Tokmanni Group Oyj

OMXH:TOKMAN

Earnings Call Transcript 2021-Q4

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

Ladies and gentlemen, welcome to Tokmanni's Fourth Quarter of 2021 Result Presentation. My name is Mika Rautiainen, and together with Tokmanni's CFO, Mr. Markku Pirskanen, will present the highlights and key results of the fourth quarter and the whole year of 2021, as well as the guidance for year 2022. First of all, it's a little bit mixed feelings with the result presentation. On the other hand, for the full year of 2021, we had a very good year, record high sales, record high result. However, the cost increase, partly unexpected, made the last quarter weaker compared with the previous year. So let's look at the highlights. First of all, revenue was reasonably good considering the great sales from previous year. And of course, in Finland, the uncertainty caused by the pandemic with our customers. Gross margin was lower due to the attractive benefits offered to loyal customers as well as the fact that Tokmanni didn't do large-scale increases with the sales prices in the end of the year. The operating profit was lower due to the increased costs compared with the previous year. Some positive things. Tokmanni Klubi, Tokmanni's customer loyalty program has attracted more customers than planned. Well, let's look at the figures. First of all, revenue grew by 2.3% compared with very strong figures from previous year, 14.6%. And like-for-like revenue actually decreased slightly, but still 0.3%. This is actually the first time in more than 4 years where the like-for-like revenue decreased. So we take this actually very seriously. Comparable gross margin was lower compared with the previous year, 36.2%. On the other hand, it was on a pretty good level. And as you can see, sales were higher. And actually, the gross profit also was a little bit higher compared with previous year. So when the EBIT actually was clearly lower compared with previous year, it's all about the costs. The EBIT was EUR 40.5 million, representing 12.1% of revenue. Cash flow from operating activities amounted to EUR 71.6 million, clearly lower compared with previous year, and this is something to do with the inventory level. Due to the supply chain issues, actually the global problems with the supply chain, by the end of last year, we had a big part of our spring season products actually here in Mäntsälä in our warehouse. So this has an effect on the cash flow obviously. Earnings per share was EUR 0.52 compared with previous year's EUR 0.57. And if we look at the market, the nongrocery market in Finland and the development, as you can see, we actually lost market share during the last quarter and the second quarter of last year. And we definitely take this very seriously. However, if you look at the market share development during 2020, obviously Tokmanni was a real winner that year. So obviously, it's good to take these 2 years as 1 period to understand a little bit better the market situation in Finland. And then the highlights of the whole year. Revenue growth was very good, 6.4%, compared with very strong growth, 13.6%. We reached record sales, EUR 1.141 billion. And like-for-like revenue growth was also good, 4.8%, compared with the strong figures. A slight improvement with gross margin, 34.7%. And EBIT amounted to EUR 105.7 million compared with the previous year's EUR 99.7 million. So the profitability level was basically exactly the same, 9.3%, 2021 as well as 2020. And as mentioned already, the cash flow was lower, EUR 126.8 million, due to the high inventory level. Earnings per share, EUR 1.33. And Tokmanni's Board of Directors' proposal of dividend is EUR 0.96. And by the way, on the figures for 2020, there had been some adjustments, minor effects on the business. But Markku will explain a little bit more detail about these adjustments in a short while. Let's take a look at the retail environment for Tokmanni. A couple of things which are affecting the business for Tokmanni. First of all, raw material prices are on a very high level. But we actually don't see at the moment any further increases. Obviously, it's all about the demand, how the demand is developing with this inflation, price inflation, cost inflation. We could see a little bit lower levels of demand, but let's see anyway. But yes, of course, if the demand stays on a very high level, the raw material prices, they won't go down. Operating expenses are largely increasing when it comes to the, for example, property rents, maintenance costs like electricity, freight costs, especially when it comes to the transportation in Finland due to the high gasoline prices and obviously, there are some salary increases also coming up later this spring. So these all have to be taken into consideration with the business. Tokmanni supply chain has been working very well during the pandemic. We're very happy, very satisfied with professionals with Tokmanni who have been managing this part. The cost pressure at the moment is very well in control. However, obviously, we've been forced to invite products, for example, seasonable products for spring time. They're on a very early stage to Finland, as mentioned already. The customer behavior will probably change due to 2 facts. First of all, the development of pandemic. There will be some developments anyway. So obviously, it will effect on the customers' behavior. And of course, the rising inflation level will also obviously effect on the shopping behavior. That's at least our idea that there will be effects on the business. In Finland, we see that the sustainable choices are becoming more and more important for, first of all, discounters and customers. Our customers in Finland, the level of awareness with the sustainable choices are getting higher all the time, which is very good. And I think that we're also able to serve our customers so that they can rely on Tokmanni's sustainable way of doing business. But definitely, the low prices will be more important for customers in Finland when prices and costs are increasing. So this is how the retail scene looks at the moment from our perspective. We launched a year ago Tokmanni strategy for a period for 2021 to 2025. Basically, we divided it with sources of growth, sources of profitability, and sources of success. A couple of words about this, how we're basically implementing the strategy projects. First of all, the sources of growth. We opened 4 new stores last year. Now we have 196 stores. And the target is to have over 220 stores in Finland by the end of 2025. We actually bought last fall, the first large-scale Tokmanni or actually large-scale store in Tornio, which is actually a twin town on the border of Finland and Sweden. The size is over 10,000 square meters. And at the moment, we're basically building the new concept over there. And the target is to have 10 of these large-scale stores in Finland by the end of 2025. Online sales, it's still increasing, almost 60% last year. We started with 25,000 SKUs in our online stores. Now it's 32,000 SKUs, and the target is to have 50,000 SKUs in online business. Obviously, online is the route actually or the channel that we're using with a higher amount of SKUs. And of course, we have these destination categories for Tokmanni, where we want to be the #1 retailer in Finland, for example, garden, apparel, leisure, and home decoration. They increased very well. The sales increased very well during the last year, so we're happy and we can see that we are on the track with this strategy. The target is to have EUR 1.5 billion turnover by the end of 2025. And as you can see from here, we're very well on track. And then the sources of profitability. First of all, the sales of our private labels, the biggest one, Kotikulta, and then Future TT Sport, Pola, Vaeltaja, Brücke ja Noixx, they grew very well, and we are very happy about the development with private labels. Product labels managed by Tokmanni were actually 32.5% of the total sales. The direct imports is also growing. Share of sales was 16.8%. And then in 2 weeks' time, we will be launching a new private label range called Miny. In Finnish, it's called Miny. It's a new product group for youngsters. It's actually also -- it's like a shop-in-shop concept. So we will have a start with 5 stores in 2 weeks' time, and there will be several new stores also with the Miny concept later on this year. Actually, if I talk about this Miny, it's basically very important also to delight our customers with new concepts, new ideas, new products. It's also for Tokmanni itself. It's basically a way to renew the business, which is, of course, very important for a discounter like Tokmanni. As mentioned already, supply chain management succeeded very well already. Actually, 2 years ago, we said that the supply chain efficiency is very important for our profitability. But then the pandemic started and basically it has been like a game of survival with the supply chain. But now we're in a situation where we can start improving the supply chain efficiencies again. And I'm very happy about the fact that actually the construction work of Tokmanni's new warehouse has already started here in Mäntsälä. And obviously, for the coming years, this has a key role also for the efficiencies with our supply chain. And here's the route with the EBIT target, which is basically EUR 150 million by the end of 2025. As you can see, we are on track. As you can also see and we can definitely see that we also need to speed up a little bit during the coming years, starting already this year. And last but not least, the sources of success. Over 800,000 customers have already joined Tokmanni Klubi, Tokmanni Club. Actually, it's getting closer to 900,000 customers by the end of this year. And this year, we will be launching also personal benefits and services for our customers. The development of Tokmanni sustainability work has also been very active. For example, most risk raw material practices are defined. I think one of the key issues over here is definitely the sustainable cotton, which we also defined very clearly with our suppliers. We started 4 years ago with the bonus program for the whole Tokmanni personnel. And this is now the fifth year in row when we are continuing a bonus program for everybody, all the 4,100 employees of Tokmanni. And in addition to that, we also included an ESG target with management incentive program. So good development with this one as well. Well, during the pandemic, it's been a lot of talk about remote work, but out of 4,100 Tokmanni people, 95% are working basically in stores, in our warehouse. It's been a very, very, very tough period for these people who have been in contact with colleagues and customers and so on. And that's why we're starting a well-being and recovering program for everybody in Tokmanni during this spring. We're actually very proud of this because we want to be the #1 retail employer in Finland. So this is one crucial part of it. So here was a short recap on the development of our strategy plan. At this point of time, I would like to say many, many thanks to all Tokmanni people over here in Finland as well as in Shanghai, China, for very good work. Thank you very much. And then we're going to dive deeper with the key figures and Markku, please, your turn.

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

Okay. Thank you very much, Mika. And good morning from my side also to everyone. So Mika already mentioned or explained a little bit about these figures, but let's look then a little bit deeper. But first, starting about this adjustment, which we made to comparison year 2020. There has been made some adjustments due to the correction made to the figures from previous financial years. And these corrections concerns the method of recognizing purchase rebates and IFRS 16 rental agreements. But still, we have to remember and say that as a whole, these adjustments has a very marginal effect to the figures of 2020. But let's go to the figures then. And as earlier, we have also this time taken 3 years development that we get some kind of a little bit longer period view. And starting from revenue. And here on the left-hand side, these bars are quarter based and these 3 bars on the right-hand side all are yearly figures. Okay. Starting from quarters, we can say that we achieved a decent growth in revenue when we look Q4 2021, 2.3%, especially when we think how strong growth we have in 2020. But some small disappointment was, of course, this like-for-like revenue development and slight decrease there, 0.3%. And if we look what we're selling well during Q4 2021, they were apparel, leisure and home electronics products. Moving to comparable gross profit and margin. First of all, saying that in fourth quarter, the gross profit was increasing a bit in euro-wise, but at the same time we have to say that gross margin was a bit lower level during Q4. We achieved 36.2%, when it was in 2020 Q4 36.7%. Of course, looking at 2019, we were at the level of 35.3%. So now we were a bit -- not a bit, quite clearly on a higher level when we compare these 2 figures. But when we are looking what affected Q4 2021, that why gross margin was on a lower level, there are 2 clear explanations behind that. First of all, benefits what we offer to Tokmanni club members affected. We offered very good discounts and also onetime discount when you join the club. And this same effect was also during Q3 and now Q4. This is, of course, when we are looking at the gross margin percentage, it looks here on a negative way, but at the same time we have to be very glad that we have got more members to the club, what we planned at that time. Other thing which, of course, affected was that we made a decision to still refrain from large-scale increases in our sales prices, even our sourcing costs were increased. At the same time, we can look how the sourcing cost or purchasing -- higher purchasing prices are going through to our books. They are coming step-by-step when we are looking what is our inventory rotation speed. And of course, it takes a while when the whole purchasing price increases are affective to us. Next thing is the direct import and product labels managed by Tokmanni, meaning basically private labels. This is the issue which clearly affects to our gross margin, and we have a target to increase the share of these 2. And first, looking at the direct import during Q4, small improvement and looking the whole year in direct import share, quite a good jump up to 27.3% compared to the previous year 26.5%. And product label is managed by Tokmanni, and as said, mainly private labels. During Q4, the share was decreasing a bit. It was 34.2% compared to last year 34.7%. But again, when we look at the whole year, the development was good. We achieved 0.5% improvement in this year, ending up to 32.5% in 2021. Next, the operating expenses, which was clearly a challenge for us during Q4. First, looking at Q4, we are seeing here that in Q4 2021 the share was 19.1% compared to previous year 18.4%, which is not, of course, a good development. When we look euro-wise, the total expenses was increasing EUR 3.8 million, up to EUR 63.9 million. And of course, one part of that euro-wise increase is coming that our business is growing and we have new stores and so on. But when we look relative-wise, there are clearly different explanations why it was increasing. And part of these reasons are the ones which were clearly known beforehand. For example, we didn't have pension contributions during '21. Other one was clearly our own decisions, meaning these marketing investments which we made to support or launch Tokmanni Club. But there were also reasons which were not at least easy to forecast or were unknown beforehand. This increase in sick leaves caused by pandemic and other thing was that clearly general rise in costs and really sharp price in the price of electricity, especially towards the end of the year. I can pick up the example concerning this electricity. In December, given we have a quite high hedge ratio in electricity prices, we got a EUR 0.5 million extra cost in December from electricity. I would pick up perhaps this personnel expenses in the fourth quarter. Even the total development was not satisfied when we look relatively. These expenses, Q4, the personnel expenses, which are, of course, included to the total operating expenses, the share was 10.7% compared with year 2020 of 10.5%. And when we take out this pension contribution, we were almost at the same level, which I think was a good achievement when we think what kind of circumstances we had during Q4. Looking at the whole year 2021, 19.9%, some increase from year 2020, which were at the level of 19.6%. But when we look at 2019, we were at the level of 21%. So we can say that now we are moving totally different level, roughly under 20%. Of course, logic way to coming to EBIT. First, revenue, gross margin and expenses, the end result EBIT. And as said, we achieved some improvement in gross profit, but it was not enough when we are looking increasing operating expenses. And of course, in Q4, the end result was at Q4 2021, EBIT was somewhat lower level compared to 2020. We ended up to EUR 40.5 million, and 2020, it was EUR 44.8 million. Looking at the whole year numbers, we achieved 9.3% EBIT level, which was at the same level of 2020. And the improvement euro-wise, roughly EUR 6 million, ending up to EUR 105.7 million. Next, balance sheet. Here we are seeing, when we are looking at the level of inventories and how big they are, we are seeing a different kind of market situation what we have in logistics and product availability. And that, of course, we know all that there has been difficulties. And we have made a decision that we guarantee our product availability in our stores, which, of course, means that we have taken products into our warehouse earlier, and we can see that we got roughly EUR 40 million extra in our inventory levels, ending up roughly EUR 260 million. Other reason to this increase is that we have expanded our product range during 2021. And looking at the cash flow, we had a lower cash flow during 2021 compared to 2020, which is, of course, end result from this inventory level increase -- or this inventory level increase was for a clear reason to lower cash flow. The good thing here is the ratio of net debt to comparable EBITDA, which was 1.8, and we can say that it's in a good level compared to our strategy target, which is 3.2. So there is clear space between these 2 numbers. Looking at our investments, net capital expenditure. On year level, in 2020, we were at a level of EUR 12.8 million, which was clearly lower. And as communicated at that time, we made some postponements in our inventories due to the Corona pandemic. And now we can see these investments in 2021 figures. We ended up 2021 to a figure which is roughly EUR 22 million, but at the same time we have to remember that it includes this TEX acquisition. Now we are estimating that during 2022, the investments will be at the level of EUR 18 million to EUR 20 million, but that does not, of course, include the new warehouse. And when we are looking at this new warehouse, it's a roughly totally EUR 60 million investment, which will happen during 2022 to 2024. But I have to say that looking from a balance sheet point of view and from a cash flow point of view, the plan is that we are selling, after it is ready, this building to investors, and we are getting in 2024 this cash back to the company, which we invest now during the 2 years' time. And it's, of course, a little bit different from cash flow point of view. Of course, it will be in our balance sheet due to this IFRS 16. But as I said, from a cash flow point of view, it's a bit different issue. That's shortly about the numbers, and I'll give the stage to Mika.

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

Thank you, Markku. About the year 2022, we are feeling quite confident regarding this year. We see that the inflation level will be higher. But on the other hand, Tokmanni is among the companies or the retailers with the best or, let's say, the lowest price image in Finland. It's a valuable asset in this situation for us, and we feel that it will also help us with this year and, of course, coming years.Another issue is that we will be seeing already the implementation of our strategy, where basically in 2 weeks' time there will be this Miny concept, and there will be also the other new things based on our strategy that we will see this year and, of course, coming years.Regarding this year, we forecast an increase in revenue and comparable EBIT in euros. However, of course, we have to say that the forecast is subject to uncertainties due to the development of pandemic and its effects during the 2 years' time. Pandemic has been affecting quite a lot with the retail scene. So obviously, we have to take this into consideration.So that's it. Thank you very much. And operator, now it's time for questions, and I will ask Markku to join me to discuss or answer the questions. Operator, please go ahead.

[Operator]

[Operator Instructions] And so far, we have 1 question in the queue. That's from the line of Nicklas Skogman from Handelsbanken.

[Nicklas Skogman, Research Analyst]

Yes. I have a couple, but first of all, I'd be very interested to hear some more detail around the guidance in terms of what sort of like-for-like sales do you expect in that guidance? Or what like-for-like sales is baked into that guidance? And then also, is it fair to think that you basically then expect the gross margin to be flat this year, considering the input cost inflation? Or do you think there's upside there?

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

Markku, will you take the like-for-like question and I can go with the gross margin?

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

Yes. We said that the revenue will grow. And of course, one part of that is like-for-like. And certainly, we are targeting to make some like-for-like growth also.

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

And regarding the gross margin, obviously, as mentioned already, the buying prices are on a higher level due to, for example, the raw material price increases. And then there are cost increases. I mean both raw material prices and cost increases, of course, they are affecting everybody in retail. As a low-price retailer, we have to take the price levels very carefully to consideration. But we basically, by the end of last year, we already saw that we were the last one to keep the low price level. And obviously, this year, we'll also monitor extremely carefully like what's happening with the market. It's very difficult to say exactly what's going to be happening with the gross margin. Obviously, we will take care of the company profitability and gross margin is one key part with that. So yes, it's very -- I have to be a little bit around with my answer, but I'm sure, Nicklas, you understand the situation. Obviously, we target to improve the profitability of the company according to our strategy. And well, gross margin level has a key part with that. But we've kind of made the decision that we won't be the first ones with changing the prices, and we're happy with this situation and with this development, and that's why we're also pretty confident with the sales growth this year.

[Nicklas Skogman, Research Analyst]

Okay. Perfect. Secondly, I'm interested to hear about the TEX stores that you acquired in August. And as I understand it, they are now all converted to the Tokmanni banner. Are they up and running operationally? And what's the early lessons learned from there?

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

Yes, first of all, we're very happy that we have these 2 stores. The development, the sales growth has been very, very good. They are under Tokmanni banner at the moment. But the concept, we're basically testing and building the concept at the moment. We see this kind of large-scale stores also as online delivery hubs for the bigger cities. And obviously, this will take a little bit more time to work with this. And the concept, we see that there will be a lot of opportunities with this large scale. But at the moment, it's under Tokmanni banner, but the concept is not ready. But already now, we're very happy with the sales growth under Tokmanni banner. So we have very high hopes when the concept is ready.

[Nicklas Skogman, Research Analyst]

All right. Sounds good. And then finally, how much CapEx do you expect for the new warehouse in '22 and '23?

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

Sorry, I didn't hear. What is how many...

[Nicklas Skogman, Research Analyst]

What's the CapEx that you expect to spend on the new warehouse in this year and next year?

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

So basically, as Mika already mentioned, it started for construction, but looking at how the costs are coming, what we said, it's roughly straight line increase in our investment. Total investment is EUR 60 million, and calculating straight line. I would say that it is the best guestimate at this moment.

[Operator]

[Operator Instructions] There seems to be no further questions coming through, so I'll hand back to our speakers for the closing comments.

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

Okay. So thank you very much, and we'll talk to you next time. I think it's in April. So very good. Thank you very much.

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

Thank you.