Tokmanni Group Oyj

OMXH:TOKMAN

Earnings Call Analysis

Tokmanni Group Demonstrates Solid Growth

Tokmanni Group's total comparable EBIT increased by EUR 2.9 million to EUR 26.4 million in the third quarter, while comparable EBIT margin was 7.2%. Gross profit rose to EUR 126.9 million driven by higher private label sales and lower freight costs, hitting a gross margin of 34.8%. Sales of cleaning products, storage, and pet food climbed, whereas home improvement and electronics declined. Debt rose to EUR 839.7 million due to the Dollarstore acquisition. Looking forward, Tokmanni Group expects revenue of EUR 1,370 million to EUR 1,440 million, with comparable EBIT between EUR 90 million and EUR 110 million.

Tokmanni Group's Solid Q3 Performance with Revenue Growth Despite B2B Decline

In the world of retail, Tokmanni Group stands out with a notable performance in the third quarter. The group, led by CEO Mika Rautiainen and CFO Tapio, reported an impressive 23.6% increase in total revenue, reaching €364.3 million. While B2B sales experienced a contraction of 13.8%, the diversification of Tokmanni's revenue streams buffered this decline. Their commitment to the online sales platform, which saw a slight uptick of 1.1%, exemplifies their adaptive business strategy in an ever-evolving retail landscape.

Productivity and Profitability: Gross Margin Gains and Private Label Expansion

Tokmanni Group's strategic focus on productivity is evident in its third-quarter performance. The group's gross profit margin improved to 34.8%, credited to a rise in private label sales and lower freight costs, indicating efficient operations and strong brand management. Furthermore, Tokmanni's comparable gross margin increased from 33.2% to 34.1% year-over-year, reflecting the company's ability to optimize its product mix effectively. With almost an equal split between grocery (51.1%) and non-grocery (48.9%) sales, the business maintains a healthy balance, adapting its offerings to consumer trends, including growing demand for cleaning, storage, apparel, pet food, snacks, and confectionery.

Evaluating Operational Costs Against an Expanding Business Footprint

The Tokmanni Group has not only grown its top line but has also managed to keep a keen eye on operating expenses, which were 20.6% of revenue equating to €75 million. While there has been an increase in real estate costs and personnel expenses, the company's prudent financial management has ensured that such increases do not disproportionately affect profitability. With operating expenses up from 19.2% last year, this indicates a strategic investment in growth such as the expansion of its physical store footprint and enhancement of digital services.

A Double-Edged Sword: Strong Cash Flow and Elevated Capital Expenditure

Tokmanni Group's strong cash flow from operations, which stood at €36.8 million for the quarter and €103.6 million for the first 9 months, is a testament to their profitability and effective inventory management. However, this financial strength is accompanied by a significant increase in net capital expenditure due to the acquisition of Dollarstore. This strategic move may represent a calculated risk as they strive for greater market share and customer reach.

Debt Dynamics and Financial Strategy Amidst Expansion

With Tokmanni's acquisition of Dollarstore, the company's total debt rose substantially to €839.7 million. Despite this, the company shows a firm financial standing by maintaining an ample amount of withdrawable funds and a solid debt management plan. The net debt to comparable EBITDA ratio has increased from 2.7 to 4.7 year-over-year, which is higher than their target ratio of 3.2. Nevertheless, the management reaffirms its commitment to bringing it back within the target range in the ensuing years, showing confidence in the group's strategic direction and long-term financial health.

Steadfast Outlook for 2023: Revenue and EBIT Targets Unaltered

Looking ahead, Tokmanni Group's roadmap for 2023 remains compelling with an unchanged revenue guidance of €1,370 million to €1,440 million. Additionally, the expected comparable EBIT is set to be between €90 million and €110 million. This steady projection highlights management's belief in the group's ongoing initiatives and strategies to bolster their market position and sustain profitability amidst challenges.

Earnings Call Transcript 2023-Q3

[Mika Rautiainen, executive]

Good morning, and warm welcome to Tokmanni Group's Third Quarter Results Presentation. My name is Mika Rautiainen, and today, together with me presenting especially the financial figures is Tokmanni Group's CFO, Mr. Tapio Arimo. This is actually the first time Tokmanni will be reporting financial figures together with Dollarstore. The transaction was closed on the last day of July, so we have from Dollarstore, August and September figures.

Actually, we're very excited about this new chapter together with Tokmanni and Dollarstore. But first, some guidelines regarding the terminology. When I will be referring to -- when talking about Tokmanni, I will be referring to the Finland operations, meaning Tokmanni, Click Shoes and Miny stores. And while talking about Dollarstore, I will be referring to the Dollarstore operation in Sweden and Big Dollar in Denmark. Together, this is Tokmanni Group. And today -- or actually by the end of September, the total number of stores was 369 stores. But actually, today, the total number is already 371 due to 1 Click Shoes store opening in the fantastic city called Lahti. And actually, today, there is the fourth store opening happening in Denmark in Holbaek, so the number today is 371 stores.

And over here with the revenue, you can see that Dollarstore share is 18%. That's due to the fact that there's 1 month meaning July missing from the third quarter sales, it's approximately 25% of the total. So some highlights for Tokmanni Group for the third quarter. First of all, it's been an excellent start for Tokmanni and Dollarstore combined operation. Obviously, sales growth of 23.6%. Personally, I had very high expectations for the cooperation between Fins and Swedes for this joint operation of Tokmanni and Dollarstore, but I have to say that my expectations were exceeded, and that's what I'm very happy all about. Obviously, the both companies share a very similar discount retail culture, and that's very important for the cooperation.

We have the same mindset of low prices and good quality products for our customers, whether they are in Finland, Sweden or Denmark. We have a very active steering group with synergy teams running the collaboration, targeting with synergies across all functions. And this work has started very, very well and very actively. The first synergy benefits, already they've been agreed in several functions. But obviously, the realization of the benefits will be on 2024 due to the agreements, which will partly end in the end of this year. So the benefits will be more towards the year 2024. Now best practices sharing has been one of the best things with the started corporation. It's been already resulting in concrete improvements, for example, in store operations, supply chain and private labels.

A couple of examples with store operations. My personal opinion is that the Dollarstore is actually a world-class store concept, a discounter, world-class store concept. So Tokmanni has been very, very happy to basically copy with pride some of the commercial ideas of Dollarstore and these already show very good results, especially in our stores. And on the other hand, Tokmanni as an organization has been there a little bit longer and it's a little bit more mature with some of the functions. For example, at the moment, especially we have some experiences with the supply chain with a new warehouse or distribution center in Mäntsälä. And obviously, Tokmanni also has a wider private label range compared with Dollarstore, so we can definitely benefit from the strengths of each company.

And the preparation of joint strategy revision for '24, '25 is well underway. Maybe here, I should also say that Tokmanni has the strategy period of 2021, 2025, and obviously, this one is now a revision for the last 2 years of the strategy period. And we will tell more about it in the beginning of next year. I'll come back to that. Regarding Tokmanni Group, we've done several acquisitions actually this year. And I have to say that all acquisitions done this year, they've performed extremely well, especially Click Shoes. It's been very, very good results. We're very happy of this acquisition.

About the group's key figures. As mentioned -- already mentioned, the group revenue grew by 23.6%, and it was EUR 364.3 million during the third quarter. Like-for-like revenue increased by 0.3%. Comparable gross profit was EUR 126.9 million, a clear growth compared with last year. And comparable gross margin was 34.8% compared with last year's 33.2%. Comparable EBIT amounted to EUR 26.4 million, so almost EUR 3 million improvement compared with previous year, 7.2% of revenue.

Cash flow, very positive. Cash flow from operating activities amounted to EUR 36.8 million and this is due to the inventory level. Tapio will soon tell you a little bit more about the inventory levels of Tokmanni and Tokmanni Group. Earnings per share diluted was EUR 0.21. This was mainly -- this is lower compared with previous year, and it has mainly something to do with interest. Tapio will also tell you a little bit more about it very soon.

Then some Tokmanni highlights during the third quarter. First of all, revenue grew by 1.7%. Unfortunately, like-for-like decreased by 1%. Comparable gross margin was clearly better at 34.1% compared with previous year's 33.2%. In Finland, the consumer sentiment was still low and shopping behavior cautious. The daily goods were of much more higher interest for our customers compared with durables. We actually, during the third quarter or the decision was made already in the second quarter, we basically -- today, we have with Tokmanni club, almost 3 million members, which is a fantastic result. So we decided already to take a step during the third quarter towards a more digital marketing for our club members. But I also have to say that it didn't work yet that well, so we -- from the beginning of October, we basically increased again the printed marketing leaflet distribution.

And of course, we already noticed that our customers, really, they like the marketing leaflet that we distribute to the households in Finland; however, we will be developing the digital marketing part very heavily in future because we could already see some very good signs of how the digital marketing for our club members work. The private labels, the sales were very good during the third quarter. The freight costs, they were clearly lower compared with previous year. This all contributed to gross margin improvement with Tokmanni. The operating expenses for Tokmanni Finland, they were well in control, take into consideration salary increases and higher real estate costs. Today, it's 17th of November, so we can already say that start of Christmas season for Tokmanni has been successful, so it looks good at the moment.

Some words about Dollarstore for August-September, 2 months. First of all, happy to say that -- happy to congratulate the colleagues in Sweden regarding the record high sales of EUR 64.3 million, revenue growth 12.1% in local currencies. Comparable gross margin level for Dollarstore, very good level, clearly higher compared with Tokmanni 38.3%. Dollarstore, what we've learned during the last month is that Dollarstore is extremely good with this kind of seasonal commercial occasions like, for example, Halloween. I'm not sure, but I could imagine that Dollarstore is the #1 retailer for Halloween products in Sweden. The Dollarstore's Halloween season started very well, which is, of course, extremely good thing and something that we over here in Finland can easily be learning also from.

In Sweden, the consumer sentiment is getting a little bit weaker. Dollarstore is very well positioned due to the fact that Dollarstore according to our studies, Dollarstore has one of the best price images in Sweden. So in this kind of market, Dollarstore has a very strong position. And of course, there is a lot of sales and quality improvement potential for Dollarstore with Tokmanni private labels, which are already well established and that's what we're basically working daily with.

So that was the first part regarding the Dollarstore highlights. And then we move to the key figures for Tokmanni Group, which includes Tokmanni Finland and Dollarstore in Sweden and in Denmark. Tapio will come to tell you a little bit more regarding the financial figures. Tapio?

[Tapio Arimo, executive]

Thank you, Mika.

[Mika Rautiainen, executive]

You're welcome.

[Tapio Arimo, executive]

Good morning on my behalf as well. So diving a bit more deeper into the numbers. First, we look at revenue. So in the third quarter, as Mika said, our group's total revenue grew by 23.6% and was EUR 364.3 million. Tokmanni's revenue grew by 1.7% and was exactly EUR 300 million in the third quarter. Our online sales increased slightly, 1.1%, while our B2B sales decreased by 13.8% in the third quarter. And as Mika mentioned, Dollarstore's revenue in the August, September time frame grew by 12.1% in local currencies and were EUR 64.3 million.

Then a little bit looking into our product mix. So both Dollarstore and Tokmanni have quite similar product categories and also the product mix is fairly similar. And here, you see the total split between grocery trade and non-grocery business. And it's almost 50-50. So this quarter, 51.1% was grocery and 48.9% was non grocery sales. And among the non-grocery sales, the sales of cleaning and storage products as well as apparel categories increased. While the sale of home improvement, leisure time and home electronics sales decreased. And among the grocery trade, especially pet food, snacks and candy sales increased. And like Tokmanni also Dollarstore and Big Dollar chains have dry food and beverages in all their stores. Well, only Tokmanni carries fresh food offerings in approximately 20 Tokmanni stores in Finland today.

And moving on to profitability. Our comparable gross profit grew in Tokmanni Group to EUR 126.9 million in the third quarter, and our comparable gross margin also improved to 34.8%, and that gross margin was impacted mainly by an increase in private label sales and a decrease in freight costs. And Tokmanni's comparable gross margin increased to 34.1% from 33.2% a year ago. And Dollarstore's comparable margin in the August-September time frame was 38.3%. And looking at our private label business and white labels and nonbranded products. We managed to increase those portions during the third quarter this year, so the product labels managed by Tokmanni Group grew from 27% last year to 28.1% in this year's third quarter and also during the first 9 months of the year, the portion increased from 29.1% to 30.3%.

Our direct imports of the group also increased during the third quarter and also during the first 9 months of the year. So then looking a little bit at the operating expenses, so for the whole Tokmanni Group, the operating expenses during the third quarter were 20.6% of revenue or EUR 75 million and the corresponding figure last year, of course, without Dollarstore was 19.2% or EUR 56.7 million. And the relative increase obviously affected by the increases in real estate costs, and those were linked to our CPI index.

Our personnel expenses were in the third quarter, a total of EUR 44.4 million, and increased over the corresponding period of EUR 31.4 million. And also as a proportion of net sales, they increased to 12.2% from the 10.7% last year. When you look at the Tokmanni, then the operating expenses were EUR 59 million, an increase of EUR 2.3 million from last year. The Dollarstore's comparable operating expenses in total for the August-September time frame were EUR 16 million.

Then looking at our comparable EBIT numbers. As Mika mentioned, our total comparable EBIT grew from EUR 23.5 million last year to EUR 26.4 million this quarter, and the comparable EBIT margin was 7.2%. Tokmanni managed to grow its EBIT from the third quarter last year about EUR 1 million to EUR 24.5 million, and Dollarstore's comparable EBIT for the 2-month period of August-September was EUR 1.8 million. And the increase in operating expenses obviously had an impact on the result of the third quarter.

Looking at our inventories. The total value obviously increased from a year ago and was EUR 375.8 million at the end of September. While the inventory of Tokmanni, we are very happy that, that decreased by almost EUR 50 million and was EUR 283.4 million as compared to the EUR 332.3 million a year ago. And the Dollarstore inventory value at the end of September was EUR 92.5 million.

Looking at our financial situation. Obviously, the acquisition of Dollarstore and the related increase in interest-bearing debt means that our total debt has increased quite a bit from 1 year ago. So our total debt at the end of third quarter was EUR 839.7 million. And of that, about EUR 305 million is bank loans and EUR 539.2 million is this IFRS 16 lease liability related debt.

And out of our bank loans, about EUR 245 million is noncurrent loans and about EUR 55.2 million is current loans from financial institutions and commercial paper. And our ratio net debt to comparable EBITDA was 4.7 and compares to 2.7 a year ago. And as some of you probably remember, our long-term target is 3.2. And we are obviously over it now for a little while due to the acquisition, but our long-term target remains unchanged, and we will bring the ratio under that target over the next couple of years. And at the end of September, our financial position remains solid.

We have about EUR 216 million in withdrawable funds, consisting of loan agreements with financial institutions and a commercial paper program. And also impacting our net debt will be the imminent sale and leaseback of the new logistics center, which is estimated to be around mid-December with a cash impact of approximately EUR 57 million.

Then looking at our cash flow from operating activities. So both in the third quarter as well as the first 9 months of the year, we have had very good operating cash flow driven by our profitability and also to a large extent, our ability to manage our inventory effectively and bring down the level in Tokmanni. And the total cash flow from operations in the third quarter was EUR 36.8 million and for the first 9 months of the year, EUR 103.6 million. And then looking at our net capital expenditure. Obviously, with the acquisition of Dollarstore, the net capital expenditure has risen to levels not seen in a few years at Tokmanni.

So for the third quarter, the total net capital expenditure was EUR 187.9 million and, of course, the majority comes from the acquisition of Dollarstore with other components being store network expansion, development and maintenance of the store network and development of digital services. And the total value of the investment in our new logistics center in Finland is expected to be approximately EUR 65 million. And as mentioned before, about EUR 57 million of that, we expect to receive back in the sale and leaseback of the facility. And at the end of September, that total of the -- estimated total of EUR 65 million was EUR 52.4 million.

So that was in short financial part of the presentation. And now Mika, please join me and present the outlook for the rest of the year.

[Mika Rautiainen, executive]

Thank you, Tapio. Please be ready to come and ask some questions afterwards. Today, it's 17th of November. So some words regarding the outlook for the end of this year. It's been a very active start for Tokmanni Group for the fourth quarter. First of all, Tapio already mentioned regarding the investment of Tokmanni's new logistics center. It was actually taken into full use this week, Wednesday. I have to say this is a very good job done with the new logistics center. The schedule or the agenda for the opening or taking it to the full use was next spring. So we're very much early regarding the agenda for the logistics center. And it was done exactly according to the budget. So very good job. And of course, this has a great meaning for the efficiency in our supply chain, especially here in Finland.

Now yes, logistics center, that's, of course, been during this week, a big thing. In October, we launched around 120 Click Shoes shop-in-shops in Tokmanni stores in Finland. That was a very, very nice success. And obviously, it was done quite quickly after the acquisition. So next spring, we are able to bring the full assortment of shoes to these 120 Tokmanni stores. In Sweden, Halloween season was already mentioned regarding Dollarstore business. Now Halloween season is, of course, already gone and Christmas season is on at the moment. But Dollarstore had a very successful Halloween in Sweden, which is, of course, a great thing. We opened a couple of weeks ago a new mega size Tokmanni store in Hämeenlinna Tiiriö, about 9,000 square meters. We're very happy to say that it was the record high opening sales for the store.

So actually, the concept development has been doing a good job with this kind of larger size stores as well due to sales success. And as already mentioned already, there is a Big Dollar store opening today in Holbaek, Denmark. There was a Click Shoes store opening in Lahti, Finland. And in 2.5 weeks' time, there will be a new Tokmanni store opening in Kouvola, Finland as well. So after that, the total number of Tokmanni stores will be 201. And as already mentioned, the Tokmanni Group's most important season for both Dollarstore and Tokmanni has begun very well. Obviously, there is still a bit over 5 weeks to go and very important days, but we're ready for the Christmas business. And at the same time, while serving our customers, we have the full focus on the synergies between Dollarstore and Tokmanni.

The guidance for 2023 is unchanged. Revenue, we expect to be EUR 1,370 million to EUR 1,440 million. And comparable EBIT, we expect to be between EUR 90 million and EUR 110 million. Tokmanni Group Corporation's Board of Directors has decided of the payment of the second installment of the dividend for the financial year, which ended December 31, 2022, the dividend to be paid is EUR 0.38 per share. And the second dividend installment will be paid on the last day of November 2023 to the shareholders listed in the company's shareholder register maintained by Euroclear Finland, on the record date of November 22, 2023.

Thank you very much. And operator, now it's time for questions and Tapio you'll join me, yes?

[Tapio Arimo, executive]

Yes.

[Mika Rautiainen, executive]

Please, you can come in this side. Thank you.

[Operator]

[Operator Instructions] We will take our first question from Svante Krokfors from Nordea.

[Svante Krokfors, analyst]

I have a couple of questions. Can you tell a bit about Dollarstore's good gross margin and EBIT of EUR 1.8 million, also the inventory. Can you tell a bit about how that developed year-on-year?

[Mika Rautiainen, executive]

We unfortunately don't have the historical figures available for Dollarstore, in the same quality that we have for Tokmanni, so we can't unfortunately make any year-on-year comparisons for the first 12 months. So I think what we can say is that the current margin of Dollarstore gross margin is a tad higher than Tokmanni's, and we believe that is, in a way, let's say, quite normal level for Dollarstore and, let's say, the operating profit level is somewhat lower than Tokmanni's at the moment. And of course, we will try to increase that over time, work together with Dollarstore and help them achieve some operational efficiencies as well as then realizing some of the synergy potential. So...

[Svante Krokfors, analyst]

And then how should we expect the synergy timing throughout 2024?

[Mika Rautiainen, executive]

Sorry?

[Svante Krokfors, analyst]

How should we expect the synergy timing throughout '24?

[Mika Rautiainen, executive]

Yes. Obviously, we said that there is a minimum EUR 50 million synergies for the first 30 months. When it comes to for example, marketing or financials or other this kind of supportive functions, the synergies will start realizing from the 1st of January 2024. Obviously, when it comes to the synergies regarding buying and sourcing, that's also something to do with the ongoing agreements.

And obviously, we have finalized already some agreements regarding the buying and sourcing synergies, but especially when it comes to nonfood products, if we now make the orders regarding the nonfood products, the season, the selling time will be next fall. This is, of course, something to do with product groups, especially with nonfood, it takes a little bit more time when it comes to the buying and sourcing synergies. With daily goods, obviously, we are ready to start in several categories achieving the synergies starting from 1st of January.

[Tapio Arimo, executive]

So I would say it's sort of -- yes, I would say the synergies follow a sort of typical S curve over time. So if we have let's say, full synergies running in 30 months, then it's a little bit starts slow and then it ticks up and then at the last quarter or 2 quarters, it slows down.

[Mika Rautiainen, executive]

Exactly.

[Svante Krokfors, analyst]

And then regarding the logistics investments EUR 65 million, and you will have a cash impact of maybe EUR 57 million. Has there been some changes in the pricing of that or it will carry...

[Tapio Arimo, executive]

No. It's just -- maybe we're giving a bit more detail. So obviously, the difference about EUR 8 million is the investment will remain in our balance sheet. So the biggest item is the racks and shelves and then you have forklifts and trucks and things you need to invest in to make the warehouse run and they stay on our balance sheet.

[Mika Rautiainen, executive]

All the equipment regarding the logistical center, that -- they stay in our balance.

[Svante Krokfors, analyst]

That's very clear. Then last question regarding your guidance, especially on EBIT remains quite wide although knowing that typically 40% of your earnings is generated in Q4. But what kind of should happen for you to reach the low or high end of the guidance?

[Tapio Arimo, executive]

Well, of course, I think we have very high confidence that we will hit those thresholds, so it would have to be a very, very significant change in the market should we go over or under the guidance, let's put it that way. So I would say it's a very high confidence level that we will hit the guidance.

[Mika Rautiainen, executive]

And at the moment, we're also working together with Dollarstore for the first time for the most important season. So obviously, at this time, we also need to be a little bit careful to see how everything works together with Dollarstore and Tokmanni.

[Svante Krokfors, analyst]

Okay. That's all for me.

[Mika Rautiainen, executive]

Operator, any more questions?

[Operator]

Sure. We will take our next question from Arttu Heikura from Inderes.

[Arttu Heikura, analyst]

Hello. It's Arttu from Inderes. Could you -- Given that on the Dollarstore synergies, I mean which kind of synergies have you already materialized?

[Mika Rautiainen, executive]

Well, if I will first tell something about the marketing you could actually tell something about banking, yes.

[Tapio Arimo, executive]

Yes.

[Mika Rautiainen, executive]

Okay. So for example, both companies, we do have marketing leaflets. The distribution is quite wide both in Finland and in Sweden. And by basically doing the joint buying of paper and printing, we were able to basically close the first synergies, but of course, this will take -- this will start from the 1st of January of 2024. But for marketing due to the fact that it's a pretty big investment for both companies by combining the paper volumes and printing volumes, we were able to achieve actually quite remarkable savings. And you can also tell...

[Tapio Arimo, executive]

Yes. Just an example on the support functions. So in finance, we're in the process of consolidating our let's say, for example, foreign exchange hedging combining them instead of doing them separately, so that will result in clear savings. We are consolidating our accounts into one provider that will drive savings and also enable more effective use of cash and debt, that would result in savings. We're also consolidating our credit card payments provider into one company that will provide clear savings. So these savings once they are, let's say, annualized, they result in pretty significant 6-figure savings over a 12-month period.

[Mika Rautiainen, executive]

Yes. And something regarding the buying and sourcing, obviously, there are already, first, orders for nonfood products for Far East, but obviously, these products will be delivered to Finland and Sweden during the spring time. So -- and the sales will happen during the spring/summer season. So that will, of course, take some time. But obviously, combining volumes means better prices.

[Arttu Heikura, analyst]

How about -- how do you view the current market environment? The market growth seem to be really stronger than Tokmanni, in Finland, especially. So what were the reasons of Tokmanni underperforming to market?

[Mika Rautiainen, executive]

Well, yes, first of all, as already mentioned, we have almost this 3 million club members with Tokmanni club and we were kind of hoping that we could actually benefit from replacing some of the marketing leaflet distribution by digital marketing, and it didn't work out as well as we expected, unfortunately. So actually, we came back to the wide distribution of the marketing leaflet from the beginning of October, and made a clear difference with customer visits in Tokmanni positive change.

To be very honest, I have to say that, obviously, the commercial decisions are made during the second quarter for them or they are being finalized for the third quarter. They're finalized during the second quarter. And I have to say that, obviously, some of the management attention during the second quarter was drawn into this transaction with -- between Dollarstore and Tokmanni. Obviously, now the full focus is on the commercial success also in Finland. And I'm happy to say that, as already mentioned during the presentation, the Christmas season has started very well.

[Arttu Heikura, analyst]

How was the competition? Do you see some upward trend in the higher composition? How do you build that?

[Mika Rautiainen, executive]

Well, when the market is suffering a little bit -- when the customers -- the customer confidence is still on a low level and buying power still on a clearly lower level, obviously, the competition is harder. I think the same goes also with the Swedish market, for example, with the interests regarding the mortgages and so on. Yes, obviously, there is a hard competition. But on the other hand in Finland, we do expect actually the Christmas season to be slightly better compared with last year.

There is no discussion regarding the electricity costs, for example, for the households, not at all as much as last year this time. And that had a clear effect on the retail business last year. This year, there is no such thing. But obviously, the buying power is still lower due to the -- also, for example, the higher interest costs for households.

[Arttu Heikura, analyst]

Okay. Then my last question goes, your financial income was up by EUR 2.4 million. So could you explain what items impacted this role?

[Mika Rautiainen, executive]

Tapio, would you like to...

[Tapio Arimo, executive]

Financial income, I mean, there's basically the, let's say, translation differences with the Swedish krona that come into play now. So the majority of the financial income is there. Financial expenses, of course, grew as well quite remarkably from a year ago due to the higher interest rates.

[Mika Rautiainen, executive]

Operator, any more questions?

[Operator]

Yes. We will take our next question from Nicklas Skogman from Handelsbanken.

[Nicklas Skogman, analyst]

Yes, a couple of questions from my side. You talked about the lack of sort of good historical comparable data for a Dollarstore, but -- would you say the -- it was at least in line with your expectations or even better what you saw in Q3?

[Tapio Arimo, executive]

I think we can say that was in line with our expectations.

[Mika Rautiainen, executive]

The sales growth of 12.1%, that's in retail, it's -- as you know, it's actually very good.

[Nicklas Skogman, analyst]

Yes, I was thinking more on the earnings side as well.

[Tapio Arimo, executive]

Yes, it was in line with our expectations.

[Nicklas Skogman, analyst]

Okay. Good. Second question is on this attempt on doing more digital marketing versus leaflets, are you able to quantify the impact on the like-for-like sales?

[Mika Rautiainen, executive]

Well, unfortunately not. Obviously, we lost some customer visits during the third quarter. And it's quite difficult to say exactly how much was due to the cut of the volumes in our marketing leaflet. It was a significant cut, let's put it this way, that if the digital marketing would succeed for our club members, of course, we would be doing very good savings regarding the marketing costs. But yes, according to the customer feedback, well, basically, they were saying that they definitely want to have our marketing leaflet every week. Of course, that's very, in a way, positive news, but unfortunately, cost-wise, we were not able to make longer-term savings on this one, yet. But to say exactly like what kind of effect it has, it's slightly difficult. But yes, we lost some customer visits during the third quarter.

[Nicklas Skogman, analyst]

Okay. Good. And then I'll go back to the guidance again. I mean it's still very wide. You reported late than normal and we only have 1.5 month left of the year. And you also say that Christmas has started very well. So why are you keeping the low end of the guidance, which then only implies 4% EBIT growth in Q4?

[Mika Rautiainen, executive]

Yes. First of all, the -- let's say, the 5, 6 last weeks regarding the Christmas season, plus the New Year season as the 6th or 7th week, it has significant meaning regarding the final success of the Christmas season. And of course, it has a strong profit meaning for us. So from that perspective, it's -- yes, of course, we're already able to expect something from Tokmanni, Finland. But for us, it's the first time with Dollarstore. Of course, we don't know exactly how it will turn out in Sweden and how it will turn out for Dollarstore. So that's why a little bit careful with tightening the guidance. Tapio, would you like to add something on this one?

[Tapio Arimo, executive]

Yes, I mean it was the decision to keep the guidance unchanged for now. And like Mika said, the last 6 weeks of the year are by far the biggest sales weeks and, of course, we still don't know exactly what's going to happen. So just to be prudent, we kept the guidance at the current level.

[Nicklas Skogman, analyst]

Okay. Two more questions on debt and finance costs. So you'll be receiving EUR 57 million in Q4 for divestment of the logistic center, so where do you expect to end up in terms of net debt EBITDA ratio at the end of this year? And perhaps, also, if you have some guidance for next year?

[Mika Rautiainen, executive]

Well, obviously, the end of the year is typically the lowest point for our net debt, so it's going to be obviously, clearly lower than the current. Of course, that refers only to the, let's say, to the bank debt and commercial paper. The lease liabilities are fairly stable over time. And they obviously know they will increase as we sell and lease back their facility. So there's going to be a little bit of a shift also, there's going to be more lease liabilities and less bank debt due to this sale and leaseback. But of course, we expect that overall net debt to be clearly lower than in the end of Q3.

[Nicklas Skogman, analyst]

Okay. And at what point do you expect to be back to your target?

[Mika Rautiainen, executive]

Well, that obviously has -- depends on a number of factors, how many investments we do in the coming years and how much we pay dividends? How well we do operationally and so on. So it's impossible to say the exact timing, but I would say we expect to be there by the end of the strategy period.

[Nicklas Skogman, analyst]

Okay. Last question. Net financial costs for next year, do you have any rough estimates?

[Mika Rautiainen, executive]

Well, that -- again, it depends on the interest rates, how they go. But if interest rates stay roughly at the current levels, I expect the total interest expense, including the IFRS lease to be somewhere between EUR 20 million and EUR 25 million.

[Tapio Arimo, executive]

Including the IFRS.

[Mika Rautiainen, executive]

Including the IFRS, yes.

Operator, more questions?

[Operator]

We will take our next question from Calle Loikkanen from Danske Bank.

[Calle Loikkanen, analyst]

I just wanted to follow up maybe on the Dollarstore discussion here. I understand that the way Dollarstore has been calculating the numbers is perhaps a bit different than what you, as a stock listed company in a different country, are doing. But any thoughts on the EBIT margin? I mean, you -- when you announced the acquisition, you mentioned that the EBIT margin last year for Dollarstore had been 4.1%. So how are you seeing that developing this year either year-to-date or for the full year? And I get that perhaps the calculations are done a bit differently, but any sort of color on that side?

[Mika Rautiainen, executive]

Yes. Well, first of all, we're talking about August, September for Dollarstore. And yes, first of all, there might have been some additional cost during the first months. And with the start of the cooperation, but -- and it's good to keep in mind that Dollarstore in that sense is a similar company with Tokmanni. Third quarter is actually the third biggest quarter. So fourth quarter is number one, with sales and result. And then the second quarter is the #2. So we're still talking about, in a way, a little bit lower level of sales and EBIT also for Dollarstore on the third quarter.

Dollarstore gross margin is clearly better compared with Tokmanni. So there is like a lot of potential regarding the profitability level. Obviously, the target for Dollarstore is to increase the sales per store, which, of course, affects directly towards the better profitability. I'm sure that Tokmanni will be supporting Dollarstore with this one with, for example, a new private label ranges and so on. So there is clearly opportunities and potential regarding the better profitability for Dollarstore. And we're working very hard regarding this to achieve better profitability for Dollarstore together with Tokmanni.

[Calle Loikkanen, analyst]

Then my final question then on -- you mentioned there that the freight costs have been coming down, so how do you see this impacting your pricing? I mean do you want to keep -- do you want to lower prices further? Or are you more looking at keeping the prices as where they are now and, therefore, improve margins? Or how do you think about the dynamics between the lower costs than the selling prices?

[Mika Rautiainen, executive]

Tokmanni Group, together with Dollarstore and Tokmanni, we are low price discount retailers. So everything is all about the price level for us. We want to give our customers the lowest price level we can. And we're going to act -- at the moment, we can see that due to, for example, raw material prices, especially the nonfood products, the buying prices, they have already come down. And obviously, we will also start lowering the prices for our customers because of course, we want to keep the lowest price level.

But the situation is, in a way, very positive for everybody due to the fact that the buying prices are coming down. The inflation is not as high anymore. So obviously, there is a lot of potential for a lower price level to start with. And yes, we will always make sure that we offer our customers the lowest price level. Obviously, we take good care of the gross margin. But at the moment, there is a potential for keeping the gross margin level and offering lower prices to our customers.

Operator. What's the situation?

[Operator]

Certainly, we will take our next question from Miika Ihamaki from DNB Markets.

[Miika Ihamaki, analyst]

It's Miika from DNB Markets. I would like to ask on your synergy targets. You said that you feel quite confident about reaching it, so should we now expect synergies more in the ballpark of, say, EUR 16 million to EUR 18 million or even more? And what could possibly make you to say, upgrade your synergy targets?

[Mika Rautiainen, executive]

Well, first of all, it's still a very, very early start for this cooperation for Dollarstore and Tokmanni, and there are a lot of negotiations going on, a lot of projects for both companies' buying and sourcing departments are working, at the moment, very hard basically combining the certain SKUs, combining the suppliers and using same private labels and so on. So actually, there is a lot of things happening at the moment. It's a little bit too early stage to start commenting anything regarding the potential, regarding, let's say, additional potential regarding the EUR 15 million, but it looks -- in the beginning, it looks very good. But still too early to start giving out higher figures regarding the synergies.

[Miika Ihamaki, analyst]

And then -- so Dollarstore saw an increase of 7% in like-for-like sales, and you saw a total number of customers growing by roughly 5%. What was the like-for-like customer growth for Dollarstore?

[Tapio Arimo, executive]

I don't think we have that figure disclosed, unfortunately.

[Miika Ihamaki, analyst]

Well, could you maybe comment verbally how it was...

[Mika Rautiainen, executive]

Yes, of course, it was positive, yes.

[Miika Ihamaki, analyst]

And according to your expectations?

[Mika Rautiainen, executive]

Yes. Operator, any more questions?

[Operator]

It appears there are no further questions at this time. I would like to turn the conference back to our speakers for any additional remarks. Please go ahead, sir.

[Mika Rautiainen, executive]

Okay. Thank you very much for this. And obviously, we will be very happy to be reporting then the fourth quarter results. Unfortunately, it will be slightly delayed than our normal schedule due to the fact that we need to convert the Dollarstore figures to IFRS calculation. So that will take slightly longer time period. But thank you very much, and goodbye.

[Tapio Arimo, executive]

Goodbye.

[Operator]

Thank you for joining today's call. You may now disconnect.