Verkkokauppa.com Oyj (VERK) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Verkokalpacom's Q2 and Half Year Results Presentation. My name is Elisa Forsman, I'm the Head of Investor Relations, and I'm joined here with our CEO, Panu Porkka and CFO, Jesper Blomster. We'll start with the presentation by Panu, where he will go through the key highlights of our Q2 results. We'll then move on to the Q&A session with both Panu and Jesper. We have a few of our analysts joining us live here in Helsinki, so we'll take their questions first before moving on to the online questions. And just a reminder, if you want to ask a question, please type them into the question box on your webcast panel. I will then address them in the Q&A session. But with that, I think it's time to get started. Panu, please go ahead.

Good morning also on my behalf, and welcome to our Q2 presentation. I will start my presentation, first of all, with the operating environment, then we will jump into the report published this morning. So highlights from the financials and also from the strategy execution. We will have market outlook and guidance and then key takeaways at the end. And as Elisa mentioned, we will have a separate Q&A session after my presentation, where CFO, Jesper is also joining with me and available for questions. If I start with the operating environment, the consumer electronic market here in Finland pretty much stayed the same, so it has been muted for quite a long period of time. We did not see significant changes in the consumption or discretionary shopping. We did see some early positive signs. If you look at the consumer confidence, it started to improve during the second quarter. And during June time, it has been the best since 3 or 4 years. Also, if you look at consumers' own views on economics, it has been going into the right direction during the second quarter. But with that, in a muted market, we will still able to report decent growth figures, and we gained market share. If you look at the revenue development, the growth was driven mainly by our online business, which is the key part of our business. 71.5% of all revenue is generated through our online part of the business. The strongest category, the strongest segment was our B2B business, which was growing by over 18%. Also during the second quarter, we have seasoned sales regards to spring and summer sale. It is not a huge season for us, but it's still an important part of our business. We were successful in our commercial operations during that period of time. And once again, the key highlight in growth perspective was our international business, growing by as much as 63%, driven by our success in the Swedish market. If you look at the Finnish market, our spearhead of the strategy, fast delivery capabilities is gaining momentum, is gaining our market share volumes, again, growing significantly during the second quarter by 45%. It now amounts to 30% of all online sales. We have been systematically working on our margins. It's good to bear in mind that previous year gross margin had the positive impact of our consumer financing business, which we sold last year. And that negative impact is bigger than we have currently the delta the previous year. So we have been working hard to mitigate the loss, and we are getting closer and closer to previous year levels. With dynamic pricing, successful commercial activities, also the seasonal sales, improved supplier terms, better negotiations from that side, but also category management and healthy inventory are contributing positively to our margins. The profitability was obviously positively impacted by our volumes. So growth with good margin levels, yielding in gross profit improvement. At the same time, cost efficiency improved again, some increase in personnel costs, other operating expenses going more down than that. So in total, cost efficiency was improved. And this all yielded into operating result, EUR 2.5 million comparable operating result of EUR 2.4 million, so a clear improvement to previous year. We have done wisely so. So the overstocking in certain category has been mitigated with positive category management and inventory management activities. We are now actually on lower level in absolute figures than we were previous year. we have still good availability in those component related categories. So that will be a positive impact going forward, the third and fourth quarter. So overall, the inventory turn has improved and the inventory is on a really healthy level currently. On financials, obviously, the positive execution and operations are reflecting in our balance sheet as well. Cash flow was a strong one, significant improvement to previous year. obviously related to the inventory level development. Net debt on a low level, if you exclude the lease liabilities, it's even on a negative side, strong cash position and equity ratio now almost 25%, a significant improvement to previous year. Low amount of invest as we have an investment light This, we have been refinancing the business during the June time, and now we have rolled over the EUR 50 million term loan and EUR 20 million revolving credit facility, if there's a need for that in case. Secondly, we started -- it was probably 1 of the fewest maybe the first share buyback programs of the company amounting to total value of EUR 5 million, and it's ongoing as planned. And thirdly, due to the really good financial position of the company and good execution, the Board decided this morning that the second installment of the dividend will be paid out with EUR 0.048 per share. So thank you all investors and owners for your support. Few words about the strategy execution. We are proud in the way that we are transforming the Finnish consumer electronic market and being the trade player in making fast deliveries, the new norm. Like I said, the volumes grew by 45%. Even more important for me personally is that more and more consumers are adapting to this new way of shopping. The customer base increased as much as 65% during the quarter. We have also slightly expanded the coverage of fast deliveries and now we are really dominant with this approach to the market. If you look at the areas where we are offering fast deliveries, almost half of all online sales are tied up to fast delivery capabilities, and that is huge. Secondly, we are proud to be the market leader in the Finnish market. We are gaining market share, but this is not enough. We want to have additional growth outside of the Finnish market. We have been systematically building these capabilities and the international business grew by 63%, driven by the success in the Swedish market. In the Swedish market, we have platform partnerships with CDON and Amazon both were contributing positively during the second quarter as well as our own channels where we are selling directly to the Swedish consumers. We have a positive development in our partner network in Central Europe. So we try to find always new good partners where we can distribute our high qualitative products. We are building the brand that is standing out also when comparing best in breed. So not only in the Finnish market, but internationally as well. So we are proud to see that our marketing efforts are being recognized internationally as we won the Silver Lion in Cannes for our TikTok Currency viral payback campaign. In addition, our customer experience is benchmarked to the best in class, not in Finland, but Nordics and Europe and globally. And we were really now to be best in Finland based in electronics in general; and third overall in omnichannel index during this year. So what do we expect from the latter half of the year. Like I said in the beginning, we see the first positive signs of a recovery. The consumer confidence, most of the time has been a leading indicator which is then transported in consumption and discretionary shopping. So that is the one. Secondly, consumers' confidence in on economics is also going in the right direction. The bank institutes [indiscernible] are also expecting GDP to starting recover. Probably, it will be a slow and gradual improvement, not something [ erupt ] but these are positive signs that should be transported in consumption. Regardless of the market, we are confident that our business model stands out, and we are able to gain market share and have growth regardless of the market development. And therefore, there's no need to update our guidance. We do believe that we will be having growth year this year and the comparable operating result will improve from previous year. Previous year, the level was EUR 14.8 million. So if I sum up the second quarter, it was totally in line with our own internal expectations. The market is showing the first signs of recovery, but that didn't have any positive impact on consumption during the second quarter yet. We maintained our growth path and gained market share while working on our profitability, cost efficiency leading into this EBIT improvement. And as we are doing it at the same time, we are transforming the Finnish market we are executing our strategy and gaining momentum outside of the Finnish borders. Thank you all. And now we will jump into the Q&A.

All right. We are now ready for the Q&A session. And as mentioned in the beginning, we'll start with the questions from the live audience. And I saw Maria had your hand up first. So let's start with you. Can we break the microphone to Maria.

Maria Wikstrom from SEB. I had 2 specific questions. First 1 is on the price inflation that you're currently seeing on your recent purchases, I mean, given that you -- quite a lot, I mean, sold, you're already a little bit higher inventories that you took in the beginning of the year. So -- now when you go to the market, again, what kind of price inflation you see across different categories?

Thank you, Maria. It's a good question. Like I said in the presentation and during the first quarter, we were doing additional purchases in certain categories where we had the view that the prices will be going up towards the end of the year. And we still have a good amount of those carrying in our inventories that we are below the previous year is basically mostly due to the reason that we had the successful season sales. So we have been selling through better grills, ACs, ventilators. And these kind of products, so that has a positive impact on the total level of inventories as well as obsolete stock is on a healthy level and certain category management decisions are also positively impacting. So we have still a good position if I look at the availability and going forward to the third quarter, where we have the first really big season back-to-school and back-to-business. Obviously, we are already preparing for that and the preparation started already at the end of second quarter.

And what kind of price inflation if we talk about this, especially the components where you were expecting? I mean that you are going to see these price increases. And therefore, you were stocking up ahead of the curve. So what kind of price increase -- inflation you would see there?

Well, currently, we don't see any significant movements at the moment. The biggest movement with components where the price is somewhat doubled or four-folded for example, in certain cases. I think those are already in the prices that we see in the market at the moment. If nothing extraordinary happens, we don't set at the moment, expect any significant price increases. .

Okay. And then my second question is about your success in Sweden. So if you could a little bit discuss like what kind of actions, I mean, you think to facilitate this growth in the second half of the year? And then, I mean, just to catch up on the -- you talked about the direct sales channels in Sweden. So can you describe, I mean, what were these direct sales channels besides CDON and Amazon platforms?

Yes. If I start with the platforms. Like I said, in both of them in CDON and Amazon, we had a positive development. What we have done, I think we have also learned how to operate and how to maneuver in a platform, what is the pricing? And how do you campaign there? What kind of marketing is needed? What kind of categories, what kind of products, at what time are demanded. So learning from the customer insight and then perfection in the operations. And so we are getting better and better at that. We have also slightly expanded the assortment in both cases because certain categories don't necessarily have the same development in Sweden and Finland. So sometimes you can have positive outcomes in Swedish, while the market in Finland, for example, is on the other direction. Secondly, I think we are pretty much faster than before. In best cases, it takes 2 days to be fulfilling an order from the Amazon site to our products. When we started some cases to given 6 days or 5 to 6 days, which is not acceptable. So we have been addressing the supply chain and the last mile in those cases. So being faster is the second. Thirdly, probably as people are seeing us there and seeing our products, the trust starts to build up and you get more momentum on the customer base. And I think both parties also had improved their performance. So our products were better to be visible and we had better traffic. So a lot of smaller things, smaller commercial things regarding that. We are selling through our data network, avila.com, directly to Sweden. For example, TV categories is quite big in that channel. So the customer is ordering from our side, and we are selling it directly, delivery network as we probably have for the other ones as all products are fulfilled from -- either from Jätkäsaari or from our Voutila outsourced warehouse. And all of these -- they are basically about the same size and all of them had a positive impact yielded in Sweden, in total, to be doubling the revenue.

Perfect. And maybe 1 more, if you could give comments on the good success in B2B sales in the quarter.

Yes. I think -- well, there are many drivers. Well, if I start in general, I think we have been more successful in utilizing the strength that we have in consumer business also transporting that in the B2B business. The fast deliveries is also a key competitive advantages for many businesses or at least should be. This is the easiest way of making sure that your people, your employees are having the devices they need for the work. Secondly, we have had some positive new clients, new midsized or bigger clients in the Finnish market. And thirdly, also, the international B2B business was successful. So on many fronts in small, midsized in bigger companies. So it was quite broad-based, the growth that came. We are not executing in these big tenders. So there was not a big tender that we won and had a big one-off, for example. So in those, we are not currently representing and that's not impacting our business.

Arttu Heikura from Inderes. I have a few questions. First of all, do you have an estimate on the market growth during Q2.

We don't. The figures for June, at least yesterday were not in before that, I think it was flat. So we believe that it was close to flat.

The whole quarter. Yes. Okay. And then you said about the June that it was a little bit better in terms of the market or consumption. What is your view on the market development after Q2?

Well, like I said, the early signs are out there, it seems that every morning, you need to look in the newspaper to see if there's something happening geopolitically, which then might be impacting bad prices? Or then you see some turbulence in Europe or interest rates, for example. So those typically have impacted the consumer confidence. It seems that the consumer is somewhat also decoupling the own confidence from these geopolitical shocks because it seems that they are the norm at the moment. So it's always something happening. If all these take place, and the consumption is positively impacted by the consumer confidence, then you will see that in discretionary shopping, and that will be a positive boost for the Finnish economy, during the second quarter, this is what the Finnish Bank is anticipating. And this is what we also believe that could be happening if we see some continuation in these positive drivers. There will be salary increases still to come. So the purchasing power of the Finnish consumers should be on a positive side.

All right. As in Q1, the gross margin declined somewhat due to this delisted finance business and campaigns. So could you describe more clear that it's 1 of these where the -- which 1 of these had the most impact on the decline.

Well, the decline for the second quarter was more from the consumer financing business than the overall decline was. So there were underlying improvement beneath the 16.6% margin dynamic pricing, better commercial terms healthy inventory, all those contributed positively. Also good to note that the campaign activity was still fairly high during the second quarter. So the good and successful actions that we executed then offset the impact of those. And we got closer to that previous year level despite of the consumer financing divestment.

And what do you see the development in H2 given all these factors.

Of course, reliant on the market environment, but we have positive momentum ongoing. The actions that we are executing are yielding results as we saw now in the second quarter. Of course, the anniversary of the consumer finance divestment is coming closer. So we closed the divestment in September. So in that sense, also the comparison is more equal in the second half of the year than in the first half.