11/7/2024

speaker
Per
CEO

Thank you. Good morning everyone and welcome to MEKO's third quarter result presentation. I'm here with our CFO Christer Johansson and together we'll talk you through our performance and current position. We often say that our business model is resilient. There's always stable demand for cars that function properly. Compared to other industries, we are largely buffered from economic fluctuations, even though we still feel their impact. Our experience so far shows that our business hasn't been fundamentally affected by technological shifts if we adapt to the changes. As we all know, the electric vehicle transformation has slowed, but it won't stop. We've been in Norway for a long time, the country where the transformation is the most advanced. We're still in the early stages of this shift, and electric vehicles continue to evolve. However, our experience in Norway suggests that the total repair cost over electric cars' lifetime seems to be quite comparable to those for gasoline and diesel cars. We're putting significant effort into staying at the forefront of this transformation, adapting our offerings. In other words, MECO's role shall be remain the same, we aim to be the most complete partner for everyone who drives, maintains or repair vehicles in Northern Europe. We're committed to doing this at the same time as we continue our efforts to become a stronger and more profitable company. Looking at Q3, I see that we are on track to achieve what we are set out to do. Let's move to slide two. We're seeing mixed market conditions. Sweden and Norway are showing strength, while Denmark is somewhat softer. In Finland, the demand is weaker, and in Poland, the competition remains intense. This quarter, we integrated Elite Polska into Mekko. In total, we reached a growth of 7% with 2% organic growth. I'm especially pleased with the strong progress in Sweden, Norway, business area. Price increases helped drive up the gross margin this quarter, and we are improving efficiency. In short, we are continuing to strengthen our underlying profitability according to plan. We raised our adjusted EBIT margin compared to the same quarter last year, and our EBIT also improved. The large increase in EBIT is mainly due to accounting effects related to the elite Polska acquisition. Christer will go into details on this in a few minutes. It's also encouraging that we are maintaining a solid financial position where our leverage level is right in our target range. This puts us in a good position as we enter the fourth quarter, which usually by season is a little bit softer. We've kept We certainly kept up a high pace this year and expect an intense year ahead. We are preparing for the launch of several new warehouses in 2025, an important part of our initiative Building a Stronger Merkur. Let's have a closer look on slide three. During this year, we've been preparing for the launch of the new central warehouses in Norway, Denmark and Poland by 2025. We have also been working on the renovation of our central warehouse in Finland. In total, these are major projects in four of our eight markets, and they are progressing according to plan. To highlight one example, the project in Denmark is now more than 80% complete. This high-tech facility will combine central and regional warehouse administration and a training academy located in the heart of Denmark. This center, like the others, will provide us with more efficient inventory management and improve service for our customers. So 2025 will be an intense and challenging year, but it will also mark a significant leap forward for us. Now let's move on to slide four and a positive announcement we made this morning. I'm very pleased that we are now seeing recognition for our sustainability work. For the first time, we have been awarded the highest ESG rating, AAA, by Morgan Stanley Capital International. Only 11% of comparable companies worldwide achieve this level. This upgrade is driven in part by our dedicated effort in employee relations and in corporate governance. which is considered to be well aligned with investor interests. We work broadly with sustainability and have raised our ambitions in recent years. There's still much to be done, but this recognition inspire us to keep moving in the right direction. Before we go into details on our financial, I'd like to briefly highlight an important part of our development efforts. So let's take a look at slide five. And as I mentioned earlier, we always stay focused on adapting to technology changes and evolving consumer behavior. Stay ahead. We conduct the mobility barometer every year, the most comprehensive study in knowledge tracking mobility habits. The latest edition was released in the third quarter and relieved many interesting results. And let me highlight just two of them. First, The car remains the clear number one mode of transportation for all groups in society. Despite tough economic times, car usage has remained at the same level in 2023. Nearly 8 out of 10 people use their car at least once a week. Second, a clear majority believe that the car will continue to play a major role in the future. 62% hold this view, which is the highest number since we started the survey three years ago. So now let's take a closer look at the key event from third quarter, the integration of Elite Polska. So over to you, Christian.

speaker
Christer Johansson
CFO

Thank you, Per. So as mentioned already in the Q2 report, we are consolidating Elite from August 1st, and this added around 50 branches, two warehouses and 480 colleagues to the end of Q3 numbers. This operation is now run under joint leadership across Interteam and Elite. Financially speaking, the acquisition and the decision As communicated all along, purchase price was very low despite significant assets changing hands. And the reason is that the company has been operating with a loss and there is a restructuring need. That situation, which is a bit unusual, comes with a few accounting effects that I would like to comment upon on the next page. So essentially, we have three separate financial effects directly or indirectly linked to the transaction. To start, the purchase price was far below the fair value of assets within Elite. This comes with negative goodwill, which is unwinding through the P&L in Q3. That item, which amounted to a positive 176 million SEK, Separately, the acquisition changes many aspects of Merco's business in the Poland Baltics business area. In light of this triggering event, we have conducted an impairment test on the business area as a whole, which resulted in a 101 million SEK write-down of intangibles, mainly Goodwill. After this impairment, there is essentially no remaining area. Both these acquisition related items are excluded when we present adjusted EBIT and so while they increase reported EBIT by a net 75 million SEK they have no impact on adjusted EBIT. Finally I said earlier that the price was below fair value of assets for a reason and this reason is that There is anticipated costs for restructuring and integration of the two entities. These costs, the dashed bar here, sit in future periods. So they have not been incurred nor provisioned for in Q3. We estimate them to be in the range of 70 to 100 million SEK. And we expect that to be incurred during the rest of 2024 and 2025. In the context of those costs, I also wish to point out that Elite at the time of acquisition had 123 million SEK of cash. So in practice, you can say that this restructuring is pre-financed. Before we leave the topic of Elite, let's just recap the strategic rationale. So the Polish market is large, but our share is small. Hence, this represents a major long-term growth opportunity for Merkle. It's also so that Elite's store network in Poland has a good geographic fit. In fact, we were considering to establish warehouses in areas where we can now instead tap into Elite's existing infrastructure. Looking at the underlying financial development we are fairly satisfied with the development in the third quarter and to pick out a few things that sales continue to grow at a healthy rate seven percent on the one hand organic growth was slower two percent on the other hand there was a meaningful contribution to top line from acquisitions. As we will come back to on a later direction. With help from better gross margins, adjusted EBIT margin also grew from 6.9 to 7.2. And if we were to exclude the impact from the elite's ongoing business, adjusted EBIT margin grew from 6.9 to 7.7. So broadly speaking, a one percentage point uplift year over year, much in line with the midterm improvement potential we guided on in the Q4 earnings call. Our financial target, as you may recall, is to grow adjusted EBIT at the rate of 10%. We are delivering on this both in the quarter and the year-to-date. Looking at cash flow from operating activities, this has been strong in 2024. On top of improving profitability, we have had support from reduced working capital. In Q3 specifically, that was not the case. winter season. Lastly, when it comes to reported EBIT, I already described in some detail how events in Poland had a positive net effect with an offset in the form of future integration cost. It makes sense to also mention that our business system rollout continues at a steady pace and that will continue throughout 2025 and 2026. Furthermore, I should also mention that Q3 2023 contained a 37 million SEK profit from sales of real estate in Denmark. Looking at gross margins on page 10, the improvement is clear and stand in contrast to recent years. This is not currency and this is not mixed effects. This is due to actions that we have taken within pricing and procurement. And on procurement specifically, we can see that our increasing scale matters in global tenders. As already mentioned, were it not for the inclusion of Elite, the improvement would have been 0.7 percentage points higher. Moving to page 11. But there's no denying that this was unevenly spread. Sweden, Norway and CERN was strong in Q2 and remains strong in Q3. Finland is improving, but from a very low level. Poland is, of course, affected by the ongoing business within Elite, which is running at a loss. Moving on to page 12 in our financial position. So this remains strong. So in this quarter alone, we amortize loans by 300 million SEK. Leverage expressed as net debt to EVDA is at 2.5. If you leave the positive one off out, which we believe one should, on a reported basis, leverage comes out even lower. This stronger position also bring flexibility. And to put this into perspective, one can mention that Mekos available cash and unutilized credit facilities totaled 2.4 billion SEK at the end of the quarter. Adjusting for dividends, which we will pay in two weeks time, it's still 2.3 billion SEK. So with that said, on the totality, let's have a brief look at the various markets, starting with Denmark on page 13. In Denmark, we have directed both attention and money towards developing the organization and getting ready for the upcoming warehouse move. And in the midst of this internal work, our performance was not quite up to last year's. The comparison period benefited from a real estate gain, as I mentioned. But we also note that the market has been somewhat slower this fall compared to last year. As we've mentioned before, Denmark is a very competitive market, but obviously price is not the only component of customer offering. By working on all parts, we strive to defend our gross margins, which actually improved in the quarter. Turning to Finland on page 14, we note that the macro environment remained weak. include extended participation in group supplier agreements. Nevertheless, this is certainly not a level that we are content with, so a long way to go. But we note that several initiatives have been set in motion, and this goes beyond what has hit the numbers at this point. Next page. In Poland and the Baltics, the development is somewhat divergent. In the Baltics, which is the smaller part, the development is, broadly speaking, okay. We've also conducted a smaller acquisition out to Meister. Poland, on the other hand, is struggling with tougher market conditions. We've mentioned runaway salary inflation before. Another less known aspect is a slowdown of exports from Poland into other European markets. which in our industry is not insignificant. When it comes to the Elite transaction, we've already covered this. I will not repeat it here, but we can note that Poland Baltics is now actually our second biggest business area after only Sweden and Norway. Furthermore, one can note that Elite is diluted to margins also in the business area. Moving to page 16, Sweden and Norway performed very well, as I mentioned. 5% sales growth is good, but perhaps the real achievement here is the higher margin. 13.2% is strong. It's in fact stronger than we've seen in years. And there are no large exceptional items involved as such. This comes down to pricing and efficiency. At the same time, I don't view this margin level as the new normal. Finally, then, Sørensen and Balsen on page 17. This is our smallest business area, but only if we measure on revenue, because in fact, due to the attractive margins, it's a very meaningful contribution to adjusted EBIT. This business area is also growing, and that has been one of the factors behind our decision to build a new combined central warehouse in Norway. And for Sørensen and Balsen, the upcoming move will take place in 2026.

speaker
Per
CEO

So with that, I hand back to Pat. Thank you, Grister. Well, to sum up, we have just completed a strong quarter. We improved profitability, solidified our financial position, and begun the integration of Elite Polska, a strategic milestone. Price increases helped drive up our gross margin this quarter, and we are improving efficiency. In short, We are continuing to strengthen our underlying probability, which is completely according to plan. It's also encouraging that we are maintaining a solid financial position where our leverage level is right in our target range. This puts us in a good position as we enter the fourth quarter, which is typically a bit slower seasonally. But we are indeed maintaining a high tempo with a tense year ahead. We're preparing for the launch of several new warehouses 2025, an important part of our initiative, Building a Stronger Mexico. So that will be all for me. Thank you for listening. And now we will open up for questions.

speaker
Operator
Conference Operator

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 six on your telephone keypad. We would also kindly ask you to please mute yourself after you have asked your question. The next question comes from Mats Liss from Kepler-Chevreau. Please go ahead.

speaker
Mats Liss
Analyst, Kepler Cheuvreux

Yeah, hi, thank you, and congrats on a good quarter. Couple of questions here. well starting with cash flow I guess it's a pretty good number but the working capital eat some of the sort of improvement or cash flow is this an impact of the work you do in upgrading the inventories I mean do you need to have double units and and it sort of have an impact and we should expect that to to to continue going forward i mean you are having five projects start well to be implemented next year if i heard you right well i would say that the the inventory level is more of a seasonal effect that we're building up for the winter season uh and uh

speaker
Per
CEO

but you are right that we we I don't think you should expect that it will go down because we need also to have some buffer when we enter into the warehouse project so looking forward this this level more likely will be disabled I would guess thank you and regarding this integrations

speaker
Mats Liss
Analyst, Kepler Cheuvreux

process in Poland I guess there are one of there and you mentioned the costs involved so I guess it's not not too much to add there but going forward then do you see the Polish market as integrated fully or I mean do you see more acquisitions to be done in that market to strengthen further or fully invested there

speaker
Per
CEO

I would say that those Polish markets still need consolidation and so there will be M&A activities in the market in what way we will be part of that in the future we'll see. We'll focus now on the integration within the Polska and when that is done then we will have a new situation and look further but it will be more consolidation in the Polish market definitely. next coming two or three years, I would guess.

speaker
Mats Liss
Analyst, Kepler Cheuvreux

Dan, you mentioned the pricing crisis or did you have support there in Sweden, Norway, especially? Will this sort of continue going forward or are you sort of in a balanced position there? Do you see more opportunities to change? I mean, it's probably a mixed change also. It's not only price increases. Could you give some more color on that?

speaker
Per
CEO

Yeah, but I think that it's, I mean, we had last couple of years a little bit uh difficult to see to to increase prices enough uh to cover for inflation especially for the currency effects in in uh sweden norway and and and that has stabilized and uh so kind of balanced out i don't see that there is much room for price increases that's that's more of what's happening in the competition area uh we continue in this uh There is also purchasing prices, which is a part of that. When we see that we probably can use even more of the size and scale which we have. So that work will continue. It will be seen further on how much effect we can have. But we're working quite intense with the purchasing part as well.

speaker
Mats Liss
Analyst, Kepler Cheuvreux

Okay, great. Thanks a lot.

speaker
Operator
Conference Operator

The next question comes from Andreas Lundberg from SEB. Please go ahead.

speaker
Andreas Lundberg
Analyst, SEB

Good morning. Thank you for taking my question. Andreas here from SEB. If I start with the four plan new warehouses for next year, how do you make sure you can run your business without any meaningful disruptions or interruptions?

speaker
Per
CEO

It's complicated, but first of all, it's four very separate projects, so they are not connected to each other, which means that there is local project organization and local plans. And then What we're doing is to build up, let's say, plans for if there will be some disturbances in logistics in one of the warehouse projects, meaning that we will help from some other area. We will probably be able to use Sweden and Stainless if there will be some disturbances. So we have a couple of plan B and C, so try to cover as much as possible. from that.

speaker
Andreas Lundberg
Analyst, SEB

Okay, got you. How will these launches, you know, be spread during 2025?

speaker
Per
CEO

It's actually quite concentrated. I think they are April, March, May, June, those four months, it's one lodge each month. If everything, I mean, these plants are still not yet kind of hammered in stone, there's still that they can move. But during the spring and beginning of summer, we have most of the activities.

speaker
Christer Johansson
CFO

And of course, they do not happen overnight, as we can imagine. So there is an overlap between the old warehouse and the new one, and it's in the range of six months.

speaker
Mats Liss
Analyst, Kepler Cheuvreux

Okay, gotcha.

speaker
Andreas Lundberg
Analyst, SEB

I think maybe you can talk a little bit about the status of your various efficiency programs.

speaker
Per
CEO

Yeah, but we have talked about especially we have the big distribution program in Norway, where we now have a couple of few branches still to be merged, but we start to be under that. So more or less check on that. Then we announced this more cost-saving program in Sweden over 50 million. I would say that is mostly done, even though we always search for more. We did a reorganization in Denmark in the spring. and we're looking for more efficient food programs in Denmark and not at least connected to the new project in Denmark when we are on the other side of that. It continues with a lot of activities.

speaker
Andreas Lundberg
Analyst, SEB

On the Denmark area, I think you said you launched it during the spring or announced it at least. Have you seen any effects so far or is that still to come?

speaker
Per
CEO

Now, we have seen some effects, yes, but there is probably not 100% in the P&L yet.

speaker
Andreas Lundberg
Analyst, SEB

Okay. And also, lastly, I think maybe you mentioned it, but to make sure, you said size and scale are the things to drive the gross margins from here. Mm-hmm.

speaker
Per
CEO

Yeah, and we're doing a little bit of, let's say, retake on the on the policy changing strategy, where we have seen that there probably will be some opportunities to get even better conditions.

speaker
Christer Johansson
CFO

I think what I can add is, if you look at Finland in the quarter, one of the contributing parties was participating in group agreements that was already in place. So it's also so that we have more to do in terms of really realizing the benefit of what's already in place.

speaker
Andreas Lundberg
Analyst, SEB

I have a final one actually in Finland. I think you mentioned some extraordinary cost in the third quarter, but you didn't quantify it. Could you do that?

speaker
Christer Johansson
CFO

So there's nothing that's material enough to kind of warrant... item effect and comparability adjustment. What we are doing is that we're kind of cleaning up a little bit on items, which some of them relate back to the operations we had in Mekonom and company years ago.

speaker
Andreas Lundberg
Analyst, SEB

Right. Okay. Thank you so much, guys.

speaker
Operator
Conference Operator

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

speaker
Per
CEO

Yeah, thank you all for listening, and that will be all for us. I wish you a very, very nice day. Thank you.

speaker
Christer Johansson
CFO

Thank you.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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