Verkkokauppa.com Oyj

OMXH:VERK

Earnings Call Transcript 2021-Q1

[Panu Porkka, CEO & Managing Director]

Good morning, everybody, and welcome to Verkkokauppa.com Q1 presentation. If you have any questions, please send them via e-mail to [e-mail]. And all questions will be then answered at the end of the presentation in the Q&A section. Today, joining with me, and also available for the questions if there are any, CFO, Mikko Forsell. In my presentation today, I will first take some highlights out of the report of this morning. I will also disclose some things about the focus areas on sustainability. And I will also give you an update on the company's strategy, which was released just earlier this year. Then our outlook and understanding of the market and market development for the further half of the year. And then at the end, we will have the questions and key takeaways. But if I would sum up the report, I would say, a pretty good start for the year, revenue developed nicely. But I think the first highlight is the exceptional good development what we had in online channels. Online channels grew in sales of 33% the previous year. So clearly, we can see that as a company, we were able to utilize the opportunities that lies within the online shift, attract new customers and really get that offering via our channels to the consumers. The same kind of behavioral changes, you can see in the reflection of the site attracting more and more visitors, although we are the most visited site in Finland, we are the most known e-commerce player, and we are among the top brands. Still, we attract new site visitors and the site gets more and more visits. Within the first quarter, 20-million site visits, which had an increase of EUR 3 million in absolute figures, which is quite huge. If we then look to the strategic growth area of B2B, we were able to slightly overgrow the average 12% increase, nice development, especially in small and mid sized businesses, we see that the market is developing like the consumer market is developing, and more and more sales is really shifting to online. And we, as a company, can utilize that opportunity. And if we still look at the whole revenue development from categories. Basically, all categories grew, there were maybe 1, 2 categories not growing. But besides all developing nicely, the clear overgrown we saw in small and mid-sized categories. And in that area, the market is more and more fragmented here in Finland. There are a lot of smaller players, a lot of brick-and-mortar players, no big e-commerce players. So there are huge opportunities for us with our assortment to gain market share and also develop the total revenue nicely. At the same time, as the consumer businesses and e-commerce were really flourishing, it was quite expected that the export business area will decrease. Obviously, we still have normal figures from last year, which we are facing at the moment. So travel restrictions due to the COVID pandemic really affecting that area, and we saw a strong decrease of over 50%. But if we go further along, the previous year's figures have already the effects of travel restrictions. So we won't be seeing these kind of developments as we go further this year along. At the same time, profitability developed strongly. Majorly due to good margin development. Margin developed because of 2 main reason, both because of the sales mix development. First, if you look from consumers and channels. When the consumer -- the normal margin consumer business is over growing at the same time, low margin. Export sales is declining, the average margin normally has a positive effect out of this. And then from the categories, in midsize and small categories that the average margin is typically higher. And in the core categories where we have more price pressure, and in general, the margins are lower. And those ones not growing as fast, that really contributing also positively to the overall margin. And also, at the same time, slightly scaling the business. So costs, in general, not growing as fast as revenue. So because of the good performance of the company, it was not a surprise that the Board decided and resolved this morning we'll pay out a quarterly growing dividend. A dividend to be paid out for the first quarter, EUR 0.057. So thank you for all investors and owners. Few new KPIs, which I would like to highlight. On the left side, the total revenue, it's nothing new. But maybe good to understand that it is quite stable how our business evolves throughout the first quarter. So there's some seasonalities, but some have a higher season, some have then a lower season. But in general, I mean, it's quite stable. And the biggest part of the business obviously comes within the last quarter, where the main campaigns are and that the main season is for us from sales and also from profit wise. Then if you look at the consumer web channel development. We saw a strong increase to last year. So already the good base figures, we were able to have an increase of absolute figures, EUR 20 million alone in web channel sales. So really good performance. And while continuing like this, you can see that we can expect a good development also going to the latter half of the year. Obviously, e-commerce is also a big player in the most important time of the year. Then below left, you'll see the B2B business, what I already mentioned, good development, 12% growth. We expect this kind of development to continue and we think that we can gain market share, especially in small and mid-sized businesses. And then here, at the end, basically just the calculation that was already available before. But here, you see that the long-term target of reaching costs ratio of revenue of 10% we are on the track to reach that and a small step, again taken, during the first quarter. So the total income statement, the revenue development, 7% growth with a strong margin development due to the sales mix. Good sales mix and category mix, with the same time, costs slightly scaling, ending up in a record Q1 EBIT of all time, EUR 5.2 million with a strong increase to last year of over 50%. Actually, a good profitability already for our line of business, 3.9%. And as a reminder, we have the long-term target to reach 5% profitability by end of year 2025. So the historic good performance of the company continuing 31st consecutive quad -- quarter. So since first listing -- first not listing back in 2014. Obviously, we were growing already before that. So a growth company still and first and foremost. And at the same time, profitability developing nicely. It was already a fifth consecutive quarter where EBIT development and increase in absolute figures of EUR 1.8 million. From the balance sheet, maybe 2 things that need some explaining. First of all, inventories almost up by EUR 20 million, sounds like a big number. The reasoning behind is that we have targeted since the fall that in certain categories, there might be a cargo problems, there might be delivery shortages from Asia. So what we wanted really to make sure that the upcoming season, the spring season is secured. So we took a lot of the categories way, way before in advance into the inventory. So with that kind of operations, we are able to fulfill the customers' expectation when it comes down to availability. The second thing also affecting this is that we understand that in the market, there might be some shortages of chips and components going to this year. So in those categories, we foresee that there might be some problems. We really wanted to overstock and make sure that if those situations occur, we are the ones still providing the best possible availability. Cash flow negative but accounts payable is the reasons for that. Investment is slow, I will get later back to that. A good cash and equity situation, as always. And on top of that extra credit facility negotiated of EUR 20 million, but obviously, no need to take advantage of that. A few words about the sustainability work. We have resourced it and focused it during the last year, conducted surveys and workshops. And in the annual report and also in the interim report, you can see the focus areas when it comes down to transparency and really being the trusted and sustainable retailer in counteraction with our customers and then also how we utilize the community, the whole company in this important work. And obviously, emissions that need to be also focused on. If we then move back to the strategy, which was released earlier this year, I think the fundament of it is that we have a clear value proposition. We understand what is important for our consumers. And what are the promises that we need to take and what are the areas we need to develop utilizing our core competitive advantages. And from these, we have then selected the value streams, for example, B2B. The assortment, what it takes to have the most exciting and why is the broadest assortment in our chosen categories is something that needs to be done and developed every year, every day, every quarter, obviously, consumer behavior is changing, products are changing, technology is playing always a bigger part. So you need to develop your offering and also enrich it with those really sometimes bizarre products to be the ones that the customer wants to interact with us and really offering a playing ground for consumers to search and get ideas. Second one is around the experience and obviously, for retail and especially for e-tailers, super important to have it frictionless. Regardless where or in what way the consumer is interacting. Is it in brick-and-mortar? Is it stores? Is it is it after sales? It needs to be whole. It needs to be developed. We understand that we are not there where we want to be yet, but we have good plans, and this is clearly a focus area for the upcoming few years. Third one is basically utilizing the opportunity that we have with the local warehouses. We need to be the fastest, the most reliable the most flexible and the trusted partner also when it comes down to deliveries. The delivery promise is super important, and we understand that we are raising the bar and we need to keep on raising the bar because in that way, we can also accelerate the online shift of what is ongoing. And the fourth one, it comes down to the trust that the consumer gives us. You need to be trusted fully and then you need to earn and be there to be the trusted partner. And obviously, it is an ongoing work, which we have also focused already for many, many years. So a few highlights, maybe some detailed highlights out of the assortment. It has been enriched throughout the last year quite significantly. Especially in home and interior, outdoor and garden, we have seen products that were probably not that typical for us. So you can see that we are evolving from a general consumer electronic retail into really everybody's everyday stores with this new approaches. We want to test the market. We want to see where we can grow, and which categories are shifting more and more in online. For example, the ovens that you have in the Sonos, we have in Finland, I don't know, 1 million Sonos or something like that, you can purchase from our site we have hot tubs on our site. We have e-vehicle charging stations on our site, we are selling tons of those. So really having an open eye or an open mind on where the market is going, where the market is fragmented and where we can utilize our approach. Deliveries, like I said, we have set the bar high, we will set it even higher in the coming years. Nowadays, our capability of reaching almost 70% of Finish population within the next day with the assortment that we have in our warehouses is a good solid situation and status, but we are not happy with it. We want to even further go into 90% or more. And with the renewed investments with -- which I will go just in the next slide, slightly deeper, we can even increase the assortment that we have right away available. But we see also in these figures that the online shift is not happening just when it comes down to the purchase action as such. It also shows in the ways consumers are getting the products delivered. During the first quarter, we saw almost 50% increase in total home deliveries. So people really also getting things and products delivered at home. Especially interesting is to see that fast deliveries, so same day, and extra fast deliveries within few hours with a small extra cost increased almost by 100%. Which we have in the major density areas here in Finland. We also saw that people more and more tend to purchase the product with some kind of service included. I think the most important part is home appliances. People understand that when I purchased a refrigerator, for example, I don't need to get to the store and drag it myself to the apartment. I can get it home delivered. And somebody takes the old one away, recycles it and installs the new one. So it is really, really making shopping easy and getting those necessary things done without yourself, let's say, utilizing a half day for that kind of need. And also, the parcel locker deliveries, which is super utilized in Finland, the network is probably the widest in Europe, we saw an increase of 51%. So not only online shift is happening, the delivery shift is also happening. But that was just the front. We need to make sure that the backbone, the logistical backbone, that the pounding heart of the company keeps evolving, keeps being developed. And we are especially proud that today, we disclosed that we signed a contract to implement automated picking warehouse system here in the middle of the heart of the Helsinki, really, really providing and world class, best-in-class logistical urban hub which we can utilize to be the fastest and most flexible, with a larger assortment than ever before when it comes down to e-commerce and deliveries. We have picked out of store, which is quite familiar already supplied by Swiss lock. The automation consists out of 36 robots. It has an extreme high capacity, up to 1,000 products per hour. But even more interesting is that the capacity is 25,000 SKUs. So roughly speaking, we can double the assortment, but which we run here in Jätkäsaari, which would mean that we really have also now new opportunities to enlargen our assortment because we have a super, super lean and scalable logistical system behind it. And that's also one thing that we need to keep our eyes open when we plan next year's launches and the next summer launches. We will start hopefully, within few days, few weeks, the implementation work. We stopped for the main season. Just to make sure that all operations are running accordingly, and we don't want to take any risks. We continue then at the end of the year or late -- just the beginning of next year. And we expect to be ready by the beginning of next year at the latest by summer. And the investments program, which we disclosed already before also consists out of 2 other parts. So pallet conveyor for goods coming in to get semi-automated to the picking stations and to the places where to be picked, is one part which will also be started during the first half of this year and also packaging automation at the end of the warehouse automation is something that we will be implementing. And all these 3 components should be up and running by end of next year summer. So really interesting things ahead. So if we summarize focus areas from an operational perspective for this year, we have strategy in place. We know where to focus, we know where to play, how to win. We have nice, good development road map to support our future growth. Obviously, the just mentioned investment program, including the warehouse automation. For our company, it's a big one. We normally don't do this kind of big investments because we didn't have the necessity to do it but now, we have the courage. And also, we understand that now we can push even further to expand the assortment and get things faster delivered to consumers. So that needs to be in focus. And that's giving the needed enabler for the assortment to grow and the business to scale because we can utilize our own warehouse and own automation system, also one thing which we need to work on, that we have good new products, new subcategories and hopefully, some new categories also to be launched by end of next year. Customer experience, obviously, always important. It's not just about the e-commerce how you can operate the site, how you can search, how you can purchase. We have also planned to replenish the Jätkäsaari store, the second floor and the third floor. So we are really looking at it holistically and making sure that we are on top of our game. And last, but not least, availability issues is something that's always ongoing. You need to have your eyes open, and you need to be active with your sourcing network and react to situation when and if they occur. All right. So a few things to mention of our expectations. So in general, the business should develop quite positively in a lot of perspective, in e-commerce and B2B and export will, at some point, start to normalize, we know that travel restrictions should be taken or loosened up when not during the second quarter, then latest third quarter or beginning of fourth quarter. We expect online shift continue, not only in consumer but also in B2B segment. It is understandable that the consumption here in Finland probably will be quite concentrated in Finland throughout the year, at least until beginning of the third quarter. But at the same time, as travel will be picking up we expect the export also to pick up. So that will compensate some losses on general consumption. And therefore, we see that as a neutral development. And second thing is quite interesting study just came out a few days ago, conducted by Finish post office. Normally, they conduct it with consumers. So they ask a wide variety of B2B clients, consumers, how has their shopping behavior changed during the last year? And we were slightly surprised that actually the B2B segment is slightly ahead of that of the consumer business. So more and more businesses and small and mid-sized businesses, especially understand that the internal sourcing or the purchases for own need, the fastest and the most convenient ways to conduct it via e-commerce. And we see that already during the time of the period of the survey, almost 50% of all answers said that, yes, e-commerce is the one that we utilize, or half of the purchases is already conducted with e-commerce platforms. And not that surprising that if you ask the next question, how will it evolve? And what will it look like in 5-year period? Obviously, at that point already 62% of all B2B purchases will be conducted with e-commerce. So I think we were spot on a few years back where we understood that, okay, B2B is quite close to the consumer business, and it should be treated equally and also understand that the digital way of conducting business is the way for the future. Financial targets, dividend policy, long-term targets, all unchanged. So we expect a nice development for this year. Revenue will be somewhere between EUR 570 million and EUR 620 million. EBIT will be between EUR 20 million and EUR 26 million. Long-term targets, like I said earlier this year, we have a goal of reaching revenue levels of EUR 1 billion, at the same time, EBIT of EUR 50 million and profitability of 5%. And not only promising that we will and focus on being a growth company with a growing EBIT, but we are also a dividend company and we hold on to our promise of paying out a quarterly growing dividend. All right. So if we sum up the whole presentation. So looking at the interim report, solid staff for the year, good performance basically across all operations, which we can affect, especially the online shift, the ongoing online shift were good utilized by the company and opportunities were ceased. Financial position, unchanged, solid for the company. And we don't expect any bigger things around that topic to reflect the company's performance. We have a good 5-year strategic plan, which guide us towards the next steps in development and also revenue development. And from a market perspective, I think it's quite easy to understand that strong e-commerce players or at least strong omnichannel players will be the winners in the future. And also, third time to mention we are super, super excited about the investment, which will start also having a full automated warehouse here in almost the center of Helsinki is super unique, and we are looking forward to that. All right. So we will have some questions. And we have also have additional resources to the older Investor Relations team of myself and CFO, Mikko Forsell. Now we have also somebody who understands that. So Marja Mäkinen will be the Head of Investor Relations, has started a few weeks ago. And as I understand, Marja has already a question. So please, Maria. Feel free.

[Marja Mäkinen]

Thank you, Panu. Yes, we have one question from the online audience regarding our B2B business. So what are the key competitive advantages for Verkkokauppa.com in B2B business?

[Panu Porkka, CEO & Managing Director]

I will repeat the question just to make sure that there are no problems in hearing it. So the question is B2B business. It is developing nicely. What are the advantages that you, as a company, have against the old one? I think well, first of all, the easy answer is that we do it like the consumer business. So inside the company, it is quite scalable because we understand it the same way we understand the consumer business. Obviously, we understand that in small and midsized businesses, it is quite much self-service like. So the easiness of shopping, the easiness of logging in, having your assortment, what you want to have the right prices already. So you don't have to start negotiation or you don't have to start spending time on, do I have these kind of products?So us with the local warehouses and with good availability for midsized businesses who have maybe occurring need for 10 PCs or 30 phones or something like that. We are quite uniquely positioned because we have a strong inventory, and we can utilize that to have it shipped or delivered maybe already within the same day. So that's a clear advantage, obviously, we have good price points, which is sometimes needed. But like I said, in midsize and small businesses to treat it like a consumer business and try to be, from experience wise, on the same level as with the consumer business, I think, is the winning recipe. We have also the large enterprise and the public tenders, where we have a small team taking out that one and taking care of those one as well. There is some manual processes included like the other ones. But the volume business is conducted super self-service like and really did the transparency and the trust and the easy shopping sets us apart.

[Marja Mäkinen]

Thank you. No further questions from online.

[Panu Porkka, CEO & Managing Director]

All right. Thank you, everybody, and have a nice Friday and an upcoming weekend.