. Development of our store site network continues in 2024. We will open one UK city market store and carry out 13 store updates. Three new UK supermarket store will be opened and 12 store updates will be carried out. And neighborhood stores, six new market stores will be opened and 20 stores will be refurbished. We will focus on further development on off-store specific business ideas and further improvement of operational efficiency. We will be active in carrying out actions towards competitive price levels and targeted offers and improving price image. All in all, we are currently further clarifying our competitive advantages as part of our strategy review process this spring. Priorities in building and technical trade. We will focus on proactive sales, continuing cost savings program, developing the Oninen Express network in Finland and the Baltic countries, building central warehouses for Oninen, converting K-router stores in Sweden into K-bygg stores, finalizing Genitech's integration. finalizing the Electroscandia integration in Norway, combining Davidson's operations with Kesko's operations. And also we will look into potential new acquisitions. Priorities in car trade. In car trade, the focus is on growth that outpaces the market in all business areas. We will focus on maintaining good profitability, launching important new car models, continuing growth in used cars, expanding offering in the service business, growing multi-channel sales and network, and also developing further and expanding Keilataus EV charging network. Before I finish my presentation, I'd like to summarize our market position and market share developments in Finland across the divisions, since Finland is our largest market. In grocery trade, in retail business, K-Store's market share development was pretty close to market development. In Kespra food service business, we gained market share. In building and technical trade, our market share strengthened in both for Oninen and Keerauta. In Finland, Kesku is a clear market leader in building and technical trade. In car trade, we gained market share in both new car sales as well as used car sales. Also in sports trade, intersports market share grew. Economic cycle will turn at some point and Kesko is in very good position to grow further and strengthen its profitability. Thank you.

Thank you, Jorma, for the presentation. So now it's time for questions. We will first turn to the conference call line. And since we have had here management changes, we will have an open discussion. And the one who knows the matter the best will step in then. So conference call line, please.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from ZZZ from BBG. Please go ahead. The next question comes from Anna Schumacher from BNP Paribas Exane. Please go ahead.

Hi, everyone, and thank you for taking my questions today. I have two, if that's okay. So the first is on the competitive environment in grocery. The signals that the consumer pays or is looking to be in a better position and volumes returning, have you seen any changes in the competitive environment?

Yes, good morning. I think, Ari, you can take this question.

You can say that competition is pretty hard in the market, but like Jorma explained earlier, people are looking, of course, better prices, but at the same time, more convenience. And also ready meals are increasing. That's something that you can say. So no main changes, but also we have put lots more efforts to the better prices. Good example is that we discounted the whole K-menu range down. with the market level and K-Menu is the price fighter series for us.

Okay, great, thank you. And then I was hoping you could talk a little more about the reorganization of Kespro and the thought process behind it.

Okay, it's Kespro, so Ari, you can continue.

Yes, and like we have explained earlier, Kesko is the clear market leader in the traditional wholesale market. But now we are expanding the operation to the specialty markets and other operating areas and also offering more services for the customers. And this is, of course, a good source for the growth in the future for the Kespra. And this is the behind the reasons for the new organizations and savings that we are doing.

Okay, that's great. Thank you.

There are no further questions on the conference call line at the moment, I guess. So I will turn at this point to the questions I got here from the chat function.

Anna, are you still there?

Would you like to ask another question?

Oh, hi, sorry, sorry, no, no, no.

Okay, great. Thanks. So there's a question from Svante Kruk for Snordag asking, have you had any meaningful bad credit losses, bad credits or credit losses in BTT clients?

I can answer this one. So I'm very happy to say that no, we haven't. And same is with Kespros, which is no meaningful losses at all.

Very good. I heard that there is a call waiting, so maybe to the conference call again.

The next question comes from Fredrik Ivasen from ABG. Please go ahead.

Thank you so much. I just have one question on BTT and the margin there obviously down a bit versus last year, a couple of percentage points. Would you be open to share how much of that is due to a lower gross margin and how much is just from negative deal leverage from the low volumes?

Yes, of course, I think that it's a combination, but mainly it's because of volume. And of course, some prices are also for cross-marching, but mainly volume. That's the main reason. And of course, there are those other reasons what we have said, for example, sales days, which were more than 3 million euros negative effect for Q1, and that one will be positive in Q2. And also this case with these solar panels, only in Finland, more than 5 million euros negative effect to our EBIT. And then, of course, this Davitzen, those inventory topics, something like 2.7 million euros. So, but your questions, mainly volume, but a little bit also with cross-marching.

Okay, that's clear. And what about the outlook for the remainder of the year? Do you still judge the gross margin to remain fairly stable?

Yes, I would say so. We have also guided this year. It is what we expected also earlier that this year in BTT will be softer than last year, but next year will be better. But I would say that the biggest pressure for cross-margin was with those solar power products, and that will be month by month will be a better situation now.

Okay, very clear. That's my only question. Thank you.

Thank you, Fredrik. Anything else on the conference call line? I'll turn to the chat function again. From your perspective, how do you look at construction market phases of the cycle in your operating countries?

Okay, I can maybe start. Sami, you can continue if you want. But, of course, we operate in eight countries, and those are different. And, of course, we have to remember that we have different kind of businesses also in those countries. We have this consumer business. We have what comes to building and home improvement, professional business, and technical trade. At the same time, we have a different kind of customer segments under Ondine, and there are infrastructure contractors in the industry. So we can say kind of one point or something like that, that when change will happen in each country. But if I look at those Foregon Forecasts, for example, and how they have changed since January, I would say that I look a little bit positive when it comes to Denmark. There seems to be that in the second half of the year, it could be much, much better. Also, the Sweden situation has improved a little bit, what they forecasted earlier. And then Finland and Norway may be a little bit weaker than expected earlier. But let's see. Important is that what will happen next weeks, because the consumer business was the first one which started to decrease almost three years ago. So now it's snow in Finland, but let's see in coming weeks, very important weeks to see how the consumer business will recover. But like I mentioned, eight countries, different customer segments, and difficult to say one moment or which one will be the first one to recover, but there will be some differences. Sami, do you have anything?

Good morning, Sami here, and I think that was quite a comprehensive answer, but of course, like I said, the situation varies somewhat depending on the country, but overall, the cycle is expected to turn in 2025.

Yes.

Then, grocery trade EBIT was impacted by increase in store site costs. Is it only increased rents? Could you please elaborate?

Yes, there was three reasons for that. One is that we have increases in rentals based on the indexes. And at the same time, we have building and construction more, so we have more representations and higher property maintenance costs. These are the reasons for that.

BTT, what is your cost savings program focusing on? Is it temporary or permanent cost savings?

I can start, maybe some of you can continue if you want. I would say that both. First of all, of course, we are looking at every cost, what we can do with those funds. And the biggest item is personal costs. And there we have both, both temporary and permanent cost savings. But Sami, do you want to continue or? Some technical issues.

Some technical issues. Yes.

Yes.

Okay, thank you. Then Kesko earnings per share decreased by 46%. Please give comment on that.

Jukka can open this one. Yes.

For the first quarter, I think that the earnings per share decrease was something like 27%, so not that 40%. But then again, the reason is mainly coming from the operating profit. So EBIT was down and that we have already opened up earlier. And then another part coming from the interest rate costs, which is due to the capital expenditure that we have done acquisitions and store side costs. So the balance sheet is a little bit, you know, the net debt has increased and that is partially affecting the interest rate cost as well. So those two reasons.

Very good. Thank you. Artur Heikkonen is asking, new car trade orders increased from the end of the last year. Do you see that market to increase going forward? That is the question.

So, Sami or Johanna, which one? You can choose.

Good morning from my side, Johanna Ali. Yes, our new orders increased, and order book grew from the end of 2023, like mentioned. And then when it comes to the market, Of course, it's a market that's really challenging and it's maybe a big question mark what will happen in the whole market. But we estimate that we will at least increase the orders also for the coming months.

Yeah, correct. And also the car business, it's related very much on the models which you have. And like we have said, we have very interesting models to come from all our brands. And these are already some are introduced and will be introduced during the 2024. Thank you.

Are there any questions on the conference call line? No. Last question from here. If you have any further questions, please type your questions since it takes some time before I can see it here. But I'll take the last one I can see. Could you elaborate the factors in the decline of operating profit in billing and technical trade? There were some additional items in addition to Davidsen. Was there any additional items? Addition to Davidsen that...

Yes, that was this, Jukka, you can open maybe that 2.7 million euros.

But anything else that was impacting operating profit?

I think Jorma has covered already that question quite thoroughly. So it was really the Davisen impact then. Then the sales day effect around 3 million, more than 3 million euros as such. And then the solar panel effect just in Finland around 5 million euro. And then obviously the cycle land volume effect. So those are the factors.

Exactly. Very good. If there's any further questions, I would like to thank all the participants for the call and hopefully enjoy the beautiful spring weather coming up, hopefully this weekend. Any last comments, Jorma, to the market?

Yes, as we mentioned, the first quarter was what we expected. And of course, what we have also said that grocery business and car business are quite stable, I would say so. And we know that in building and technical trade, the market is stable. week now, but we have also mentioned that we believe that next year will be better and I also believe that in some areas the recovering will start already this year, latter part of this year.

Thank you.