Meko AB (publ)

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.

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.

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.