Tokmanni Group Oyj

OMXH:TOKMAN

Earnings Call Transcript 2021-Q1

[Mika Rautiainen, CEO & Member of Executive Board]

Good morning, and warm welcome to Tokmanni's first quarter result presentation. My name is Mika Rautiainen and I will first present the highlights of Tokmanni's first quarter. After that Tokmanni's CFO, Mr. Markku Pirskanen, will give you a more detailed outlook on the first quarter financials. After that we have time for conclusions and questions.So let's starts. First of all, Tokmanni had an excellent start for year 2021. All product groups were selling well. There were strong growth for all product groups, including clothing, which was actually last year when pandemic started, it had a lot of problems. And also last year it was strong sales for groceries. This year, during the first quarter, all product groups were performing well.Gross margin improved due to this more normal sales mix compared to last year. Expenses were well in control. And EBIT improved significantly. So it was very good combination; stronger sales, improved gross margin, and expenses in control. But obviously it was a very special quarter due to the customer behavior. It was very exceptional compared to normal situation.First of all, the customers were visiting Tokmanni stores a lot more -- not as often at all as before, but the average basket was much higher. The very nice thing and I would actually like to say thanks to all our customers, the behavior in our stores of customers was very responsible. Everybody was using face masks, keeping distances to other customers and to personnel using all the disinfected items as well. And of course thanks to our Tokmanni personnel for doing an excellent job during the first quarter.At the moment, we have a new spring and summer assortment available in our stores despite of the international transportation problems. Actually, we do have -- from the shipments from March, we have maybe a 3-4 week delay. Already the shipments in April, they are well in time. So there are only a couple of product groups have some lags in the availability. But I would say that the customers will have a full assortment in our stores already, and it will be in the beginning of May, a normal situation.So the revenue grew by 13.6%, and it was EUR 226.1 million. Like-for-like revenue growth, very good, 12.7%. Gross margin was 33.1% compared to last year's 32.1% million. And the comparable EBIT amounted to EUR 6.8 million. Last year, it was for the first time -- last year first quarter of Tokmanni was for the first time positive result with EUR 300,000 this year, a much better result, EUR 6.8 million.Cash flow was minus EUR 22 million compared to last year's EUR 23.5 million. And that's due to the fact that we called basically all the seasonal items to our warehouse much earlier than during the previous year. The diluted earnings per share was EUR 0.07 compared to last year, minus EUR 0.04.And here's the exceptional behavior of customers. First of all, we had a lot of discussions regarding all restrictions regarding COVID-19 in Finland during February and especially in March, a lot of discussions on the restrictions. However, all Tokmanni stores were open during these times, but customers were basically very, very careful with their behavior. Customers were coming to our stores a lot less than during the normal times. But we were very successful with selling a lot more to customers when visiting Tokmanni stores.So actually, the like-for-like average basket grew with 14.3%. Already last year, the growth of average basket was almost 10%, but the beginning of this year, first quarter, was exceptional with 14.3%.Now basically, we do see already a little bit getting to a normal situation in Finland. Vaccinations, it's almost 30% of the finished population. And COVID-19 contamination figures are already very low. So obviously, it's a very positive atmosphere in Finland in that sense.Also for Tokmanni store network, we have basically started like a normal time store network developing program. At the end of March, this year, we had 192 stores compared to last year's 190 stores. We have been renewing 4 stores in Hameenlinna, Loviisa, Jarvenpaa, and Raisio. There will be new premises for Tokmanni stores in Lahti Center and Jyvaskyla Center. Also a big renewal of the Mantsala store. And there are -- we do have already like new store agreements or agreements made for new stores in Helsinki, in Iitti, in Oulu, and in Nurmijarviand and there will be a new, much bigger store in Leppavirta.Now these last ones, they -- all of them won't be opened during this year, but it's actually a little bit of the situation of -- depending on the situation on the COVID-19. But yes, the store network developing program is getting back to normal and as basically mentioned also in our strategic targets.About Tokmanni online business. During the first quarter, special efforts were made to expand the product range and improve operational reliability. The online sales grew by almost 150%, but it was still a very small part of the Tokmanni business, only 1.3% of the total revenue. But anyway, the development with online sales is really -- it's growing well, and it looks very good at the moment.The sales grew particularly in home and leisure products, skincare and garden products. Obviously, it had also a lot to do with the pandemic. Fins we're not traveling during the winter holidays. Actually, the traveling was happening in Finland, a lot of families driving to the north part of Finland to Lapland. So we were actually selling a lot of -- we were selling a lot of, for example, ski boxes. And it was also pretty heavy winter in Finland, it still is in the northern part of Finland. But basically, we're selling in our online, a lot of snow work equipment.Also, we launched a selective cosmetics category in the end of last year during the Black Friday campaign, it's -- at the moment it's growing extremely well. And also, the garden products all started basically already in February, which was obviously a little bit of a surprise, a little bit early stage to start selling garden products in Finland, but it was actually a great success.Here are the figures. The red one, the red curve is basically Tokmanni's development in Finland's non-grocery market. And the black one is all the other players, which are reported in the Finnish Grocery Trade Associations figures. And clearly, this shows that Tokmanni is gaining market share in the Finnish market. However, I have to say that the online sales figures are basically missing out from these figures. But it looks very good from Tokmanni perspective when it comes to the market share in Finland.So this was basically a short recap on the highlights of first quarter. And then Markku will tell you a little bit more detailed information regarding the financials. Markku, Please go ahead.

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

Okay. Thank you. Okay. Hello to everybody from my side also, and let's go through these key figures a bit, bit deeply. Let's start from revenue side, and we have here a chart in which we have taken is last 4 years' development. And as we can see that the development has been quite strong already during 2018, '19, and '20. But now looking with first quarter '21, we see that we managed to achieve EUR 27 million increase, which is very, very strong improvement. And it was when we are looking like-for-like revenue growth, 12.7%.How it came? Basically, as Mika already mentioned, very strong sales both in leisure products and home electronics. But all product groups sold very well. But of course, we have a different kind of development. If we think last year's Q1, meaning 2020, we had -- at the end of quarter, so-called panic buying phase when people starting to buy toilet papers, different kind of groceries and this kind of stuff. And of course, last year figure in these product groups was already good. And of course, the development was during this year's quarter so strong, but still it was good even in these product groups.Jumping to our gross profit and gross margin and if we start to look at this development, again, for last 4 years' quarters, we see that we have managed to achieve quite nice development also here. Starting from '19 31.2, last year 32.1%, and now 33.1%. So we achieved 1% unit increase and why that 1.For this quarter, the sales mix was good for us. And that, of course, effected strongly to gross margin. And when we are looking at our sales mix, it's clear that it is in connection to direct import and what is the share of private labels or own brands. And these 2 indicators or items effects how well we are developing in gross margin. Because in some product groups, the share of private labels is on a higher level. And if we are able to sell these product groups, that of course helps.Last few years, we were struggling a bit because, for example, the apparel sales was lower level. And that, of course, effected to the share of private labels.Here, next, the issue about the private labels and direct import. And if we start about the chart on the left-hand side, looking first to the share of different kind of product labels. First, I'd like to mention that we have changed a bit the title of this red part of this bar, meaning earlier it was private labels, we were calling it private labels. But now we changed it to the title, which is called labels managed by Tokmanni because we are thinking that it is describing better that part. It includes private labels, white labels, and brands where Tokmanni has exclusive rights. And as I said, it has been earlier -- the content has been earlier totally the same. But now we are thinking this -- thinking that the labels managed by Tokmanni is describing better this group. But still, remember that the private labels are clearly the biggest part in that group.And looking how it has been developed. Q1 29.6% and last year 29.2%. So now we have increased -- sorry, now we have achieved increase in that part. And that's, of course, according what we have targeted to do. And also on direct import side, if you look last 3 years development, starting from 2019, Q1, 22.2% and jumping 23.6%. And now Q1 2021 we have on the level of 24.5%. So this has also developed according to our plans and to the right direction.Next one, operating expenses. And again, starting from this chart and looking at the development there and then first Euro amount. Now we are over there on the level of EUR 52.5 million, last year EUR 48.5 million. So EUR 4 million increase in Euro wise. And mostly that is explained by increase in store personnel salaries. And I'd like to remind you that when the volume is increasing, we are needing more hours in our stores, for example, to putting different kind of products to the shelf. So basically, our store personnel salaries are -- we are calling them at least partly variable expenses.The other thing which effected to euro wise expenses was heavy winter, which we have in Finland. It was clear that it affected to our store maintenance expenses. And other thing, COVID-19, we had to do different kind of actions in our stores to make this disinfections. And that, of course, effected to our expenses.But what is the most important thing here is that when we are looking, what is our expenses against revenue? What is this kind of ratio? If we start from Q1 2018, we were at a level of 25%. And now Q1 '21, we are at the level of 23.2%. That of course means 1.8% improvement, 1.8% unit improvement, which is good achievement here.Comparable EBIT, it's clear that it is end result from our revenue, our gross margin and how the expenses has been developed. And now Q1 2021, EUR 6.8 million EBIT compared to last year's EUR 0.3 million. Clear improvement. And at the same time, when we are looking at EBIT in 2019 and 2018, in Q1, we are seeing that we have been on 0 level or even on minus level when we are looking at history. Now we jumped totally the new level when we achieved EUR 6.8 million EBIT.A couple of words from balance sheet, financing, and cash flow. And one main item here is, of course, our inventory levels and looking again, the 4 years' history figures here in Q1, seeing that we have increased our inventory level and ending up to EUR 254 million at the end of Q1 '21. And last year this figure was EUR 239 million. It seems to be a quite big increase. But when we are looking at the turnover ratio of our inventories, we can note that now in Q1 2021 it was on the level of roughly 3.1 and last year it was at a level of 2.8. So when we are looking turnover ratio, we are seeing that we are going to the right level -- right direction when we are speaking about the inventory, even the euro amounts are increasing. But of course, having a clear and strong emphasis on inventory levels because it effects directly to our cash flow.Looking at Q1 cash flow, it was minus EUR 22 million last year, minus EUR 23.5 million. These minus figures are clear for Q1, which is a bit -- which is low quarter, but also we are preparing to our season for Q2, and we have to take our products into our inventory. So it's very natural that we have a minus cash flow for Q1 figures.Long-term loans at the same level what it has been, EUR 100 million. But when we are looking at the total interest-bearing debt, we were at a level of roughly EUR 400 million. And this difference comes from IFRS 16 accounting rules when we are taking our rents or rental agreements as interest-bearing debt to our balance sheet.The ratio of net debt to comparable EBITDA, 2.1, which is clearly lower compared to our long-term target, 3.2. So we are in a good position on that figure also and looking at the return on capital employed start to be on a good level of 17.6% when we are speaking about the rolling 12 months figure.And a couple of words about our net capital expenditure or investments. Q1 '21 was a bit lower level compared to last year, now EUR 2.3 million, last year EUR 3.2 million. But looking at the 2020 total figure, EUR 12.8 million. Last year we started to slow down our investments when COVID-19 started. And this year, most probably, we are accelerating it a little bit when we are going forward to the end of the year, and that's why we are expecting our investments to be at the level of EUR 16 million to EUR 18 million in '21.We published that we are reviewing the expansion possibilities of the Mantsala logistics center. And now I have to say that they are still ongoing. And let's see how it goes.That's about the figures and I still give a speech to Mika.

[Mika Rautiainen, CEO & Member of Executive Board]

Okay. Thank you, Markku, for very informative information package.And then about the year 2021, the rest of the year. Basically, Tokmanni will keep the Tokmanni outlook, the original outlook for this year unchanged. So Tokmanni forecast slight growth in revenue for 2021. Group profitability measured in Euros, comparable EBIT is expected to be on the same level as last year. Now basically it's a very, very, very good start for the year 2021. But at the same time, as Markku already mentioned, the first quarter is -- well, basically way smallest in Tokmanni's year of the quarters. So that's why we will still be looking, for example, the spring season quite carefully.Last year, if I remember correct, the second quarter sales growth was 19.2%. And basically, in Finland, it's a lot to do with the weather forecast, whether snowing still continues in May -- in April and May, it has a lot to do with the success of the garden season. But basically, everything looks quite okay. We're being careful at this moment. Basically, the customer behavior is becoming more normal. It looks good in that sense.But anyway, the outlook will be, at this point, unchanged. We had the Tokmanni CMD in the end of March, where we basically said that the target will be to continue with the strong growth. Just to remind you that here are the figures. The revenue target for 2025 is EUR 1.5 billion and the EBIT target for 2025 is EUR 150 million.Basically, the work has started, and the work is going very well at the moment. We will be concentrating on improving the customer confidence. And as for variety discounter, it's basically everything starts with the cost efficiency. So that's what we are basically doing at the moment.So that was basically the first quarter result presentation. Operator, now it's time for questions, please.

[Operator]

[Operator Instructions] We have a question from the line of Svante Krokfors from Nordea.

[Svante Krokfors, Analyst]

Yes. Mika and Markku, the first one, probably don't have a direct answer, but could you a bit elaborate on how you look at opening up the society will impact you in which ways? And what kind of risk and opportunities do you see from your side?

[Mika Rautiainen, CEO & Member of Executive Board]

Well, first of all, the consumer confidence in Finland, as you probably know very well, it's on a very, very high level. That's always very good for retail business when the consumer confidence is good. So that's what -- that's basically, it looks good. As already mentioned in the presentation, the customer behavior has been quite exceptional during the -- well, during the last 12 months. But I would say that the biggest changes were during the first 3 months of this year. I could imagine that basically the traveling abroad won't start that heavily in -- well, for Fins during the next couple of quarters. And basically that's good. There is like a boom for summer houses in Finland. So that's also very good for Tokmanni. We are quite -- we see a sunshine with the spring season. However, last -- for example, last weekend, it was still snowing and not very good for the garden season. But it looks basically everything, we're quite confident on the coming months for Tokmanni.Markku, would you like to add something?

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

I think so that was a good answer.

[Svante Krokfors, Analyst]

And then also, I think you mentioned in the Q4 report that you increased the number of new customers by something like around 20%. Have you seen that trend continuing? Or are you not now kind of getting the benefit from having been able to get new customers?

[Mika Rautiainen, CEO & Member of Executive Board]

First of all, we're not basically reporting the amount of new customers on a quarterly basis. But yes, we've seen new customers also during the first quarter of this year. And I would say that it's more about the Tokmanni in Finland. It has become everybody's variety discounter in Finland. And I think it's very important for us for this year, for the coming years as well. So we do see a clear change with becoming everybody's store in Finland.

[Svante Krokfors, Analyst]

And perhaps on that note, I mean, you have outgrown the market substantially for many years now. And who do you believe you have taken most market share from? And who do you expect to continue to take market share from? Could you elaborate a bit on that? I guess the competitive landscape is also intensifying with a lot of peers also ramping up growth?

[Mika Rautiainen, CEO & Member of Executive Board]

Yes. Well, first of all, it's a little bit difficult to say, like where do we have this growth from? I would actually say that the market is growing in Tokmanni destination categories. Well, at this moment, we can obviously talk about the garden products and garden category. I think the market is growing really well. I could imagine that almost all garden products retailers have been doing quite okay, but the market is really growing very well at the moment. So I cannot really say like who's been losing. Obviously, there are some figures already available, but not all of them. So it would be a little bit difficult to say from where we have gained our sales growth. And I also would like to say that Tokmanni's combination of destination categories is quite unique. I don't really see this kind of destination categories selection with our competitors. So it's a lot of different competitors, and it's always about the category, which category we're talking about.

[Svante Krokfors, Analyst]

You mentioned that the CMD that you will introduce the large store concept also. What's the timing on that? Can we expect something during this year, I guess, the Leppavirta store, which you said is bigger, is that probably not a part of the large store concept? But could you elaborate a bit on that timing?

[Mika Rautiainen, CEO & Member of Executive Board]

Well, we are in the middle of negotiations at the moment for the first sites, but it's not -- the decisions are not made. So unfortunately, I cannot say whether it will be this year or next year, but we're definitely preparing that. And you're absolutely right, Leppavirta is not part of the large-scale Tokmanni ideas. We're basically looking -- we're looking for sites in the bigger cities in Finland. Leppavirta is not one of them.

[Svante Krokfors, Analyst]

And then perhaps a question more to Markku regarding the logistics costs, what's your view on that for the remainder of the year?

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

Yes, it's logistic costs are increasing. That's clear, as we have said, and -- but still remembering that as we said in financial statements, that it's -- if we speak about the foreign variety, it's 0.8%. But still it's increasing and, of course, effecting to our costs. And always its question how it is effecting to all other players, how -- and that, of course, again, effect into how these price levels are developing. But basically, of course, the freights are increasing, that's sure, but still it's on control...

[Svante Krokfors, Analyst]

And I guess you will try to -- given the current situation, you will probably order, for example, Christmas products rather earlier than later.

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

Yes, that's true.

[Mika Rautiainen, CEO & Member of Executive Board]

As early as possible.

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

That's true.

[Operator]

[Operator Instructions] We have a question from the line of Nicklas Skogman from Handelsbanken.

[Nicklas Skogman, Research Analyst]

Yes. I only have 2 questions that haven't been answered. The first one is, at the CMD, you announced that you were evaluating opportunities for international cooperation and expansion. Do you have an update on where you are on that?

[Mika Rautiainen, CEO & Member of Executive Board]

Well, basically, if I recall correct, it was -- it was mentioned that after the pandemic situation is on a healthier stage, then we will start the activities when it comes to international expansion or cooperation. The situation in Finland actually is pretty good, but it's -- in Europe, it's still -- it's probably not as good as in Finland. So I don't have anything to add to what was mentioned during the CMD.

[Nicklas Skogman, Research Analyst]

Yes. I get it. It is a bit early. Then the second question is on these -- the doubling, I think it was, so SKUs from 25,000 to 50,000. How do you see that ramping up over the coming years? Like how many do you expect to have by the end of this year and then the following year?

[Mika Rautiainen, CEO & Member of Executive Board]

It's a lot about the categories, like in which categories we're basically working. And in this -- for example, in this presentation, we said that with the online business, we have been concentrating on adding the assortment. And basically, there are already a couple of thousands of new SKUs in our online business. So we always start with online. So we add the SKUs in online. If they're performing well, we also start selling them the products in our stores. But basically, that is the logic. So we're working at the same time with several different categories and the new products, new SKUS. So for example, this year, it will be quite a lot of new basically spring/summer products in our online store, but not yet in the -- in our stores. So anyway, that's the logic. First to online and if they're performing well and also like we see a lot of potential selling these products also in our stores. So then they will be ending up in our stores. But I think that during -- already during this year, it will be a rough estimation with -- from 5,000 to 10,000 new SKUs in online store.

[Operator]

There are no further questions registered. So I hand back to the speakers.

[Mika Rautiainen, CEO & Member of Executive Board]

Okay. Well, so thank you very much. This was the first quarter of Tokmanni's year. Yes, it's the smallest quarter. And actually we're looking for a very sunny and warm second quarter in Finland. And we'll come back to that in the end of July. Thank you very much.

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

Okay. Thank you.