Puuilo Oyj (PUUILO) Earnings Call Transcript & Summary

Good morning to you, and welcome to Puuilo's Half Year Financial Results Presentation. I am Juha Saarela, CEO of Puuilo. And with me is Puuilo's CFO, Annu von Weymarn.

Good morning, everybody.

We will go through the key results for Q2, which was from May to July as well as the results for the first half of the financial year and after this presentation, you can ask questions by calling the line. Here is the agenda for today's presentation. First, I will present the key figures and the events of Q2 and the first half of this financial year. And following that, Annu will provide a more detailed overview of the financial development during the same periods. And the third item on the age in that covers the outlook for the current financial year, including the forecast range for both net sales and adjusted EBITDA. And then we will move on to point 4, which is a reminder on our current strategy and long-term financial targets. And as I mentioned, we have reserved time for questions at the end. Let's look at Q2 first. Our second quarter is from May to end of July and here are the key results. Net sales for the quarter were approximately EUR 153 million, increasing by nearly 13% compared to the same period last year. Like-for-like growth was over 6%, which is clearly stronger than the comparison period last year. Customer traffic continued to increase in both old and new stores and was once again the most important driver of growth. We also saw a slight increase in average basket size. Then gross margin, it increased over to over 39% and improved by 1 percentage point compared to the same period last year especially the significant increase in the share of the private level sales had a positive effect on gross margin. Adjusted EBITDA was nearly EUR 34 million, which is approximately 22% of net sales compared to the same period last year. Adjusted EBITDA increased by almost 20% or EUR 5.6 million. And then earnings per share were EUR 0.30 compared to the EUR 0.25 in the comparison period. We continue to expand according to our plans. And during the quarter, we opened a new store in spot. At the same time, our Vanta Birkamis store was relocated to one. And at the end of the quarter, we had 59 stores compared to the 54 last year. And as part of executing our strategy, we continue our internationalization and preparations for entering the Swedish market. The preparations for our first pilot stores are progressing according to plan. The first store will be opened in Peru by the end of this year and the second 1 in Sundsvall during early next year. All in all, it was a good quarter. And then let's look at the first half of the year, which cover period from February to July. Net sales were EUR 257 million and increased it by EUR 32 million or over 14% compared to the same period last year. LFL growth was nearly 7%. Growth continued to come mainly from increasing customer traffic, which we saw in both old and new stores. We also saw a slight increase in our basket size compared to the comparison period last year. Gross margin, it increased to over and improved by 1.4 percentage points compared to the comparison period. This is mainly -- this was mainly driven by a significant increase in the share of private label sales. Adjusted EBITDA increased by approximately 28% and was EUR 50 million, corresponding to nearly 20% of net sales. EBITDA increased by EUR 11 million and relative profitability improved by over 2 percentage points. And earnings per share were EUR 0.44 compared to EUR 0.33 in the comparison period. Overall, the first half of the year was good. Customers continue to pay close attention to say spending, and this is still visible in purchasing behavior. However, customer traffic at Puuilo continues to grow and that is the most important measure of how well our assortment, pricing and overall concept are performing. We have continued to grow and gain market share despite an increasingly competitive market environment. We are now seeing some early signs of improving economic conditions, which is, of course, a positive thing for us. The first half of the year was strong, and we have good reasons to expect a favorable second half of this financial year as well. We continue our profitable growth with confidence. Good. Now with Annu, please.

Thank you, Juha. And first, we will take a look at the net sales development in Q2 and in H1. First, -- on the left-hand side chart, we can see that the net sales for second quarter was EUR 153 million and they increased approximately 13% in total. In like-for-like stores, Net sales grew by about 6%. This increase mainly originates from customer traffic but now we also saw a slight increase in the average basket size. Customer traffic increased with 12% in all stores and by 5% in like-for-like stores. Then a chart on the right shows the net size -- net sales development in H1. Cumulative net sales were EUR 257 million and with the increase of 14% compared to last year. Like-for-like growth was almost 7%, also in H1 increase in customer traffic explains the main part of the sales development, but also average basket size grew slightly. And these figures include 1 new store in Q2 and 3 new stores in first half year. This positive development in customer traffic is a very important sign for us that our concept works well. We also saw a slight increase in basket size and which tells us that the market environment is improving. I can say that we are very pleased with the development of the net sales. Next, we will move on to gross margin. And here, again, we will start with Q2 figures on the left. In Q2, gross margin was a bit above 39%, and it increased by 1 percentage point compared to a year ago. And this change mainly originated from the increase in the share of private label sales. The chart on the right side shows the cumulative figures. And there, we had the same gross margin as in Q2. That is 39.2%. And there, we had an increase of 1.4 percentage points compared to last year. Here, the change originates from the increase in the share of private label sales but also from the change in sales mix. In Q2, sales of private label products grew by 19%. And in H1, the development was plus 23%. So -- gross margin development has remained strong, and we are very pleased with the continued improvement. Next, we will take a look at the profitability. Development in Q2, we see on the left chart, where the adjusted EBITDA was almost EUR 34 million with increase of EUR 5.6 million or almost 20% compared to last year. In relative terms, the profitability was 22% compared to last year's a bit below 21%. This means that the relative profitability has increased from a year ago. Adjusted operating expenses in relative terms were slightly lower than last year. Then H1 figures on the right, adjusted EBITDA was about EUR 50 million with increase of 28% compared to a year ago, and it grew by EUR 11 million. Relative profitability was 19.5% and it grew by more than 2 percentage points. And also in H1, adjusted operating expenses in relative terms were lower than a year ago. The reason behind the profitability are the familiar ones, good sales development, positive gross margin development and good cost good cost control that is typical for Puuilo. To summarize the first half of the financial year, our business model continues to scale well. All metrics -- earnings metrics were at good level and developed in right direction. Next, let's move on to inventories. This chart shows the inventory levels over the last 3 comparable periods. At the end of July this year, inventories were about EUR 130 million, and it increased by EUR 10 million compared to last year. The inventory increase originates from our growth. We have opened 5 new stores during past 12 months. And those inventory figures also include private label products for stores that we will open after the end of reporting period. So that has also affected inventory levels. So we can say that this inventory growth is an investment in growth. We have also increased the volume of private label products that has also had an effect on inventory levels. As you can see in the chart, our inventory turnover has improved and this is something that is in line with our targets. To summarize this, inventories have grown, but in a controlled way, and they are consistent with our network expansion. It's also worth noting that there is a natural variation between quarters and years. So movements during a single period should not be over red. And next, we will take a look at our cash flow. Our cash flow was very strong. On the left, you can see the cash flow -- operating free cash flow in Q2 and that was a bit over EUR 43 million, and it increased by EUR 5 million compared to a year ago. The chart on the right shows the operating free cash flow in H1, and it was EUR 60 million, and the increase was EUR 8.6 million. Cash flow has now improved for 3 years in a row, both on a quarterly basis and also cumulatively. And this is something that tells us that our growth is healthy. Cash flow was supported by the same factors, both in Q2 and in H1. And those are good sales growth, improved profitability and positive change in working capital. Strong cash flow gives us financial flexibility. We are able to execute our strategy and expand our store network, both here in Finland and also in Sweden, and this can be made through internally generated funds. At the same time, we are able to distribute profits to our shareholders in line with our target, which is paying out at least 80% of net profit. The strong cash flow shown on the previous slide is directly reflected in the balance sheet. In the first chart, where you can see net debt to adjusted EBITDA ratio. There we can see that the ratio has improved in 2 years from 1.3 to 1.1, July. And this is in line with our long-term target where the ratio is less than to 2.5%. At the same time, we have grown by 13 stores in 2 years period. So we can see that the growth has not become at the expense of the balance sheet. The middle chart shows the net debt at -- net debt to adjusted EBITDA, excluding the impact of IFRS 16, meaning lease liabilities and the ratio stood at 0.2% at the end of July. It has also improved from 2 years ago. And on the right, cash and cash equivalents. They were more than EUR 51 million at the end of July. At the same time, bank loans were approximately EUR 70 million. This means that net debt, excluding the impact of IFRS 16 was EUR 18 million. This means that the company's net debt is relatively low, and our financial position is strong. Next, we will have a summary of the figures we already went through in more detail. And to summarize this second quarter. The quarter was very strong in terms of both growth and profitability. The quality of growth was good as it was supported both increasing customer traffic and improving gross margin. The development of earnings, cash flow and balance sheet shows that we are able to grow in a controlled and profitable way. This means that our strategy is progressing according to plan. And next, Juha will go through the updated outlook for the current financial year.

Thank you. Yes. Then the outlook for this financial year. As unknown said on first of this month, we have revised our guidance for this financial year. We forecast that net sales will grow and be between EUR 495 million to EUR 515 million. We also expect adjusted EBITDA to be between EUR 87 million to EUR 97 million. Like-for-like store net sales growth in the first half of the year has exceeded expectations. And in addition, profitability has been supported by positive gross margin development and disciplined cost control. Therefore, we have increased our guidance for both net sales and adjusted EBITDA compared to our previous guidance. There are uncertainties related to the outlook, including changes in consumer purchasing power and consumer behavior. In addition, geopolitical crisis and international tensions may have direct or indirect effect on inflation, interest rates, product availability and product prices, which could, in turn, affect both sales and profitability. And lastly, the outlook includes the budgeted setup expenses for international expansion, which we expect to remain at approximately EUR 1 million and in line with our previous estimate. Good. And then a reminder about our strategy and our financial targets. 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, then entering the international market starting with the pilot in Sweden. Third one, continuing like-for-like sales growth, where is still significant potential. Then strengthening our current position by increasing private label sales and being 1 of the most cost efficient operators in the industry. Fifth, providing an omnichannel customer experience, a shopping experience that is easy offer label and fast is a key factor for both current and potential customers. And then sustainability work and its development. We call this team as responsible retailer, which covers the key elements of our sustainability efforts. And working towards this 6 objectives will support us in achieving our long-term financial targets and they are presented in the lower half of this page. Our sales growth target is to achieve average annual sales growth of over 10%. By the end of the strategy period, we aim to exceed EUR 800 million in net sales. In terms of profitability, our target is to reach an adjusted EBITDA margin over 17% corresponding to more than EUR 136 million in adjusted EBIT. And then we aim to distribute at least 80% of company's net results -- the results to shareholders. And regarding net debt, our target is to keep the ratio of the net debt to adjusted EBITDA below 2.5x. The figures for the first half of the year show that we are making good progress towards these targets. 10 expansion in Finland. This year, we have opened stores in Holola, Uvascula, Marakoski and Sona. Also, we have relocated our store in Vanta, Mirkamistuan Data Mist. During reminder of the year, there will be 5 store openings. New stores, Laholm and Kangasala will open their doors on 17th of this month. Store in Razor opens during autumn and Kurian Turco near the end of this year. For the next financial year, we have already unknown set store openings in and ams. In addition, our Cayan store will relocate to new premises during the summer '27 and our vascular Seppala store will move to the new premises during next year. And we will provide updates on other new stores openings in due course. The ramp-up of new stores has followed the same pattern as in our previous openings and has been in line with our expectations. Growth is, therefore, continuing acquiring to plan. And then let's move on to our expansion in Sweden. As we have communicated before, we are preparing for international expansion into Sweden, alongside our continued growth in Finland. All preparations are progressing according to plan. We have already unknown our first 2 pilot stores. The first store in Ebru will open towards the end of this year and the second 1 in Sunsol during early '27, and we will provide updates on other store openings in due course. We will continue to update this on our progress as we reach the next milestones in the pilot phase. Great. Good. Thank you. And now we move on the questions. So moderator, please open the line.

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

This Maria from SEB. I had it on mute. I have a few questions. I wanted to touch first on the gross margin development. Your gross margin grew 100 basis points in Q2, supported by the higher private label sales. Is that the level that we should expect for the remaining 2 quarters of the year? Or is there some seasonality when it comes to the private label share between the quarters?

Thank you, Maria, for the question. Well, our -- as we went through our increase in gross margin that is mainly based on share of private label, increase in share of private label sales in total sales -- and there, we expect that our solid performance will continue. So we are not expecting anything that would dramatically change our gross margin. But at the same time, our business is growing and also we are working on our private label products. And in past year, that has also increased our gross margin. There may be some variation between quarters, but you should always look at the long-term trend in -- also in our gross margin.

And then I wanted to touch on the current trading environment. given that the Finnish consumer confidence figure was the highest year-to-date in August. So have you -- do you see the sales trend continuing similar from the Q2? Or how do you see the improving consumer confidence impacting your trading environment?

Thank you, Maria. Our concept works very well in the tougher economic situations and environment. And if you look at our last year's performance when the consumer confidence has been very low. We have gained in to new customers and get a better profitable -- but now, consumer confidence is in highest level in, let's say, 3 years. It is not very good. But anyway, it is a bit higher we can get a benefit of the situation also. It is very difficult to say how much. But anyway, that kind of situation will is supporting activations and purchasing in consumers. So the situation is good, and we are waiting that there will be a bit better situation and a higher consumer confidence in near future. But yes, the situation supports our growth and our gross margin and profitable development.

And then finally, maybe a little bit on the expected inventory levels now when you are expanding to Sweden. So what kind of a inventories set up? I mean are you will be doing in Sweden. So should we expect the inventories to come up somewhat follow the expansion to Sweden that you would then build up inventory for your own private labels? Or how should we view the inventories, I mean, going forward?

We are going to Sweden with the same concept with same assortment. So it means -- practically, it means that Swedes new stores in Sweden will be or quite similar than in Finland. So there are no -- we don't expect that there are there are coming a dramatic or significant inventory values. As I said that there will be similar stores with the similar inventory values than in Finland.

And if I may add there, we are going to Sweden with the same logistics model as we are using here in Finland. So in that perspective, we are not going to -- for example, we are not going to have a centralized warehouse in -- separately in Sweden. So they are kind of similar stores that we are -- we have here in Finland, also in Sweden.

The next question comes from Miika Ihamaki from DNB. Carnegie.

This is Miika make from DNB Corona. We had yesterday a major announcement in Finland for data center build-out and this, of course, suggest a prolonged period of construction activity and it should be largely supportive for economic outlook overall. So although Puuilo is predominantly a consumer-focused rather than a B2B distributor, but you have categories such as tools, work accessories, safety equipment, et cetera, and you're offering -- do you expect these investments to provide a tangible sales tailwind for Puuilo over the coming years is my first question?

Yes, we saw very nice news from northern part of Finland. And I think that -- it will support the demand in that part of Finland. And of course, in some extent to the B2B business. But our business and business model is based for the consumer business and not basic about that. But let's say that, of course, we can get a big benefit of those investments, which are coming. So let's say, by that way.