Verkkokauppa.com Oyj

OMXH:VERK

Earnings Call Transcript 2021-Q3

[Panu Porkka, CEO & Managing Director]

Good morning, everybody. Great to see you, and welcome to Verkkokauppa.com's Q3 presentation. If you have any questions during the presentation, please feel free to send them to [e-mail], and all questions will be then read out loud and answered at the end in the Q&A section. Today joining with me and also available for the questions is, CFO, Mikko Forsell. In my presentation today, I will start -- let's see. Well, the slides seem to be slightly stuck. But still, I will start with the highlights from the report of this morning. And then at the second part of the presentation, we will go through highlights of the company's strategy development. Perfect. Okay. Now we are all set. And then at the end, we have the Q&A with the questions. If we start with the report, normally, the first -- or the 2 most important topics out of it, revenue development and profitability. If we start with the revenue development, first of all, it was a solid performance throughout operations, especially good performance in strategic important growth areas such as online and B2B. Online business developing almost plus 20% and B2B business over 20%. So in the online development, we can clearly see that the online shift is permanent and the consumer behavior changes are also rather permanent and there to stay. In B2B business, we can see that our approach, very consumer-like, ease of shopping, good availability, best possible prices, is really paying off and also appreciated by our B2B customers. If we then look at the total revenue from different categories. So this time, we actually saw that core categories such as IT, TVs and phones and screens, for example, were growing quite significantly. But still, we saw that basically in all categories we were able to grow our business. So really also addressing large group of different segments and different customer groups. If you look then at the newest arrivals, evolving categories, we saw good performance in gaming, toys, for example, and home and lighting, which is one of the newest introductions to our offering. And also for the first time in a long period, we saw some light at the end of the tunnel for our export business. It's an important part of our business. Slight growth, 4.5%. But still, I think it's good to bear in mind that the figures from previous year are quite soft, so this kind of development is not that significant to the whole revenue development, but it's still good to see that gradually that part of our business is recovering and slowly starting to grow as well. And I think one of the most notable things about the growth is that in the GfK reported categories, our growth was 13.4%. At the same time, the total market in Finland, including all players, grew only by just over 3%. So we outgrew the market by almost 10%, meaning that a significant part of our growth came throughout market share, which is always nice to know and understand that you are running faster than your competitors. But that has a flip side to the coin, if we then go and look at the profitability side. Because of the softer market, market really softening down, which always brings more price pressure, more tighter competitive environment with it, and also the sales mix this time slightly in favor of the core categories, which have typically slightly lower gross margins, our total gross margin declined from previous year. And because of that, basically, we weren't able to have the same record EBIT that we had previous year, and EBIT stood at EUR 4.7 million for this period. Another surprise, on the other hand, was that this morning our Board decided to pay out a quarterly growing dividend. And for this time, the installment will be EUR 0.059 per share. So thank you all investors and owners for your trust, and welcome all new investors to this great growth story of ours. So if you look at some KPIs on a whole year's perspective, on up left, you can see the revenue development steadily growing on the growth figures from previous year, but you can also see the magnitude and the big importance of the last quarter for the revenue and also for the profit. So now we are really where most part of revenue and also most part of EBIT is made. So really important time period. And if you look then on the right side, on the online business, where we have really nicely gained growth on growth, there the importance of the last quarter is actually even stronger. The last quarter is heavily online-flavored. Black Friday, Cyber Monday, Singles Day, for example, really online-driven campaigns. So -- and therefore, it's really important to succeed in that period of year. In B2B, down left, steadily strong growth, gaining market share there. The importance of the last quarter is not that big. But still, also for a lot of smaller enterprises or small companies, it's important time of period where they can fill their needs and get new equipment to utilize in their work. And then down right, you see some long-term targets. So cost ratio to revenue, we are targeting by year 2025 to be below 10%. So you can see that we were, again, a step closer to the long-term targets that we have set and below 11% cost per revenue. So if we once again look at the P&L. So total revenue, almost 2 digit, 9.1%, heavily driven by online and B2B. And here, you can see the significant impact of the market softening down and the competitive and price environment toughening down and also the sales mix. So we were not able to have the same kind of gross margin as we had previous year. From the cost side, you see a slight increase in personnel costs. Personnel-related costs, we make sure that we have the right people, right capabilities and right know-how also to fulfill our strategic needs and get to the targets that we have set ourselves, so we will be investing in that also in coming years. Other operating expenses then slightly more increasing. The main reason behind that is the logistical setup that we have at the current situation. So we are building an auto warehouse system here in Jätkäsaari in our own premise, in our own main warehouse, meaning that we needed to shift some portion of our assortment into an outsourced warehouse. So a bigger portion of the revenue coming from an outsourced warehouse, meaning that there are more handling and more costs related to that. And the second part comes with the higher inventory than we had the previous year. We have record-high inventory to fulfill the availability that we want for the coming season. So the higher inventory and higher warehouse costs are to be seen in this line of costs. And the third part is we have also increased our marketing efforts to get our message to our customers and also to new segments because of the softer market, so we invested also slightly more in marketing to get the revenue. So there we have the comparable operating profit not able to match the record figure of previous year, but still the second best that we have ever done during the third quarter. So all in all, if you look at the quarter, again, a nice, steady, significantly faster market growth, 33rd quarter consecutive growth now behind us. Sadly, couldn't be -- continue the streak with EBIT improvement quarter because of the market environment heavily impacting our gross margin. So it's always a balance between the right EBIT levels and the revenue growth that we want. And at this time, we really wanted to push and make sure we gain market because we had the opportunity for that. So if we then combine the 3 quarters that we have now behind us for this year, revenue is up by 7.4%, mainly driven by online and B2B being really successful, good performance, both growing above 20%. EBIT still EUR 0.8 million above that of previous year. And then you can easily calculate that earnings per share has also developed nicely. Maybe 2 things good to mention out of the balance sheet. So first of all, the inventory that I already mentioned, almost EUR 80 million in our own logistical chain. We really wanted to make sure that the sustain -- the supply chain, logistical, some chip shortage issues that we have faced in the global market doesn't affect our revenue development and doesn't affect our availability for the most important time of the year. So we made the decision that we take all in as soon as possible to have those already there to fill for the customers' increasing expectations and the higher revenues that we will be seeing at the end of the year. The second highlight, good thing to mention is the line with the investments. So during this year, we have been investing EUR 3 million. For a company the size of ours, obviously a small figure. But historically, for us, bigger than normally, mainly due to the reason that we are investing in our warehouse, the automation that I already mentioned. And maybe also good to understand the cash position being below that of previous year goes pretty much hand in hand with the higher inventory that we are running at the moment. All right. So let's go into the second part, the strategy execution. As a reminder, all development work inside the company is really tied around the value proposition, the customer promises that we really want to nourish, about the most exciting assortment throughout the best possible customer experience, utilizing our position to be the fastest, most transparent supplier and also the trust, the recognition and understanding that we have here in the Finnish market. There was conducted a survey once again with the Finnish Data & Marketing Association yearly survey around customer experience and customer loyalty. Without -- out of all the retail operators, we were voted or given the highest score when it comes down to customer loyalty, so we are quite proud of it. And thank you for our loyal customers. Maybe a side note that I think it's quite good achievement to be the loyalest -- or having the most loyal customers without having actual loyalty scheme as such. So that really underlines that we have extremely loyal customers who trust us and really want to interact with us. On the other side, the customer experience, we are ranked #4. So there are 3 ahead of us, although they are not in the same environment or not with the same main categories, somewhat different players, but still in the retail landscape. So us being quite competitive have set ourselves a target. We want to be a leader also in this category. So there's still room to improve and gain. The second part and actually quite interesting when we look at the strategy is how is the assortment evolving throughout the coming years. Obviously, we need a larger and bigger assortment to fulfill our growth targets. At the current state, we are expanding our assortment faster -- at a faster pace than ever, almost up to 100 new SKUs introduced into offering every day. There are mainly 3 different drivers behind that operations. First of all is that sometimes we want to test the market with individual products. So we haven't decided on going full in, in the category or subcategory, but we have good SKUs, good different products to test the market, how the consumer searches for those products, how or who buys those kind of products, do we have those kind of customers already in our base. And with that market intel, with that insight, we can make more sophisticated decisions when deciding on where to expand and when to expand. The second reasoning could be that we see -- we utilize growth hacking, for example. We see rising trends. We see buzz about some kind of products or technologies. We see media or social media talking about different kind of news releases. So we utilize that data to be then really fast to the market with those kind of products or those kind of rising trends, for example. And that's normally throughout individual products. And the third reasoning could be that we are really enriching the current assortment, our current category where we see that we really don't have all the products to be able to say we have the most exciting assortment. There are still some gaps, still some brands missing, but we are working hard to really have the best possible assortment in the categories that we have chosen. For example, in kids, baby category, we have been doing a lot of enrichment, a lot of new releases. And I think now we have really -- a really good assortment that grows at the same time those babies and children are growing up and we have always the products needed for that phase when growing up. Customer experience throughout our technology backbone, so on front and on back end, really gives us the edge to be quite fast and agile in this area. Finding the new products that we list or really getting or finding the products that you need for your need for a certain period of time or situation is extremely important. So we have been working quite hard on the search function on the site from the technology-wise, also from the content-wise. We have added hundreds of different layers and filters. So customers can make even more sophisticated searches and really find those products. Because 80,000 SKUs in the assortment, it's hard if you don't have a search engine inside your site that really finds the right products for the customers. And we can see that, with these kind of approaches and enrichment in those categories, the conversion rate obviously goes up, so we can also serve the customer much better. The second area is about slightly more innovative. We have added ways to search products that look similar to each other. Obviously, that is not that important for consumer electronics. But if we then go to home interior and design, for example, those areas where we are interested in going with a broader assortment, I think that could be an interesting way of looking for products that look a certain kind of way that really fits into the home or into the need the customer has. In customer care, immensely important that the customer feels that there's always somebody that answers me or when I have a problem, when I have a question, I get a quick answer. So to be faster also in that line of business, we are utilizing automation and AI to get for those simple or quite -- not that so -- I mean those kind of answers that we can actually get from our data that we have already. So optimizing that gives the customer the feel that you really get the answer or your problem is quickly solved, not within days or within weeks or even within months, in some cases, that you can read about. So that's important area also. And then the last one, also widely connected to the trust with the recognition the company has, sustainability is getting more and more important for everybody, for businesses, for goods consumers. We have always been working around that topic, transparency, being customer side, the Robin Hoods of retail. So there are different kind of values that have always been part of our business. Now we have -- besides that, we are focusing on 2 areas. One is about the supply chain, Far East sourcing, working conditions in the manufacturing. We really want to make sure that those sites are visited, those sites are audited and everything is done in a decent manner. The second thing is about the greenhouse gases and emissions. We have worked also around that topic quite hard, calculated that. And you can see on the right side that we are quite fast going in the right direction and pretty sure that we can be significantly before the governmental or legislative have set their targets when it comes down to be neutral in emissions. So what we expect from the last part of the year? In general, we expect that we have a good position to maintain the development, continue to grow, continue to gain market share, especially in evolving and midsized categories. Those are also quite heavily asked in the last part of the season. We think that we can gain market share. The COVID situation is hard to predict. If travel restrictions would ease up and situation on the eastern border would ease up, that would obviously benefit our export business, but we don't expect that rapidly dramatically to change, rather gradually starting to recover and gaining momentum by next year and maybe until the end of next year. When it comes down to consumer behavior, we think that online will be the preferred channel going forward as well. There are many season -- seasonalities, many campaigns, Black Friday, Cyber Monday, Singles Day, for example, which are typically extreme online-driven. So we believe that consumers will tend to prefer the online as the first choice. The shortages in different products, in different categories or even different brands is obviously a situation that will continue. To this point today, we are quite certain that we have mitigated the risks that it will affect our revenue development in the coming months. But still, it will be an issue that we need to have a close eye when also talking about the beginning of next year or even the next year in total. And we are also ready for new ideas when it comes down to investments. So we have now one big investments going on. We have a good financial position to seek for new opportunities if the market opens up new investments or acquisitions or areas in our business where we want or can improve throughout investments in technology. So we are ready for that as well. From figures, from guidance, nothing to change about the expectation. We expect revenue to be between EUR 570 million and EUR 620 million and EBIT to be between EUR 20 million and EUR 26 million. Long-term targets, obviously, not changed at this moment. And today morning, the Board decided to hold on to the promise of paying out the quarterly growing dividend, and this is something we also want to hold on for the coming years. So if we wrap up the presentation and the report in the morning, I think the biggest important area is the revenue development. We are a growth company. We want to grow on our way to EUR 1 billion revenue. We need strong growth. Sometimes the market is in favor. Sometimes the market is not in favor. This time it was not in favor, but I still believe that we made good choices in focusing on revenue development and also that revenue coming from strategic growth areas, online and B2B, is a positive sign. At the moment, obviously, if you look at the operation, all focus on the campaigns, availability, fine-tuning marketing efforts, for example, so now we are really in the most operative time of the year. Investments in Jätkäsaari, so auto store warehouse system running as planned. So we start building within this year, then we continue the beginning of next year. And all should be set up and ready by summer next year. Like I said, the strategy part, we are executing according to it. We have -- we see nice growth in those areas that we have identified, those areas that we have focused. So strategy is going also to plan. So what I understood, there are no additional questions. So at this point, at least in Finland, we have stormy weather. So I don't know where you are sitting. But to all, I wish you a great Friday and a great weekend. Thank you.