Puuilo Oyj (8JQ.F) Q3 FY2026 Earnings Call Transcript & Summary

Hello, and welcome. Thank you for attending Puuilo's Q3 Results Presentation. I am Juha Saarela, CEO of Puuilo, and joining me in this presentation is Puuilo's CFO, Ville Ranta.

Hello.

In this report, we will go through the key results of Q3, that is period from August to October, and cumulative results of financial year. And after this presentation, you can ask questions by calling the line, and we are happy to answer your questions. Here is the agenda for today's presentation. First, I will present the key figures and events of the third quarter and the first 3 quarters of the financial year. Following that, we will provide a more detailed overview of the financial development during the same period. The third item on the agenda covers the outlook for the current financial year, including the forecast range for both net sales and adjusted EBITDA. Then we will move on to point four, which presents our growth strategy and long-term financial targets for the strategic period. And as always, we have reserved time for questions at the end. Our third quarter covers the period from August to the end of October. And here, you can see the key results. And first, net sales. Net sales for the quarter were just over EUR 116 million, showing strong growth compared to the same period last year. Total growth was nearly 14%, and like-for-like growth was 2.2%. The increase in customer traffic continued to be the main driver of sales growth. Sales increased in both old and new stores, and net sales grew in all months of the quarter. The average basket size was slightly lower than in comparison period. And then profitability. Gross margin in Q3 also increased and was 38.6%, up by 0.6 percentage points compared to the same period last year. The improvement in gross margin was mainly driven by increase in sales of private label products and a continued shift in the sales mix toward more affordable goods. Adjusted EBITA in the third quarter grew by about 11% and amounted to EUR 21.9 million, representing 18.8% of net sales. This was an increase of approximately EUR 2.2 million, and relative profitability remained strong, but was 0.4 percentage points lower than in the comparison period. In Q3, operating expenses were slightly higher compared to the reference period, mainly due to an increase in personnel costs. This was primarily driven by a higher general increase according to the collective bargaining agreement compared to the previous year. However, the difference is not significant. And earnings per share were EUR 0.19 compared to EUR 0.17 in the comparison period. And regarding expansion, we did not open new stores during Q3, the most recent openings was in Iisalmi in November, which belongs to last quarter of the financial year. And then now let's look at the financial year thus far, it means from February to the end of October. First, the net sales. Net sales for the period were approximately EUR 341 million, growing by nearly EUR 44 million compared to the same period last year. And the growth was almost 15%, and the like-for-like growth was 3%. The increase in customer traffic continued to be the main driver of sales growth. Sales increased in both old and new stores and net sales grew in all months of the period. And the average basket size was slightly lower than in the comparison period. Gross margin for the period increased and was 38%, up by 0.5 percentage points compared to the same period last year. The improvement in gross margin was mainly driven by increased sales of private label products and a continued shift in the sales mix. Adjusted EBITA grew by about 15% and amounted to approximately EUR 61 million, representing 17.8% of net sales. This was an increase of around EUR 8 million. Relative profitability was slightly better than in the comparison period, up by 0.1 percentage points. Earnings per share were EUR 0.52 compared to the EUR 0.45 in the comparison period. We continued our strategic expansion and opened 5 new stores in Varkaus, Savonlinna, Lohja, Mäntsälä and Jyväskylä. And at the end of the period, we had 54 stores. And as I mentioned earlier, our 55th store was opened in Iisalmi last month. Performance and the results for the first part of the year were good considering the circumstances. Business is steady and predictable, with nothing unusual or noteworthy. Customers' cautious spending and frugality as well as unemployment are still reflected in purchasing behavior. However, our customers' traffic continues to grow, which is the most important metric. We have grown and gained market share despite these challenges and despite increasing competition. Overall, the first part of the year was good, and we expect that last quarter and the beginning of next year to also be favorable. We are in a good position to continue. Good. Ville, please?

Thanks, Juha. Let's start from the net sales. Net sales for the third quarter was EUR 116.2 million, an increase of 13.7% compared to the previous year. At the same time, like-for-like net sales grew by 2.2%. Customer traffic in our stores increased by 16%, and on a like-for-like basis by 4.6%. The average basket size continued to decline in Q3. This decrease is still influenced by consumers' caution and saving behavior. The growth in customer traffic continued at very good levels, which is extremely important for us. During Q3, we did not open any new stores, which was purely a timing issue, given our otherwise full opening calendar this year. Cumulatively, 9 months of the financial year have now passed, and the net sales has reached EUR 341 million. The company's total revenue growth was 14.7%, and on a like-for-like basis, 3%. Cumulatively, customer traffic increased across all stores by 16.1%, and on a like-for-like basis by 4.6%, which we are pleased with. Overall, Puuilo's performance from the net sales perspective has been very steady quarter after quarter, considering Finland's challenging economic situation and consumers' cautiousness when making purchases. Then we move on to gross margin. In Q3, Puuilo's gross margin was 38.6% of revenue, up by 0.6 percentage points compared to the same period last year. The improvement in gross margin was driven by a favorable sales mix and an increased share of our own private label brands in total net sales. Sales of our private label products continued to grow strongly, up 18% during Q3. These private label products are the main factor behind the solid gross margin development in Q3. On a cumulative basis, Puuilo's gross margin at the end of Q3 stood at 38%, an increase of 0.5 percentage points year-over-year. The same driver is behind this trend. Our private label products are steadily increasing their share of the company's total net sales and delivering better margins. Cumulatively, private label sales grew by a rate of 24%. We are continuing to push hard on private label development and are constantly expanding our assortment with the new private label products. Then next, let's move on to profitability. Adjusted EBITA for Q3 was EUR 21.9 million, an increase of EUR 2.2 million compared to the same period last year. In percentage terms, adjusted EBITA grew by 11.2%, and EBITA margin was 18.8% of net sales. Relative profitability was solid, but slightly below last year's level, mainly due to the marginally higher personnel costs. These personnel costs were impacted, for example, by wage increases under the retail sector collective agreement and the store opening concentrated in the early part of the year. On a cumulative basis, adjusted EBITA at the end of Q3 was approximately EUR 61 million, with an EBITDA margin of 17.8%. Compared to last year, adjusted EBITA grew by EUR 8.2 million or 15.5% in percentage terms. Relative profitability was cumulatively slightly better than last year. The improvement in profitability is driven by strong net sales performance, higher gross margin and disciplined cost control. Adjusted operating expenses were 15.9% of net sales on a cumulative basis, with the cost ratio increased only moderately compared to the last year. As a result of these factors, profitability improved slightly. In summary, Puuilo's year-to-date performance has been strong from an earnings perspective, and the figures are well aligned with the company's strategic targets. And then here, you can see the development of Puuilo's inventory levels over the past 3 comparable quarters. Inventory turnover improved compared to the same period last year. This is despite of the fact that the figure includes initial stock for 7 new stores and a significant increase in import volumes of private label products. The company is implementing measures aimed at accelerating inventory turnover. We actively monitor inventory turnover, and our long-term goal is to improve it further. In the short term, however, there might be fluctuations between quarters and years due to the reasons mentioned above. In Q3, Puuilo's operating free cash flow was EUR 12.7 million, an increase of EUR 2.7 million. The cash flow was driven by good net sales development and, of course, good profitability. Cumulatively, the operating free cash flow was almost EUR 65 million, which was very strong. The growth compared to the same period last year was EUR 20.6 million, strong cash flow, which we are very pleased with. The company's net debt to adjusted EBITDA ratio remained at the same level as in the comparison period, and is well aligned with our long-term targets. The middle chart shows the ratio of net debt to EBITDA, excluding the impact of IFRS 16, which increased slightly compared to the previous year. The metric calculated without IFRS 16 adjustments is currently at a low level. Puuilo's cash position at the end of the quarter was approximately EUR 33 million, and the company's financial position is healthy. Net debt, excluding IFRS 16, meaning cash minus bank loans, stood at EUR 36.6 million at the end of October. And as a reminder, in spring '25, Puuilo completed a financial agreement under which the company decided to raise a total of EUR 20 million in new long-term bank loans. The agreed EUR 20 million increase to the existing loan has now been fully drawn, bringing the total amount of bank loans to around EUR 70 million at the end of the quarter. And here are the figures in summary, which we already went through in detail. We are very pleased with the performance of the company. And then Juha will tell you about the outlook update for the financial year '25. Please, Juha.

Thank you, Ville. Good. We specify the outlook for this year. Now we forecast that net sales will grow and will be between EUR 430 million to EUR 450 million. We also expect adjusted EBITA to be between EUR 72 million to EUR 79 million. There are uncertainties related to the outlook, such as the development of the still uncertain general economic situation, in addition to changes in purchasing power and consumer behavior. Additionally, there are other unusual uncertainties in the outlook, such as the ongoing war in Ukraine, but also other potential geopolitical crisis or international tensions that may have a direct or indirect impact, especially on the availability and price of goods, which can affect sales and profitability. Next, a brief reminder of our strategy and financial targets for period '26 to '30. The 6 key elements of our strategy are: The first one, opening new stores and continuing our expansion in Finland. Our target for this period is to reach over 90 stores nationwide. And then entering the international market, starting with a pilot in Sweden. Third, continuing like-for-like sales growth where there is still significant potential. Fourth, strengthening our current position by increasing private label sales and being one of the most cost-efficient operator in the industry. And then providing an omnichannel customer experience. A shopping experience that is easy, affordable and fast, is a key factor for both current and potential customers. And the last one, sustainability work and its development. We call this theme responsible retailer, which covers the key elements of our sustainability efforts. Working towards the 6 objectives will support us in achieving our new long-term financial targets presented in the lower half of the page. Our sales growth target is to achieve average annual sales growth of over 10%. And by the end of the strategic period, we aim to exceed EUR 800 million in net sales. And in terms of profitability, our target is to reach an adjusted EBITA margin over 17%, corresponding to more than EUR 136 million in adjusted EBITA. And then we aim to distribute at least 80% of the company's net result to shareholders. And regarding net debt, our target is to keep the ratio of net debt to adjusted EBITDA below 2.5x. And then store openings. We opened 5 new stores during the first half of the year, and the ramp-up of these stores has followed the same pattern as previous openings and all have performed in line with our expectations. Expansion continued toward the end of the year, and we opened a store in Iisalmi in November. And the next store will open in January in Heinola, where we are already working on setting up the store. And the next year, new store openings have been announced in Hollola, Espoonlahti, Holma in Lahti, and Kangasala. The Vantaa Virkamies store will relocate to Vantaa Tammisto retail area. And if all goes according to plan, next year, we expect to open at least 7 new stores. So growth continues and the future looks promising. Thank you. And now we move on to questions. So moderator, please open the line.

[Operator Instructions] The first question comes from Maria Wikstrom from SEB.

This is Maria from SEB. I had a few questions. First, I wanted to touch on the personnel costs and the personnel cost inflation. And I think you write in the report that you had this wage increases starting from August. I kind of thought that the collective agreement raised wage is already starting from May this year. So can you a little bit disclose? I mean what is the timing of your wage increases, please?

Maria, it's Ville here. The union agreement came into force in the beginning of August. So it affected full Q3 quarter in our case. And the biggest driver for the increase in personnel costs is the union agreement increase in Q3.

And can you remind how much that was in August?

It was 2.6%, if I recall correctly -- sorry, it was 2.9%. And actually, it came into force in the beginning of May, actually, sorry.

That's good. That clarifies. And then I wanted to ask about the -- you were mentioning that the gross margin improvement came from partly also on a higher share of private label products. So can you disclose a bit? I mean, where are you currently as a share of private label? I think you are targeting the -- was it the 30% of sales? So how much more room do you have to reach your targets?

We are not disclosing the number during the financial year. So traditionally, we have given out the number in the end of the financial year. But this year, we made an exception. So we told last time, in connection with the strategy update, that the private label share of total net sales were 23% and our long-term target is to reach 35%. And so we are -- well, let's say that we are doing hard work to boost that share up, but I'm not disclosing the exact number now in the end of October. But you can maybe estimate that it's higher than last time, but we are not still in 35%.

Okay. And then finally, I wanted to ask about, I mean, the Swedish expansion. So if you have advantage that product -- that project somehow, I mean, during the third quarter, please?

Maria, this is Juha. Now we are in a preparation phase and we are doing the work in all our organization, and we have started also the country manager recruiting. And let's say that we are much more better to the estimate when we can open the first store in Sweden in next spring time. But at the moment, I don't have any news to tell to you, let's say, that everything goes as planned and every organization are in the preparation phase.

And just to clarify, so you are going to let us know when to open the first store in next spring or you are opening the first store in Sweden next spring?

No, no. As we have told that the first -- the coming months and the coming years are the piloting phase. And it means that we try to open, let's say, 5 to 10 stores in Sweden during '26 to '30. We are not saying that when, and we have not decided that when the first store openings will be, but we may, can do that decision during the next spring time.

[Operator Instructions] The next question comes from Calle Loikkanen from Danske Bank.

Maybe just a follow-up on the personnel costs. Was there any increase in personnel costs related to Sweden? Or was this increase in Finland only?

In Finland only practically. As Juha mentioned to his previous answer that concerning the Sweden, we are in the planning phase still, so all the recruitments for the Sweden will come next year. But let's say this way that, of course, we have done some increases in the organization, but not for Sweden only. Those people who has been hired in the company are preparing partly the Sweden expansion, but also doing work for the Finnish business. So it's 50-50 or -- how would I put it. But the answer is that, no major recruitments for Sweden hasn't been made still.

Okay. And then I was wondering that now in Q3, your personnel costs were up like 20%. In Q2, they were around 14%. And both then -- so I was just wondering that will the personnel cost growth that we should kind of expect for the coming quarters, will it be closer to that 20% or more of that like 14% type of growth that we saw in Q2?

No, you should look the long-term trend there. And I can tell that we will keep the cost control and level in the future. So there might be fluctuations between the quarters, of course. And if you look at the one quarter figures, quite small changes there due to timing or whatever might affect on those figures. But if we look at the full year figures, we will keep the level, and you shouldn't be worried about the personnel expenses in the future. We will keep the cost control.

That's good to hear. And then I was wondering about the basket size development. Was this kind of small decline related to any certain product categories or was it more kind of broad-based? I mean, obviously, the increase in private label sales probably puts pressure on the basket size as well. But was this kind of related to any certain product category or was it broad-based? And then also, do you expect this basket size to continue to trend down slightly also in Q4?

Well, I can say that there is no any major product category, which affected on those. It comes quite evenly from here and there. And the biggest driver behind this, we see, is the consumer weakness. So consumers are still saving. They are very cautious with their purchases. And well, of course, there might be other smaller drivers, of course. What we have told here that, for example, our private label strategy, the private labels grow. And those might have some kind of effect, of course, on basket size because if we replace some products with the private labels, typically, what happens there is that the prices are lower for consumer. On the other hand, we get better margins on those products that might affect in some extent. But I would say that the effect is very small. The biggest driver is the consumer weakness here. And it's very hard to say at this point when the basket decline will stop. It's more related to this general economic situation. And we have been now waiting for, like how many years, promising that the Finnish economy will recover, but we haven't still seen it. But when it happens, I believe that the basket size recovers.

And I would like to add one thing. As you know that our customer traffic is increasing. It is growing both in old stores and, of course, new stores. And we have opened it and we will open a huge amount of new stores in coming years also. That means that the customers have more options to visit and shop in our stores, and we'll get new customers, new areas we don't have or hadn't stores yet. As you know that if Puuilo store locating far away from customers' hometown and he or she will shop there, typically, if it is so far away, he buy more than the customer who lives in same city where we have store already. So customers have more and more options to shop in our stores, and they shop more frequently, we think.

Okay. That's actually very, very helpful. And then my final question regarding Sweden. So when are you expecting the first kind of, let's say, a bit more significant costs coming in from Sweden? Is it already in Q4 or is it more like Q1, Q2? So how should we think about the timing of cost from Sweden?

The majority of the costs comes next year. So practically, we only have booked this year, this onetime designing costs -- or how would I describe it, on Q2, and which is recorded on one-off. There is no significant or any major costs during the Q3 or for the rest of the year regarding Sweden. There might be some small costs, I would say. Of course, there is coming something. But majority of the cost will come next year. And as we said that, for example, recruitment for Sweden will be made next year, not this year.

The next question comes from Miika Ihamaki from DNB Carnegie.

It's Miika from DNB Carnegie. I have also a question on the basket size dynamics, but this time across store vintages. So I would like to understand, with your older stores having significantly higher sales per square meter, how does the average basket size correlate with store maturity in this environment? So do your more established stores, the typically larger baskets as customers become more familiar with a full assortment or does the frequency drive the sales growth? So just trying to understand the dynamics here.

Thanks, Miika. I would say that, of course, the frequency of visiting store is, of course, driving up the sales. And as you can see from the customer traffic growth numbers here, that those were really strong. I would say that if we look at -- I won't go in the details, I have to say that. But in general, I would say that the basket size is more related to the micro location of the store. If the store is located, for example, in a very tense city area where the surrounding people who are living around the store, typically, the basket size is smaller than if we compare to the unit, which is on the country side. So that's the main difference, I would say. But if we look at now the basket size decline, so the decline is quite even, no matter is the store in the countryside or in the city area.

Okay. That's very helpful. And then given that there is 2% to 8% negative margin differential on higher ticket items, do you have any concerns that your gross margins could become under pressure if customers would start purchasing more of these big ticket items, whether it's then '26 or '27? So how can you handle this one?

No, we are not worried about that. So of course, we hope that the basket will turn back to growth. But as you can see from the numbers, we can live with this situation and eventually, it will turn. So the economical situation in Finland will turn. We can live with this level of basket sizes. And of course, we are mixing there, like we have said here, more private labels. We are expanding the store network, and the customer traffic growth has been on a very healthy level for a long time. So I would say that the customer traffic growth is a more important metric for us than only looking at the basket size. But like I said, of course, we would be very happy to receive a higher basket. But that's the KPI, which is very difficult to change.

And I would like to add that, as Ville said, that, of course, we are waiting for the better financial time and when the economical situation start to improve and customers' confidence is better. It means that -- and we can wait that our basket size will increase also. Together with the increasing basket size and increasing the customer traffic, it support our sales growth in the near future very heavily and nicely.

There are no more questions at this time, so I hand the conference back to the speakers.

Good. Thank you for the questions and joining us today, and I want to thank all our customers for trusting us, and special thanks to all our employees of your great work. But additionally, as we have announced, Ville will be leaving the company at the end of the year. At this point, I want to thank Ville, you, for the past years and for the excellent work done. I would have gladly kept you in Puuilo's team. But as they say, everything has its time. I warmly wish you good luck and success in your life and in your new role. Thank you, Ville.

Thank you, Juha, for your kind words. I have had a privilege of being part of creating Finnish retail success story for nearly 10 years. Together with my team, other colleagues, the company's management team and the Board, through our excellent collaboration and support, we have built Puuilo into a thriving listed retail company. We have earned the trust of our customers, and along the way, created significant value for the company's shareholders. I want to wish Puuilo continued success in the future, and extend my heartfelt thanks to all colleagues and stakeholders who have contributed to building this success story. Thank you.

Thanks. And I'd like to wish you a Merry Christmas.