Tokmanni Group Oyj (TK9.F) Earnings Call Transcript & Summary

Good morning, and welcome to Tokmanni Group's Second Quarter Results Presentation. My name is Mika Rautiainen. And today, together with me doing the presentation will be Tokmanni Group's CFO, Mr. Tapio Arimo. I will go through the key points of the second quarter first. Tapio will present the financial figures. I'll come back to explain a little bit of the action points for the second half of 2025. And afterwards, it's time for questions. So let's get started. As already published in July, the second quarter for Tokmanni Group, especially for Tokmanni segment was very disappointing. We are satisfied with the increase of customer visits and also the revenue increase especially for Dollarstore and also a slight revenue increase for Tokmanni as well. But due to lower gross margin and higher OpEx, the profitability declined clearly, which was, of course, extremely disappointing. Let me go through a little bit detail the second quarter happenings. But before that, a familiar slide regarding the Tokmanni Group position in the Nordic market, One point I would like to highlight over here is the share for Dollarstore for the total revenues, it's 27%. Last year, second quarter, it was 25%. So we are obviously very happy regarding the growth in Sweden and in Denmark for the whole group. The group's second quarter customer visits, as already mentioned, increased in both segments, and revenue increased especially in Dollarstore, basically Dollarstore segment, which means Dollarstore in Sweden and Big Dollar in Denmark. But the sales of spring and summer season products were weak especially in Finland due to the pretty cold spring/summer, especially the months May and June. And due to this, comparable gross margin declined due to the Tokmanni's low seasonal product sales. On the other hand, the grocery sales was developing very well which, of course, was very good for the revenues and the customer visits. But of course, the gross margin with groceries is clearly lower compared with seasonal products, nonfood products, which basically at the same time are a little bit with higher-priced high-ticket products. With Dollarstore, the segment's comparable gross margin improved, which was of course very good after a lousy first quarter for Dollarstore. So this was a clear improvement which was, of course, satisfying us. But again, something causing a negative impact was the high personnel and marketing costs, which impacted EBIT negatively. The personnel costs grew due to salary increases, new store openings and extra hours needed in implementing the new supply chain management systems. In Tokmanni segment, we actually launched the same system as Dollarstore is using for forecasting and replenishment. And on the other hand, Dollarstore segment was implementing a new warehouse management system that is actually something which Tokmanni segment is using all the time. So our main purpose is to combine the supply chain systems to get later on the efficiencies, but the implementation phase was actually causing quite a lot of costs. Cash flow was on a very good level driven by inventory actions taken, and the Renewed One Company management model is proceeding well. And let's take a look at Tokmanni segment. Comparable customer visits increased by 2.5%, which I consider pretty good results, but the like-for-like revenue grew only by 0.8%, and that's due to the fact that the like-for-like average basket size decreased by 1.7%. And that's, of course, the seasonal setup for Tokmanni. Tokmanni is probably the market leader in Finland regarding the garden products. Garden products are usually slightly higher-ticket products like garden furniture, barbecues, well, summer toys and pools, these kind of products. And of course, when the sales were on a very, very low level that caused the drop with like-for-like average basket. And at the same time, a good part was that the grocery sales increased by 5%. And I believe that with 5% growth in grocery sales, we were able to take some market share as well, which is, of course, a good thing. But as already mentioned, grocery sales is always slightly lower gross margin. So seasonal sales were at the low level and comparable gross margin declined a lot, meaning by 1.4 percentage points. And of course, as already explained, it was the seasonal products and good sales for groceries. And operating expenses increased mainly due to higher personnel and marketing costs, something, yes, I already mentioned this, the new replenishment and forecasting system which was implemented during the second half. But at the same time, we prepared quite well for a good spring/summer season with marketing and store hours, meaning like we were prepared with very good service in our garden departments. Unfortunately, the end result with the sales wasn't on a good level. Regarding the store networks. The Tokmanni store network continues to expand. We didn't have any new openings during the first half. On the second half, we will open 3 new stores or actually, at the moment, the plan is to open 3 new stores, to relocate one. We're going to close one old store and then open a new one. And then there is one closure of Tokmanni store. It's one of the smallest store in the store network, but this will happen during the second half of 2025. Some good parts. Tokmanni Club, Tokmanni Klubi has over 800 app customers and the customers who have downloaded the Tokmanni app have a significantly higher average basket size than other customers. And this is, of course, a very good development that we have been able to do with Tokmanni Club. It's proceeding very well. Actually, during the second quarter also something -- we opened the first EUROSPAR supermarket in connection with Tokmanni store in Ylöjärvi in Pirkanmaa the 12th of June, so a couple of months ago. And during -- the opening was very good, very interesting actually. I can say that Tokmanni is learning a lot through the cooperation with SPAR International. And this Ylöjärvi store is, after the two -- first months it's one of the biggest stores in Tokmanni chain in Finland. So it looks good. And then we'll go through the Dollarstore segment during the second quarter. Also, the comparable customer visits increased well by 1.7%. This is of course comparable customer visits, and the total customer visits was even higher. The total revenue increased by 8.8% and the like-for-like by 5.1% in local currencies. The Dollarstore and Tokmanni segment, it's a slightly different setup. We are, of course, with Dollarstore very happy that actually the non-grocery sales increased by 9.7% in local currencies driven by the wider assortment of Tokmanni Group's private label products. Private label products, of course, this was the first summer -- well, spring/summer season when we launched basically the Parco garden products, BBQ King, barbecues in Sweden as well as several other private label product ranges like Kotikulta and Energy+. And the total sales is on a very good level. Like-for-like average basket size grew by 3.3%, which is also very good. There are basically slightly higher-ticket products available in Dollarstore at the moment via the Tokmanni Group's private label product ranges. Comparable gross profit improved by EUR 5 million compared to the corresponding period of the previous year. And this is, of course, a very good achievement because especially during the first quarter, Dollarstore gross margin was on a very low level. So very good development in Dollarstore regarding the gross profit. Operating expenses, on the other hand, was increasing basically also too much. And that's due to the salary increases, the new store openings and an increase in working hours in both in the warehouse and in the stores. And this was due to the new warehouse management system, where we actually had to make sure that things will go smoothly for the customers with the launch of the new system, which, of course, didn't happen without some hiccups, but they should be over at the moment. Inventory level in Dollarstore was at a lower level compared with end of March. So these were the key points for both segments. And yes, well, regarding the Dollarstore segment, it continues to expand. So during the first half of 25, 1 new Dollarstore and 2 new relocations in Sweden and 2 new Big Dollar stores in Denmark during the first half. And the second half of '25 will be very, very active both in -- especially in Sweden and in Denmark with 5 new and 2 relocations in Sweden and 2 new stores in Denmark. That's about it with the segments, the key points. And then Tapio will explain a little bit more detail the group's key financial figures. Tapio, please go ahead.

All right. Thank you, Mika. Good morning, everyone, on my behalf as well. So let's dive into the numbers a bit more. So if we look at the total figures, so like Mika said, our sales or revenue actually wasn't that bad. We grew by 4.8% during the second quarter and our total revenue was EUR 443 million roughly. Also, our like-for-like revenue increased by a total of 1.9% compared to last year when it actually declined. And our comparable gross profit totaled EUR 157.7 million, a slight increase over last year. But like Mika said, the gross margin percent declined clearly, being 35.6% for the group, a drop of 1.1 percentage points over last year. And due to the lower gross margin percent and higher operating expenses, our comparable EBIT amounted to EUR 21.4 million, which is a clear drop from a year ago of EUR 27.9 million. And the relative EBIT margin was 4.8 percentage points. What I'm most happy in this slide is the cash flow from our operating activities, which amounted to EUR 73.1 million, and that was driven by our focused efforts to control the inventories during the second quarter, and we continue those actions during the third quarter as well. And our earnings per share diluted was EUR 0.17 per euro. Now a little bit deeper into the revenue mix. So as you can see, our second quarter there was, especially in euro terms, a big increase in Dollarstore, which Mika explained and which we're very happy with, especially the fact that it was driven by the, let's say, non-grocery revenues and the increase in the group private label sales. And our like-for-like revenue in total increased 1.9%, as mentioned, and that was also helped by Easter in April when you compared to last year when it was in March. And the Tokmanni segment's revenue also increased by 1.9%. So positive results in terms of sales growth for both segments. And as I said, the Dollarstore revenue increased by 8.8% in local currencies and about 11% in sort of euro terms compared to last year. Now we look at the product mix a little bit more in detail. So as you can see, our total mix of groceries continued to grow in the Tokmanni segment and was 54.5% of total revenue. And that, obviously, like Mika said, was driven not only by the strong sales of groceries helped by Easter, but also the very low sales of spring seasonal products during the quarter. Dollarstore, the mix development, very different. There we had strong sales growth overall, but especially the non-grocery sales grew more than the grocery sales, and the proportion of non-groceries increased to 43.9% during the second quarter. And we're very happy with that because it means that also the Tokmanni private labels that we have introduced more and more into Dollarstore offering continue to drive the sales growth and also obviously helping the margin development as well. So then we look at the gross profit. There, we saw a slight growth during the second quarter, but as I said, the relative margin was clearly lower, and that was especially driven by Finland and the change in mix and the lower seasonal products mentioned earlier. And comparable gross profit in the Tokmanni segment actually declined from a year ago, and the gross margin percent clearly declined by 1.4 percentage points. Dollarstore, on the other hand, grew their gross profit significantly from a year ago about EUR 5 million, and the comparable gross margin was down slightly, so 0.4 percentage points. And if you compare this to the first quarter, the growth was even more remarkable. If you remember, the first quarter Dollarstore was really, really poor. And now we are basically, you could say, almost to normal levels during Q2 already. So that's very good achievement. And then the operating expenses, so this is one area where we clearly are going to put more focus on going forward. So the operating expenses as a percent of sales continue to grow during the second quarter, obviously somewhat impacted also by the sales being low on seasonal products at Tokmanni money. But more than that, it was the absolute increase in expenses in both segments. So personnel expenses increased by EUR 6 million from a year ago and total operating expenses also increased significantly. For Tokmanni, it was 22.4% of net sales or EUR 72.2 million, which is a growth of about EUR 4 million, slightly less. And the Dollarstore also grew significantly their operating expenses also, close to EUR 5 million. And as a result of that, overall percentage of operating expenses in the group was 23.6% during the quarter. And the operating expenses and, let's say, lower gross margin percent combined, that resulted in the EBIT that we have for the second quarter, which was EUR 21.4 million or 4.8% of net sales -- or revenue. And we're definitely not happy with the performance during the second quarter so we are taking actions to improve the performance going forward. And for Tokmanni segment, the comparable EBIT was EUR 20.8 million, a decline of EUR 5.7 million. And for the Dollarstore segment, the comparable EBIT was EUR 1.6 million, a slight decline from the previous year's EUR 3.1 million. Then looking at the inventories. So on a normal year, the inventories typically grow slightly during the second quarter. Now we managed to reduce the inventories from the end of the first quarter. So that's a good result. And we continue to drive inventory actions also during the third quarter. The third quarter, end of September, is basically the peak for our inventories. So we do expect the inventory levels maybe to grow slightly or then a slight decline, but definitely not much growth from the second quarter levels. Obviously, it depends a little bit on the timing of the deliveries of the Christmas products and also, of course, a little bit on the sales during the third quarter. And the total value of the inventory at the end of the second quarter was EUR 465 million. And out of that, EUR 328 million was Tokmanni and EUR 137 million was Dollarstore. And looking at our financing. Our total interest-bearing debt at the end of the quarter, EUR 924 million, which obviously is a significant increase from last year. But if you look at the quarter before, then the level was fairly flat. And we do have most of our debt in the lease liabilities, so if you want to call it bank debt or financial institution debt, we had about EUR 347 million or EUR 346 million of financial debt at the end of the second quarter. And then looking a little bit our net debt to comparable EBITDA ratio. So that was flat during the second quarter from the first quarter at 4.2 including IFRS and 3.6 not including IFRS liabilities. And we have the target of 2.25 for the year-end, and we still are able to achieve it. Of course, we need to manage the inventory carefully but it's within reach. I have no doubt about that. So our financial position is very stable. And then the last, cash flow from operating activities. And this was especially positive during the second quarter, so it was almost as high as our record quarter in 2023. So very happy with that. And that's obviously driven by our inventory reduction actions taken during the second quarter. And as I said, we continue to work on that. And then for the whole half, operating cash flow was pretty much at the same level as year before, so roughly at par. And then on the capital expenditure side. This quarter, we had clearly lower capital expenditure as we were not spending that much money on new store locations. So most of the capital spending during the second quarter was IT and maintenance-related CapEx. And then I invite Mika back on stage to talk about our guidance.

Thank you, Tapio, and please don't go too far because we're going to start asking -- answering questions pretty soon. About the guidance first. So we expect Tokmanni Group's revenue to be, during 2025, EUR 1.7 billion to EUR 1.79 billion, and we expect Tokmanni Group's EBIT to be between EUR 85 million and EUR 105 million in 2025. Obviously, based on the first half results of 2025 results in Tokmanni Group, the full focus at the moment for the whole group is on profitability. The actions are ongoing obviously already quite some time. So we'll continue with this, with the actions for profitability, improving profitability. And obviously, the first point is to continue to drive with like-for-like sales. This, of course, will always be over there. And obviously, we shouldn't be having any seasonal effects anymore during the second half of 2025. So we'll be, of course, focusing also on improving gross margin for the whole group actually. But let's say, the biggest action points will be on the costs. We'll definitely have extremely tight cost control during the second half. And we do believe that after implementing, for example, the supply chain new systems, we will be able to improve the efficiencies both in our warehouses and in stores. We've already made the decisions to improve our marketing effectiveness, and we'll continue with that. Also, the managing of inventory levels at the moment looks good. Of course, it takes a little bit of time, but it still looks quite promising. So for the second half, basically it's 4 months left for that, it will be full focus on profitability. Maybe a couple of words regarding the what we call One Company model. At the same time, with a full focus on profitability, we are also tightening the integration of Tokmanni and Dollarstore. This is actually also something to do with the profitability. First of all, we have launched the new management model. And we're combining, for example, the sourcing organizations into one. It will be starting from the 1st of September as one organization. Basically, we'll combine the best parts of both retail companies, trying to get the best practices from both segments in all operating countries. And as already mentioned several times about the supply chain, so we are at the moment creating a common operating model also for the supply chain, which hopefully will also improve the store efficiencies in both segments. The SPAR International cooperation gives us basically a view to, let's say, world-class practices. So we will definitely improve our operation based on the expertise coming from SPAR International. And yes, the annual synergy target of over EUR 20 million at the end of 2025 is there as well. This One Company, basically, we now have some experiences with the two separate segments and, of course, the segments will be separate also in the future. But basically, like operating as two separate companies, we can clearly see that tightening the integration will bring us more savings in the future. So that's why this One Company model is very, very important for us. Tapio, I guess, that's it for the result presentation. And now it's time for questions and answers.

So please, I think that you will find a link for the questions under the broadcast. And we can see that there are already the first hands up in the chat. So -- and the first one to make questions is Maria. Maria, please go ahead.

A few questions. I wanted to start with the gross margin outlook for the second half of the year given that the decline this quarter came mainly from the Tokmanni segment. And there, I mean, obviously, are some explanation explanations coming from a very cold early summer weather. So what would you say, I mean, the outlook for the second half for the gross margin in the Tokmanni segment now when the weather has, say, more normalized?

Yes. Well, actually, let's say, of course the change especially in Finland, and those who haven't been spending the summer in Finland, have a very cold weather until the almost like half of July, but afterwards an extremely nice summer weather. And of course, we were able to, let's say, clear the inventory for the summer products pretty well during the start of the second half, which is of course very good for the inventories and the -- well, sales, inventories. But unfortunately, there is already like in July, it's already like the sales period for summer products for basically with all the retailers, whether it's like clothing or garden or barbecue or whatever summer products. So obviously, it had an effect on the gross margin with Tokmanni segment. But in the -- well, we take a little bit bigger picture. It's obviously a very positive thing from the total picture's point of view. When it comes to the rest of the year, the gross margin, we don't expect any specific elements in Tokmanni segments which would be declining the gross margin. Tapio?

Yes. Obviously, it's driven by the mix to some extent. So if the grocery continues to outperform the non-grocery, then you can expect a small decline in the revenue margin as well. But of course, let's say, the economic picture for Finland is quite mixed. There are some positive signals and some negative signals, especially regarding the consumer spending on, let's say, more expensive items. So obviously, if the consumers start to spend more on non-grocery products, that would be very positive for our relative margin. So it will be interesting to see how the second half sales develop.

Yes.

And then I had a second question. Maybe, Tapio, you can help me out a bit, on the personnel cost, and let's now talk about the Tokmanni segment. So I think you had like some 150 people less, I mean, if you calculate it as like the whole year people -- I mean as whole work year, I don't know what the term is, whole work year employees. But still, I mean, your employee cost, I mean, increased by 6%, so by EUR 2.5 million. So how do you attribute -- I mean, there is a lower number of full-time employees and, at the same time, you have a 6% growth in your salary costs. And what is the outlook, I mean, for the second half? And so have you -- if you had these extra hours, will they be clear for the second half of the year?

Yes. We're trying to, let's say, work very hard on that, let's say, put a little bit tighter control on the hours in the stores and warehouses. Of course, like Mika said, we have new systems implemented and like all new, let's say, very complex systems. It takes a little bit of time to optimize the performance there. So we had more hours than we were planning. But at the same time, you have to also keep the customer satisfaction level at some level. So it's always a balance there. And if you think about the growth, I would say we had about 2.9% on average is the salary increase compared to a year ago. And then the rest is really due to increase in the work. So I mean it's, let's say, very simple math from that perspective. So the FTEs, of course, depends a little bit on the average salary, how it develops. But I think the financial math is, in a sense, fairly simple. That 3.9% came from statutory increases and then the rest is mainly from the extra hours worked.

They are not reflected in the number which is full-time employees?

Yes, that's a very good question. They -- I will have to look into that a little bit more in detail. Obviously, the FTE calculation method is quite complex. So -- but that's a good question. I will look into that and get back to you.

Thank you, Maria. And the next one is Calle Loikkanen. Please, Calle, go ahead.

This is Calle Loikkanen from Danske Bank. A couple of questions. You mentioned that the July sales or sales in the first part of the second half of the year and that you got the summer stuff kind of going. But I just want to check that have you seen any kind of significant catch-up in the sales in July and then early August in terms of the spring and summer products.

Well, I don't know what you mean by catch-up. Like Mika said, I think we're pretty happy with the leftover inventory from the spring and summer season. So we managed to sell most of it. And of course, you want to end up with a little bit of inventory. Otherwise, you've been missing out on sales, which no one wants to do. But I think in that sense, it's been caught up pretty nicely. But of course, from a revenue and profitability perspective, like Mika said there, that July is already sales month for the seasonal summer products in many cases. So the net sales per item is less as well as the profitability per item is less.

Okay. Got it. So you're not kind of worried about any inventory issues like having to store stuff over the winter or anything like that?

No, not in any significant amounts, no.

Okay. Perfect. And then still continuing on the operating expenses and kind of your expectations for the second half. You mentioned salary increases, 2.9% on average. So that will, of course, continue to be there.

Yes.

Anything else in terms of other expenses like marketing? Anything else that we should kind of be aware of?

Well, I think like Mika said, we are going to be pretty tight in marketing expense and also I think we will be tighter on the store hours and warehouse hours as well during the rest of the year. So of course, it's not dramatic change. It's not like 10% change but maybe a couple of percentage points tops.

But yes, several action points already taken. Of course, if we compare it, for example, with consumer confidence, that's something that we can't basically affect them or can't manage at all. But of course, operating expenses is something that it's basically in our own hands. So we'll make the necessary action points regarding the operating expenses. They won't happen just like this with all expenses, but many of the decisions have already been taken.

Okay. Got it. And then I was just wondering about the price increases. Is it kind of impossible to do those kind of things in this environment given that the salary inflation is there and so on? So is it impossible for you to raise prices in this environment?

At the moment, we don't -- we are not working on increasing prices. Actually, let's say, the buying prices are on the same level or even slightly lower level. And that's, of course, something that the combined buying and sourcing organization is doing or basically concentrating, to combining the volumes and getting better buying prices. But there is -- well, as a low-price operator, we're not at the moment thinking about increasing the prices.

Okay. And then lastly, regarding SPAR. Obviously, you sound very pleased about how things have been going and what you've been learning. But are there any kind of financial figures that you would like to kind of share with us regarding SPAR and the performance early on?

No, not at the moment. First of all, the first EUROSPAR store in Ylöjärvi, it's been open exactly 2 months. Yes, the beginning is positive. We're learning a lot, and we're basically preparing the 2 new openings. And basically, what we also like have been discussing with SPAR International, it's good to have like several stores to get all the learnings regarding the market and then make also decisions and maybe be more, let's say, public regarding the first SPAR steps. But with 1 store and 2 months, it's too early to get any -- to give -- to start sharing any further information except the fact that Ylöjärvi is one of the biggest stores in Tokmanni Group at the moment. Thank you, Calle. And the next one is Arttu Heikura. Arttu, please go ahead.

Yes. Arttu Heikura, Inderes. A couple of questions from my side. Given that the summer sales were like poor in the market levels, so my question is, did you see any increased price competition during the quarter? And if so, has it continued to H2?