CEO comment in annual report 2020
Well positioned for the future after a challenging year
I can now sum up an eventful and challenging year for the Mekonomen Group, impacted by covid-19 and a subsequent weakening of the exchange rate and a data breach within the MECA/Mekonomen business area. I am proud to say that we have a robust business model and a strong and competent organization capable of handling crises.
We report a strongly improved profitability, supported by a wide range of strong measures and structural initiatives. It is my firm belief that Mekonomen Group, as an enabler of mobility, is very well positioned for continued profitable growth.
It has been a special and challenging year for people and businesses around the world. When the spread of covid-19 gained momentum at the beginning of the year, few had any idea of the global consequences. We acted with great determination to secure our supply of goods at an early stage. In the next stage, contingency measures and efficiency enhancements were quickly initiated in our operations to mitigate the effects on earnings and cash flow and to maintain health and safety for our employees and our customers. The pandemic is not yet over and restrictions are still partially in force in our markets. How long the situation will last is still unclear and we anticipate that negative consequences due to the pandemic will impact some of our markets for some time to come.
At the end of March, the MECA/Mekonomen business area was exposed to a data breach that caused extensive disruptions to our IT systems and negative effects on operations. Through our insurance, we gained immediate access to IT expertise and the compensation paid out has largely made up for the loss in sales caused by the breach. The incident has thereby not caused any major negative financial impact for the year as a whole.
Strong measures to reduce costs and increase profitability
We have worked intensively during the year, with strong measures to mitigate the negative short-term effects of the pandemic and the introduction of structural initiatives to increase our profitability over time. We quickly initiated short-term efficiency enhancements and cost-saving measures which led to reductions of personnel and marketing expenses. We have also adjusted our prices to varying degrees to mitigate the effects of the exchange rate depreciation in several of our markets this year. About a third of these short-term measures are expected to be made permanent to increase our long-term profitability. To the same end, we intensified our structural initiatives within MECA/Mekonomen by closing down a number of unprofitable branches and workshops.
Previously implemented structural initiatives to realize purchasing synergies following the acquisitions of FTZ and Inter-Team were completed during the financial year and are expected to have full effect in 2021. The integration of the companies in the Group has been successful in its entirety.
The merger of MECA’s and Mekonomen’s central warehouses, into one warehouse in Strängnäs, went according to plan and reduced our rental costs from January 2021. Reducement in stock levels had effect already in Q4 2020. The initiative will give us more efficient and sustainable logistics for the business area and is expected to reach full efficiency in 2021.
Stable demand and improved profitability
I can confirm that Mekonomen Group is strong despite uncertain times, and the underlying demand for our products and services is robust. During the year, we sharply improved profitability through successful measures and structural initiatives. Sales amounted to SEK 11 511 M (11,842) and the adjusted EBIT margin increased to 8 per cent (7). Adjusted EBIT include government support due to covid-19 in the form of reduced employer contributions, sick pay support, short-time working support and support for personnel-related costs totalling SEK 48 M, in the business areas Inter-Team, MECA/Mekonomen and Sørensen og Balchen. The gross margin increased to 45,1 per cent (44.8), positively affected by purchasing synergies and currency-related price increases in most of our markets.
During the year, we took measures to secure operating cash flow and to reduce our working capital, which has resulted in a strong cash flow. We have benefited from government-subsidized deferred tax payments and prioritized investments where possible. During the second quarter, we successfully completed discussions with our banking group regarding adjustments to our loan terms in order to reflect the possible negative impact of the pandemic more accurately. Overall, we have a solid financial position at the end of the financial year with improved liquidity and reduced indebtedness.
Strategy for profitable and sustainable growth
Our vision as an enabler of mobility – today, tomorrow and in the future, forms the basis of our strategy. We will be the best and most comprehensive partner for everyone who drives, repairs and maintains vehicles. Our strategy is based on four strategic areas that will contribute to creating value for customers and profitable sustainable growth for the Group. Sustainability is an integral part of everything we do.
- Within operational excellence, we work to streamline and optimize our core business in order to remain competitive, improve quality and increase profitability.
- We will continue to develop our workshop concepts to attract new customer groups, increase workshop loyalty, create profitable workshops and be a sustainable business partner.
- By digitizing and developing new customer solutions for car owners, we strengthen our offering throughout the value chain, while increasing loyalty.
- We will also create new revenue streams by broadening our business, offering new services and expanding our product range to reach new customer groups and increase sales to existing customers.
Adjusted long-term financial targets
At the end of the financial year, we adjusted our long-term financial targets based on our strategy and clarified our dividend policy. The Group aims to achieve:
- Average annual sales growth of at least 5 per cent, through a combination of organic growth and smaller acquisitions.
- An adjusted EBIT margin of 10 per cent.
- A net debt/EBITDA multiple of between 2.0 and 3.0.
Our dividend policy means that Mekonomen Group aims to distribute the equivalent of at least 50 per cent of profit after tax to shareholders, but that the company’s potential acquisition opportunities, financial position, investment needs and future prospects must be taken into account.
Attractive partner for new manufacturers
When the Chinese electric car manufacturer Xpeng entered the Norwegian market Mekonomen Group was chosen as its exclusive wholesale partner for spare parts and our workshops will be authorized as service partners. The new generation of electric car manufacturers is looking for efficient sales channels and cooperation with existing actors to quickly establish themselves in new markets. We have unbeatable availability and broad expertise that makes us an attractive partner with a wide network of workshops, an efficient wholesale business and with our own competency academy with electric car certification for our workshops. This cooperation is clear confirmation of our strong position and leading role in the transition to new and greener technology in the automotive aftermarket. We are well equipped and ready to drive the development, regardless of the type of vehicles driving on the roads.
Well positioned for the future market
Looking back, Mekonomen Group has enabled mobility for almost fifty years, and I am convinced that we will have an important role to play for a long time to come. Mobility is one of the cornerstones of our society, which provides a comprehensive and stable demand for workshop services and spare parts. Society will continue to develop through new and greener technology in vehicles, new consumer behaviour and an increased overall focus on sustainability. We stand behind the principles of the UN Global Compact, which we signed in 2013, and our sustainability work is based on the UN’s global goals for sustainable development as well as our stakeholders’ demands and expectations of us. Today, we have a leading position in our markets, which we will build upon to become an even more sustainable and stronger partner for the future. We are well prepared for new and emerging competition thanks to our leading digital position, our strong concepts and the synergies we enable between our markets.
I am proud of the energy and commitment that my employees have shown during this special year. We are also pleased that our sustainability work has been recognized by Mekonomen Group being named one of Sweden’s most equal companies by the Allbright Foundation. I see this as a prerequisite and a strength for the future. Together with all committed employees, we will be the best and most complete partner for those who service and repair cars in our markets, and we will continue to deliver according to our strategy for long-term profitable growth.
President and CEO