Tokmanni Group Oyj

OMXH:TOKMAN

Earnings Call Transcript 2022-Q3

[Mika Rautiainen, executive]

Good morning, and welcome to Tokmanni's third quarter results presentation. My name is Mika Rautiainen. And first, I will be presenting the highlights of the third quarter, and then we'll dig deeper to the key figures of the third quarter.

Today, I will be doing the -- or presenting the result all by myself. And next time, which is basically the fourth quarter result presentation on the 10th of February, next year, Tokmanni's new CFO, Mr. Tapio Arimo, will be joining me, supporting me and helping me with the presentation. Tapio will start officially in Tokmanni during the second half of November. But let's start with the presentation.

Revenue increased -- cost increases were causing problems for Tokmanni during the third quarter. Actually, we were quite happy about the revenue growth of 5.3% and like-for-like growth of 2.1% during the third quarter. The total was EUR 295 million.

In this situation where the, basically, customer confidence is on a very low level and the buying power is also like smaller compared to previous year. So this was from our perspective a good result. And we're, like I said, quite happy about it. On the other hand, the comparable gross profit was EUR 97.9 million, EUR 2.8 million better compared with last year, but the gross margin percentage was lower -- clearly lower -- 33.2% compared to previous year's 34%.

Now since we were able to grow the sales and also the gross margin in euros. So as you can see, when the EBIT was approximately 10% lower, EUR 23.5 million compared with previous year, it was because of the costs. Tokmanni's EBIT during the third quarter was basically 8% of revenue compared with previous year's 9.3%.

Cash flow during the third quarter was negative EUR 3.6 million. This is mainly due to the higher inventory level, which was basically causing the negative cash flow. Earnings per share, EUR 0.27 compared with previous year's EUR 0.32.

Some of the highlights from the third quarter. First of all, the customer visits. We're very happy about the 3% growth with the customer visits. Even the comparable customer visits were on the positive side. And obviously, in this situation where the buying power and the consumer confidence is clearly on the lower level, we were very happy that Tokmanni was able to invite more customers to our stores.

Obviously, the customer behavior was focusing more on the low prices and offers and also groceries. This is quite understandable in this situation and Tokmanni's price level in Finland is on a -- well, on a very good level. So, obviously, the customers, they've noticed that Tokmanni can offer the lowest price level in Finland.

So this was our target, and we could see some results out of it. But the costs, basically, all of them were increasing, and that's why the result was lower compared with last year.

The value of inventories was at the very high level. I'll come back to this a little bit later to explain a little bit like why and how.

A couple of positive things from the third quarter. Parco, Miny and Arki360, the Tokmanni new private label ranges, the launch and the sales were very successful with these 3 new private label ranges during the third quarter.

And then we also -- basically, we launched Tokmanni Klubi. The Tokmanni customer loyalty program was launched in August 2021. So we had the first-year anniversary this year, August.

And the actions were very positive, and we're able to reach or get actually more than 1.6 million members to Tokmanni Club, which is, from our point of view, a very, very good achievement, even much higher than we expected. So that was very positive highlight from the third quarter as well.

The key figures for the 3 first quarters of 2022, revenue growth at 2.6%. Like-for-like revenue for stores decreased by 0.6%. Last year, the 9 months were very successful sales-wise. Like-for-like growth last year for the first 9 months, 7% and the total was 8.2%. So in this current situation, we're still quite okay with this revenue level.

And comparable gross profit was EUR 278.5 million, slightly better compared to last year, but the gross margin 33.6% was clearly lower compared with last year.

And comparable EBIT amounted to EUR 50 million. And as you can see, the difference is quite clear compared with last year, EUR 15.2 million (sic) [ EUR 65.2 million ]. On the other hand, the third quarter was like the smallest difference compared with last year from the 3 first quarters of this year.

And the cash flow was negative EUR 5.8 million. This is due to the high inventory level, plus the lower result from the first 9 months. Earnings per share, EUR 0.59 compared with previous year's EUR 0.80.

Now this is the graph of the market share. And as you can see, the last quarters, it's been pretty tough fight with the market share. We are happy that we were able to gain market share again during this third quarter, and hopefully, we'll continue like this during the coming quarters.

And then let's dig deeper with the key figures. First of all, the revenue. As you can see from the graphs, we have been able to grow revenue with all quarters and even the 9-month periods. And obviously, this has been always our target as well.

Now we've been spending quite some time with analyzing the effects of the pandemic. And if we take the pandemic, which was basically supporting Tokmanni revenue during the last 2 years, it's pretty systematic growth, and we basically aim to continue with the same growth phase also during the coming quarters.

Basically, during this third quarter, the sale of groceries, as already mentioned, was overemphasized. But in Finland, the second quarter was weather-wise, very bad. Basically, the summer season started only in the second half of June. And that's why it was quite difficult with outdoor furniture and barbeque product groups during the second quarter.

And Tokmanni's -- with garden, its -- Tokmanni is the market leader in Finland. So after a very difficult second quarter, we were quite happy to see a real nice sales growth with outdoor furniture and barbeque products during the third quarter.

But on the other hand, the sale of toys, swimming pools, hot tubs, actually like with a higher ticket price, higher unit price products, especially with the swimming pools, hot tubs, the sales were basically stopping almost totally. Also, home storage products, the development was negative during the third quarter.

Gross profit and margin, already I mentioned that year wise we were able to improve the gross margin level, but the margin was lower. And basically, it was affected because of the -- because customers' focus on the campaigns and offers, and also the fact that the sales mix was much stronger on groceries instead of nonfood products. This is coming from the customer behavior.

And then Tokmanni own actions basically were Tokmanni Club's 1-year anniversary. We definitely invested in different kind of positive actions and offers for our customers, and we were able to reach very good results out of it. So it was pretty much like an investment on the member level, which is over 1.6 million at the moment.

And on the other hand, we wanted to secure the lowest price level in Finland, especially when the customer's purchasing power has been weakening for months now. And yes, obviously, it shows with the margin.

But on the other hand, according to our customer studies, we have been basically winning some customer confidence due to the low-price level.

Obviously, with higher buying prices and with inflation, it's very difficult to keep the low-price image. But compared to our studies -- or according to our studies, we've been doing as well as we can in this situation.

A couple of words about our private labels and the labels managed by Tokmanni. Actually, the percentages are a little bit lower during the third quarter and the 9 months. This is mainly due to the labels managed by Tokmanni. Our private labels have actually been doing very well.

But the labels managed by Tokmanni includes all the COVID-19 related products, for example -- well, the biggest is the facial masks. This year, we haven't been selling almost at all facial masks during the third quarter. And during the last year's third quarter, the sales were the biggest ever.

So whether it's the tests, facial masks, the sales have been very, very, very low during the third quarter. So has its effect on the percentage, but the private labels are doing very well, and that's, of course, something we're very happy.

A couple of examples. Here's the Miny, as we call it here in Finland. This is the new lifestyle brand of Tokmanni. We have, by the end of this year, approximately 20 shopping shops in Tokmanni stores. Actually, now we have 3 stand-alone stores as well. Just to try it out, yesterday, we opened the third stand-alone store.

The target group is young ladies, and we've been very successful with this. And we're very happy about it. And also in the a shop-in-shop operations, it's been very, very successful. It's a new target group for Tokmanni, so that's why it's extremely interesting tryout.

This is Arki360, it's health care products, vitamins and so on. We launched this in August. And definitely in Finland, the fall time is basically the best timing for this kind of products. It's been very successful. And we're very happy about it -- the launch. Obviously, people are extremely careful about the health care, so this is with the lowest price level of -- in the market. This is very -- seems to be, at least in the beginning, very successful.

And one more, Parco, which is our new outdoor furniture private label. As I said, we had a very difficult spring season due to the fact that there was no warm weather at all during the spring time. So that's why we're very happy to -- basically, it was like more than 20% sales growth with outdoor furniture during the third quarter with this, for example, the Parco private label and some other Tokmanni private labels in, for example, the barbeque product groups.

And then the operating expenses. They were -- basically, as mentioned already, the expenses were -- all expenses were increasing during the third quarter. Still, we were able to keep the level, 19.2% of revenue on a quite good level, yes, compared with last year's 19%. And this is mainly due to the fact that with the personnel expenses, it was like 10.7% of revenue compared last year's 11%.

And take into consideration the -- well, the salary increases that we have in the retail business in Finland, plus the sick leave mainly due to COVID-19, this was managed very well with the sales and supply chain team. But if we then talk about -- obviously, it was higher -- on the higher level, the personnel expenses, but there were also like new stores bringing new expenses. So considering -- taking into consideration all these issues, this was on a quite good level there, the personnel expenses.

But basically, one of the biggest increases was caused by the rents. Our rental agreements are connected with consumer price index, and that's why, unfortunately, we were facing quite a lot of increases with the rent levels. Now we, of course, negotiate our rental agreements yearly, at least maybe 1/4 of the rental agreements. But in this situation, the rental cost, especially were increasing quite a lot, as well as the other real estate costs and electricity.

Now with electricity, we're hedging these costs quite well. But even with the hedging, it's additional cost from electricity as well.

Marketing costs were increasing due to the paper prices and printing costs and already mentioned the personnel cost. But still on a pretty good level. But anyway, we were not able to get enough of gross margin in euros to cover all the higher costs from -- during the third quarter.

And this was basically caused then the lower level of EBIT, EUR 23.5 million, so approximately 10% lower level during the third quarter. But as you can see, after 6 months, the worst development was basically during the first quarter and the second quarter. And now we're already getting closer to the previous year's level.

For Tokmanni, basically, the last 12 months, they've been quite difficult. Actually, the fourth quarter during 2021 was already on a lower level compared to 2020. So this basically tells us that we are getting back on track with both revenue and EBIT development level.

Then if we talk about the balance sheet and especially the inventories level, which was -- on the highest level this far, EUR 332.3 million, almost EUR 60 million higher level compared with last year. Obviously, the biggest difference comes from higher purchasing power -- purchasing prices.

And then, of course, the Christmas season is the most important season, most important quarter, the fourth quarter for Tokmanni. When we were basically making the orders for the fourth quarter, that was by the end of January this year, beginning of February, basically, we're in the middle of very heavy pandemic times those months.

And to make sure that we succeed well with the Christmas season, we decided to basically invite all the products, all the seasonal products to Finland before the end of September. So this was the second issue, which was causing the very, very high level on inventories.

Obviously, as mentioned before, we were also, during the last 2 years of pandemic, we've been having like a buffer with the different product groups and our inventories due to the difficulties or problems with the supply chain. So the buffers have been there now for 2 years, and already during the second quarter and especially during the third quarter. And now also in October, we have started to get rid of the buffers.

So we basically expect to reach like a normal level by the end of this year -- normal level of Tokmanni inventories. But obviously, this has all to do with also the success with the Christmas season.

But at the moment, it looks as if the inventories, we are able to reach like a normal level by the end of this year. And as mentioned, the operating cash flow was negative EUR 5.8 million due to the higher inventory level and of course, the lower EBIT.

The debts -- the interest-bearing debt were EUR 458.3 million. This is including the EUR 100 million in noncurrent corporate bonds and loans from the financial institutions. And then there is like EUR 70.5 million with current corporate bonds and loans. And this is due to the construction of the new Tokmanni DC in Mantsala, Finland and of course, the higher inventory level. Now the remainder of the liabilities are mainly lease liabilities reported under IFRS 16.

The net -- the ratio of the net debt to comparable EBITDA was 2.7. The target -- the long-term target is 3.2, so this is clearly under the target level. So that is even though -- even for example, with the background, this is quite okay level for the net debt compared to EBITDA.

And then the capital -- net capital expenditure, EUR 11.4 million compared to last year's EUR 9 million during the third quarter. The capital expenditure is higher during the construction of the new DC. It's basically during the third -- well, during the 9 months, it's been EUR 20 million higher. The construction work actually -- well, the timing of the new DC, well, let's put it this way, I'll take a couple of steps backwards.

Tokmanni's distribution center or logistical center is located in Mantsala, Finland. At the moment, we do have some external warehouses as well, especially with a high inventory level. And basically, this current DC was built in 2008. So it's been quite a lot of development with Tokmanni compared today and 2008.

So to get rid of the external warehouses, we started this year, the new distribution center construction work. We were supposed to get the first part of this new DC in 1 years' time in fall 2023. But everything has been developing very well with this new DC. And the first part or the first section of the DC, we're able to start using by the end of spring next year. So we're very happy about this development because it will definitely bring some efficiencies with Tokmanni supply chain.

But of course, this year, also next year, there will be more or higher capital expenditure as informed already earlier, approximately EUR 60 million. Tokmanni's history's biggest investment, but it will be approximately EUR 60 million in total.

Other capital expenditure included expansion of the store network, renovating stores and developing digital services. And capital expenditure in 2022 is expected to be around EUR 18 million to EUR 20 million, excluding the construction work -- or construction of the new DC.

But as you can see from the graphs, the net capital expenditure is pretty much on the normal level, excluding the warehouse, the new DC.

And about the year 2022, the outlook. Tokmanni expects the revenue to be at the previous year's level and comparable EBIT in euros is expected to be EUR 90 million to EUR 110 million in 2022. And obviously, the forecast includes these elements of the uncertainty, which are pretty well known in Europe at the moment.

So that was the Tokmanni's third quarter result presentation. Thank you. And now it's time for questions. So operator, please, do we have any questions?

[Operator]

[Operator Instructions] And we'll take our first question.

[Nicklas Skogman, analyst]

It's Nicklas Skogman from Handelsbanken. I have a couple of questions, please. The first one would be on your decision to keep the guidance unchanged given the development in the first 9 months. Basically to reach the high end of the guidance, you need to grow by 48% in Q4. And given that the profit declined by 10% in Q3, that seems a little bit -- that seems like a difficult one. So please talk me through your thinking around the guidance.

[Mika Rautiainen, executive]

Yes. Obviously, it was -- or it is a very good question. Now as I mentioned already before, it's the last 12 months, which have been the most difficult for Tokmanni. The fourth quarter last year was already -- from our point of view, it was a little bit soft. It was actually a lower result compared with 2020.

And the first quarter was the most difficult one and the difference compared with the previous year was the biggest. It was the biggest difference on the negative side when it comes to EBIT development.

The second quarter as well. But during the second quarter, it was quite a lot about the, let's say, the seasonal issues, which were causing some problems. Now the third quarter was still on a -- we were still left from the previous year's results, but we're quite confident with the fourth quarter. I don't know whether it's a smart thing or not, but we've been analyzing this quite a lot.

And telling you the truth, in this situation where basically it is all about the buying power and consumer confidence, it's very, very difficult, of course, to estimate how the fourth quarter will be. But on the other hand, from our perspective, the Christmas season and the fourth quarter is always -- it's always been a very good season for Tokmanni.

And for example, if you -- or let's say, if we compare with product offer from Christmas season compared with the spring season, the spring season is usually the -- it's more like high ticket price products. Now for Christmas, it's also a lot of lower-priced products like starting from Christmas chocolate, candles, seasonal lights, Christmas decoration and things like this. So it's slightly different.

So as said, I don't know whether it's smart or not, but we're very confident with the Christmas season and take into consideration the soft figures from 2021 during the fourth quarter. Hopefully, this was a little bit like helping you to understand our thinking.

[Nicklas Skogman, analyst]

That helps a bit for sure. It's just that even at the low end, you would still be up 25% versus Q4 '19, whilst the Q3, you just reported was just up 7% versus '19. But what we'll see, I can see how you mean with the sort of lower ticket items, things being sold over Christmas.

But is it sort of -- you have pretty good momentum in terms of sales. And then you did not mention in this release any pressure on the gross margin from freight costs or not passing on costs fully to consumers. It was really only sort of the mix effects and the campaigns. So are you sort of -- have you pushed through these -- the cost increases to consumers now?

[Mika Rautiainen, executive]

Well, yes, it's -- and first of all, it's -- now this is my personal opinion, but we've been investing during the last 12 months on the price image. It's been very, very difficult because there is quite a lot of price increases in the market. So it's difficult to keep the low-price image when the prices are getting higher.

But according to our customer studies from the last months, we've been, well, quite successful with that. And this is basically -- we can see that we've had the best price level for customers in Finland and -- but there is also some room to maneuver, so to speak, at the moment. So on the other hand, that will support us quite well.

When it comes to freight costs, it's more like domestic freight costs, and they were on a higher level already a year ago. When it comes to outbound, for example, we have very, very, very good contracts. Actually, during the pandemic, we've had pretty good contracts. So we're not that worried about freight costs.

With, well, electricity -- higher electricity costs in Finland are -- like everybody is talking about it, the customers, the households and companies, especially companies with almost 200 stores, they have to talk about the electricity costs. We've been, of course, hedging the electricity costs, but still it will affect approximately 0.2% unit compared to the yearly revenue. So it will be higher 0.2% unit this year. So in a way, from our perspective, it's higher, but it's not dramatic.

[Nicklas Skogman, analyst]

Interesting on the electricity costs. So the point 2, is that for the full year? Has that been impacting the whole year? Or is that something you've seen now in Q3, so it's actually more than that if you isolated third quarter?

[Mika Rautiainen, executive]

I'm not quite sure whether I got it. But obviously, as you know, it's all about how the electricity price will look in the future. And during the coming months, it's all about, for example, weather conditions in the Nordics and so on. So yes, it will be still a little bit of a surprise like what will happen, but we'll see.

[Nicklas Skogman, analyst]

And if the prices stay at this level next year, how much would the impact be on revenue in percent of revenue next year, approximately?

[Mika Rautiainen, executive]

Well, obviously, it's pretty difficult to estimate the situation next year. But let's put it this way. Our hedging policy is better secured in 2023 compared with 2022.

[Nicklas Skogman, analyst]

Okay, i.e., lower prices or more of your usage secured?

[Mika Rautiainen, executive]

Yes. Well, when it comes to usage, I just have to point out our solar energy, which is nowadays already -- now, okay, talking about solar energy, in Finland by the end of October, might sound a little bit funny, but still it's already more than 10% over total -- our total consumption, which is quite good. But obviously, the usage will be in -- starting next -- or yes, starting from next March until next October.

But yes, it's -- we're not going through the details when it comes to the next year electricity costs because there are so many issues related to that. But like I said, our hedging policy is better secured next year compared to this year.

[Nicklas Skogman, analyst]

Okay. And maybe I'll follow up afterwards on that one. And you mentioned that your rents have already started going up because of the CPI, i.e., the inflation linked. Is that happening gradually now because at least here in Sweden, it's basically using the October inflation rate, which is then applied at the beginning of next year. But does it work sort of more gradually with your rents?

[Mika Rautiainen, executive]

Yes. We were seeing higher rental costs already by the -- already last year fourth quarter. So it's like a development. Yes, we have -- maybe 1/4 of the rental agreements are being renegotiated yearly, so obviously, we try to get back to the reasonable level with the higher rents. But still, it's causing higher rents. And it's been doing that already from the fourth quarter last year. So but it's like -- because the rental agreements are like -- every single of our 200 agreements are like -- it's like different timing. So it's all the time it's continuous work with this.

So we're facing the costs -- higher costs. On the other hand, we're facing like negotiations where we are able to negotiate the rental agreements or the rental cost slightly lower because, yes, there is no actually anything else, but the index causing the higher cost. So that's why it's not that difficult to negotiate those to be a little bit more reasonable.

[Nicklas Skogman, analyst]

But I'm thinking if it's sort of inflation linked and inflation has really only started to increase in the past, I don't know, 9 -- 6 to 9 months, then there should perhaps be an even bigger hit in 2023 from higher rent that are linked to CPI.

[Mika Rautiainen, executive]

It will be on a high level, but there won't be -- we're not expecting there to be like a big hit. According to our calculations, we already faced the biggest hit. Now obviously, it will be -- the level will be on a higher level, but the increase with the current level won't get that much higher anymore. This is, of course, our -- well, according to our calculations, but that would here be on a quite confident level.

[Operator]

[Operator Instructions] There are no more questions. So let's go back to the studio.

[Mika Rautiainen, executive]

Okay. Thank you, very much. And thank you all, and we'll talk next time in the beginning of February after the fourth quarter. Thank you very much, and bye.