Interim report January - March 2020

29 May 2020 07:30

Challenging start of the year – but well positioned to navigate through the difficult market situation

1 January–31 March 2020

• Net sales amounted to SEK 2,874 M (2,909). Net sales declined 1 per cent, of which -2 percentage points in organic growth.
• Adjusted EBIT amounted to SEK 98 M (214) and the adjusted EBIT margin was 3 per cent (7).
• EBIT totalled SEK 59 M (170) and the EBIT margin was 2 per cent (6). EBIT was not impacted by items affecting comparability in the quarter (neg: 5).
• Earnings per share, before and after dilution, amounted to SEK -0.29 (1.68).
• Cash flow from operating activities amounted to SEK 62 M (158).
• Net debt was SEK 3,928 M (4,185) at the end of the period, compared with SEK 3,709 M at year-end.
• In March, the Board resolved to withdraw the previously communicated proposal to the 2020 Annual General Meeting of a dividend of SEK 0.50 per share. The AGM on May 7 approved the Boards proposal of no dividend.
• COVID-19 and the data breach impacted the quarter negatively.

CEO comments:

Challenging start of the year – but well positioned to navigate through the difficult market situation
We conclude an industrious and challenging first quarter where our operations has been affected by both the Covid-19 pandemic and a data breach. A solid start of the quarter was eliminated by the extraordinary events in March, resulting in both lower demand and a weakening of our most influential currencies. We believe that the negative development due to the pandemic will continue for some time before it gradually will get better. We are fully focused on mitigating the effects on our operations, through forceful actions with a broad range of measures. Our firm belief is that Mekonomen Group, as an enabler of mobility, is very well positioned for the time when ordinary life in our markets becomes normalized.

Restrictions affecting demand
The world is facing an extensive challenge from the Covid-19 pandemic and it affects us all, both personally and professionally. Our top priority has been to safeguard the health and safety of our employees and ensuring sustained operations as automobile spare parts and workshop services are vital to keep society and car owners mobile over time. As local authorities in most of our markets have initiated physical restrictions to control the pandemic, demand has been severely impacted from mid-March and onwards. Mobility has in many places been forbidden.

In late March, our business area MECA/Mekonomen was exposed to a data breach. This caused extensive disruptions to our IT-systems and negative effects on our operations until mid-April. However, our cyber insurance gave us immediate access to IT expertise and will limit the financial impact from lost revenue and additional costs incurred.

Lower profitability due to lower demand and currency headwind
January and February resulted in a solid start of the quarter, where sales and EBIT were somewhat affected by the mild winter conditions and only a limited impact by the Covid-19 pandemic. From March and onwards, the impact related to the pandemic became more evident in most of our markets. Demand was severely impacted by the strict countermeasures initiated by governments from mid-March and our most influental currencies weakened following the increased uncertainty.

The first quarter reported net sales declined by 1 per cent and by 2 per cent organically, where sales in March alone declined organically by approximately 10 per cent. EBIT decreased to 59 MSEK (170) in the quarter and the EBIT margin to 2 per cent (6), with a considerable impact on EBIT from the pandemic and the data breach combined. In equal parts, lower volumes and currency headwind and thus higher purchasing prices in the latter part of the quarter explains the lower gross margin of 44.0 per cent (45.5). The sharp decline of the Norwegian Krona put further pressure on profitability when ledgers was revaluated for currency effects at the end of the quarter.

Forceful actions to reduce costs and adapt operations
Due to the expected negative development going forward, we have acted forcefully and implemented a broad range of contingency measures to mitigate the impact on earnings and cash flow. We swiftly initiated efficiancy improvements and cost saving actions throughout our operations, including reduction of temporary workforce and consultants, short-term layoffs and work-time reduction, reduced marketing activities and negotiations towards lower facilities rents. Our recently implemented country-based organisation in MECA/Mekonomen has led to further cost reduction. In early May we increased prices sharply in Norway to compensate for the weaker Norwegian Krona complemented by further adjustments to our pricing in Sweden. Further activities have been put in place to secure the operational cash flow, where we have strengthened our management processes to monitor our working capital. We take advantage of government aided tax deferrals, when applicable, and have been reprioritizing capital expenditure by deferring and scaling back investments to further strengthen the liquidity buffer.

Furthermore, we have also received support from our shareholders at the AGM 2020 to withdraw the initial dividend proposal to further protect our balance sheet. At the end of March, we have accessible cash and unutilized credit lines of approximately 655 MSEK.

Current outlook
The pandemic is not over, and strict countermeasures are still in effect in many of our markets. How long this situation will last is unclear, even though we see restrictions being slightly eased in May. As a result, it is not possible to predict the scope or impact on the company and its full potential financial effects. In the second quarter 2020, we expect a considerable net sales and EBIT margin deterioration compared to the year-earlier quarter. Net sales declined by approximately 17 per cent in April, impacted by both the data breach during the first half of the month and Covid-19. In May, sales recovered noticeably in most of our markets, except for Poland being in a later phase of the closedown of society compared to the Nordics. Profitability is expected to improve significantly from the first quarter, when the initiated actions comes into effect as of April, along with an expected recovery of our most influential currencies. EBIT in April was negatively impacted by the data breach for part of the month. We expect that our cyber insurance will cover these losses. Adjusted for this we estimate that EBIT in April would have been on a similar level as we experienced in 2019.

Well positioned for the future market
I am convinced we are taking the necessary steps to address the short-term challenges posed on us by the pandemic and to ensure Mekonomen Group is well positioned when the society inevitably return to a more normalized life. Mobility is one of the pillars of our society, which safeguard an extensive and stable demand for workshop services and automobile spare parts. We are highly digitalized and have a strong position within our footprint and will take advantage of the opportunities to further strengthen our customer relations and build an even stronger company for the future. Together with all our committed employees, we will be the best and most comprehensive partner for those who service and repair cars in our markets and continue to deliver on our long-term profitable growth strategy.

Pehr Oscarson
President and CEO