Tokmanni Group Oyj

OMXH:TOKMAN

Earnings Call Transcript 2023-Q1

[Mika Rautiainen, executive]

Good morning, and welcome to Tokmanni's Year 2023 First Quarter Result Presentation. My name is Mika Rautiainen, and today together with me presenting the results is Tokmanni's CFO, Mr. Tapio Arimo. I will first present the key points of the first quarter. Tapio will then share a little bit wider look at the figures. I will come back with focus areas for 2023, and afterwards it's time for questions.So let's start. Record number of customers, revenue grew, but EBIT declined. Let's take a closer look at it. First of all, we had a record number of customer visits in Tokmanni's stores during the first quarter, more than 0.5 million customers during the first quarter. That's quite remarkable for us and it basically tells quite a lot about the customers' price focus during the winter time in Finland.Basically the purchasing power figures were -- and the customer -- consumer confidence was basically on the lowest level in history during the first quarter, and it showed in the customers' purchasing behavior. Purchase is focused on discounts, offers and inexpensive groceries, and especially non-food products were not selling that well during the first quarter. And this was especially in January and February. In March we already saw some light with purchasing behavior.But anyway, then the number of products in the shopping basket decreased clearly. Basically we could say that it was 1 product less compared with previous year.The sales of groceries. Higher sales of groceries, affected on the gross margin, as well as the discounts on apparel during the first quarter, that was reducing gross margin. We decided to basically have very strong discounts on apparel for the winter season to get rid of the winter season products. So this was, of course, affecting our gross margin during the first quarter.The biggest increases with the cost side were in rents and real estate costs. Overall operating expenses grew moderately, slightly lower compared with the inflation level in Finland. Inventories, which has been basically already last 12 months on the focus area -- so the inventories measured in units decreased significantly, but inflation -- especially inflation and the inventories from these acquired companies, Jyskan Varastomyymala and Click Shoes, Shoe House shoe store chain, increased the inventory value.And then when we look at the key figures, revenue grew by 4.7%, like-for-like revenue increased by 2.7%. Comparable gross profit was higher compared with previous year, EUR 75.5 million. But the gross profit margin was 31.7%, clearly lower compared with previous year's 32.4%.Comparable EBIT amounted to negative EUR 2.2 million, minus 0.9% of revenue. Cash flow from operating activities amounted to minus EUR 12.9 million compared with previous year's minus EUR 65 million, and this was, of course, due to the inventories -- lower level of inventories compared with the previous year. Earnings per share diluted was EUR 0.07 minus.And let's take a look at a little bit closer on the groceries and non-food. First quarter in Tokmanni, it's always been more of grocery sales. It's actually the first quarter during the winter time. It's not really a season for non-food products. But still, this time this year, it was even -- the groceries were even bigger share of the total. The increase was 6.7% during the first quarter.And basically it was -- the sales of groceries, it was grocery, especially food, pet products, washing, cleaning and tissue paper products were on a very high sales growth. And on the other side, non-food products, non-grocery products, especially home electronics and leisure products decreased clearly. Apparel was growing fast, but that's mainly due to the discounts during the first quarter.When we then look at the market share with -- the red line over here is basically Tokmanni's market share and basically the sales increase, sales development figures compared with hypermarkets in the market and department stores. And as you can see, during the last 2 quarters we've been losing market share. With hypermarkets, they are clearly bigger with food products and food is clearly smaller in Tokmanni compared with hypermarkets.The inflation with food products during the first quarter was sky high in Finland, 15%, 16%. So obviously this has an effect on the sales growth with -- in the market. But obviously we, of course, try to do our utmost to start winning market share again.So this was like a quick snapshot on the first quarter. Then key figures, and Tapio, please, your turn.

[Tapio Arimo, executive]

Thank you, Mika, and good morning, everyone, on my behalf as well. So we start with the key figures. Revenue. In the first quarter we had good revenue growth of 4.7%. And as you can see, we hit record revenues in Q1. And also, what I'm very happy about is the like-for-like revenue, which increased by 2.7% as compared to last year when it actually declined by the same amount. And let's say, most growth showing product categories included food, pet products, apparel, washing and cleaning products and tissue paper.And from now on, we also will start to share our B2B, or business sales. And in the first quarter, the B2B sales accounted for 3.5% of total revenue. And likewise, our online sales accounted for 1.2% of total revenue in the first quarter.Looking at our comparable gross profit, we also hit a record there with EUR 75.5 million in euro terms. And our comparable gross margin declined to 31.7% from 1 year ago of 32.4%. And the gross margin was negatively affected, in particular by the increased discount and campaign sales we had, our sales mix which focused more on grocery, and also our significant winter apparel discount campaigns during the first quarter.Looking at our direct import and product labels managed by Tokmanni, we had very good progress in the first quarter compared to last year. So our direct imports grew to 25.1% of total and import through Shanghai sourcing office increased to 15.7%. And also, when you look at our product labels that are managed by Tokmanni, there we also saw very good growth in the first quarter, an increase of 1.7 percentage points to 30.1%.Looking at our operating expenses, they grew about EUR 1.9 million in the first quarter compared to last year, and the increase in expenses was driven by higher property costs, but, of course, also other cost items increased. Personnel expenses were in -- I would say, in good control. There was slight increase, but as a percentage of sales, they declined so to 14.1% from 14.5% 1 year ago. And also, in total, our comparable operating expenses declined as a percentage of sales to 24.9% from 25.2% 1 year ago.Our comparable EBIT declined from 1 year ago and was minus EUR 2.2 million. And as you can see, the absolute figure is about exactly the same as it was 4 years ago in 2019. And especially in '21, we saw the Corona impact in the figures, so. Compared to last year, the weaker result was mainly due to the lower gross margin percentage and an increase in the operating expenses and depreciation.Looking at our inventory. Our inventory value declined slightly from 1 year ago. It was EUR 300.7 million, and the increase was mainly driven by higher sourcing prices and inventories of the acquired companies we acquired during the last quarter. And if you think about our inventory in number of items, the inventories actually decreased clearly.Looking at our financial position. At the end of March, our interest-bearing debt totaled EUR 441.2 million, and out of that figure, EUR 100.4 million was in noncurrent loans and EUR 51.4 million was in current loans from our commercial paper program and financial institutional loans. And the remainder of the interest-bearing liabilities were then this IFRS 16 liabilities. And our ratio of net debt to comparable EBITDA declined slightly. It was 2.8 at the end of last quarter compared to 2.4 a year ago.And our financial position remains very strong. We have a total of EUR 139.6 million in withdrawable funds, consisting of loan agreements with financial institutions and our commercial paper program. Our cash flow from operating activities was very good in the first quarter. Compared to last year there was a significant improvement. But also looking at the previous 4 years, we had record cash flow, albeit still being negative. And this year, the operating cash flow was particularly impacted by our prudent management of working capital during Q1.Moving forward to capital expenditure. In the first quarter, our capital expenditure totaled EUR 18.3 million. And as Mika mentioned, during the first quarter, we acquired the business operations of Jyskan Varastomyymala in Jyvaskyla and then the entire share capital of 2 Finnish footwear shoe store chains, Click Shoes & Shoe House.And in addition to these acquisitions, the CapEx was related to our normal capital expansion, store network development and maintenance, development of our digital services and, of course, the construction of our new logistics center, which was about EUR 4.5 million in the first quarter. And the total value of the investment in our new logistics center is estimated to be around EUR 65 million, and it is recognized over time during this year and last year.So with that, I give the floor back to Mika to talk a little bit about our 2023 plans.

[Mika Rautiainen, executive]

Thank you very much, Tapio. Yes, the beginning of the year, as mentioned already, for our customers was quite difficult, especially January, February time, due to inflation, higher costs with food, high inflation, higher electricity costs, higher interest costs and so on. But already in March, we could see a little bit more light with the situation. And of course, throughout Finland, the salary increases will start affecting already in April as well.But let's take a short look at the focus on Tokmanni's year 2023. We will be focusing on sales growth, improving profitability and improving competitiveness. Basically, from sales growth, it's strengthening our destination categories. With destination -- Tokmanni's destination categories, it's, for example, apparel. Part of the apparel business -- we decided to buy these shoe store chains, Click Shoes & Shoe House and we will be working on that very actively. We'll short come back to also an outdoor brand called Catmandoo, a traditional Finnish well-known outdoor apparel brand, which we actually acquired yesterday.But anyway, apparel is one of these key destination category areas. Now, at the beginning of the second quarter is -- of course, the second quarter is our second biggest season, spring/summer season. And the garden, for example, is our destination category. We are at the moment the market leader with garden. So obviously, we will be focusing very strongly on these destination categories, especially now during the second quarter.Of course, store network will be -- we will get -- we will be getting new stores during this year. Previous year -- last year, the construction costs were on a very high level. Now we can see a clearly lower level with the construction costs. So we are able to move on with our target of 220 Tokmanni stores.Tapio already mentioned Tokmanni business-to-business sales growth, Tokmanni Turku. We can clearly see that the -- when normal customers are focusing on low prices in Tokmanni stores, companies also -- other businesses are also focusing on low cost, low prices with their shopping, so -- and goods not for resale. So we will be, of course, focus -- we will focus also on the sales growth of our business-to-business sales.With profitability, we already could see during their first quarter that private labels were very popular to the price level. So we will be developing new private labels, and we will, of course, focus on strong sales of Tokmanni private labels.Supply chain efficiency mainly is about our new distribution center in Mantsala. We started to use the first part in April -- the first part of our new distribution center in Mantsala during April, and we're basically able to finalize the external warehouse contracts during May and June, actually, which will, of course, make our supply chain, again, much more efficient compared with, for example, the last 2 years. An increasing inventory turnover, this is what we've been working for now, especially for last 12 months, and we will continue with this one as well.Improving the competitiveness, it's Tokmanni Club. The -- our loyalty -- customer loyalty program, Tokmanni Klubi -- We have now already more than 2.2 million members with Tokmanni Club, which is a great asset for the company. We are getting a lot of customer data, which will make us more efficient at the moment. And of course, all the discounts, offers, services, different kind of benefits will be offered to our club members. And this is only now the beginning.And of course, traditionally, the success with Tokmanni starts with Tokmanni employees. So we will be strengthening the -- our employees' competencies and well-being. Last but not least is making the concrete and increasingly responsible actions, of course. These are the focus areas for 2023.Already mentioned, Catmandoo, traditional Finnish outdoor apparel brand that we acquired yesterday. So we will be developing this one starting from today, actually. Very enthusiastic our apparel team to start working with this. This will definitely increase the quality level of our apparel offer as well. So we're very excited about it.The guidance for 2023 unchanged. Tokmanni expects revenue to be EUR 1.2 billion to EUR 1.27 billion. Comparable EBIT in euros, we -- the guidance is we expect it to be from EUR 85 million to EUR 100 million.Thank you. That's it. Operator, now it's time for questions. And Tapio, please join me to answer all the questions. Thank you.

[Operator]

[Operator Instructions] The first question comes from the line of Nicklas Skogman calling from Handelsbanken.

[Nicklas Skogman, analyst]

My first question would be on -- perhaps if you could give some color on how the -- let's say, if you would include April, how the spring season has developed? I remember last year, there was this -- at least in Finland, this weather impact where you basically went from winter to summer. So I was just wondering if you could give an update on how you feel about this spring season, if it's looking better than last year?

[Mika Rautiainen, executive]

Nicklas, this morning in Helsinki it was plus 2 degrees. So it's a little bit early for spring time, but of course, we had some sunny weeks and it's -- yes, it's -- of course, it's always about the weather, but it's always -- it's also about the consumer confidence on their own economy. So we're very happy that the consumer confidence is improving at the moment.Of course, the inflation has been quite high. But starting from April, there were, I think, already quite the -- big part of the salary increases were in Finland with employees all over Finland. So these are -- and of course, the electricity costs will be a little bit lower because during the spring time even if it's a little bit chilly during the nights, it's still on a lower level. So the -- from our perspective, the consumer confidence is also a very relevant issue. Obviously, usually, the spring time starts in May, and we're very much looking forward to it. But I would say this time it's also about the consumer confidence.Tapio, would you like to share a little bit more on this or…?

[Tapio Arimo, executive]

No, I think you've covered it pretty well. So -- it's been a sunny April in Finland.

[Mika Rautiainen, executive]

That's true, at least the beginning.

[Nicklas Skogman, analyst]

And then the second question is on the gross margin. It sounds like it was only down because of this shift to more groceries and because of the discounted apparel and not much at all due to sort of price hikes lagging your input cost increases. And if you then -- I don't know exactly when this new freight agreement will actually start hitting your COGS, if that's later in the year or not, but it sounds more positive than for the gross margin outlook in the second half?

[Mika Rautiainen, executive]

Maybe I should go a little bit -- it's absolutely true that the groceries -- the growth with grocery sales, that was affecting our gross margin. But with apparel, as you know, we have to make the orders for apparel almost 1 year before the sales. And 1 year ago, it was still quite good growth on business. So basically, the discounts on our winter season products where we just -- that had quite strong effect on our gross margin, but we decided to get rid of the winter season products with apparel just to make sure that we can, in future, do healthy business.With the new freight contracts, that's already from the beginning of April. So yes, there are a lot of positive things also happening at the moment. The cost -- the additional cost from the external warehouses, we are getting rid of them by the end of May and by the end of June. Obviously that will affect our 2023 in total, not that much maybe during the second quarter. But for the whole year, it will have an effect for sure.

[Nicklas Skogman, analyst]

But this new freight, it's an agreement effective as of April 1st or is it that you will --?

[Mika Rautiainen, executive]

Yes. April 1st.

[Nicklas Skogman, analyst]

So the effects of the lower agreement will come into play in your COGS as of April 1st?

[Mika Rautiainen, executive]

It's starting from April 1st, so everything already happening now in April is with the new contract.

[Nicklas Skogman, analyst]

Everything you order now?

[Mika Rautiainen, executive]

Yes. Operator, any more questions?

[Operator]

Yes, of course. The next question comes from the line of [indiscernible] calling from Nordea.

[Unknown Analyst]

I have a couple of questions. The first one relates to the consumer behavior. You mentioned that you saw a bit improvement towards the end of the quarter. But I don't know, is that more based on consumer sentiment to date? Or what have you observed yourself in your business during January, April?

[Mika Rautiainen, executive]

Yes. Well, January, February, we could see clearly that there were -- that customers were very cautious with their shopping behavior. If you remember, backwards the January, February timing, it was quite a lot of discussion regarding electricity costs, interest rates, food -- record high food inflation, things like this. So we could clearly see that the customers are very, very, very cautious with their consumption coming more often to our stores, focusing on discounts and low-priced products.But already in March, it was a little bit more like a normal situation. It was probably due to the fact that the winter wasn't that bad after -- yes, afterwards, or the winter wasn't that bad with the costs. For example, with electricity costs, probably it wasn't that bad and so on. So I cannot -- when we start looking at the spring season, obviously, people will be -- or customers will be still cautious, but probably it's not that critical the situation as it was in January, February.

[Unknown Analyst]

Next question about the inventory. If we -- how much inventory did you acquire during Q1? Or I'm actually asking how did the, let's say, like-for-like inventory develop?

[Tapio Arimo, executive]

Well, of course, I mean, the overall inventory was down from 1 year ago. And of course, we have the acquisitions in there. So obviously, in a way, the like-for-like inventory was lower, but we don't disclose the exact amount of the acquired companies' inventories.

[Mika Rautiainen, executive]

But the like-for-like inventory was clearly lower if we take the effect of the inflation, the higher buying prices out of it. So unit-wise, it was clearly lower compared with previous year. We feel at the moment that we're on -- very much on the right track with our inventories. But of course, it's usually with -- the seasonal business usually takes 12 months to get back on track because -- like, for example, spring season products, it's very difficult to sell during the Christmas time and so on. So obviously, we feel at the moment that we're very much on the right track with inventories as we should, of course.

[Unknown Analyst]

Then I don't see any numbers disclosed regarding Catmandoo acquisition. Can you elaborate a bit on the magnitude of that, not perhaps price but sales?

[Mika Rautiainen, executive]

Well, unfortunately not. It's been -- it's basically -- it's been like a wholesaler who's been selling Catmandoo products to different retailers in Finland. It could be that the other retailers are not that happy buying Catmandoo products from Tokmanni. Obviously, we're happy to sell to other retailers as well. But we clearly see space for Catmandoo type products with Tokmanni apparel sales.Actually, it's been something our customers have been asking for, a little bit higher quality level with apparel products, especially outdoor, which is selling quite well totally in Finland at the moment. So this fits our outdoor offer in total. So very excited with this. But yes, it's going to be a little bit of a shift because it's -- we're buying the Catmandoo brand from a wholesaler.

[Unknown Analyst]

And last question regarding Tokmanni Turku business-to-business sales. What's the share? Or how big is it now? And what are the growth rates there?

[Mika Rautiainen, executive]

I think…

[Tapio Arimo, executive]

Yes. So I think we said it was about 3.5% of total sales in Q1. And I think we can say that we plan to grow it significantly over time. So we are -- have a, let's say, a very good plan for that to expand on those sales.

[Mika Rautiainen, executive]

Yes. Instead of -- as we were calling it business-to-business sales in Finnish, [Foreign Language], and we obviously noticed that a lot of companies in Finland, they don't know that we do have like this kind of business-to-business section. And now we are using a name called Tokmanni Turku. Tokmanni has a very good price image in Finland for our customers. So obviously, the same price image goes for companies as well. So we've seen several very, very positive contacts with our business-to-business customers, finding out that Tokmanni is actually doing business-to-business sales. So this is something where we can see that there's definitely space for real good growth.

[Operator]

The next question comes from the line of [indiscernible] calling from [indiscernible].

[Unknown Analyst]

Yes, I would have some questions. The first one is regarding the price effect that you had in Q1, please, if you could quantify a bit what sort of price effect did you have in the Q1 contribution, please?

[Tapio Arimo, executive]

I guess you mean -- price effect on the net sales, you mean?

[Unknown Analyst]

Yes.

[Tapio Arimo, executive]

Yes. So obviously, the net sales increased and taking the -- into account the inflation. So the volume was still negative slightly. So the growth is driven by the increases in prices.

[Unknown Analyst]

And does -- it is sufficient to cover your cost inflation in Q1 at least? Or is it a bit lagging behind in terms of yes, sales -- cost inflation -- between cost inflation and price increase? Is it --?

[Tapio Arimo, executive]

Yes. So, of course, we do our best to keep prices very competitive to our customers. So typically, we are not once increasing prices. And of course, we negotiate very hard with our supplier base as well to try to, let's say, contain the input pricing as well. But of course, in this kind of environment, the input prices also go up on average.

[Unknown Analyst]

And when it comes to gross margin and EBIT margin, it has been some quarter since you really declined in this metrics. Do you expect, given the main tailwind that you mentioned on logistics, on freight, maybe a return to a better mix in terms of sales -- with better sales of non-grocery products in the spring? Do you expect to come back to an improvement on your gross margin and EBIT margin in Q2, for instance?

[Tapio Arimo, executive]

Well, of course, Q1 is always our worst quarter due to the seasonality. So of course, we do expect the numbers to increase from Q1. So there's definitely the spring sales season that drives also the product mix a little bit more towards the non-grocery part of the -- our business. So that will have an impact on the figures as well.

[Unknown Analyst]

I mean compared to last year and compared to the first quarter, obviously, given…

[Tapio Arimo, executive]

Yes. So I…

[Unknown Analyst]

The negative territory?

[Tapio Arimo, executive]

Yes. So last year, I think we talked about missing the spring season in a way last year that it was a very poor season for our traditionally strong sales. So comparing to last year, I think we do expect an improvement also.

[Unknown Analyst]

Last question for me is on inventory as well. If you could give us an idea of the decline that you observed in unit terms on your inventory in Q1, please?

[Tapio Arimo, executive]

Well, it's difficult, of course, when the inventory mix is different every quarter. So you can't say exactly, but let's say, we had input inflation in the average prices in the inventory of somewhere around a little bit less than, I would say, the average inflation. But if you add into the mix there, let's say, additions into the inventory from last year in terms of the acquired businesses, then the unit numbers are clearly lower, I will put it that way. So without saying anything specific, it's a notable difference in the inventory unit numbers.

[Unknown Analyst]

And what would you say in terms of inventory normalization in terms of figures, what would be a good inventory figures for you at the end of this year given you expect strong progress in the coming quarter?

[Tapio Arimo, executive]

I think we can't give a specific number. But if you look at our historical figures, we've had, I would say, about maybe 18 months of high inventory now, 15 to 18 months. Mika, correct me if I'm wrong. So if you look at figures --

[Unknown Analyst]

Sorry, what…?

[Tapio Arimo, executive]

So, if you look at -- let's say, at the end of the year, if you look at our figures 2 to 3 years ago, maybe 3 years ago and then you add in all the, let's say, business acquisitions that we've done, I think that's a good sort of target level, without being too specific.

[Unknown Analyst]

And on the inventory risk, I would say, in terms of potential further discount on other categories, do you see any categories at risk today where you could apply some discount going forward?

[Mika Rautiainen, executive]

Well, at the moment, it's about, of course, the spring season. As last year -- unfortunately, we have to rely a little bit on the weather circumstances in Finland during the spring time. And unfortunately, we cannot really effect on the weather circumstances. But anyway, so that's, of course, the, I would say, only issue with our possible discounts during the coming quarters, if -- let's say, if we have like a same kind of spring season as last year, and actually, we can already say that it's been much better during the beginning of April, but it's always affecting a little bit like the business, how the weather forecast or the weather circumstances are in Finland during the spring season.That would be probably only thing that would cause some discounts in certain areas, especially garden, outdoor furniture, things like this. But otherwise we're not seeing really issues like that.

[Tapio Arimo, executive]

So we are being very careful now with ordering products. I think we have put a lot of effort in our -- improving our forecasting capabilities. So we are hoping to hit the numbers better. Of course, you have to remember that we need to order the seasonal stuff 6 to 12 months in advance, and you never know exactly what happens between the time we place orders and when we actually sell them. So there's always some risk of running out of stock or ending up with too much inventory. That's just the nature of the business. But I think we have clearly improved our capabilities in the forecasting in the last 12 months.

[Operator]

We currently have no questions coming through, so I will hand it back to your host to conclude today's conference.

[Mika Rautiainen, executive]

Okay. Thank you very much, and see you next time with our second quarter result presentation in the beginning of August. Thank you.

[Tapio Arimo, executive]

Thank you.