Tokmanni Group Oyj

OMXH:TOKMAN

Earnings Call Transcript 2022-Q4

[Mika Rautiainen, executive]

Good morning and welcome to Tokmanni's Fourth Quarter and Full-Year 2022 Result Presentation. My name is Mika Rautiainen and today together with me -- today together with me, Mr. Tapio Arimo, Tokmanni's new CFO will be presenting the financial figures. Tapio has now been with Tokmanni for almost three months and I'm very happy to say that Tapio seems to be a very fast learner, highly result-oriented and shares exactly the same values with Tokmanni. So we're very happy at the moment with Tapio is joining the team. So Tapio will be presenting the financial figures. But before that, I will share the key points regarding the fourth quarter and year 2022 with you. And after Tapio, I will come back with some comments regarding 2023. And afterwards, it's time for questions.So let's start. Take into consideration the market situation in Finland last year and especially during the fourth quarter, we were quite happy to achieve the same level of revenue compared with the previous year, slight growth. But unfortunately, the operating profit declined due to higher costs. So let's take a closer look at the key points.Consumer confidence during the fourth quarter was on a historically low level in Finland. The purchasing power decline with purchasing power and the low level of consumer confidence had a significant impact on consumer behavior in Finland. For Tokmanni, I have to admit that after several years of strong growth, adapting to these declining volumes and drastically increase the costs were definitely a challenge.On the other hand, groceries, low price level, offers, campaigns, strengthened our sales, but at the same time they decreased the sales margin. Probably the worst case regarding last year and of course, the fourth quarter was the increase of costs. For worse case, for the full year, it was more than EUR20 million and obviously, it had a significant impact on our result.During 2022, the inventory level was very high and actually a problem. We were able to reduce the inventory level significantly during the last quarter. The value is still or was still on a higher level compared with previous year, but that's mainly due to the increased purchase prices. But there is definitely still room to improve, especially when now we can see that the supply chain works as planned, so to speak after the years of pandemic.So let's take a look at the key figures regarding fourth quarter revenue growth was 1.5%, EUR339 million during the fourth quarter. Like-for-like revenue decreased by 1%. Gross profit was slightly lower compared with previous year, EUR119.5 million, but gross margin was clearly lower 35.2% compared with 36.2%.Comparable EBIT amounted to EUR35.8 million profitability level, 10.5%. Cash flow from operating activities amounted to EUR92.2 million, clearly better compared with previous year's EUR74.9 million and this is due to the changes with inventory level. Earnings per share during the last quarter diluted was EUR0.41 compared with EUR52 from the previous year. And the key figures for 2022 revenue growth with revenue growth of 2.3% and EUR1.168 billion as a total. Like-for-like revenue decreased by 0.7%, gross profit slightly better compared with previous year EUR398 million, but the gross margin was clearly lower, 34.1%.Comparable EBIT amounted to EUR85.8 million, clearly lower from previous year's EUR105.7 million. Profitability level, 7.3% of revenue. Cash flow from operating activities amounted to EUR86.3 million. Earnings per share diluted was one year compared with EUR0.33. Tokmanni's Board of Directors proposal for Annual General Meeting for dividend is EUR0.76 per share and it will be paid in two installment.A little bit more about the structure of Tokmanni's business regarding last year. As already mentioned, the sales of grocery products increased by almost 5% in 2022. And as you can see here, it's -- the Tokmanni's business is divided with division so to speak, grocery products and non-grocery products. Tokmanni has traditionally been a chain focused on non-grocery products. But the change with customer behavior is turning towards grocery product.Historically, Tokmanni has been always selling lot of products in grocery section like household papers, washing, cleaning products. They've always been emphasized with Tokmanni's business. But now we can clearly see that customers with very low confidence and also a lower level of buying power. They've stopped buying non-food products with a little bit higher unit price. And therefore, Tokmanni has been, as you can see, compared with previous year, Tokmanni has been selling actually quite a lot more of groceries. And we consider groceries as food products, beverages, pet products, actually pet products had a very good sales growth, health products, household papers, magazines, cleaning products and daily cosmetics.This is, of course, we consider this as a strength for Tokmanni that we can always rely on either part of the business, either the grocery products or non-grocery products, especially for example, for the coming year, the second quarter has always been very important season for Tokmanni. And then, of course, the non-grocery products, especially garden is supposed to be emphasized. Hopefully, the weather conditions will be a lot better this year compared with previous year.But anyway, so if there is an issue with non-grocery products, the grocery products sort of bring some sales growth for Tokmanni and supports the total picture. The retail environment for Tokmanni in Finland at the moment, obviously, the high level of inflation and rising interest rates are affecting our customers. On the other hand, the price level has become the most important criteria and for choosing a store. And in this situation, obviously, Tokmanni with one of the best price images in Finland has a very strong place with retail market. And obviously, we do our utmost benefit from this position.There's been a lot of changes as already mentioned between non-food products and grocery products volumes when it comes to the retail market in general, they've been clearly lower last year compared with previous years and the rising prices have been the main driver of retailers value growth.Inventory levels with the retailers, I would say, globally, they're getting normal -- on a normal level after the changes in supply chains and demand. And obviously, the more systematic process with the supply chain supports a lot more efficient management of inventories nowadays.And when we look at the Tokmanni strategy, couple of words about Tokmanni strategy for 2021 - 2025. The revenue target is still EUR1.5 billion in 2025. And as you can see from the graph, obviously, we are slightly behind after last year with our track, but not that much. So we are confident to keep the target level. Obviously, we need some action points to reach the EUR1.5 billion level. And the action points comes from our sources of growth. And first of all, last year was a slowdown with our -- with a growth of our store network due to the very, very high building costs.Nowadays, we see clearly lower level of the costs regarding constructions and so on. So we are able to speed up with our growth with store network. We also mentioned with our previous CMD that we will start developing our B2B business. We call it in Finnish, we call it Tokmanni Tukku and actually we branded in the end of last year this B2B sales channel. The -- we were thinking that there is lot of potential with B2B business and last year clearly showed us that there is a lot of potential. Tokmanni has one of the best price images in Finland. So obviously, our B2B customers are extremely interested in Tokmanni's offer for these customers and we're now developing this part very actively.We also actually exactly a year ago, we launched this Miny lifestyle brand, trying to get new customers to Tokmanni, young lady starting from the age of 13 to 30. And this was very successful. So we will be expanding Miny departments in the largest Tokmanni stores and also like standalone stores.And then acquisitions, obviously, is also one route to our target of EUR1.5 billion. Today, we informed about the acquisition of Click Shoes & Shoe House, shoe store chains. I will come back to this a little bit later. But this kind of acquisitions, obviously, are very interesting for Tokmanni and leads also to reach the target of EUR1.5 billion.Then when we look at the EBIT target of EUR100 million -- EUR150 million in 2025, as you can see, we do have a lot of work regarding this target, but we're still confident that we are able to reach this target. And the action points to do so, but before going to the action points, as already mentioned earlier, I said that the increase of cost for Tokmanni during 2022 was more than EUR20 million. And as you can see from the results here, obviously, the rising costs have been issue a problem for Tokmanni during last year.And of course, this is something that we need to solve during this year and the coming years before 2025. Some of the action points regarding this target. First of all, we've already started the purchase negotiations regarding the purchasing prices. Obviously, we can see from our -- through our Shanghai office that raw material prices are already coming down or they've already come down and there are already like lower buying prices regarding the Far East sourcing. And it's -- in Finland, it's at the moment, I would say it's only fresh food, which is not that big with Tokmanni, it's fresh food buying prices are still a little bit on a higher level. But otherwise, it's almost all buying prices are definitely not rising anymore and depending on the category, we can see already lower buying prices.But this is, of course, a matter of negotiations with our partners. We're very happy with the private label sales and the private label development. And there we are definitely driving our private labels this year and the coming years since the customers are emphasizing with buyings our private labels. This is, of course, gross margin related, the two first bullet points. And then, of course, we are concentrating also efficient indirect sourcing, especially at the moment, the freight costs.We were basically -- during pandemic, we were very happy to have an extremely good agreement for the freight and now the agreements are getting to their end by the end of March. So -- and the prices are coming down or they've come down a lot, so we are in a perfect position to negotiate new agreements regarding this. With the electricity prices, we can -- or it looks as if already the worst part is over in Finland and that's why we are quite confident that 2022 electricity prices were the all-time high and already this year, we are able to have slightly lower electricity costs.Our new logistics center in Mantsala is obviously bringing new efficiencies with our supply chain and lower costs because we don't have to rely on external warehouses anymore after this year. So we're definitely looking forward to this one and I'll come back to this slightly later. And of course, the personnel expenses, we are obliged to manage the personnel expenses by streamlining the processes for sure this year. So these are the action points related to the EBIT target for 2025.At this point of time, I would like to thank our customers, our partners and all Tokmanni employees. The year -- last year was definitely a difficult one, we'll make a success out of 2023. Thank you and Tapio, now it's your turn to present some key figures regarding the fourth quarter and year 2022.

[Tapio Arimo, executive]

All right. Thank you very much, Mika. So good morning to everybody on my behalf as well. My name is Tapio Arima. I've been the CFO now for about three months, super excited to be here at Tokmanni and back to retail in my career. So without further, let's get to the numbers and if we start with the revenue.So in Q4 2022, our revenue grew by 1.5% and like-for-like revenue decreased by 1%. Measured as a percentage, the biggest growth came from the sales of pet products, groceries, apparel and craft supplies. Our online sales for 2022 were 1.7% of total revenue and for the full-year '22, our revenue grew by 2.3% and like-for-like revenue decreased by 0.7%. And as a percentage, the biggest growth in sales came from pet products, groceries, apparel and cleaning products. And our online sales were 1.7% of full-year 2022 sales.Moving on to comparable gross profit and comparable margin in Q4. Our comparable gross profit was EUR119.5 million and that is equal to 35.2% gross margin. The gross margin was negatively affected especially by campaign sales based on special offers and the sales structure, which focused more on groceries than in the comparison period. And for the full-year 2022, our gross profit was EUR398 million, slight increase over the previous year and the comparable gross margin percent was 34.1%, a decline of 0.6 percentage points.And the decrease in the gross margin percent was due in particular to the sales structure and our decision to maintain low prices despite higher sourcing costs. Looking at our direct import and product labels managed by Tokmanni, in Q4 last year, the percentage grew significantly from a year before and was -- the direct import was 32%. And looking at the full-year, our direct import percent was at the previous year's level at 27.1%.And looking at the product labels managed by Tokmanni. Again, in Q4, we increased the percentage of those, up to 35.9%, while for the full-year, there was a slight decline [ 32.3% ]. Moving on to operating expenses, in Q4 last year, the total operating expenses in comparable terms were EUR66.2 million and the increase was mostly due to higher property costs. Personnel expenses were 10.7% of revenue, same level as last year and a total of EUR36.1 million. And then for the full-year 2022, our comparable operating expenses were EUR243.1 million or 20.8% of sales and personnel expenses increased slightly in terms of percent of sales to 11.7% and total personnel expenses were EUR137.1 million.Then our comparable EBIT. In Q4, it was EUR35.8 million, a decline from the previous year's EUR40.5 million and also our comparable EBIT margin declined to 10.5% from 12.1% a year ago. For the full-year, comparable EBIT was EUR85.8 million compared to EUR105.7 million a year ago and the comparable EBIT margin also declined to 7.3% from 9.3% a year ago. And the decrease in profitability was mainly due to the increase in operating expenses and also depreciation. And the depreciation increase is mainly due to the depreciation on rental properties based on the IFRS 16 calculation.Looking at our inventories, at the close of last year, our inventories amounted to EUR281.3 million, which is an increase from the previous year of SEK263.6 million and the value of that increase mainly reflects the increase in sourcing prices. Our interest-bearing debt totaled EUR392.4 million at the end of the year and consisted of long-term corporate debt of EUR100 million and EUR10 million of current corporate debt and the remainder of the interest-bearing debt is then related to the lease liabilities under IFRS 16 reporting standards.And our ratio net debt to comparable EBITDA for the past rolling 12 months was 2.4 million and our financial position at the end of the year remained very good. We had a total of EUR206 million in withdrawable funds at the end of the year, consisting of loan agreements with financial institutions and a commercial paper program. Moving on to our cash flow. In Q4, our cash flow was very good, EUR92.2 million compared to a year ago of $74.9 million and the increase in cash flow was mainly due to the decrease in the inventory level from the previous quarter. In 2022, our cash flow was EUR86.3 million, down from the previous year's EUR126.8 million and the decrease in the cash flow from operating activities was mainly due to the weaker result and the amount of capital tied to inventories at the end of the year.Then looking at our capital expenditure. Our net capital expenditure in Q4 was EUR20.9 million and for the full-year, our net capital expenditure was EUR54.7 million. And our capital expenditure is mainly related to the expansion development and maintenance of our store network, development of digital services and the construction of our new logistic center. And the total value of the investment in our new logistic center is estimated at EUR65 million and that investment will be recognized in -- or for the most part in last year and this year.Then moving on to 2023, I will give the floor back to Mika.

[Mika Rautiainen, executive]

Thank you, Tapio. Yes, couple of words regarding this year. First of all, the acquisition and we've informed about this today. We've said in our strategy that we have destination categories where we try to be the #1 retailer in Finland. One of them is apparel and we had the chance to acquire whole share of Finnish shoe store chains, this is basically one chain, but anyway with two different banners, Click Shoes and Shoe House. The company has 29 stores across Finland and an online store. Actually, this is a leading shoe retailer in Finland at the moment, fitting Tokmanni extremely well, very efficient, very efficient and a very good price image. So this will definitely strengthen our apparel business in Finland, both ways in with -- as a continuation with the Click Shoes and Shoe House stores and Tokmanni stores as well.These Click Shoes and Shoe House stores are mainly located in shopping malls, where actually Tokmanni is not that strong. So there won't be cannibalism in that sense because this will be clearly separated. The transaction is expected to be closed on the 1st of March, so in couple of weeks' time. The owner, Mr. [ Tommy Lehtinen ] has been doing extremely good job with building up this shoe store chain and with his team of approximately 100 employees. They will all join Tokmanni to build up the Tokmanni shoe business.The company's current employees continue as old employees. The revenue for this company was almost EUR10 million in 2021. So if -- obviously, we are all the time interested in acquisitions, which are related to our destination categories, which will make us stronger in our customers' minds in our chosen destination categories and this is a perfect example regarding our business development.Some other issues regarding 2023. As already mentioned, we launched this business-to-business channel, in Finnish, it's called Tokmanni Tukku for Fins probably a quite understandable name. And the idea, obviously, is definitely to use our whole assortment of almost 40,000 SKUs and the perfect price image with -- in Finland for also our business customers. The development, the start has been very, very successful, so we're definitely putting a lot of energy on this part of the business as well.Yeah, actually, already in next week, the Tokmanni app, Tokmanni club app will be in app store available in the app Store in one week time. So it will be launched next week. And obviously, this is a continuation for our customer loyalty program and we're definitely looking forward to get this also in use in couple of weeks' time.And well, this is the biggest investment in Tokmanni's history, the new logistic logistics center in Mantsala right beside our current logistics center. At the moment, we have several external warehouses in use because our current warehouse was basically built 15 years ago. And obviously, 15 years ago, it was completely different, a lot lower revenue levels with Tokmanni. So we've been forced to use external warehouses during the last years.Now when this will be ready, we can basically stop with all external warehouses and the best part of this huge project is that, first of all, it's ready earlier than expected. If everything goes well and now I have to say that it seems as everything is going really well. The first part, half of this building, we are able to start using already in April. And the second part of this building, we're able to start using by the end of this year. So we -- the original plan was to start using this in Spring 2024. So we're early and this has been -- the building has been according to the budget, which is, of course, a fantastic part of the whole project as well.But we really expect this one to bring a lot new efficiencies with our supply chain. So just a couple of issues regarding 2023. We definitely look forward to working hard again in 2023 and we also expect growth with our guidance for 2023. So we expect revenue to be from EUR1.2 billion to EUR1.27 billion during 2023 and comparable EBIT measured in euros is expected to be EUR85 million to EUR100 million this year.Thank you very much and operator, now it's time for questions and Tapio, please join me answering the questions. So operator, please. Go ahead.

[Operator]

Thank you. [Operator Instructions] We currently have no question coming through. [Operator Instructions] Well, there are no further questions. So I will hand you back to your host to conclude today's conference.

[Mika Rautiainen, executive]

Okay. Thank you very much, operator and thank you for joining Tokmanni result presentation. Thank you.

[Tapio Arimo, executive]

Thank you very much.

[Mika Rautiainen, executive]

Have a nice weekend.

[Operator]

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