Verkkokauppa.com Oyj

OMXH:VERK

Earnings Call Transcript 2023-Q1

[Panu Porkka, executive]

Good morning, everybody, and welcome to Verkkokauppa.com First Quarter Presentation. If you have any questions, please feel free to send them to [e-mail]. And the questions will be then dealt at the end of the presentation in the Q&A section.

Today, as usual, joining with me and available for questions CFO, Mikko Forsell, and Investor Relations Manager, Marja Makinen. So in my presentation, I will first start with highlights out of the report of this morning will give you some insight on company strategy execution, the market outlook and at the end and key takeaways and questions if there are any. But let's start with the market and the environment. The big picture is pretty much unchanged, although we see slight improvements in consumer confidence in their own economics, but still the level is quite low. And if you look at the consumption and the purchasing power as such, which is the main indicator and impact also our business inflation has been ongoing for -- on a higher level. Interest rates have been going up. And there is expectations that there will be additional increases in that as well. So the actual purchasing power has been decreasing, and it will be decreasing throughout the year.

So in a big picture, the environment is pretty much unchanged. And these bigger drivers have been also impacting our B2B business. Biggest part approx 80% of our B2B business comes from small and midsized businesses, and they have been struggling the same way as consumers have been struggling and they have been postponing or holding on investments.

If we then look only at consumer electronic market here in Finland during the first quarter, the price fight was not as intense as it was the previous quarter. So that's maybe also one good thing to mention. If we then jump into the report, start with the top line development. I think it's fair to say that revenue declined only by 2%. So that's a good performance from the company. In major segments and channels, we saw a small decrease, which was expected to be seen in our export business, we saw a nice improvement. It's fair to say that the levels that we were on previous year have our work quite low. The export business has been struggling for some period of time and also the impact on losing all -- the whole Russian export business also impacted the levels of previous year. But we have been capable of developing new areas, new markets also to a nice better margin.

If we then look at the second important highlight, the margin as such. We see that the gross margin improved nicely, was at a strong level of 16.6%. A few drivers behind that. Well, first of all, the market not being that price fight price for. And our campaigning and pricing activities were quite affected, had a positive impact on the margin. Secondly, the sales mix impacting it as well. So sales in lower-margin core categories declining by 2% sales in evolving in higher-margin categories, growing on the same amount, having a total positive impact on the margin. The third reason mentioned is our private label categories performance. So with the company acquisition of sourcing office in China, we have been able to find new interesting products introducing them to the Finnish market and gaining higher margin than out of a brand products. So if we sum up revenue and gross margin development, so the high gross margin impacting gross profit to increase by 5%.

On a cost position, we were pretty much on par to previous year. So in personnel expenses, a small decline. So we were able to have our levels of resources matching the revenue levels. On the other hand, we have been investing in certain capabilities and resources as well due to strategy execution. So these two things pretty much leveling each other up.

In other operating expenses, we also so the impact of inflation, and we were not able to mitigate all of that throughout our own operations. But in a big picture, the cost levels on previous year. And for these kind of reasons, we saw a nice improvement in the comparable EBIT, which stood at EUR 1.4 million. In the operating profit, we have a one-off provision regarding the change negotiations, and that's the reason that the operating profit was below that of the comparable operating profit. So all in all, a solid performance from the financial side during the first quarter. Then if you look at the balance sheet, we have been somewhat struggling and working hard on inventory levels, so getting them down to matching the market and demand side. Typically, the first quarter, we can see a small increase in inventory levels as we -- as well are preparing for the upcoming spring and summer season.

This didn't happen on a huge magnitude. And if we compare the figures to previous year, first quarter, we see a significant decline by 16%. So we have been working hard on getting the levels to the levels we want them to be. We are not still satisfied the outcome, and we expect the total inventory to go from this point down until the end of the summer.

Investments, quite moderate, EUR 1 million, mainly relating to the site renewal of our e-commerce platform and also some data analytics capabilities. Cash flow significantly improved from previous year cash position solid. On equity ratio, we have still room to improve. So let's jump into the strategy part. So we are mainly driving strategy on two different perspectives. The short-term perspective is to get the profitability back on a decent level. During this year, we have a solid program, which includes over 200 items, 2,000 initiatives. Which are divided in operational teams and commercial teams. We expect this program to yield on this year's level, somewhere between EUR 5 million to EUR 8 million EBIT improvement and on a yearly level, about EUR 10 million.

And on the right side, you can see that we were pretty much spot on target during the first quarter. So all improvements conducted and yielding the way we expect them to yield. But you would also see that the major part of profit improvement will be seen during the latter half of the year. But the program is going according to plan.

On the other hand, we are also developing the company according to our strategy and according to our long-term targets. Giving and creating value throughout our assortment experience, speed and flexibility and brand position. We have been able to introduce new recycled, reused products in our lineup. So it's not only a commercial part. It's also an important part of our sustainability program. We have been implementing dynamic pricing capabilities. First, integrations are ready. We are now in the face of testing this out. And the biggest positive impact tend to be seen during the latter half of the year throughout the gross margin improvement.

In our speed and flexibility, we have been focusing on internal logistic processes to improving them and making it even faster than it is at the moment, and we have also introduced new ways of delivering products in Helsinki area, even faster than before. The brand is in a solid position, although it's fair to say that in profitability improvement program, we also look quite closely to investments and marketing spend as well but also as -- although that we have been making some sacrifices on that front, the brand is still on a strong position.

We also have been working out on new brand and guideline concepts that will be then rolled out during this year. A few deep dives from the experience improvement. So the biggest e-commerce site renewal in company's history is also going according plan. So major parts of the visuals have been updated. Major part of the technicality inside. The site has been improved already. Now we are working on suitability, category paging, portability, et cetera, so these kind of items. And we expect to be close to ready within this project by end of the first half. And it is obviously an ongoing process as this is some big part of our business, which we want to make sure that it's top of line.

Like I said before, we introduced express deliveries for most people living in Helsinki. So all of the assortment that we have in Jätkäsaari, urban logistic hub, so between 30,000 and 40,000 SKUs, we are able to deliver within an hour. The test has been positive. So it's rollout as part of our business. And at the moment, we are looking closer into other store locations as well to expand this kind of service also to those store regions.

Also interesting to see that consumers are more and more likely to spend some money to have those e-commerce deliveries even faster at home. In March, already 8% of all our deliveries were connected to a speed delivery capability. So it's -- the internal share has been over doubling during the year. And the last new feature, which we are also very proud of, just launched week ago. So we have been developing our own trading service, totally integrating our purchasing funnel and in our architecture. So basically, a customer can -- from the home couch have giving a value to the product that they have holding on. And then we give a fair price to each item.

And those items are then sent with our directions to external partners and the consumer will have the credit throughout this trading right away on their account to be utilized on our website. So totally integrated just a week ago launched. We are quite excited that this is also a nice way of attracting new customers, a nice way of improving experience, but it's also an important part of our sustainability program.

So how do we see the yield, like I said already in the beginning, the big picture is unchanged. Consumer confidence has slightly improved, but now we are more looking at the purchasing power because that is the main driver on consumption. And the purchasing power has been decreasing in Finland because the inflation being high for quite a long period of time. And also interest rates has been going up many, many times already, and we expect there to be seen at least 1 to 2 increases already. So we foresee that maybe during the third quarter, we can look at the market and look at the purchasing power and say, okay, maybe this is the new norm, and then we can make more accurate estimation on where the assumption will or would go.

And the same indicators, like I said in the beginning also impacting small and midsized businesses capabilities in investing in certain kind of products which we have in our lineup. That said, we strongly believe that our business model is suitable, even more suitable for these kind of tough times.

As we have a quite effective operations, quite low cost position. We have a good program at hand to make the profitability on a good level again. We also see that during this kind of turbulences, normally, you see some kind of market changes, some consolidation maybe. Specialty retail, brick-and-mortar retail, typically, those kind of areas where you see movements, and we believe that this will also give us new nice opportunities going ahead. And then the megatrend retail going online hasn't gone anywhere. We believe that this might or could even be an accelerator when the time is right for the market to open up again.

So like I said, big picture unchanged. We don't expect future growth potential this year. We, as a company, have guided it like this. And we also therefore, want to indicate that we are focusing heavily on EBITDA profitability and EBIT for this year to make the company stronger and then attack when the market is right. So if we sum up the presentation, the surrounding environment is difficult, but we have now believed the right recipe to come out winners out of this turbulent times.

It has been a tough start for the year -- for the company, a big change in negotiations went through. And I would like to thank my staff and all the people who have been working hard to get the company where we are at the moment. We have a solid profitability program at hand, which we are executing nicely at the moment. We have the positive impact that we expected. But like I said, the biggest impact on an EBIT level will be seen throughout the latter half of the year.

At the same time, as we are facing the short-term tasks ahead, we are working rigorously on long-term targets and getting the company to next levels. We have been introducing new features, improve experience, site renewal is ongoing. So we are also working to get the company on a long-term perspective to the level we wanted to be. And on top of that, we are working and updating our long-term strategy as we speak at the moment. And if they are bits and pieces or targets to be updated. Those ones will be then distributed to the market at the right time.

So thank you. And as I say, they are -- I see there are no questions. So thank you for listening in, and have a great Thursday day. Thank you.