Meko AB (publ)

Hello and warm welcome to Mekong's second quarter result presentation. I'm here today with our CFO, Krister Johansson, and we'll talk you through our performance and where we stand today. As you know, our goal is to be the most complete partner for everyone who drives, repairs or services cars in Northern Europe. We made it clear that we want to reinforce our leadership position. We're also committed to build a stronger, more profitable Mekong. Since November last year, we launched the Building a Stronger Mekko initiative, and this has been our top priority. The second quarter shows that our efforts are paying off, so let's move to the highlights on slide two. It's been a solid quarter. We are improving probability, have a strong cash flow, and are also improving our financial position. Our adjusted operating profit has seen a clear increase, while our operating profit has been impacted by one of the effects from the comparison period. This improvement in adjusted EBIT margin is largely due to our work to streamline and optimize, especially in Sweden. We'll come back to this in a moment. In fact, this is the best quarter for Merkur so far in terms of adjusted EBIT. We've also achieved a solid growth this quarter, driven by both rising volumes and our own price adjustments. Our strong cash flow has allowed us to reduce our debt ratio, bringing us well within our target range. This gives us stability and flexibility. We're not satisfied, so we're taking additional steps, including actions in Finland to strengthen our performance, In parallel, our efforts to streamline and optimize will continue across the company. As a final highlight, we strengthen our position in one of Europe's largest markets by announcing and completing the acquisition of Elite Polska. Let's go more into detail on slide three. Elite Polska is a well-established wholesaler with a large network of branches across Poland. Strategically, it's a perfect fit for Mieko. As you can see from this slide, Elite Brands Network complements our existing footprint very well. And with this acquisition, we're becoming the third largest player in Poland, a market with 38 million people and 26 million cars. This means there's significant growth potential. We also see opportunities for synergies. a crucial advantage in Poland's competitive market. Optimization of warehouses has started early decisions, including co-locating capacity in the Warsaw region. In addition, overlapping brands network is being analyzed, and this will be ongoing for some time. But the most obvious cases, we have already reached decisions. On the short term, the acquisition will cause some margin delusion, and Krister will come back to this in a minute. But in short, we're making a strategic move today to strengthen our business for tomorrow. We have also taken several other steps this quarter, including in Denmark. Let's look at slide four. We acquired the Danish operation in 2018. And since then, we have been running a successful business with strong probability. We are the market leader in the country and our strategy is working well. This is confirmed by the solid probability in the second quarter, which Krister will discuss in a minute. We have six years behind us, but many more ahead. One reflection of this is our decision to restructure the organization in preparation for the launch of the new automated central warehouse next year. We are also taking similar actions in Finland, as you can see on slide five. We want to improve our performance in Finland. As a part of this plan, we have made an important decision to modernize and automate our central warehouse in Helsinki. This was communicated in April. Just like in Denmark, this will increase efficiency and service levels and strengthen our probability over time. The modernized warehouse will be fully operational in the second half of 2025. This summer, we took the next logical step in Finland with the reorganization. The new structure will enhance our customer offering and strengthen our long-term profitability in this market. This and much more was covered during our capital markets update, which we had in May, shown on slide six. Yeah, it was a pleasure to meet many of you and others to share more about our efforts to build a stronger company. We focused on various activities as well as our financial situation. And one key takeaway is that our financial targets remain unchanged. Lastly, before I turn over to Krister, I want to briefly highlight a small but strategic important acquisition we made this summer. So let's move on to Estonia on slide seven. Automagister is an established wholesaler that also owns the Carstop workshop concept with 14 locations across Estonia. We are now integrating this well-managed business into our existing operations, which means that we'll be running two workshop concepts in Estonia that will be Trixus and Carstop. This expands our market shares and provide opportunities to realize synergies in our Baltic operations. We are excited to welcome both Elite Polska and Automajster to the MECO family. With that, I'll hand over to Krister to go through the quarter's developments in more detail. So over to you, Krister. Thanks, Per.

So Q2 came with healthy net sales growth and all markets contributed to this. In total, we see net sales up 9% for the quarter, with 5% being organic growth and some of the residual growth coming from more work days. And some of you may recall the comments we made about Easter in our last earnings presentation. Adjusted EBIT margin is improving. If you compare Q2 to Q2, it's up by 1.3 percentage points from 6.2 to 7.5. If you instead compare the first half of 24 to the full year of 23, The improvement is approaching one percentage point, which aligns well to the midterm improvement potential pair communicated in the Q4 earnings call. Reported EBIT include items affecting comparability, and those items, which totaled 48 million SEK in the quarter, are no surprise. We have in Q2 accounted for 14 million SEK of transaction costs relating to Elite. And we have also continued our investment into a common business system. That part amounted to 26 minutes in the quarter, bringing the total investment to date to 76 minutes. And here we have started this project in Poland. We aim to sequentially cover at least three of the other big markets, meaning this investment will carry on at about this pace throughout 25 and 26. For a fair comparison, one should also remember that Q2 last year included a 59 million SEK windfall profit from selling real estate in Finland. Looking at cash flow from operating activities, this amounted to almost 1 billion SEK in the first six months. The modern improvement, of course, helps here. The internal focus we've put on reducing working capital also helps, but must from this point be balanced against availability for customers. For reference, cash flow for the full year of 23 was 1.25 billion CX, so a very satisfying step up here. This cash flow has allowed us to reduce net debt, and I will come back to this later. Moving on to gross margins, the aggregated situation is stable. Effects from pricing, currency and mix are small and offsetting each other. The residual net movement ends up being explained primarily by effects coming from aligning accounting practices in Finland to the group obsolescence model. And just to be clear, this technical effect does not reflect an actual change in scrapping rates or anything like that. Next slide. As Per mentioned, adjusted EBIT was better than in any previous quarter, despite overall economic conditions being mixed. We are in a robust line of business. Furthermore, we also have a well-balanced geographic mix. That said, we are of course not immune to individual market dynamics, and you can see signs of that here. Sweden-Norway on the left contributed strongly to growth in adjusted EBIT. In the middle of the pack, you find Sørensen and Bakken, which continue to perform very well. And in Poland and Finland, to the right, we did experience tougher conditions. So the overall market development was weaker. This also fed into a more fierce competition on price. As previously noted, Poland is also seeing wage inflation at an unhelpful rate. Turning to page 11 and leverage. I said earlier that operations generated a healthy cash flow close to a billion SEK in the first six months, as illustrated here on the left hand side, with some support coming from improved working capital efficiency. As covered on this call, we are certainly investing for the future. We have the next payment of dividends coming up in November, but we are also using this cash flow to reduce net debt and leverage. where we are now passing the midpoint of our two to three target range. So with that said, on the totality, I wanted to give a few more detailed comments by market, starting with Denmark. Denmark is our second biggest business area. We saw net sales growing by 8% to almost 1.2 billion SEK in the quarter. It's also a competitive market, and given that, we are satisfied with delivering 7.9% adjusted EBIT margin in the quarter, which is in fact better than in any of the comparison periods shown here. Reorganization and cost reduction, which was highlighted earlier on this call, came with a 9 million SEAC restructuring charge in the second quarter, and that was reported as an item affecting comparability. Pat also mentioned the new central warehouse. This investment is well underway. We are now working on the final third of the total scope. You don't see it as CapEx as it's being built for us by partners, but it does amount to a major upgrade, not only operationally, but also in terms of HSE. For example, through better fire protection to reduce risk. and through solar cell roofing helping us to reach our sustainability targets. Turning to Finland on page 13, we did in Q1 state that one, we were not pleased with the development and two, the actions we saw as required would lead to a gradual improvement. So both those statements still stand. We have several actions in progress. There is a gradual improvement. In fact, now we're back in territory, but there is much left to do here. And I know that our Finnish management team are addressing these challenges head on. I did already mention last year's real estate sale, which affects comparability. It's also fair to mention that we perceive current macro conditions in Finland to be less helpful. Nevertheless, certainly in our hands to improve from here. Next page. Similar to Finland, the current macro environment of the Baltics and Poland is less supportive than in Scandinavia. Poland is, on the one hand, a large market with solid growth. In our case, we saw 14% total sales growth, of which around half is organic growth. On the other hand, we see pricing in the market being competitive. Inflationary cost and salary increases have not yet been passed on to customers. At least not to the extent that we see as eventually inevitable. These factors impacted EBIT margins, which were down compared to a year earlier. A key event in Poland was, of course, the acquisition of Elite Polska, and Per covered the strategic rationale. I would like to add three financially oriented comments here. So first, the only effect on our Q2 results is 14 million SEK in transaction cost. This is the full transaction cost, and it was reported in Q2 as an item affecting comparability. Secondly, we are consolidating Elite's results from August 1st, so a five month effect on 24 financials. In those five months, I expect Elite to contribute with approximately half a million SEK in revenues. On EBIT level for the same period, I expect a negative contribution of circa 40 million SEK, including restructuring. And this uphill start is as planned. It has been fully considered in the overall terms and conditions of the transaction. The third and final comment on Elite. Looking beyond 2024, in 2025, we expect a positive run rate contribution to EBIT And by 2026, we will be at full synergy realization. Moving to page 15, Sweden and Norway continue to perform very well. 9% sales growth and EBIT margins north of 11% is a testament to the strong position we hold in these markets. And obviously 80% increase in EBIT would not be possible if it were not for the hard work of a lot of colleagues. But if I were to call out two areas, it would be the structural changes undertaken in our Norwegian branch network and the cost savings captured in Sweden. One can also note that one of our competitors in Norway has struggled a bit in 24. And while we are happy to focus on our business and the things we can affect, one cannot exclude that there would be a degree of temporary tailwind benefiting business areas, Sweden, Norway, and Sørensen and Bakken here. Finally, on page 16, again, also here, strong growth and very healthy margins, organic growth of 10%, EBIT margin close to 20%. In fact, here we are closing in on operating at full capacity. In the long run, we take comfort in a new central warehouse coming along. This will eventually serve all our business in Norway. In the shorter term, high capacity utilization I would like to hand back to Per.

Thank you, Krister. To sum up our second quarter, it's clear that our efforts to improve probability are paying off. There's been a strong quarter. In fact, the best so far in terms of adjusted EBIT. We are improving probability. We have a strong cash flow and improving our financial standing. Our adjusted operating profit has improved significantly, and thanks to our initial to streamline and optimize, especially in Sweden. We've seen the robust growth in this quarter and our strong cash flow is enabling us to reducing our net debt ratio. We now have a solid financial position that provides us with greater stability and flexibility. At the same time, we are addressing unsatisfactory performance in Finland and taking steps to improve I'm also pleased that we have advanced our position in one of Europe's largest markets with the acquisition of Elite Polska. This will strengthen us over time. That's all from me. Thank you all for listening and we will now open up for questions.

If you wish to ask a question, please dial pound key five 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 Mats Lis from Kepler Tuvriax. Please go ahead.

Hi, thank you. Congrats on a solid quarter, I guess. Improper to say. I have a couple of questions. First, I mean, Sweden is sort of surprising positively. You mentioned the measures starting to pay off. But could you be a bit more specific regarding the sort of implementing measures and maybe also somewhat how you see markets going forward? I mean, it's pretty late in the third quarter now.

Yeah, but we start in Sweden. I mean, the activities or the measures which we have done has been so far mostly on cost savings. And there will probably be more to come. But we are also looking into to, let's say, more organizational possibilities and analysis to see if we can find more synergies, more efficiency. But it's mostly cost cuts, I would say, which we see in Sweden. In the other markets, it's a combination of the merger of branches and the optimizing of logistics and so on.

And regarding I mean we are pretty late in the third quarter now and do you have any sort of I mean it seems that things are moving along quite well but is this the general view so far in the third quarter?

Yeah we don't guide ahead of that but we have a Everything that we control, then we, of course, have the ambition to continue. And the concept of building a strong Emeko is still not finished. So there is a lot of activity still to come to improve our probability. There is, for example, coming next year's free warehouse will be automated. So that will be effective next year. So there's still a lot of work to be done.

I mean, yeah, that's quite substantial changes you implemented, but is it sort of scalable? I mean, is it the similar measures that you already have implemented in Sweden? So we shouldn't be too worried about these changes.

No, we shouldn't be worried about it because we have that good control and there is very good business cases. the projects as Krister mentioned in Denmark, for example, the warehouse project and the new head office. So that's quite a big project, but that's already in the third phase. And we will look at the keys already somewhere in February or March. So we are very comfortable with those projects.

Great. In Finland and Poland-Belgium things are not as strong as in Sweden and Norway. Do you see the same upside potential there as in Sweden or is it more of a special situation with a different structure and so on? We shouldn't expect that kind of improvement.

I expect, let's say, we have the ambition to have the same increase in probability here, but to be very honest, we're not reached the number which we have in Sweden, but we can definitely make the same move in terms of percentage points.

And maybe I can add very much, so in Poland specifically, then of course, the coming will of course also be characterized by integrating elite into team.

Yeah. Okay. Well, thank you. Great. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Andreas Lundberg from SEB. Please go ahead.

Thank you and good morning, Andreas, here with SEB. Maybe for you, Chris, how should we think about working capital going forward? That's my first question.

Good morning, Andreas. Yes. So as I mentioned, we're satisfied with the reduction. Actually, there's some better background that you could use.

I will try to leave the room.

So as I said, we're happy with the reduction in working capital up to this point, although I don't see that as a sort of a path that we could continue on forever and ever with no negative consequences. At some point, availability to customers will be a countering force. So for the second half of the year, I don't expect a continued improvement in the working capital situation.

But could it be where you are, or should we think that you need to increase it in line with the top line over the coming years?

I would say from here, I would expect it to grow with sales. I think that relationship at or about this level, of course, there could always be a little bit of seasonality here as well. But yeah.

And on cash flow in general, I mean, you now have a financial gearing in line with your target and I think you could generate maybe up to one billion in free cash flow annually or maybe potentially higher than that. So the question is, how will you spend the free cash flow going forward?

I think I said it before that we would like to first be in the down area of the range, closer to the two than to the three. So that would be the first step. And then we'll see. But there is, of course, investments that we could do. There is possible acquisitions, but it could also be extra dividend or share buyback. But that's still nothing. The first plan is to get closer to the number two, and then we'll leave with that problem at that moment.

And maybe I can just add there. is to pay out roughly half which I think is a balanced position and there are also investment that we are progressing for example on the IT system side.

And did you say that on the acquisition side that most interesting is to step up in some of your let's call them weaker markets or where you have a weaker market position? Like you did now in Poland for instance.

We want to be prepared if possibilities pops up and there's nothing on the table at the moment but as you said Poland is still a market where we could grow even more and maybe the Baltics even if it's small countries the rest of the markets we have such a be difficult due to antitrust. But then you can all think about acquisition, it's more sideways, of course. We have a constant look on that, but the focus now is probability and it's also to reduce that a little bit more closer to the doing leverage.

Last on the market, especially in Sweden perhaps, what's driving the market at the moment would you say and how do you view potential interest rate cuts and implications from new car markets etc?

I don't see any direct impact. We have had a low new car sales for a while now and if interest goes down maybe that will pop up but that has very limited impact and then it's a very long term because It's still we service the full car park, which is about 5 million cars. So it doesn't move that much. So I expect the market to be very stable in Scandinavia. And then we have a bit other situations in Poland and Finland. Thank you so much. That concludes my question.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you. It was very nice to present a very strong quarter, best ever. Thank you all for listening and have a very good day.