Kesko Oyj

to sunny Helsinki, and thank you for tuning in for Kesko's Q2 2024 release call. Our agenda today is the following. CEO and President Jorma Rauhala will give first the Q2 presentation. We have here together with us our business division presidents, Ari Akseli for grocery trade, Sami Kiiski for building and technical trade, and Johanna Ahli for car trade, as well as CFO Anu Hämäläinen. After Jorma's presentation, it's time for questions both by phone and via chat function. All the materials related to Q2 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 stage is yours. Please.

Thank you, Hanna. Ladies and gentlemen, Welcome also on my behalf to this release call. I am Jorma Rauhola, and I have now the pleasure to present Kesko's Q2 results. Today's headline is Good Performance in a Weak Market, and it describes the second quarter well. Now I will give an overview of our business's performance and open up elements behind the results. Key events in the second quarter. Net sales and profit decreased as expected. Gas flow from operating activities strengthened. In grocery trade, net sales were down and profit at a good level. In building and technical trade, profitability weakened as expected due to the weak construction cycle, but decline was slower than in Q1. In car trade, net sales and profit were down. In May, Kesku agreed to acquire the operations of the Autotalo-Lohja dealership. In June, we published our updated strategy. Main strategy pillars are intact, and competitive advantages as well as targets for each division were refined. There were many changes in the company's group management board. Sami Kiiski was appointed as president of building and technical trade. Johan Naali as president of car trade. Anu Hamalainen as chief financial officer and Lasse Luukkainen as EVP legal and sustainability. Net sales in Q totaled close to 3.1 billion euros. It was down by 11 million euros. Net sales increased in building and technical trade as Davitzen acquisition is now included in the figures. Rolling 12 months net sales were over 11.7 billion euros. In Q2, comparable operating profit was 178.3 million euros, and operating margin was 5.8%. Comparable operating profit decreased in all three divisions. Rolling 12-month operating profit was 656.3 million euros, and operating margin was 5.6%. Return on capital employed was 11.8%. Return on capital employed decreased in all divisions as earnings declined. Financial position. Cash flow from operating activities rose clearly to 309 billion 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 logistics and in grocery trade store site network. Net debt to EBITDA was 1.1. Capital expenditure decreased in Q2 and totaled 128.4 million euros. We continued investments in grocery store site network. Other investments include Onninen and Keiauto shared logistics center in Hyvinkää, Finland, where construction is expected to be completed in 2025. Expenses. Expenses were up due to David's acquisition and real estate costs, but personal expenses were at last year's level, excluding acquisitions. Fixed costs were 532 million euros and cost rates was 17.2. It was down compared to last quarter, but up year on year. We have succeeded well in focusing on cost efficiency. Now to grocery trade. Profitability was at good level. In Q2, net sales totaled 1.6 billion euros and declined by 28 million euros. Rolling 12 months, net sales totaled 6.3 billion euros. In grocery trade, comparable operating profit for Q2 was 114.5 million euros, and it was close to last year's level, decreasing only by 3.9 million euros. Profitability was 7.2%. Rolling 12 months operating profit was 439.5 million euros, and operating margin was 6.9%. The decrease in comparable operating profit was impacted by an increase in store-side costs and a decline in net sales for K-City markets' home and specialty goods, so-called non-food. The comparable operating profit for Gespro increased slightly. Key events in grocery trade in Q2. In the grocery trade division, net sales and operating profit decreased. Operating margin was close to flat year on year. K-group's grocery sales were down by 1.1%. K-group's net sales were down by 1.3%, still again exceeding market growth. K-city market non-food sales were down by 4.3%. Online grocery sales continued on the strong growth trend and grew by 13.5%, and were some 4.1% of K-Group's grocery sales. Total grocery market growth was approximately 0.1%. K-Group's sales performance was likely below the market. Price inflation for groceries in Finland stood at 0.1%. Last year, at the same time, it was over 10%. Customer flows continued to grow thanks to campaigns, but average purchase was down. There was a change in Finnish legislation that enabled the sales of beverage with 5.6 to 8% alcohol content in grocery stores and tent of shoe. Previously, the limit was 5.5%. These beverages were successfully added to grocery store selection all over Finland. The impact of the legislative change on Kesko sales is expected to be around some tens of millions of euros annually. Nearly 450 wine products are now sold in K-group grocery stores. Approximately 30% of sales are coming from products that are available exclusively in our stores. White wines account for about half of the wine sales. Also, some 100 stronger beer products were added to selections. They now account for a few percent of total beer sales. New alcohol products were introduced to stores in a responsible manner and wine is typically bought as a part of larger food baskets. The possibility to buy strong alcoholic beverages from a grocery store increases customer convenience and benefits especially smaller stores in rural areas. And now to building and technical trade, where the result was in line with expectations in a difficult cycle. Net sales increased by 55 million euros to 1.2 billion euros, thanks to Davidson acquisition. In comparable terms, net sales decreased by 5.4% due to the weak construction cycle. Rolling 12 months net sales was 4.1 billion euros. Comparable operating profit for the building and technical trade division totaled 56.1 million euros and operating margin 4.7%. Rolling development's operating profit was 173.4 million euros and operating margin was 4.1. The decrease was due to a decline in net sales, which was impacted by the weak construction cycle. Key events in building and technical trade in Q2. Construction cycle is still weak in the Nordics, but turnaround can be seen in Poland and the Baltics, where online sales are growing. Overall, net sales and operating profit development were in line with expectations. Davidson is included in the figures. Oninen's operating profit, in particular, was impacted by weaker sales and profitability of solar power products compared to the exceptional levels of Q2 2023. The allocation of fair value related to division acquisition, mainly related to inventories, had a positive €1.2 million impact affecting comparable operating profit. Write-downs of overdue trade receivables totaled €2 million. Share of results from Kesku Senukai was 6.3 million euros. There are signs of a pickup in sales in both building and home improvement trade and technical trade. In this picture, we can see Keerauta's and Oninen's sales development in Finland since 2019. Keirauta is the market leader in building and home improvement business in Finland and Oninen in technical trade. Both have nearly 50% market shares. And these two represent approximately half of the whole building and technical trade division. In the graph, we can clearly see the consumer COVID boost for Keirauta in Q2 and Q3 2020. And then in 2021, we saw B2B sales increase with high demand and global price increases. The same demand and price increases happened in Oninen too. Turning construction cycles started to affect First Keirauta in 2022, but Oninen was at the time boosted by high demand for alternative energy solutions, like solar panels and heat pumps, as energy prices increased due to Russia's offensive war to Ukraine. After several quarters of week cycle, we can now see sales turning. First in Keiraata, but also in Onninen. This positive trend has continued also in July. In car trade, good performance in a challenging market. In cars rate, net sales for Q2 decreased by €39 million and were €299 million. 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 clearing of order books as the availability of cars improved. The comparable operating profit totaled 14.9 million euros and decreased by 9.5 million euros year-on-year. Operating margin was 5%, rolling 12 months operating profit was 70 million euros and operating margin was 5.9%. Key events in car trade. Market demand for new cars was mute. Q2 first registration in Finland decreased by almost 20%, and market for used cars were up to 0.9%. Net sales and profitability were at expected level in a difficult market. New car sales were down, but customer demand for new models is at a good level. In used cars, sales grew significantly outpacing the market. Good growth continued also in service sales. Growth in K-Lautaus EV charging proceeded according to plans. There are over 1,700 charging points located on K-Store's parking lots, creating also customer flows to the stores. 679 of the charging points are fast charging. In sports trade, net sales decreased, but market share strengthened. Now let's move to some key highlights to summarize the businesses. In grocery trade, consumer confidence in Finland is still weak, but it has improved in recent months. Consumption is polarized, price is still important, but quality and convenience are important too. The development of our store site network continues. There will be seven new stores openings in the second half of 2024 and 23 stores updated. OPPO season is strong in all areas of food trade. In building and technical trade, market is showing signs of picking up in all operating countries, but the cycle is still weak. We will continue the execution of country-specific strategies. Inventories are today at a healthier level in both building and home improvement trade and technical trade. In car trade, the business portfolio is balanced. New car sales are muted, but new models are expected to support sales. New models include, for example, Audi Q6 e-tron, Porsche Macan, a new Volkswagen ID.7 Tourer and Volkswagen Passat. Strong sales growth is expected to continue in used cars and services. Guidance and Outlook Outlook. There are actually no changes to the outlook compared to what we said in January and in Q1. The big picture is that in grocery trade, B2C trade and the food service market are expected to remain stable. In filling and technical trade, the market is expected to continue the decline in 2024. The cycle is expected to turn in 2025. In car trade, new car sales are expected to fall short of the level 2023 level. Sales of used cars and services are expected to grow. 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 680 million euros. Previously, the comparable operating profit was estimated to amount to 620 to 700 million euros. The profit guidance specification is based on development in the first year half and on updated estimates regarding development in building and technical trade and car trade in latter half of the year. In June, we published our updated growth strategy for 2024-2026. I'll go through the key slides now. Kesko's growth strategy in one page. This is my most important slide and the way I lead Kesko. The leading and most attractive trading sector growth company in Northern Europe. This is our vision. Strategic targets. Delivering profitable growth. Strengthening market position in all businesses and all countries. Building focused B2B and B2C business portfolio. Increasing customer value. Competitive advantage, operational excellence. This is very important, critical, and also very difficult. It includes our daily processes, store concepts, assortment, and pricing management, product availability, delivery accuracy, and so on. But these are the most important for our customers. Omni-channel customer experience, both physical stores and digital services, and customers make the choice. K-retail model is important in the grocery, B2C business, and K-router and intersport. Commons of spirit in all our businesses. Forerunner in sustainability is important, not only, for example, in fighting the climate change, but it is important for our customers too. We focus on three businesses, grocery trade, building and technical trade, and car trade. Our purpose is to strive for better trade every day, customer and quality in everything we do. The way we work in Kesko is to operate directly, openly, and honestly, creating trust. In grocery trade, our aim is to gain market share. Key actions. Strengthening store-specific business ideas. Focusing on strengthening chosen competitive advantage and raising the quality level of stores. Developing store site network. Targeted investments in the store site network focusing on growth centers. Improving price competitiveness. Strengthening price competitiveness and improving price image. Continuing good development in Gespro, further strengthening Gespro's market leading position. Store site and price investments will have a slight impact on grocery trade profitability in upcoming years. However, EBIT development will be stable and profitability clearly above 6% despite investments during the strategy period. In building a technical trade, we are focusing on securing profitability. Key actions. In Finland, continuing growth and winning over market share. In Sweden and Norway, stabilizing and improving business performance and integration of acquired companies. In Denmark, finalizing the integration of Davidsen and improving performance through growth. Growth through acquisition, M&A to boost profitable growth in Northern Europe. Our long-term target of 6% to 8% operating margin is still valid. In car trade, focus is on outperforming the market in all businesses. Key actions. Continuing with growth strategy execution. Major turnaround and continuous development establish a robust foundation for the next strategy period. Maintaining the balanced business portfolio, new cars, used cars and services. Cooperation with the Volkswagen Group, continuing the good cooperation with the Volkswagen Group and Porsche. Sports trade, continuing as a strong market leader in sports trade. Solid EV development and number one brand awareness and preference. The team to lead this strategy is our group management board. There have been five changes in management team this spring. New presidents for billing and technical trade and car trade, new CEO, CFO, as well as new position for legal counsel, including responsibility for sustainability. I am happy to have this professional and ambitious team in place. Well, this was my presentation from my behalf. I guess it's time for questions now.

Thank you, Jorma, for your presentation. And now it's time for questions. Let's go first to the conference call line. Do we have any questions coming from the conference call? Please.