Tokmanni Group Oyj

OMXH:TOKMAN

Earnings Call Transcript 2020-Q1

[Mika Rautiainen, CEO & Member of Executive Board]

Good morning, and welcome to Tokmanni First Quarter Presentation. My name is Mika Rautiainen, and together with me today to do the presentation is Tokmanni CFO, Mr. Markku Pirskanen. Let's jump right away into the figures. From our point of view, we had -- in Tokmanni, we had good performance during the first quarter. Revenue grew by 5.8%, and I'm especially happy about the like-for-like revenue growth, which was 4.4% compared to last year's 4.1%. So I think that this was a good achievement. And we were able to improve our gross margin, which was 32.1% compared with last year's 31.2%. Our target for the first quarter was to have a first-time positive result for the first quarter performance. And we're especially happy about the fact that we were able to get the positive -- we succeeded, and we got the positive result. Comparable EBIT was the EUR 300,000 compared with last year's EUR 2.2 million loss. If we compare Tokmanni's performance with the nonfood market in Finland based on the stats from Finnish Grocery Trade Association, we performed well as well. At the same time, we all have to take to consideration that these stats, they don't include the online retail sales of, for example, from abroad. But anyway, good performance. Some of the highlights for the first quarter. As already mentioned, like-for-like revenue developed very well. And for Tokmanni, this lack of normal winter season in the southern part of Finland was actually more critical than coronavirus during the first quarter when it comes to revenue performance. Now the southern part of Finland, it's -- we're talking about 70% of Tokmanni customers and lacking the normal winter season. Of course, it did have an effect on the business, but I think that we managed this quite well. However, some of the winter products were left for the coming season after the end of the winter season. And as already mentioned, it was like a combination of good sales performance, improved gross margin and efficient operations that we managed to end up with a positive comparable EBIT for the first time in Tokmanni's history. Due to coronavirus, we canceled our guidance for 2020 on 26th of March and started the changes with the action plan already in the first part of -- the first half of March. Some facts about the -- well, impacts on coronavirus on Tokmanni business during the first quarter. We have this Tokmanni-Europris Shanghai trading office. And of course, we heard already during the Chinese New Year about the virus itself. And we started basically daily contacts with our Shanghai office to get more information about -- of course, about the delays with the supply chain and deliveries. And at its worst, it was like 3- to 4-week delays with deliveries. But for the moment, this part of the supply chain is quite okay actually. Goods coming from China are now even faster over here in Finland than expected. But in the beginning of February, we faced basically 3 to 4 weeks delays. And of course, the grocery sales increased a lot when the start of the panic buys started about -- well, toilet papers, cleaning products and things like this. And when the government set the restrictions, then we faced a clear drop with customer visits. From our point of view, the change was quite dramatic because we've basically been able to increase the customer visits during the last 2 years. So suddenly a drop with the customer visits was, from our point of view, quite dramatic. However, the customer behavior, of course, changed, and the basket size increased strongly. And of course, online sales started a strong growth also in the end of March. Well, from Tokmanni point of view, online sales, it's been only 0.6% of the total sales during 2019. So we're talking about quite limited part of business, but still the strong growth with our online business started at the end of March. And of course, a small part of the -- or let's say, the biggest or the strongest sales were coming from the sports and leisure product groups and yard and garden. The spring season almost started in Finland. So the yard and garden products had a very, very, very strong sales already by the end of March. And of course, cleaning and tidying and home decoration. We started the investments in the development of our -- on our digital services and online business already in the beginning of February. And since the customers with our online business, it has -- well, they're basically more than 5x more customers than before. So obviously, we're able to also get a lot of customer feedback, and we're able to develop our online services based on the customer feedback. And with our online sales, based on the customer feedback, we're -- the target is also to expand the product range, even multiply that. It's currently approximately 20,000 SKUs. So the action points, expanding the product range are already happening at the moment. Most of the action points regarding the crisis of the coronavirus epidemic and the crisis itself actually, from Tokmanni's point of view, they happened already during the second half of March. A lot of action points were done regarding the safety in stores for our personnel in stores, in our warehouse, in our office, and of course, also the safety regarding customer visits. A lot of these action points took place already in March. And of course, these have a clear effect on additional costs as well. There will be like additional costs regarding the safety for our personnel in stores and in our warehouse also during the second quarter, probably during the third quarter as well. But anyway, I'm very happy that we were able to very, very quickly do these action points. And that's why things are already getting better during this -- we see already things getting a little bit better during the second quarter. Of course, that has something to do with development in the Finnish society as well. At this point of time, I would like to say many thanks to Tokmanni employees over here in Finland as well as in Shanghai regarding the commitment and excellent work during these exceptional times. And then let's go to -- let's dig a little bit deeper to the financial figures. Markku, please go ahead.

[Markku Pirskanen, CFO, Deputy CEO & Member of Executive Board]

Okay. Thank you. So as Mika said, go a little bit deeper concerning the financial figures. Let's start with -- about this quarterly based graph. And this graph is, as said also earlier, tells us that Tokmanni business is clearly seasonal. Normally, the first quarter is the lowest one. And then in normal situations, second and third quarter is roughly on the same level. And the fourth quarter is clearly the biggest for Tokmanni. Here, you can see the red bars, which is for Q1 figures. And I have to say that we are satisfied with all of this. And like-for-like revenue growth, we achieved now during the Q1 2020 with 4.4%. Last year, it was 4.1%. And if we look this 2018 Q1 figure, at that time, we achieved roughly 6% like-for-like growth. So that means that we have had now 3 consecutive quarters, which we have had a nice like-for-like growth. Comparable gross profit on our long-term targets. We have said that we are trying to improve our gross margin. And now when we are looking at the Q1 numbers, we see that we managed to achieve 0.9% improvement by ending to 32.1%. And things which we have already earlier said that we are trying to improve or increase, the share of direct imports and private label products, we managed to do that during the Q1. But of course, at the same time, when this crisis situation started, our product mix changed in March a bit. And we sold more grocery products, which have a lower, lower margin. And that, of course, affected a bit for Q1 margin figures. As said, we increased the direct imports share and ending up to 23.6% during the Q1 now 2020. And I have to say also at the same time that we were -- when you look this red portion from that bar that we were able to utilize our import through Shanghai office, which is, of course, good because we have targeted to do that. Also said that private label share increased and now up 29.1%; last year, 28.1%. Operating expenses. If we look relative share of these expenses, we have targeted to improve that share. Now we managed to do that a bit, ending to 24.4% compared to last year's 24.9%. And as I have said also earlier that when we are able to increase our like-for-like revenue and also the total revenue, and at the same time, we are keeping our expenses well in control, that will mean that this share will improve. But of course, when we now start the end of Q1, when this crisis started, we have some extra expenses to make our stores and logistics center on safe places to work. There were different kind of actions, for example, on shifts that the people will not meet each other and so on. And that, of course, affected to the -- this ratio clearly. And of course, have to remember also at the same time that it's obvious that these expenses will continue on some level during the Q2. Okay. Comparable EBIT, nice improvement, EUR 2.5 million improvement and ending up to -- on comparable EBIT at the level of EUR 0.3 million. On that time, I have to say that cash flow and financial position are very critical. And of course, we have put our eyes on that and really concentrate on that. This is on good shape. Starting from inventories. If we look at balance sheet items here, the increase of inventories were higher compared to the like for like or total revenue increase. And there are 2 different kind of items which affected to that one. If we look that our winter was missing somewhat half of Finland this year, that, of course, affected to that. We have still some products which we were not able to -- winter products which we are not able to sell, and of course, they are now on warehouse. And the good thing is, of course, that there are some products which we are able to sell next year. But for example, if we speak about the winter clothing, that's a bit more difficult issue. Other thing which affected to the level of inventory was that when the panic buying started, we really hoarded some products to guarantee that we have products in our stores to sell. And when we look at situation at that end of March, we clearly have more this kind of products in our inventories. And these 2 issues really affected to the level of inventory. When we look our cash or basically cash or financial position, as you see here that we are -- we have a certain limits or credit limits, which we are able to use. And we are speaking about roughly EUR 58 million at this moment, and that gives us a good base to make our normal activities. So we can say that Tokmanni's liquidity is at good level. Looking our debt situation. Total number of interest-bearing debt is EUR 425 million, and the biggest portion out of that is coming out of our rental liabilities based on this IFRS 16 booking principles. But if we look what kind of real bank loans we have, we have noncurrent loans, EUR 100 million, and the current loans, EUR 13.9 million, so totaling roughly EUR 114 million, which is so-called bank loans, so smaller portion out of this EUR 425 million. Net capital expenditure. So investments, a little bit higher level during Q1 compared to last year, now EUR 3.2 million. And looking what -- we're really looking very carefully, what kind of investments we are doing at this situation and consider every detailed investments and investment decision because you have to be very careful with your cash flow. But at this moment, we are estimating that our investments during 2020 is at the level of EUR 15 million. So I will transfer speech for Mika, again.

[Mika Rautiainen, CEO & Member of Executive Board]

Thank you, Markku.

[Markku Pirskanen, CFO, Deputy CEO & Member of Executive Board]

Thanks.

[Mika Rautiainen, CEO & Member of Executive Board]

Thank you for the review. In the end of 2019, we decided that our key focus for 2020 will be strengthening the discount retailer business model, which basically means low prices, interesting assortment and very efficient supply chain management. Now in this current situation, this focus, of course, stays and is even stronger at the moment because especially the low price level with all the layoffs and uncertainty, that's very important for our customers. But of course, we are adding -- or we have to adapt to the changes in the market environment. And that's why we've been really focusing on quick reaction on different market changes and changes with the whole society, with the whole situation. Some of the impacts of coronavirus from Tokmanni's point of view. As already mentioned earlier, we kind of saw the biggest action points already during the first quarter. But of course, the biggest impact we estimate will happen during the second quarter. These have something to do with, of course, with all the restrictions and the decisions of Finnish government and things like this. So of course, there is a big uncertainty. But this is how we see it. The biggest impact on Tokmanni's businesses will happen during the second quarter.Regarding the second quarter, it will be, of course, still a lower level on customer visits. But at the same time, the average basket is higher. So there is like a clear change with the customer behavior. And yes, at the moment, we are, all the time, every -- basically every day observing that like how the changes are moving day by day. But at the moment, this is the clear change with the customer behavior. And of course, as already mentioned as well by Markku and myself, there will be additional costs on the safety issues regarding our employees and customers, of course. And well, we can see a very strong development on our online business all the time. So that's, of course, backing up the situation very nicely. But of course, it's still -- compared to all our 191 stores, it's still a smaller part of the business. We estimate that during the third quarter, there will be, of course, already a lot of stabilization happening from Tokmanni's point of view. And of course, there is always the uncertainty. But still, we have already plans that we will return to normal opening hours. At the moment, especially in Tokmannis located in shopping malls, we've basically reduced the opening hours because the shopping malls are basically losing most of the customers at the moment. And we can -- we feel that we can also normalize the workplace arrangements where basically, especially in the warehouse and in the stores, people are -- our employees are working in the small teams to make sure that they will -- that people will stay as healthy as possible. And of course, a very clear chance for or a very clear, yes, opportunity for a discounter is buying the stock lots, which there exist quite a lot at the moment. And this is something that we will clearly look at already during the second quarter. And then, of course, we feel that -- or we estimate at the moment that the fourth quarter will be the time of recovery. We can concentrate. We estimate that we can fully concentrate on the Christmas season during the fourth quarter. And basically, we can deliver the discounter retailer business model, which is, at the low price level, an interesting assortment. But of course, everything has to do with the consumer confidence, which is, in Finland at the moment, it's on a very, very low level. And of course, the amount of money available for -- after the layoffs and things like this, these have something to do. And of course, especially with possible new restrictions or how the restrictions will be withdrawn and so on, these are all -- of course, they have an effect on Tokmanni's business. As mentioned, the economic and industry's outlook has changed rapidly. And we won't be issuing guidance for 2020. Once the visibility improves and uncertainties have cleared, then of course, we will update our outlook and issue a new guidance. Hopefully, this can happen during the half year -- by the half year financial review, which will be published on -- in 3 months' time on 29th of July. So thank you very much, and I believe now it's time for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Manon Coulon from Erasmus Gestion.

[Manon Coulon;Erasmus Gestion]

I have 3. First, you talked about extra costs due to COVID-19 safety plans. Can you maybe detail more on that one, especially in term of numbers?You talked as well about cost-saving measures. Can you give us a sense of how much it would be? Same question.And then on flow of customers, you said it decreased significantly end of March. What are you seeing in April? What are you seeing in the last few days now that, it looks like the peak is behind us now on some -- I think some restriction of movement have been lifted? In Finland, I'm not sure. So what have you seen so far in April?

[Mika Rautiainen, CEO & Member of Executive Board]

Thank you for the questions. Markku, would you like to start with the first one?

[Markku Pirskanen, CFO, Deputy CEO & Member of Executive Board]

What was the first one?

[Mika Rautiainen, CEO & Member of Executive Board]

The line was -- unfortunately, the line wasn't so clear for us. So could you please repeat the first question?

[Manon Coulon;Erasmus Gestion]

Sorry. So my first question was on how much do you plan on extra cost due to COVID-19?

[Markku Pirskanen, CFO, Deputy CEO & Member of Executive Board]

Sorry, now I can't follow. I'm very sorry about that. But could you somewhat repeat...

[Manon Coulon;Erasmus Gestion]

Okay. I'm very sorry. Can you hear me? Hello? So my question was how much do you plan to have on extra cost due to COVID-19, additional costs?

[Markku Pirskanen, CFO, Deputy CEO & Member of Executive Board]

Okay. Now, sorry, sorry, it's -- now I got it. Of course, it's very difficult to estimate the exact increase of extra costs. And now we are -- or at the end of March, we clearly saw some extra costs when we started to make the safety arrangement in our stores and putting different kind of shelters, putting hand hygiene material and this kind of stuff. And of course, they all cost when you have 190 stores. And of course, that will continue. That's clear, and we are speaking -- of course, very difficult to estimate exact figures, but some hundreds of thousands, that's clear. And otherwise, of course, it's depending on how this situation will develop and how -- what kind of restrictions we have when we are speaking about, for example, how much we are paying salaries because that is dependent and how many different kind of special arrangements we have to have in shifts and in stores or logistics center. And it's absolutely very, very difficult to estimate here at this time. With other issues, it's easier, but this other side is more difficult.

[Mika Rautiainen, CEO & Member of Executive Board]

And I think that the second question was regarding the kind of savings program. And well, Tokmanni -- first of all, Tokmanni, we didn't do any layoffs. We -- actually, we were able to cut actually quite a big part of the hours from our stores. But at the moment, we're back to almost like normal level because the spring season is the second biggest season for Tokmanni. And we have to make sure that our stores are on a good shape and all the -- for example, garden department as well as spring/summer clothing departments are good enough for our customers, even though the level of customer visits are -- is still a little bit lower. But otherwise, regarding the savings program, we're basically still negotiating the rental agreements. That's, of course, very difficult. We've basically stopped all the development projects for the moment. And of course, we're being extremely cautious with all the additional costs. But that's how a discounter basically behaves otherwise as well. So it's a little bit limited that we're able to do if we're basically not doing any layoffs and things like this.And I think that the third question was regarding the customer visits. And yes, it's -- as mentioned earlier, during the last couple of years, we've used to the fact that the customer visits are increasing. And it's -- of course, in the end of March, it was very dramatic due to the fact that basically, the Finnish government was telling all -- everybody in Finland to stay at home. And of course, it showed also in our customers' behavior. Yes, we can see that like it's -- the situation is improving at the moment, but it's still a lower level than compared to, for example, last year. And at the same time, well, there is this consumer behavior change while people are visiting the stores less often and then buying more at the same time. So we definitely need to follow that day-by-day to see how things will develop. But at the moment, the situation is not that dramatic due to the higher basket size of our customers.I hope that these were good enough answers to your questions.

[Operator]

[Operator Instructions] And there seems to be no further questions at the moment. So I will hand the word back to our speakers for any final comments. Please go ahead.

[Mika Rautiainen, CEO & Member of Executive Board]

Thank you very much, and thank you for following the presentation. As mentioned, we, of course, observe the situation in Finland and for Tokmanni, daily, very much. And we -- of course, we try to make the guidance as quickly as possible. But at the moment, the situation in Finland is still so uncertain that we are not able to give any new guidance in the coming weeks, but we definitely hope to be able to do that during the second quarter. And we'll see that latest by the 29th of July. Thank you very much.

[Markku Pirskanen, CFO, Deputy CEO & Member of Executive Board]

Thank you.