Tokmanni Group Oyj (TOKMAN) Earnings Call Transcript & Summary

Good morning, and warm welcome to Tokmanni Second Quarter Results Presentation. My name is Mika Rautiainen, and I'm today, together with me presenting the second quarter results will be Tokmanni's CFO, Mr. Tapio Arimo. The agenda for the presentation goes like this. I will first go through the key points. Tapio will come and present the key figures. Then we'll have a like short recap on the Tokmanni acquisition of Dollarstore, a variety discount retailer in Sweden. And afterwards, it's time for questions. So let's start. During the second quarter, revenue grew by 4%. Comparable gross profit improved to 36.1%. Revenue grew by 4%. It was EUR 318.9 million. Like-for-like revenue increased by 1%. The sales figures basically tells already that the customers are still suffering from weak buying power and weak consumer confidence in Finland. Comparable gross profit was clearly better compared with the previous year, EUR 115 million and the gross profit percentage was 36.1% compared with previous year's 34.8%. Comparable EBIT was slightly better, EUR 28.5 million compared with last year's EUR 27 million. 8.9% of revenue. Cash flow from operating activities was on a record high level, EUR 79.8 million. Earnings per share diluted was EUR 0.33. Some key points regarding the second quarter. Some shadow for -- on top of the second quarter was bringing the fact that the spring season started pretty slowly in Finland. Of course, in the very southern part of Finland, it was pretty much like normal, but let's say, already like 100 kilometers north from Helsinki, it was the winter times. Basically, the snow was off the ground by the end of May, which was slightly late for Finnish standards. As mentioned, cautious shopping behavior continued. We could clearly see that especially when it comes to a little bit more expensive items, let's say, over EUR 100 ticket. The sales was very small compared with previous year. And then clearly, the customers were thinking about whether they can afford buying a little bit more expensive products or not. But the product availability compared with the last years was very good. Share of private label sales was at a very high level, 33%. And due to a much more normal situation, much more normal steady flow of goods, the efficiency of supply chain improved clearly. The value of inventories decreased to EUR 292 million compared with previous year EUR 314 million. We've been working quite a lot, getting the inventory levels down again. And we can clearly see that now when there is a steady flow of goods, we can definitely improve the efficiency in the supply chain. So, there is still a lot more room to improve with inventory values. But okay, this is a good start, but there is a lot that we can still improve that we've noticed. One of the success points again was the Tokmanni Klubi, Tokmanni Club, the customer loyalty program, we have now around 2.6 million members. We'll be having the second anniversary for Tokmanni Club. And in 2 years' time, 2.6 million members. With a total population of 5.6 million people in Finland, I consider this as a very, very good achievement. At the moment, more than half of total sales come already from the club members. So clearly, this has been a success. Then if we look at the key figures regarding the first half of the year, revenue grew by 4.3% and was EUR 557 million. Like-for-like revenue increased by 1.7%. So according to our standards, very modest growth with sales, but it's very understandable due to the quite weak buying power of our customers. Gross profit, clearly EUR 10 million better compared with last year and gross profit slightly better 34.2%, compared with 33.8% from previous year. Comparable EBIT approximately at the same level, EUR 26.2 million, 4.7% of revenue. And cash flow from operating activities amounted to also a record high level, EUR 66.8 million. Earnings per share, diluted was EUR 0.26. The share of non-grocery and grocery products, that was exactly on the same level as last year. In grocery products, we can still see that the inflation is on a high level. And in non-grocery products, the purchase prices and sales prices have already started to decline. So, there is a clear difference with non-food and grocery products when it comes to the inflation or effects of inflation. Of course, with especially non-food products, the material prices are already down from the previous year's peaks. So it's very clear that buying prices as well as the sales prices will be coming down already, which is, of course, very good news for our customers. With groceries, the sales of pet products, for example, and washing and cleaning products, increased clearly with non-grocery apparel was doing a very good job during the second quarter, as well as barbeque and Miny products as well. And on the other hand, the sales of home appliances and home declaration decreased. When we look at the Finnish market, especially when it comes to department stores and hypermarkets, with the red curve, it's Tokmanni figures, ending the last quarter with 4% growth. And the market, as you can see, was 7.1%. We made an extensive analysis on this. And of course, the prices of grocery, as mentioned, grew during the first half of the year, 12.12%. And the prices of food and non-alcoholic beverages grew by 13.6%. And obviously, especially with hypermarkets where the food section is the major part, it of course shows with sales level as well, where basically non-food products, non-grocery, where there is not that much inflation anymore. Obviously, it was -- the sales prices were more like on a steady level. So it shows with market shares. Basically, based on our own estimation, the volumes have been coming down with all retailers in Finland, also with Tokmanni. But I would say that Tokmanni volumes are -- it's only a couple of percentages -- percent units down from previous year. We can see a lot bigger figures over there as well. But anyway, as a total number, we would be losing market share. But when it comes to especially non-food products, I believe that we are keeping our market share. And then the key figures. Tapio, please, it's your turn.

Thank you, Mika, and good morning to everyone on my behalf as well. So if we start with revenue. So as Mika mentioned, in the second quarter, our revenue grew by 4%, and the total revenue was EUR 318.9 million. And like-for-like revenue turned positive and was 1%. Our B2B sales accounted for approximately 3.1% of sales and our online sales for 1.7% of total sales. And as you can see from the chart, over the last 5 years, we've managed to grow both Q2 and first half earnings every year or net revenue, not earnings. Then looking at our comparable gross profit. So, this is really one of the bright spots of Q2. So in Q2, our comparable gross profit was EUR 115.1 million or 36.1% of revenue. And this 36.1% is really the highest that we've had in the past 5 years, and this is a very, very good result in the current market conditions. And the gross margin was positively affected by share of private labels, then the sale of spring season products and other measures taken to improve profitability over the last few quarters. And also, our gross profit has grown every year in the past 5 years or 4 years, both in the second quarter and also in the first half. Then we will look at our own product labels and direct imports. So as Mika mentioned, our own product label sales increased to 33% in quarter 2. And also over the first half, we see a significant increase. And the share went up from 30.4% last half to 31.7% this half. And then also our direct imports, the percentage increased slightly, both during the second quarter and during the first half. Then looking at our operating expenses. And this is where we are struggling a little bit at the moment due to the high inflation. So, our comparable operating expenses during the second quarter were 21.2% of revenue or EUR 67.7 million, which is an increase of EUR 4.7 million over the previous year. And the relative increase in expenses was particularly affected by the real estate costs. And these like other costs were really driven higher by the inflationary environment. Our personnel expenses were 12.4% of revenue, or EUR 39.6 million, an increase of EUR 3 million over the previous year. And here, the major impact comes from the EUR 400 one-time payment that we paid out in April and then the 3.88% salary increase across the personnel and the total impact of these increases in Q2 was approximately EUR 2.1 million. And majority of this EUR 2.1 million was from the one-time lump sum payment of EUR 400 per employee. And also, if you look at our comparable operating expenses over the last 5 years, you can see a clear trend. And this is something that we are constantly working on. And hopefully, we'll get also a little bit tailwinds now in this operating expense increases as the inflation seems to be cooling down in the euro area and also in Finland. Looking at our comparable EBIT. In the second quarter, we had a comparable EBIT of EUR 28.5 million, which is an increase of EUR 1.5 million over the previous year. And also, our comparable EBIT margin increased very slightly to 8.9%. And here, again, the increase in the operating expenses was a major factor contributing to the, let's say, lower increase in EBIT compared to the increase in the gross profit margin. Then looking a little bit at our inventories. So as Mika mentioned, we've been working very hard to bring down the level of the inventories, and I'm pleased to report that we have had a significant cut in the value of inventory since second quarter last year. At the moment or end of June, we had inventory of EUR 292 million, which is down about EUR 20 million from the situation a year ago. And also worth mentioning that this includes now the Click Shoes inventory as well as the, let's say, increases in purchasing prices, so that, let's say, the volume of inventory has gone down even more than the value of inventory. Then our financing situation. At the end of June, our total interest-bearing debt was EUR 461.9 million, of which EUR 129.2 million was real debt and then EUR 332.8 million was this IFRS 16 lease liabilities. And our total ratio of net debt to comparable EBITDA rolling 12 months was 2.8, up slightly from a year ago, 2.6%, but still well below our long-term target. And here, it's good to mention that as a result of the Dollarstore acquisition, this ratio will go over our long-term target in the short term. But obviously, we have this target and at the moment, there's no plans to change it. So, we will do our best to bring that total debt level down then under this 3.2 over the course of the coming quarters. And our financial position was very strong at the end of Q2. So, we had over EUR 212 million in withdrawable funds, so consisting of loan agreements, financial institutions and then a commercial paper program. Then looking at our cash flow from operating activities. This was again a very good result, both in the second quarter as well as the first half. And over the last 5 years comparison, we achieved record cash flow from operating activities, both in the second quarter and the first half. And this was particularly impacted by our inventory management results. Then looking at our capital expenditure. So, our net capital expenditure in Q2 was EUR 15 million and in the first half, a total of EUR 33.2 million. And there is an increase in both numbers from a year ago. And obviously, these numbers include the acquisitions that we have done during the first half. We acquired the Jyskan Varastomyymala in Jyvaskyla, then of this Finnish footwear store chain, Click Shoes and Shoe House Oy, as well as most recently Catmandoo brand and its inventory. And in addition to acquisitions, of course, we are still investing in the new warehouse or logistics center. And the total investment there is expected to be around EUR 65 million, and we are still expecting the warehouse to be completed by the end of the year. And as of the end of June, the total investment into the warehouse was EUR 41.1 million. And as told previously, we will sell the facility and become a lessee in the building then as soon as it's finished or very shortly after it's finished. All right. That was it for the finance part. And now welcome back, Mika, to talk about the strategy.

Thank you very much, Tapio. Yes. About Tokmanni strategy for 2021 to 2025. When we launched this strategy, we set very, very ambitious targets. The revenue target, EUR 1.5 billion in 2025. As you can see from last year, we're lagging a bit with this phase regarding the target for 2025. And when it comes to the EBIT target of EUR 100 million -- EUR 150 million in 2025, there, we're lagging a little bit more regarding the target of 2025. What we also said that during this strategy period, we will be examining the possibilities of an international partnership or acquisition or merger. And now with this situation that we have, basically, we've renewed the guidance for 2023. We expect revenue to be EUR 1.37 billion to EUR 1.44 billion during this year and comparable EBIT is expected to be EUR 90 million to EUR 110 million. So, we are well on our way to reach the targets of 2025. And that's basically because of the acquisition of Swedish variety discount retailer, Dollarstore. Now as mentioned, for several years, we've already been examining the markets in the Nordics, especially in Sweden. And I have to say that we're more than happy with the acquisition of Dollarstore. From our perspective, it's a perfect match between Tokmanni and Dollarstore. Of course, it's a perfect match. We're both working on -- with low prices, and both companies were having the best price images in our countries. But also when it comes to Dollarstore, I have to say that according to our information, Dollarstore has been one of the fastest-growing retailer in the Swedish market. And that tells us a lot about how customers think about Dollarstore. They seem to appreciate Dollarstore very much. And of course, that's one of the key reasons for the acquisition as well. It has a really, really good future Dollarstore. Let's take a look at the -- well, a short recap on the acquisition. So, we had the closing this week Tuesday in Stockholm. And the acquisition price was SEK 2.028 billion, which is basically EUR 173 million and it was fully financed with the bank debt. We expect value of identified synergies amount to over EUR 15 million. But we are talking about net synergies over here. So obviously, I could imagine that this year, there will be some additional costs when we start working together. Basically, this net synergies is basically minimum target for us. And yes, we expect that some to be fully implemented within 30 months. As I said, we've already started the work to get the synergies done or to achieve the synergies. But obviously, it will take some time. So for this year, we don't have any high expectations regarding the synergies. But definitely next year, we will already get the first results. And as mentioned, it's Dollarstore growing fast. Dollarstore has really great plans also to grow, and customers appreciate the Dollarstore very, very much. Dollarstore in Sweden and Big Dollar in Denmark. And the price image is one of the best in the countries. Well, I have to say, in Sweden, in Denmark with 2 stores. There is no real price image yet. But anyway, in the Swedish market, Dollarstore does have one of the best price images. So obviously, we will continue as is with the brands. Tokmanni in Finland, Dollarstore in Sweden and Big Dollar in Denmark. And Dollarstore has really been doing a great job. So definitely, with the management of Anders Kind, the CEO of Dollarstore and the management team, they will definitely continue working to take Dollarstore also to the future success and the future expansion. There is a clear strategic rationale with Tokmanni and Dollarstore start working together. First of all, we will -- actually starting from the 1st of August, so this week, we already formed one of the leading variety discount retailers in the Nordics. With the acquisition, of course, it will change the situation for Tokmanni. Tokmanni has until now -- Tokmanni has been a very domestic company in Finland. We have 200 stores. In our strategy, we said that there will be space for more than 220 stores. So in a way, we did, of course, understand that it's a little bit limited picture that we're giving for Tokmanni future. So obviously, together with Dollarstore, it will be a completely different story. And it will be a natural next step for building a solid platform for a future further growth. Through this combination, Tokmanni and Dollarstore, basically while combining our strengths, we are able to serve customers much better with product offering. First of all, Dollarstore has great products that I'm sure that we can basically sell also over here. In Finland, there will be new products for the Finnish customers and vice versa. Then of course, we do have a very, very nice private label ranges, for example, that we can offer to Dollarstore to also improve their assortment. So obviously, with bigger volumes, bigger opportunities, we're also able to show even lower prices for our customers and better assortment. And of course, we will definitely benefit from the combined scale in purchasing and distribution. We already have very, very clear understanding where we can find fantastic synergies based on the -- basically, all the examinations that we did during the due diligence process. And of course, Dollarstore has been active, very active, even, I would say, aggressive with Swedish market expanding, with the expansion with new stores and so on. It's been really great to follow the expansion of Dollarstore in Sweden, and of course, in Denmark as well. Definitely, we do believe that we are able to support Dollarstore in the further growth, also an expansion. We are able to bring a lot of support due to the fact that with 200 stores in Finland, we've already experienced the pitfalls and this kind of thing. So, we're able to help Dollarstore to avoid this kind of issues with their expansion. The focus for this year, for the 5 months, obviously, achieving synergies. Synergy benefits is now our #1 priority, and we've started the work already. And in a way, it's also quite clear since we do have exactly the same product groups in our stores. A little bit different setup, but we are able to definitely get some benefits from these synergies. And of course, Dollarstore will continue its expansion and it will proceed as according to the plan. And definitely, we'll be doing the support for Dollarstore expansion. I believe that there will be some new stores opening already during this second half, if I remember correct. The next opening will be in Denmark in September already. And yes, the whole process of this acquisition was very quick. So just actually yesterday, we have started the preparation of a joint strategy for 2024-2026. And obviously, we will be telling about the strategy in the next result presentations or actually, I would say, it will be the next Capital Markets Day where we will be presenting this. So, this was the short recap on the Tokmanni-Dollarstore collaboration. And thank you for that. And now operator, it's time for questions, please. And Tapio, please join me to answer all the -- especially the difficult questions. I'll take the easy ones.

Okay.

Thank you.

Good.

[Operator Instructions] We'll take our first question from Nicklas Skogman from Handelsbanken.

First of all, on the changed guidance from Tuesday or Wednesday maybe it was, it looks like the midpoint is basically going up by EUR 7 million. And now that's a little less than half of the EUR 16 million that Dollarstore generated last year, which then would at first glance sort of correspond to the 5 months of worth of profits. However, for you, I mean, your EBIT has generated roughly 60% of the annual EBIT is generated in Q4. So, I was just trying to see if Dollarstore either has a more even distribution of profits or that there is an underlying cut to the full-year guidance with the updated guidance?

Yes. First of all, it's a slightly different setup with Dollarstore and Tokmanni. Tokmanni is more seasonal retailer compared with Dollarstore. So obviously, this is one part of the discussion. So it's more like a steady EBIT structure for the calendar year with Dollarstore compared with Tokmanni. But Tapio, would you like to add on a little bit with the guidance?

Yes. So obviously, with the guidance, we haven't been able to meet Dollarstore very much until after that transaction was announced and closed. So obviously, we're in early stages. And them being a private company, they haven't really put that much focus on forecasting in the past. So that coupled with 5 months out of 12 months and like Mika said, the seasonality is a bit weaker at Dollarstore compared to Tokmanni and then, let's say, some expected extra costs as we get to know each other and work together. So that's the result. So, I would say that there is no change in the way the old Tokmanni guidance or the Finnish Tokmanni guidance that this change was due to the acquisition.

Okay. Perfect. Very clear. The second one is on -- you mentioned the purchase prices on non-food items are now lower year-on-year. Should we expect that to gradually sort of become more of a benefit and in particular, considering the new freight agreement, which I expect would start to kick in towards end of Q3 and in Q4?

So hold on a second. I'm not sure whether I got the question right. Could you please repeat that, Nicklas?

Yes. So on the gross margin in the quarter which improved. You mentioned one of the reasons are the lower purchasing prices for non-food. So I thought, is this -- because I feel that must have contributed to after 7 quarters of declining gross margin that's now improving. So, I'm thinking will that be an even bigger factor going forward because clearance sales can vary by quarter and the private label sales perhaps even so. But will that improve further, i.e., lower purchase prices? And then in addition, will you get the benefit from the lower freight costs?

Yes. First of all, we are already benefiting from the lower freight costs. Second thing is that, yes, we do believe that the inflation will start going down, not only with non-food products but also with groceries. But it's not going to be that fast, but there will be like -- they will be going down. I would say that it's still one of the key issues regarding the improved gross margin during the second quarter was the growth of private label products. Clearly, we can see that customers are very, very interested in our private labels due to the fact that they are much lower price compared with the A brands. The customers buying power, until now it's been getting worse all the time. But somehow, we're here now in a situation where we believe that it will start getting better. But the pace will be quite slow. So, we expect that, for example, our private labels will be doing a good job in the coming months as well. But for sure, it's the success of private labels that had quite a big impact on the improved gross margin. Tapio, would you like to add on this?

Yes. So as Mika said, so that was one of the driving factors. And of course, if you look at the last year's figures, we didn't have a very good situation in the second half last year. So, we are hoping that the situation will be a little bit better this year.

[Operator Instructions] All right. It appears there is no further questions at this time. I'd like to turn the conference back to the host for any additional or closing remarks. Thank you.

Okay. Thank you very much, operator. Yes. Thank you. And in the next result presentation for the third quarter, that will be the first time Tokmanni Group will be reporting then figures regarding Tokmanni Finland and Dollarstore Sweden, Big Dollar Denmark. But anyway, Tapio will then tell us all more about the reporting. But anyway, that will be the first time Tokmanni Group will be reporting full figures of all these 3 countries. Thank you very much.

Thank you.