Tokmanni Group Oyj

OMXH:TOKMAN

Earnings Call Transcript 2021-Q3

[Mika Rautiainen, President, CEO & Member of Executive Group]

Good morning and welcome to Tokmanni's Third Quarter Result presentation. My name is Mika Rautiainen, I will present in the beginning the highlights and results for the third quarter. And afterwards, Tokmanni CFO, Mr. Markku Pirskanen will give you a deeper analysis on the third quarter figures. And then it's time for questions.So let's start. Talk on the third quarter sales and results continued to increase. Sales continued to grow well on top of last year's very good growth. Something very important for Tokmanni was this launch of Tokmanni customer loyalty program called Tokmanni Klubi, Tokmanni club. We launched the program, or the club, in August. And I'll come back a little bit later on this one.As you know, the global market situation is exceptional at the moment and also price inflation in Finland has started. Tokmanni, however, maintained the low price level despite the increase in purchasing prices. Comparable EBIT improved despite the cost pressures. And basically, all preparations for Christmas season have been progressing in an excellent way and availability of products for the most important season at the moment is on a very high level.The key figures for the third quarter. So the revenue grew by 7% and like-for-like revenue grew by 5.4%. Comparable gross margin was 34%, exactly the same as last year. I'd like to explain this one a little bit more carefully. Basically, we gave all the registered customers in our -- in Tokmanni club a 10% discount for their purchases and some excellent deals as well.And at the same time, we had to keep in mind that Tokmanni is the leading counter in Finland. We could see price increases in the market already actually quite a lot, but we kept the low price level. At the same time, we were inviting our customers to join Tokmanni club. So we didn't want to do this -- that we sudden -- at the same time, increase our price level.So this was basically -- it showed very well here in the gross margin. It was lower than, of course, the targeted gross margin, but we felt it was the smart thing to do. The comparable EBIT was EUR 26.1 million, 9.3% of revenue compared to last year's 9.2%. Cash flow from operating activities amounted to EUR 12.5 million. And earnings per share was EUR 0.32.And then the first 3 quarters for the year 2021. Revenue grew by 8.2% compared to last year's EUR 13.2 million. Like-for-like revenue, 7% growth compared to 11.8%. And with comparable gross margin, a slight increase to 34.1% compared to last year's 33.7%.Comparable EBIT amounted approximately EUR 10 million better there compared to last year's EUR 54.9 million, so it was EUR 65.2 million, basically representing 8.1% of revenue compared to last year's 7.4%. Cash flow from operating activities amounted to EUR 51.9 million, and earnings per share EUR 0.80 compared to last year's EUR 0.63. A couple of words about the Tokmanni club, Tokmanni Klubi as we call it in Finnish. Basically, the purpose for our customers is to offer personalized offers and best deals, of course. And -- but the meaning of Tokmanni club for Tokmanni was actually part of also of our strategy. The Tokmanni club actually gives us a lot better understanding on our customers' needs and behavior.We feel that we will be getting some efficiencies through this customer loyalty program, we will be -- it will help us to act smarter with -- basically on our buyings and orders were from our suppliers. As mentioned already, we gave a 10% discount as a registration benefit and of course, some fantastic deals. And basically, our target was 0.5 million customers joining our club during this year. We've reached already this level. So it has been very successful.According to the first insight, obviously, it's only a short time period, but still club members' average basket and the number of visits are on a much higher level, which, of course, was the original purpose for the customer loyalty program as well. So it is working according to our plans. And of course, in the future, Tokmanni club will give its members new benefits and services, meaning that the start has been okay. And now we will also continue with all the developments.Then, of course, something about the Tokmanni online business. During the third quarter, the online sales increased by almost 65% compared to last year's very strong growth figures as well. But well, we'll need to keep in mind that it's still a quite small portion of the total revenue. For the third quarter 1.6%, and for the first 9 months this year 1.7%. But basically, what is very interesting for Tokmanni is the sales mix and our online is clearly different from the sales mix of brick-and-mortar.So basically, it's -- we sell in Tokmanni online products with clearly higher unit prices, such as outdoor furniture, barbecues, air conditioners, jacuzzis, swimming pools, ski boxes, and especially right now when the season starts for -- especially for selective cosmetics. These are clearly different from the sales mix from our stores. And everything looks very good actually at the moment for our online business, and we're ready for the high season, which is obviously Black Friday and Christmas season.There's a graph from Finnish Grocery Trade Association. And as already mentioned, we wanted to maintain the low price level in Finland because the -- society has been opening basically after a little bit lower pandemic figures. And there are -- people are basically spending the time and money to social events, restaurants, sports events and so on.So if the market is not growing as much we need to gain market share. And I'm very happy that we were able to gain market share again during the third quarter, even though if you look at the figures from third quarter in year 2020, we were taking a huge market share compared to our competitors. So we were very satisfied with this development. A couple of words about the international sourcing markets from Tokmanni's perspective. In the beginning of 2021, the global demand, especially in Tokmanni's product categories, was on a very high level and growing very strongly. And consequently, the demand for transport capacity, whether it's containers, sea freight, port capacity or fuel increase, everything was basically increasing. Some of the price increases were extremely high, especially containers, for example.At the same time, the prices of many raw materials started to rise sharply. Some of them are still increasing the raw material prices. In addition to this -- to all of this, China, for example, we introduced the dual control program, energy consumption policy, only a month or so ago. And this has been affecting basically the whole society, but also factories and product plans.At the moment, it seems that the demand for production capacity and sourcing prices are at their highest levels, this is at least how we see this. Some production capacity or even some buying prices are not even available at the moment, which is very, very strange situation in the market.Now if we look at the Tokmanni sourcing, we've had -- we've made basically some very, very good agreements with our partners, regarding the transport capacity and freight rates. And we've been successful with securing the sufficient rates basically for imports from Far East.And with the help of our Shanghai office, the deliveries of seasonal products have been done earlier to ensure product availability. Basically, we have the whole Christmas season products in Finland already and actually by the end of the year, we will already get a large part of our spring season product to Finland. And most of that before, for example, the Chinese New Year, which will take place in the beginning of February.So inventory. Inventory-wise -- well, transport capacity freight rates, we're on -- from our point of view, we are in a very good position. But at the moment, the timing for future purchases. So when we have the Christmas season already in and spring season coming in, then we're talking about basically next year full Christmas, even the beginning of 2023.So all this timing for those purchases and orders they're particularly critical because price and production capacity keep changing on a daily basis. Some of them even on an hourly basis. So we need to be very careful with that, and that's exactly what we're doing. Actually, no rush at the moment.And we believe that production capacity, sourcing prices and transport capacity will begin to normalize during '22, year '22. And at the same time, we're all the time keeping in mind Tokmanni's most important mission, which is to offer our customers the lowest price level in Finland. And therefore, we monitor basically the competitive situation and prices at the moment daily and of course, react according to the changes.So here, it was just a short recap on the situation when it comes to buying and sourcing and the supply chain. We feel we're on a very good position with this. So it's, of course, very good for the business. Then we'll move on to Markku's analysis on the key figures. Markku, please?

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

Okay. Thank you, Mika. And good morning from my side also, and then let's look at finances a little bit bigger. So let's start from revenue. And first of all, when you see this graph here, just the same method goes forward, basically the 3 on left -- 3 bars on left side, they are quarter-based and the 3 bars on right-hand side, they are cumulative figures.So basically going through the revenue first, we have to say that we are satisfied for the growth, what we achieved during Q3, especially when we think how stronger growth was last year. Last year, we managed to get 13% growth. And now this year, the growth was 7%. So that was a good achievement for us. When we look what kind of product categories we have managed to sell well. We can say that during Q3 and also cumulatively, the same product categories have managed well. So basically, lesser home electronics, apparel and car products.Looking these figure in euros, as you've seen in our graphs, we have achieved, for example, during Q3, now EUR 20 million increase in our revenue. And then even last year, EUR 30 million addition. So -- but good achievement. But as I have told many -- not many times, but sometimes, but it's always balancing the sales and also gross margin. How -- what we want, sales or gross margin, and we are trying to balance it.Now when we look at Q3 '21, basically, there are 2 things which were supporting our revenues, the launch of Tokmanni loyalty program and also the decision that we didn't raise our prices, and we kept the low price level, even the purchasing prices were increased. But of course, as I said, it's always balancing the revenue and gross margin. We achieve a good revenue, but it has some effect to our gross margins.The launch of customer loyalty program and the discounts which we gave to our customers, that, of course, affected negatively to our gross margin. But at the same time, we have to say that it's clearly the investment for the future. Other thing, this decision to keep the prices it, of course, affected negatively to our cost. But on the other hand, we have other things which supported our gross margin, we were able to increase the share of private labels and direct imports during Q3 and also cumulatively. Let's look at figures a little bit later.Now looking at the actual margins during the quarters. 2019, we were at the level of 35.4%. Last year, when we have some challenges with our apparel, it dropped to 34%. And now during 2021, we were at the same level 34%. And when we look at cumulative the figures, now we achieved a level of 34.1%, which is 0.4% more compared to last year 33.7% figure.As mentioned, to increase the share of direct imports and private labels that support our gross margin, and it's our strategic target. And now looking at how we have managed there. Direct import during Q3 from last year's 26.4% up to 27.4% and the same trend also when we look at cumulative figure. Product labels managed by Tokmanni, which are basically the private labels mostly, now 32.1%, last year 31.3%. So 0.8% higher level, and cumulatively the same thing. So we are progressing on that segment clearly.Operating expenses. Here, I took 4 years development to show clearly how we -- and got a better picture how we have managed during the last 4 years' time. Starting from Q3 2018, 20.6%, down to 19.7%, last year 18% and now at level 19%. So about the same percent what we had last year and cumulatively about the same kind of trend. So we have to say that when we are looking a little bit longer period, we have developed very well on that side.Looking the Q3 expenses. The biggest part on operating expenses are the personnel expenses. During Q3, it was EUR 30.8 million out of this EUR 53.3 million. And if we look relatively now we achieved in personnel 11%. Last year, it was 10.7%. So last year, it was a little bit lower level. But when we take account with pension reduction, what we have last year is EUR 0.8 million. We can say that we were about the same level in relative personnel expenses. And when we think that we have this salary raises also during this year, which affected 0.4%, we have managed a little bit -- we have managed to develop our efficiency in -- when we are looking for our personal expenses.So sum up comparable EBIT. Despite of some pressures on our gross margin, we still managed to improve our EBIT. Looking again, the 3 years' development from 2019 from 21.9%, up to this year's 26.1 -- sorry, EUR 21.9 million, up to EUR 26.1 million this year. And when we look what is in a relative figure this year, 9.3% compared to last year's 9.2%, which are a little bit lower level compared to 2019, which was 9.5%. But still, the euros are clearly more. And when we look at cumulative figures, we have managed to improve our euros very well. This year EUR 65 million, and last year roughly EUR 55 million. And relatively, again, clear improvement from 5.8% up to this year's 8.1%.Balance sheet, financing and cash flow. When we are looking at our balance sheet, it's clear that the inventories are the biggest part there. And this year's global market situation has been, as Mika told, very, very -- we can even say confusing, but anyhow very, very difficult. And this year, we have made a decision to take the products into our inventory very early.So -- but clear explanation why our inventory levels are now on higher level at the end of September '21. And when we are leaking -- when we are thinking the year-end, it's most probable that, that still -- the inventory value will still be on a high level because the spring products are coming also earlier. But of course, during the spring time, the working capital will be released and the products are sold to our customer.Other reasons for increasing the inventory values are clearly the acquired TEX stores and also the business growth. Cash flow during January-September time period now EUR 51.9 million. And last year, a little bit more EUR 61.5 million and the clear explanation why we are a little bit lower level on that one is inventory development. The ratio of net debt against the comparable EBITDA, we are on a good level 2.0, and last year 2.6.And let's look the net capital expenditures. So clearly, the investments, for Q3 we ended up EUR 9 million compared last year's corona time, very low, EUR 2 million. The clear explanation why we are on a higher level is this acquisition of TEX stores.Now we are expecting that the whole year's investments will be on the level of EUR 20 million to EUR 22 million and this figure is including this acquisition of TEX stores. After Q2, we announced the level -- that this investment level will be from EUR 16 million to EUR 18 million, and that figure didn't include these TEX stores. So basically the change were roughly these TEX stores.A couple of words about our consideration of expanding the Tokmanni logistics center. They are still ongoing. The market situation on building business, it's very hot at this moment. And of course, it is very good to make the good feasibility studies and consideration before making any decision of this kind of big investment. So it's still ongoing process.So for Mika, still the speech.

[Mika Rautiainen, President, CEO & Member of Executive Group]

Thank you, Markku, for very good analysis and please don't go too far because we'll have the questions next. But before the questions, the outlook for 2021 for Tokmanni. Basically, the message is clear. We're going to be sticking to the previous outlook for this year, which basically is Tokmanni forecast revenue growth for 2021 and group profitability measured in years, meaning comparable EBIT is expected to improve and to be from EUR 105 million to EUR 150 million.So that's it. Thank you very much. And operator, now it's time for questions. And Markku, please join me.

[Operator]

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

[Nicklas Skogman, Research Analyst]

So my first question is on the gross margin and how much of the implied headwind comes from the loyalty program launch? And how much is due to the higher input costs basically growing faster than your retail prices?

[Mika Rautiainen, President, CEO & Member of Executive Group]

I guess we haven't clearly said the -- how much the -- what is the exact effect of the Tokmanni club. But let's put it this way, it was quite a lot because like it was a little bit more popular than we actually even thought. So it's a big part with Tokmanni club, but I guess we haven't told exact figures like...

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

No, we haven't. But it's clear that both have a clear impact.

[Nicklas Skogman, Research Analyst]

Okay. It is slightly more for Tokmanni club than perhaps than for the other pressure. So how do you think about -- I mean I would assume that the input cost pressures are sort of really starting now in Q3 and are only expected to get worse. So since you didn't raise prices to compensate, or at least now in Q3, how do you think about Q4 and at least the first half of next year?

[Mika Rautiainen, President, CEO & Member of Executive Group]

Yes. Well, obviously, we've seen already higher prices from our competitors. Like I explained earlier, it felt very difficult to start maneuvering with our low price level when we invited people to join Tokmanni club. But yes, we've seen our competitors with -- raising their selling prices. And we will -- we're basically monitoring that daily.And -- but we haven't really reacted strongly on that because we definitely feel that at the moment, it's also about the market shares. When people's money is also going to -- as mentioned, to different kind of social sports events, restaurants and everything else. Then of course, it's very important to stick to the low price level. But yes, there are -- I would say that the change is global. And of course, Tokmanni will also follow that very, very intensively. And so Markku, is there something you would like to add?

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

No, I think so, that was a good answer.

[Nicklas Skogman, Research Analyst]

Okay. So I mean I read that as you will eventually be starting to compensate for these higher raw material -- higher input costs, but Q3 wasn't a very good quarter to do so because of the launch of the loyalty program. But do you already now want to sort of flag pressure in the coming quarters from the higher input costs? Or do you think you'll be able to manage them?

[Mika Rautiainen, President, CEO & Member of Executive Group]

Well, obviously, for Christmas season, also for the spring season, the basically -- the purchases are -- especially for the seasonal product, they're already done, a big part of the products are already in our warehouses or they're like on their way to Finland.And of course, there is pressure on the prices. But -- well, Nicklas, maybe you can understand that for a discounter, for the company who's having the lowest price level in Finland, it's always extremely difficult to say that we would be raising our prices, so -- but of course, we will monitor that very, very carefully.

[Nicklas Skogman, Research Analyst]

All right. But I'm thinking if your competitors are raising prices, then maybe it's easier for everyone else. So you have started to see some price upward pressure on the retail level, generally in Finland, right?

[Mika Rautiainen, President, CEO & Member of Executive Group]

Of course, that's very clear. Basically, starting from the freight costs and so on. And of course, the higher raw material prices, obviously, that's affecting the market.

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

Yes, and if I can add, it's absolutely really clear that the companies have to raise the prices as a common level. And -- but of course, the question is always because we always also talk about the margins, what companies are making. And it's clear when your purchasing prices are increasing, for some day you have to make the changes also your selling price. That's fact. But of course, the competition situation is affecting and different companies are timing that changes, price changes in different time and it has a clear effect how the prices will develop in the future.

[Nicklas Skogman, Research Analyst]

Okay. And my last question is on -- now looking ahead, as I understand, Finland, reopened early October. What's the early impressions from the restrictions being lifted? Is -- are you seeing a normalization of consumer behavior or is it still a bit pandemic influenced?

[Mika Rautiainen, President, CEO & Member of Executive Group]

Good question, by the way. During the third quarter, it was still like the restrictions and also the advice from the authorities, they were not exactly very clear and it showed with our -- in our customer behavior. Usually, if there are restrictions, I think that Tokmanni customers will -- they -- Tokmanni customers have been reacting very -- well, according to the advice and maybe a little bit less visits in the stores, but at the same time, much higher average basket.There was a lot of changes during the third quarter with this behavior, depending on the message from the authorities and they were not always very clear, unfortunately. But at the moment, during this -- the beginning of fourth quarter, we can already see that the customer behavior is normalizing again. Hopefully, there won't be any, let's say, third or fourth wave anymore.

[Operator]

[Operator Instructions] We have no further questions. So I will pass back to the speakers.

[Mika Rautiainen, President, CEO & Member of Executive Group]

Okay. Thank you very much, and everybody, you're more than welcome to do your Christmas shopping in the Tokmanni stores in Finland. Thank you very much.

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

Thank you.