Q2 2020 Tokmanni Group Corp Earnings Call
Mantsala Aug 20, 2020 (Thomson StreetEvents) — Edited Transcript of Tokmanni Group Corp earnings conference call or presentation Wednesday, July 29, 2020 at 8:30:00am GMT
TEXT version of Transcript
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Corporate Participants
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* Markku Pirskanen
Tokmanni Group Oyj – CFO, Deputy CEO & Member of Executive Board
* Mika Rautiainen
Tokmanni Group Oyj – CEO & Member of Executive Board
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Conference Call Participants
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* Nicklas Skogman
Handelsbanken Capital Markets AB, Research Division – Research Analyst
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Presentation
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Mika Rautiainen, Tokmanni Group Oyj – CEO & Member of Executive Board [1]
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Welcome to Tokmanni’s Second Quarter Result Presentation. My name is Mika Rautiainen, and I’m the CEO of Tokmanni Group. And today, with me, I have Tokmanni’s CFO, Mr. Markku Pirskanen. First, I will go through the second quarter highlights, and Markku will then dig deeper with the numbers. After that, I’ll come back and — to the outlook for the second half of this year. Then we’ll have time for your questions.
Well, it’s — it’s of course, my great pleasure to share the results of the second quarter of Tokmanni with you. It’s been a very strong quarter for Tokmanni in a very difficult environment. And that’s, of course, many thanks to our customers and personnel. We think that one of the key drivers for the great performance was basically the customer confidence that we’ve been building up for the last couple of years. It has been on a very, very high level, and of course in this situation, we basically had our, let’s say, most difficult times in the end of March. And then we decided that we won’t start any — we won’t do any layoffs of personnel, and we just decided that we’ll go through these difficult times together. And basically, our Tokmanni employees, they’ve been doing fantastic job during these exceptional times. And luckily enough, we were only — we were — we had basically 3 registered corona cases within the company of more than 4,000 people working for Tokmanni.
And due to this fantastic job, we basically — we’ve decided to give a special reward for our personnel from the second quarter performance. The spring season was basically excellent for Tokmanni and the very strong revenue growth that also led to result, to a very strong result. Of course, we had, well, almost 20% revenue growth. At the same time, with the supply chain, especially in our warehouse, we — we’re forced to basically make sure that employees in our warehouse, they are in a very safe situation.
We basically had to divide the whole team in very, very small groups, and this led to, let’s say, 10% less efficient work flow in — with our supply chain. This, combined with plus-20% higher sales, I think that — on the best weeks, we had plus 40% to plus 50% growth. So this combination was, of course, very difficult. And the shelf availability in our stores, that was on a couple of weeks, it was on a very difficult level or let’s say, bad level and not according to our targets. But of course, we’re working at the moment, very hard, too, to get the situation back on track.
In Finland, and I’m sure other countries as well, there is a lot of question or discussion regarding the changes in — with the retail business from the stores to online. These are the figures, which actually don’t include the customer visits from our online business. And the like-for-like customer visits for the first half of 2020, it was plus 2.2%. We consider this as a very, very good achievement.
As mentioned, the end of the first quarter of this year was very difficult. It was a dramatic drop with the customer visits in our stores. And of course, in the beginning of April, it was still — well, it was — there was no growth at all. So considering all of this, we think that this is a very good achievement. We were able to invite a lot of new customers in the Tokmanni stores.
And of course, in the end of March and the beginning of April, we also decided to stick to a discount model as strong as we can to make sure that we will succeed in these difficult times. Of course, the average basket was basically on an excellent growth. We — especially the — all the product groups that were related to basically our customers’ home and whether it’s like home decoration, home improvement, all of these product groups, they were doing excellent as well as food products, and we’re doing very, very well.
At the same time, with the clothing and cosmetics, these product groups, the sales development was lower. Actually, with clothing, it was a little bit lower than in the previous year. And that’s only natural when people were basically staying at home and also, like, working online. So there was no real need for new clothing products. But I would say that I personally consider this as a great achievement that we were reaching almost the same level as in previous year.
And then about the figures. Both revenue and result grew very strongly. This was already — the revenue figures were already informed before in the beginning of July. We also mentioned that we expect that the gross margin will be slightly lower than last year. It ended actually with 0.7% lower level compared to last year.
And comparable EBIT during this — the second quarter was a EUR 30.6 million from our point of view, on a very good level, 10.7%. And cash flow from the operating activities amounted on to EUR 70 million — almost EUR 79 million.
A big change with this was, of course, with the better results and better control with the working capital.
Earnings per share during the second quarter were EUR 0.38. About the online sales, of course, it grew strongly from the end of March. I think that the — basically new customers or customer visits, it was like 3x higher than previous year. The online sales, it’s still on a very low level, 1.4% of total revenue. But of course, a very positive thing is that it — the business was — the online business was profitable.
We were successful with the expansion of product range, especially for the online business. And then, of course, the customer experience, site functionality and how to find products, these improved significantly and that was, of course, a very positive thing. We actually — the visitors on our website, there was a very, very strong growth. And the combination with our online business and with our nationwide store network with 190 stores, that works very well together.
Basically, in Finland, Tokmanni is located approximately 5 minutes for every Finn. So it’s actually quite easy to check it — check the products out on the — our website. And then just 5 minutes away, you can pick up the product.
They seem to work very well for Tokmanni.
Well, regarding the first half of 2020, revenue growth was 13.3%, and like-for-like growth was 11.8%, very good figures. We were basically at the same level with the gross margin being 33.5% compared to last year’s 33.4%. The EBIT amounted to EUR 30.9 million compared to last year’s 16.5%. So the growth was very good.
And as already mentioned, the cash flow was significantly higher than the previous year, amounted to EUR 55.3 million. And earnings per share, EUR 0.34. Based on these figures, Tokmanni Board of Directors have made a decision of an additional dividend for year 2019, and it will be EUR 0.37 per share, and this will basically be in addition to the EUR 0.25, which was paid on the 12th of June this year. And altogether, this is EUR 0.62, as the plan was originally.
So basically, we feel that the situation for Tokmanni is getting more normal. Actually, it’s even better than normal. So we are able to stick to the original plans when it comes to the Tokmanni dividend from year 2019. And as a last part of the highlights of the second quarter, it’s the Tokmanni and nongrocery market development. And here, you can see Tokmanni figures with the red line. And then it’s the Finnish Grocery Trade Association’s information regarding the department store and hypermarket chains. And as you can see, the nongrocery market was developing positively during the second quarter, but Tokmanni really gained some market share when it comes to the nongrocery market. This is, of course, very good from our perspective.
So that’s the highlights of the second quarter, and then Markku, please, can you open up a little bit financial details? Please go ahead.
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Markku Pirskanen, Tokmanni Group Oyj – CFO, Deputy CEO & Member of Executive Board [2]
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Thank you. So let’s go a bit deeper on the financials, and then I will start about revenue, and then looking with Q2 numbers and taking a little bit longer time frame by taking also the figures from Q2 2018.
And as we see, we have had a good development during the last 3 Q2s, and this 19.2%, which we achieved now 2020. It’s — we can say it’s exceptional. And of course, when we are looking at last year, we achieved 10 — over 10% increase. So these two together are our big numbers. What’s good here is our operating profit — no, sorry, EBIT figure. And when we are looking 2018 Q2, we were at the level of EUR 13 million. And now coming up to EUR 30.6 million, which is very good development.
Comparable gross profit, we had a good revenue. And due to this nice good revenue, we achieved also higher gross profit when we are looking that on a euro — euros and then that’s, of course, the most important thing that you will get more euros there. But when we are looking on percentage-wise, we had an — now 34.5% compared to last year’s 35.2%. So we lost 0.7% in gross margin percentage. And this is due to the two different reasons.
Mika already mentioned that in the beginning of April, we started to push our prices so that the customer has good, good prices. And of course, it was a little bit unstable or not a little bit, it was an unstable situation, and we didn’t know how the demand will develop, and we wanted to ensure the good revenue by pushing with the prices. And that, of course, effected to our gross margin percentages.
Another thing which effected to the margin was also the sales structure. People bought different kind of products, what they have usually bought during the Q2. We estimated that when we published second of July the pre-information about our revenue and margin, but it will be — the difference to the last year Q2 will be at 1%, and we ended up to 0.7%, which is, of course, good because it’s lower figure, lower difference.
And then there were two different reasons behind that. Our shrinkage, when we look at that on proportional way, was on better position compared last year. And also, we were managing better our inventory, which meant that we didn’t have so much non-marketable products at the end of Q2.
All in all, looking at the situation after 6 months, our gross margin percentage is about the same level compared last year. We have said that we are targeting to increase private label’s shares — share. And now looking the numbers after 6 months, we are about the same level compared to last year, but especially during Q2, due to the reason that the sales mix was different, we were on a lower level, so ending up 31.4% compared to last year’s 32.2%. And that’s as said, it’s coming from our sales structure. This private label is going on hand-to-hand with our direct import, somewhat hand-to-hand. During Q2, the private label share was a bit lower. But when we are looking at our direct import share, we managed to increase it a bit. We ended to up to 25.1% compared last year, 24.4%, so there are 0.7 percentage unit increase. But of course, when we are looking at the cumulative figures, we see that the increase was slower during Q2 compared to Q1 2020.
Revenue margin and after that, looking at operating expenses and have to say that operating expenses were well in control. And euro-wise, somewhat increased. But when we are looking for relative figures we achieved during Q2, 18.5% operating expenses against the revenue compared to last year’s 21.5%.
So there are 3% difference, and that’s — how would I say? Big amount. And of course, it — if when we are going forward, most probably very difficult to achieve these kind of steps. But when looking Q2, very good performance,when we are looking operating expenses.
And the biggest part here in operating expenses are personnel expenses. And we see that we had a EUR 31.8 million personnel expenses out of that with total expenses, which were EUR 52.9 million. And also when we are looking personnel expenses, 11.1% against 12.9%. So good development on that side, too.
But however, different kind of items which effected to our personnel expenses. There were pluses and minuses. It was clear that when we’ve made some arrangements to prevent the spread of coronavirus epidemic, we have to make the different kind of shifts, separate the shifts in stores and our logistics center. That’s clear that way effect to our efficiency there, which increased the expenses.
The other one which effect here is the additional bonuses to employees, EUR 0.6 million, which we are paying and have to say that these people really deserve this bonuses when we have been serving the customers and then taking somewhat risks with the coronavirus. Other direction on cost side was with employee pension payment reduction, which was decided by the Finnish government. And it’s temporary and then it effected to the Q2 by EUR 0.9 million.
Comparable EBIT. We already discussed about the numbers. But looking the percentages, we see that when we are looking at the 6 months development last year, 3.9%. And now we achieved 6.4% and I have to say that the — that’s good, good development.
Balance sheet, financing and cash flow. Especially when this coronavirus epidemic started, we put strong emphasis on cash flow and in finance situation. And one part that was, of course, with postponement — postponing, difficult word, postponing the payment of dividend. But also, we are looking the investments and then this kind of issue by really concentrating how our cash flow will develop during Q2.
But now afterwards, we can see that we were managing well with our inventory and due to the good inventory management and good result, the cash flow was very strong during the first half of a year. And when we are looking our cash position at the end of June, we see that now we have EUR 49.8 million and comparing with last year’s figure of EUR 5.8 million. So the cash position is — really, as said, stable.
Interesting — interest-bearing debt, it’s EUR 420 million. And mostly, these liabilities are coming from our lease liabilities. But at the same time, saying that as a whole, EUR 110 million are so-called real debt out of that EUR 420 million. Ratio of net debt to comparable EBITDA was 2.5%. And at the same time, saying that our long-term target is 3.2% and so we are now under this 3.2% clearly.
And about the investments, as I already have mentioned that when we were — at the beginning of April and when coronavirus started, we decided to postpone some investments to our store network and secure our cash flow. And therefore we can see that our investments during Q2 ’20, is only EUR 3.1 million and last year, it was EUR 5.6 million. So we are clearly on a lower level. But now when the situation has somewhat came here in Finland, back to not normal, but at least near-normal, we are starting to make the investments to our store network again, and we are expecting them to be at the level of EUR 15 million, which was also originally planned earlier.
So that’s about the numbers somewhat and now Mika will continue again by looking the H2 2020. Thank you.
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Mika Rautiainen, Tokmanni Group Oyj – CEO & Member of Executive Board [3]
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Thank you, Markku. Well, as described, the combination of a very strong customer confidence in Tokmanni, excellent spring/summer season and Tokmanni’s very active commercial plan during the second quarter, this was very successful. And obviously, we will have a very strong focus on discount retailing during the second half of the year as well.
However, I have to also say that during the third quarter, it’s not really any specific season for Tokmanni. Of course, the most important season is Christmas season, which is basically the fourth quarter. But we feel that the situation in Finland will start getting a little bit closer to the normal commercial situation. But of course, our key actions, we will continue all the investments regarding the security and well-being of our customers, personnel and partners.
For Tokmanni, of course, as you can see from the big picture, the warehouse supply chain is very critical, and we’re really investing to, first of all, getting the shelf availability on track, plus, of course, for maybe if there will be a second wave of COVID-19 also in Finland. We basically made all the preparation for it.
During the Spring season, basically, during the first — or in the end of the first quarter of this year, we had from 2- to 4-week delay with our imports from Far East for our spring season. Now this time, we’ve been making the action points to secure the supply chain and product flow from Far East. And we will have the — basically the Christmas season products in Finland. Part of them is already over here, but latest in the beginning of September.
So basically, during October — sorry, basically during August, they will be here in Finland, so we will kind of secure the sales of Christmas season. And as mentioned already several times, we will be improving the efficiency of the supply chain and the shelf availability.
And the strong commercial plan for the rest of the year, we will continue with that. We basically made the plan end March, beginning April. And of course, it had — it has basically showed that it works well, so we’ll continue with this one.
And based on all this information, we — our outlook, we will forecast a strong growth in revenue and like-for-like revenue in 2020. And the group profitability is expected to improve on the previous year. Of course, this outlook is basically — it’s based on the assumption that there will be no significant disturbances or situations with the environment of Tokmanni business.
So basically, that’s it. And operator, I think it’s now good time for questions. Markku, could you please come over here as well to answer the questions. Please go ahead.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Our first question is from Nicklas Skogman from Handelsbanken.
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Nicklas Skogman, Handelsbanken Capital Markets AB, Research Division – Research Analyst [2]
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Yes. I’m, of course, keen to hear what you can say about current trading. In the report, you said that currently, shopping behavior has returned to almost normal. Are you then talking about the way people shop, buying more normal average baskets and more normal traffic, store traffic?
And maybe that sales remain elevated because of more domestic holidaying and so on? Or do you actually mean that sales growth is trending down toward normal like-for-like levels now already in July?
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Mika Rautiainen, Tokmanni Group Oyj – CEO & Member of Executive Board [3]
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Well, yes. Well, I think we cannot speak about the normal situation, really, with the current situation. But let’s put it this way. First of all, in the end of March, it was a dramatic drop with the customer visits. Then during the — or in June, basically, as Nicklas, you very well know this, mid-summer timing. So during that timing in the middle of June, the customers’ visits were — they were very strong growth with that.
And so first down and then up there quite a lot. And then I think that now, the level is getting more normal to — from our perspective. But of course, it’s very early to really say anything thing about this, but let’s say that there are no dramatic changes. As mentioned that we were in June, like the revenue growth was — and then there were weeks with plus-40%, 4-0, to plus-50%. So that’s, of course, something very, very special, but now it’s getting more to the normal.
I would say that the average basket is a little bit higher. I think that we also — we were basically — we succeeded with the seasonal products. We were able to — or basically our buying and sourcing, we’re doing a very, very good job with having an very good assortment of products. And now when the school start is getting closer, well, it’s too early to say anything about the average basket. But it’s like it’s on a positive normal level.
It’s a very round answer, but I’m sure you understand why.
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Markku Pirskanen, Tokmanni Group Oyj – CFO, Deputy CEO & Member of Executive Board [4]
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But as an additional, what Mika said, it’s clear that this Q2 was exceptional. And then, too, as said, we are coming back to the normal direction.
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Nicklas Skogman, Handelsbanken Capital Markets AB, Research Division – Research Analyst [5]
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Okay. It still sounds like July is pretty strong though. Okay. On your guidance, I don’t think you have ever defined what you mean by strong sales growth. But should we assume that you’re talking 5% to 10%?
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Mika Rautiainen, Tokmanni Group Oyj – CEO & Member of Executive Board [6]
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Well, if it’s, let’s say, 5%, I would call it already with retail, I would call it already a strong growth.
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Nicklas Skogman, Handelsbanken Capital Markets AB, Research Division – Research Analyst [7]
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Okay. And then finally for now at least, I’m looking at your — the other operating expenses, OpEx, excluding staff costs. They only increased by less than 2% in the quarter. Did you hold back on marketing? Or is there anything else that’s on a low level in Q2?
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Markku Pirskanen, Tokmanni Group Oyj – CFO, Deputy CEO & Member of Executive Board [8]
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There are clearly certain items in which we got the savings because people were working remotely. It, of course, meant that we were traveling which would save — make some saves. They were not driving with their cars, which will make some savings.
And then this kind of stuff we achieved there. Of course, they are not huge, but of course, they are also effect there, but marketing was roughly on the normal level.
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Mika Rautiainen, Tokmanni Group Oyj – CEO & Member of Executive Board [9]
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Yes. Actually, we even made some investments with the marketing because we, yes, again, in the beginning of the quarter, the second quarter, we decided that as a discounter, we try to push it hard.
If there is like a drop with all the retail, we will be there like still getting some market share. And we did make some investments, additional investments with the marketing. So no savings from there, but let’s say, not huge additional costs either.
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Operator [10]
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(Operator Instructions) And there seem to be no further audio questions at the time. I will hand it back to the speakers.
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Mika Rautiainen, Tokmanni Group Oyj – CEO & Member of Executive Board [11]
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Okay. Thank you all, and thank you very much. The next third quarter presentation will be published on the 29th of October. See you latest then. Thank you.
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Markku Pirskanen, Tokmanni Group Oyj – CFO, Deputy CEO & Member of Executive Board [12]
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Thank you.