Puuilo Oyj (PUUILO) Earnings Call Transcript & Summary

Hello, and welcome to join Puuilo's Q2 Conference Call. I am Juha Saarela, the CEO of Puuilo. And like before, our CFO, Ville Ranta is here with me.

Hello, everyone.

In today's presentation, we will have an overview of the second quarter of the year, as well as the results for the first half of this year. As a reminder, our financial year starts in February and ends in January. After the presentation, we will be happy to answer any questions. Let's take a look at today's agenda. First, I will go through the key numbers and main events of the reporting period. And after that, Ville will go through the financial development of the second quarter and the first half of the year in more detail. And I will continue with the strategy and long-term financial targets, as well as the outlook for the financial year. And we will conclude the presentation with Q&A. Here, you can see the key figures for the second quarter. In Q2, that we'll say period May to July, our net sales grew strongly, and the total increase was 17%, while the like-for-like stores grew by 8%. We are very pleased with the performance and the growth continued clearly higher than the market average. We gained new customers and the net sales increase was driven by increase in the number of customers. The net sales increased in each month of the quarter, and the growth was especially strong in July. Our sales growth continued to be broad-based, and it was supported by both old and new stores. The gross margin increased to 37.1%, which means an increase of 0.7 percentage points compared to Q2 last year. The gross margin was supported by lower cost of logistics, a slight change in sales mix and a solid level of private label product sales. Although we sold a few summer products with discounts. So overall effect was small because the combined effect of other factors was more significant. Adjusted EBITA was EUR 20.9 million, which corresponds to 20% of net sales. This was EUR 2.8 million higher than previous year, and the margin remained at the same level as in Q2 previous year. All operating expenses have increased, but we have been able to maintain our low cost ratio. In June, we opened a new store in Vihti's Nummela, which is our 39th store. Nummela had a very good start, and it was a pleasure to see the customers rushing to our store. During the summer, we reorganized our logistics operation by centralizing the main part of our external warehouses under one roof. Now, we have enough storage space for needs for coming years and for larger import volumes. The arrangement makes it possible to increase to imports as planned and in a cost effective. The second quarter went well and was in line with our expectations. Even the current operating environment can be described in -- as uncertain, we were optimistic with the summer season. Discount retail is doing well even in downturn. And then let's take a look at our results for the first half of our financial year, meaning the period February to July. The net sales grew strongly, and the total increase was more than 14%, while the like-for-like stores grew by more than 7%. As in Q2, the growth was clearly higher than the market average. The net sales increase was mainly driven by the increase in the number of customers. The net sales increased in each month of the reporting period and especially summertime was strong. Net sales have not decreased in any product group, but all product groups grew also in comparable terms. Our sales growth continued to be broad-based, and it was driven by all product groups and was supported by both old and new stores. The gross margin increased to 36.9%, which is 1 percentage point higher than last year. The gross margin was supported by lower cost of logistics, a solid level of private label product sales and like in Q2, a slight change in sales mix. If I open this a bit more, as it's generally known, more expensive products sells less at the moment. This is true for our case as well, but the impact is limited because the share of the more -- of more expensive products of our total sales is quite small. At the same time, cheaper products with higher gross margin sell well, which has a positive impact on our gross margin. Adjusted EBITA was EUR 28.2 million corresponding to EUR 16.6 million of net sales. This is EUR 4 million or 0.2 percentage points higher than previous year. During the first half of the year, we opened 2 new stores, 1 in Vantaa Porttipuisto and 1 in Vihti's Nummela. As of today, the number of the store is 40. As in August, we opened a new store in Kerava. To sum up, we are pleased with the first half of the financial year, and we expect a similar development also in the near future. Good. And now, it's Ville, your turn. Please.

Thank you. Thanks, Juha. Let's start with the net sales. The net sales for Q2 was EUR 104.4 million, and it grew by 17% compared to the comparison period. We crossed the EUR 100 million net sales level for the first time on a quarterly basis in the company's history. Like-for-like net sales grew by 8.1%, at the same time, which was also very strong. The company's basket size was flat, which is primarily due to the product mix change in the products with lower unit prices, and to some extent, to the amount of products that customers buy per visit. Compared to the last year, the change in customers' purchasing behavior is also explained by more restrained preparation, which had quite heavy levels in the previous year. A good example of this is the decline in sales of firewood splitter and generators. Thanks to Puuilo's rich and defensive product range, we have managed to attract a lot of new customers to us, and the company's number of customers increased by more than 18% and on a comparable basis by more than 9% during the second quarter. E-commerce sales decreased, but the situation in e-commerce is currently somewhat divided. The decline in net sales comes from delivery sales, while, at the same time, the number of orders of store pickups increases. Then when we look at the last half of the year, our net sales grew by 14.3% and on a like-for-like basis by 6.8%. The background here is the same as above. The main driver of the increase in net sales was the increase in the number of customers. The average basket size remained practically unchanged compared to the previous year. The net sales of the online store also decreased on a half yearly basis. Currently, the ratio of store pickups and delivery sales is practically 50-50. Our own hypothesis is that, paying delivery fees on top of the relatively small basket size does not interest customers right now. As you can see from these figures, Puuilo is growing in a good tailwind, but upstream compared to the comparable retail market. Puuilo's market share is growing and the flow of customers from elsewhere to us continues. Then next, an overview of the development of the gross margin. In Q2, the gross margin was 37.1% of net sales, and it grew nicely compared to the comparison period. The main reason for the development of the gross margin was the decrease in logistic costs and the emphasis of the sales mix on goods with a lower price point, which have the better margins than the so-called expensive price point products. In logistics, the decrease is explained by sea freight, but also by [ enhanced ] domestic logistics, where we have managed to centralize storage and thus, gain efficiency in the process. Regarding the margin effect of the sales mix, the matter could be described in the way that we now proportionally, we sell more masking tape than generators. This increases the gross profit margin. Cumulatively, in H1, the relative gross margin increased by exactly 1 percentage point unit. And the level could be already described as good. The background here is largely the same drivers, a decrease in logistic costs and change in the sales mix. Inventory turnover also improved and absolute values decreased. More on this later in this presentation. During the rest of the year, we expect the gross margin level to maintain its level and even grow from the current levels. The main reason for this is the continued decrease in logistic costs and the acceleration of inventory turnover. Then let's move on profitability. The adjusted EBITA for Q2 was EUR 20.9 million and the EBITA percentage was exactly 20% of the net sales. Adjusted EBITA increased by EUR 2.8 million from the comparison period, good profitability explained by the increase in gross margin shown in the previous slide and cost control for which we are already very well known. In H1, we reported an adjusted EBITA of EUR 28.2 million, and it increased by EUR 4 million from the corresponding period of the previous year. Relative profitability was 16.6% of net sales, which also increased compared to the previous year. In H1, personnel costs, in particular, increased due to the changes in service union agreement change for the trade sector, but also because of the new store openings, of which 2 were in the reporting period, Vantaa Porttipuisto and Vihti Nummela new stores. Then a few words about the inventories. The absolute level of inventories has decreased by almost EUR 5 million since the same last year. The inventory turnover ratio has improved significantly. The ratio of inventory value, the rolling 12 months net sales was 27.8%, which is the lowest reading in the comparison period shown in this figure. The direction is right and work will continue on improving the inventory turnover speed in the future as well. In addition, it's worth noting here that the inventory of 5 new stores is included in these figures. The effect of this is total of approximately EUR 8 million. When looking at this way, the comparable inventory value has fallen even more strongly than the reported numbers actually indicates. Then cash flow, in Q2, cash flow strengthened and grew by EUR 2.4 million compared to the comparison period totaling EUR 32 million. Cash flow grew, thanks to good sales development on EBITA and cash conversion, meaning the ratio of cash flow to EBITDA rose to an excellent level. Of course, the cash flow was also affected by the decrease in the value of the inventory, which we have been taking a determined measures now for a long time. In H1, operating free cash flow grew EUR 9.5 million, and it was in total EUR 42.3 million, very strong cash flow. Then a few words about balance sheet. The ratio of the company's net debt to adjusted EBITDA decreased, meaning improved compared to the comparison period. The current ratio of the net debt to adjusted EBITDA is in line with our long-term targets. At the end of the second quarter, Puuilo's cash resources were at record levels. The cash level exceeded EUR 50 million. Puuilo's cash position is currently record-breaking high. A strong cash gives Puuilo financial buffer, defensiveness and enables the ability to pay dividends according to our targets. When looking at the company's bank loans and current cash position, we end up to the number EUR 19.8 million. Practically, when excluding lease liabilities, our net debt is already very low. Well, I have to say that with these cash positions, company's CFO sleeps very well. And here are the figures as a summary, which we already went through. Very good [ cordial ] machine runs smoothly at the moment. And then Juha will continue from this. Please, Juha.

Good. Thank you, Ville. Next, we will go on to Puuilo's strategy and targets for the coming years. Our strategy is simple and strong growth strategy. We open new stores every year. The number of openings can vary from year-to-year because we don't want to open them at any cost. Year '23 standouts with 5 new stores. In August, we opened a new store in Kerava, and if everything goes as planned, we will have 42 stores by the end of this year. Also, next year is looking good. We still have unused potential in terms of marketing our concept works well and the current economic situation is favorable for discount retail, at least compared with other industries. These factors make it favorable for us continue. We have many good years ahead. Even thought Puuilo as a company is getting middle-aged, our store network is rather young. About half of the stores are less than 5 years old. So we expect the store sales to increase in the coming years in the same way as before, and we don't see any major changes or obstacles for growth, at least in the near future. Increasing the number of private label products and their share of sales is in important strategic goal for us. This way, we are able to improve and differentiate our assortment, as well as improve the profit gross margin. The development of private label products has been good and especially during the last 2 years faster than before. Puuilo is one of the most profitable retail companies, and our goal is to maintain the profitability while we continue to grow. The current inflationary situation with rising cost makes it more difficult to keep the operating cost under control, but we have been able to maintain good profitability also in the current environment. We have also been able to prioritize our resources. With the help of our ongoing development projects, we expect our operational efficiency and [ through ] our profitability to further improve. Online store is a very important part of our service and concept. It has become a more and more important part to customers' experience. And this is why we have continuously improved it in order to better serve our online customers, as well as those customers who visit our stores. Our targets have continued the same as communicated before. Our net sales target is above EUR 400 million by the end of financial year '25, and adjusted EBITA margin at least 17% every year. We aim to distribute at least 80% of the net income for each year. Puuilo is a very profitable company with a good cash conversion rate, which enables a solid dividend yield. And then let's take a look at Puuilo's outlook for the near future. And we also specified the outlook for the current financial year. We forecast that net sales for the current finance year will be EUR 325 million to EUR 355 million. Adjusted EBITA will increase, and it will be between EUR 50 million to EUR 60 million. We specify the guidance because it is, of course, easier to forecast the results for the whole year as we move on towards the end of the financial year, but also because a good development during the first half year. The forecast includes commonly known elements of uncertainty. The war in Ukraine is not over. The war and other international and power political events may directly or indirectly affect purchase prices or availability of goods. Inflation rate is still high and its impact on consumer prices is [ spurt ], which together with high interest rates, lower consumers' purchasing power. But we are optimistic about the near future. As the past results show the current circumstances work well with Puuilo's concept and affordable price level. Our relative competitive advantage that is typical for discount retail is even better. Finish Commerce Federation recently estimated that in Finland, retail sales volume will decrease by 3.9% this year and next year's development will be modest to say at least. The development was negative also in previous year. The number of employees in the trade sector has also been decreasing. Puuilo is performing as well. And although the overall retail market is facing difficulties. We are expanding by opening new stores. We are hiring more people and our ability to pay dividends has remained good. We gained new customers and grow our market share. The current situation also creates demand to future. We should not be compared with the retail in general as it includes various players and concept from furniture stores to hardware stores in mentioned a few. Some of them are more cyclical than others. We are clearly more defensive than retail in average. The demand for tape, glue, sandpaper or, for example, tarpaulins is quite constant regardless of the economic cycle. So we sell everyday product to handy and price-conscious customers. You have probably seen some examples of these products in this presentation. The share of more expensive products in our assortment is rather small. These products sell less at the moment. The majority that will say more than 80% of the products sold in Puuilo cost less than EUR 20. We believe that Puuilo's growth continues and our strategy works, and we are moving toward our targets. Let's then a few words about our store network. As I mentioned, we opened new stores in Vantaa Porttipuisto in March, Vihti's Nummela in June and in Kerava in August. All these openings were successful and have also been the company's best openings both in terms of number of customers and sales also. The sales have met our expectations also after the openings or even exceeded them. We still have 2 openings this year. First one to Helsinki Konala and then Vantaa Varisto, which we will open by the end of the year, hopefully before Christmas. Also next year looks promising, and I believe that we will be able to open even as many stores as this year. And we will inform about this in the near future. Good. Thank you. And now we have time for questions. So moderator, please open the line.

[Operator Instructions] The next question comes from Svante Krokfors from Nordea.

Juha and Ville, congratulations on a very strong performance in Q2. The first question -- I hope you can hear me.

Yes, we do.

Yes, the first question regarding your -- I mean, you have stores of different ages with an increasing number of new stores. But could you give some flavor of how the sales or like-for-like growth has developed in, let's say, the older category? Has there been any change in that?

Yes, I can take that. The sales development was quite solid throughout the whole quarter. So we didn't see any big differences between the older stores or mature stores or the middle-aged stores or -- and so on. And you can see that from our like-for-like figures, which was really strong from the Q2. So it was a very -- it was a perfect quarter in terms of sales development overall.

Okay. And do you have some own views on -- I mean, your brand awareness must have grown quite significantly given this kind of like-for-like growth in this environment. So what's your own view on the brand awareness increase?

We have not measured that number at the moment. We make investigate, the latest was the spring -- this year's springtime, but we don't have the new numbers. But let's say that customer number increasing tells same story. And, of course, our marketing is, let's say, different and favorable. But anyway, awareness is increasing, but we don't have the fresh numbers just now.

Okay. And on your growth, do you have -- do you see any bottlenecks in your growth? I mean, do you get personnel? And can you keep your personnel, especially in the more densely populated areas?

We don't see significant bottlenecks. But, of course, we have sometimes challenges to find, for example, new personnel to the new stores as in this industry in general. But this is not a bottleneck. We understand that if we boost our new stores openings or try to boost our growth too much, we will face bottlenecks. But as our strategy says, we try to open every year 3 to 5 -- 3 to 4, even 5 new stores. And by that way, we can manage bottlenecks.

And then a question regarding the inventory level where the development in relation to sales has been or was exceptionally good in Q2. What have been the own initiatives there? Or is it mostly because of the increased sales and increased number of customers?

Yes, I can take that. We have done, like we said, determined actions now for a long time to -- with the inventory. And as you, Svante, may remember that we had this excess inventory challenge a while ago, but now it's history. So there is no excess inventory anymore. What we have done, we have sold out during the summertime, especially some of our own private label excess inventory items with the discounts. But as you can see from our gross margin, those hasn't affected to the company's gross margin because we are talking rather small batches of those. Well, good examples of these kind of products where the -- for example, the [ super ] boards or grills, gas grills. And now we have managed to get rid of those items.

And regarding private label, should we expect similar increasing share of private label also going forward? Or should we expect a gradual slowdown?

No. Share of private label products of our total sales is our one of the most important element in our strategy, and we will increase that share in coming years. Of course, let's say, that we have made a very well work -- very nice work in 2 years during the 2 past years, and that share was, let's say, jumped more than before. And if we look at the Q2 this year, the development is, let's say, flat, but that does not mean that this development is stopped. We will increase the share number of the private label products and the share of the total sales in the coming quarters and coming years.

And then the last question regarding the guidance. The top line guidance is quite positive. My first thought was that the EBITA guidance is a bit more cautious. I mean, midpoint points turn in EBITA margin of 16%, and the range is quite flat 14% to 18.5%. So should we just read this to be that you are on the cautious side?

Well, it's our view, and you should remember that we are not calculating any average as we try to forecast this range. And the average is, of course, I know that analysts usually puts the range to the middle. So then you get that kind of result. But it's possible that we are delivering more than the average during the rest of the year. But at least we can promise that we are delivering 50 or 60 or something between result this year.

The next question comes from Calle Loikkanen from Danske Bank.

I have a few questions. Maybe if we start with the gross margin. In the first half of the year, the gross margin is up 1 percentage point compared to H1 last year. Do you expect a similar kind of improvement in the second half of the year? Or how should we think about that?

Ville, would you check to the gross margin in Q1?

Q1?

Yes.

Sorry, I mean, the first -- H1, the first half of the year.

Yes.

Yes. First half of the year was 36.9%. And your question is...

Yes, that it improved. If you look at the first half, the 36.9%, it's 1 percentage point higher than in H1 '22.

Yes.

So is that the kind of the rate of improvement that you would expect for the second half as well?

The reason behind why we get the higher gross margin was that, of course, one was the logistics cost were much more lower than last year same time and one of that. We have managed the better, let's say, selling prices. At the same time, we decreased some certain product selling prices. But at the same time, we have to -- possibility to increase some selling prices, but at the same time to be the lowest option in this market. And, of course, our -- despite of our private label share in Q2 is not rising so -- and it is so fast. It's flat comparing to last year. The level is quite high and that support our gross margin also. But let's say that logistics cost, better selling pricing and private label share. And what is coming to the last part of this year, let's say, that we are quite confident that we can keep our -- and we -- so we can improve our gross margin. But at the same time, it is good to understand that there is a specific pressure, you know that purchasing prices are going down, and that means that we may be -- that means that there is a special pressure to the gross margin at the same time. But we are quite confident.

Okay. Then just a follow-up on the inventory development for quite some time, but how much lower can you still go in the inventory?

Could you repeat the question? How much...

Yes. I mean, yes, how much can you still improve the inventory situation? I mean, it has been improving for quite some time, but how much more...

When we are talking about inventory --. Yes, when we are talking about the inventory value, absolute value will increase in coming quarters and coming years because we are opening new stores every year, and we are increasing our own importing. That means that our inventory value will increase because new stores, every stores needs, let's say, EUR 1,300,000 inventory. And larger importing volumes need bigger warehouses and leads to bigger inventory value. But at the same time, we need to and try to improve our inventory turnover. And that doesn't mean that if our inventory value increasing, we try to improve our inventory turnover. And that -- by that way, to be more profitable.

Okay. Got it. And then lastly, on the cash position. It is very strong and, I guess, there's no reason why the cash flow would not be very good in the second half of the year also. So you probably will have quite a lot of cash at the end of the year. But what are you then planning on doing with all these cash? Do you look to accelerate the pace of new store openings? Do you want to pay down on the debt? Or are you looking to return this cash to shareholders?

Yes, our cash situation is very strong. And so, we have many options. We can pay off our debt. Of course, it is one. Maybe we can pay the extra dividend, but of course, that means [ separate decides ]. But we can use that money to the boosting or strengthening to our strategy, of course. But let's see what's happening, our Board and if needed, our AGM make new decisions if needed.

[Operator Instructions] The next question comes from Joonas Hayha from OP.

Yes. It's Joonas from OP. I just have one question regarding the guidance. You specified it. And the revenue part seems to imply some 5% to 25% growth for H2. And considering the new stores that you've opened and will open in H2, if I reiterate, the lower limit apparently seems to leave room for negative like-for-like growth for H2. So the question is that right way to think about it? And could you also discuss the assumptions behind the lower end and the upper bound of the new guidance ranges?

Ville, did you get the question?

Sorry, Joonas, can you repeat? We didn't get your questions. There is some blackouts in the line. So please repeat the question.

Yes, sure. Okay. So the -- your updated revenue guidance seems to imply some growth rate of 5% to 25% for H2. And considering that you are opening new stores, if I reiterate, the lower limit seems to leave room for negative like-for-like growth. So the question goes that, is this the right way to think about this? And could you discuss the assumptions behind the lower and upper bound of the guidance ranges?

Yes. We have -- of course, we have estimated our guidance carefully, and it's practically based on the -- now the H1 development. And we already know, of course, at this point that our Q3 has started and I'm now talking about our August. I'm not going to report any August numbers here, but we are quite confident with the start of Q3. It's true that rest of the year, there is some challenges. And one is the comparison figures from last year. We had a very strong Q3 last year and also quite good Q4. And that was because of the preparation and energy crisis discussion, especially in media. Some of you might remember that there was a general talking about electric blackouts, which didn't happen. And now we are facing those figures from last autumn. So, of course, we try to forecast the rest of the year carefully, but realistically. So let's see what happens. But once again, what I said earlier, we have given out the ranges, not any averages. The averages are -- it's your analyst conclusions about our result or net sales result. And all we can say that we will hit between those ranges for sure.

Yes. And apparently, if I reiterate, the negative like-for-like growth is not something that you're seeing currently in your early Q3 trading. Is that the right way to think about it?

Currently, no.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Good. Thank you for questions. And thank you for joining us today. Finally, I want to thank all our customers for trusting us, and all coworkers in Puuilo [ for their hard work ]. You made a great summer sales possible. And I wish you all a pleasant autumn. Thank you.