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Edited Transcript of VERK.HE earnings conference call or presentation 14-Feb-20 9:00am GMT

Full Year 2019 Verkkokauppa.com Oyj Earnings Call

HELSINKI Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Verkkokauppa.com Oyj earnings conference call or presentation Friday, February 14, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Panu Porkka

Verkkokauppa.com Oyj - CEO

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Presentation

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Panu Porkka, Verkkokauppa.com Oyj - CEO [1]

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All right. Good morning, everybody, and welcome to Verkkokauppa.com's Q4 presentation. Joining with me today is CFO, Mikko Forsell, who's also available for questions via mic at the end of the presentation. So if you have any questions, please feel free to send them to investors@verkkokauppa.com, and all of the questions will be read out loud at the end of the Q&A section.

To my today's agenda, it will be probably 30 minutes long. First, I will take -- pinpoint few highlights out of the report of this morning and then also resume of the whole year, then our view on the market, market developments, then we go deeper into this year guidance and what we are developing on. And then at the end, we have a short summary and then questions if there are any.

But few things taking from the report in the morning. First of all, revenue stood at EUR 160 million, with a growth of 3%, a bit slow for our historical growth. But what you have to consider is that at the previous year in Q4, we had a growth of 22%. So we were still able to top that with the growth, so we can be happy about it.

The second thing is profit. Profit was EUR 4.5 million, below that of last year, mainly due to the margin what we had to invest in a tougher market than expected. I will go that through in detail later on.

Third, as a resume, last year, the company has paid out a quarterly growing dividend, and it is highly expected that the Board also proposes this to the AGM that we continue like that. And there will be a growing -- a quarterly dividend also for this year for all the investors.

But already at this point story of this great company, founded back in '92, we've been working 28 years to achieve this goal. And now for the first time, we broke the barrier of EUR 0.5 billion in revenue. We are super happy and super proud of that. We will celebrate it internally, and I wanted to share this great information also with you investors.

But if we have some deep look at the figures, we talked about the revenue already. The next interesting thing, what you see is the gross margin, the gross margin actually declined almost 1% point to previous year, which basically meant that we had to invest in short more margin to support the revenue, to support growth than we had already planned. If you do short-term actions in pricing or campaigning, normally, it affects right away the margin because there's no possibility of negotiating prices new with the suppliers. So that's the reason for the declining margin.

On expenses side, personnel expenses slightly up. Other operating expenses on the contrary, slightly down. So not about that.

And if you calculate EUR 12.5 million EBIT, which was lower than that of the previous year. So all in all, a tough quarter to get revenue growth. We have to invest more margin in it, but still came out with 24th consecutive growth quarter. And let's go the revenue development later in detail through.

From the balance sheet, few highlights. Inventory was slightly up to previous year, mainly due to the reason that we expect that the revenue development be a bit more positive than it was, but we can utilize this for the coming months to go. Cash flow from operating activities at this point of the year always positive, slightly better than last year or previous year. Cash position super strong, over EUR 40 million on the bank account. And on top of that, we have an undrawn credit facility of EUR 20 million. If we would see a need for major investments or saw opportunities in the market, which there are none at the moment, so therefore, no need to take that in action.

So equity ratio on a high level, as previous year as well. Financial situation of the company solid. No debt, no interest-bearing debt at all. So there's nothing changing of that good situation.

The sales development had few more incidents than normally, first some internal things. The campaigning around Black Friday was actually the most successful that we have ever done in the company's history. We broke all records in all channels, in all stores during that time of year. So we have never ever sold more than we did on that time of the year.

But on the contrary, the time before -- weeks before that and few weeks after that, the consumer demand was weak. So basically, the consumer demand concentrated around that campaign, which was partly expected.

Another thing, a Finnish-specific thing is that we have usually paid out a large amount of tax refunds in the mid-December time every year. Last year, it was the first time that we didn't. So we didn't see the peak in revenue at that point of the month, so we actually lost some sales. So that was not expected to hit the development as hard as it did.

And third thing, which was also Finnish-specific. We had an unfortunate Finnish post office strike situation, as we are super strong in e-commerce in that, and posting is the most taking way of delivery. It has a major -- it had a major effect on our sales and sales development, which we couldn't otherwise compensate.

If you look at the categories, in TV, phones, computers, we are in a high market share level. It is very, very hard to achieve high realized a larger assortment than the main competitors.

And due to those external reasons, we have to take a children apparel. And in those segments, we really invested in marketing and campaigning and large assortment and, therefore, we were able to gain market share in that segment.

Black Friday, we already talked about, and this is actually a big milestone, big achievement for the company. In Finland, we measure the brand awareness and the top brands on a continuous basis. And at the end of last year, Verkkokauppa.com was able to be first time in history, among the top 10 brands when asked from the consumer in Finland. We actually make sure that few of the old, old very known brands got rid of this list, and we were able to get on this list for the first time. So actually, we have only worked around that brand and the brand campaigning only for a year's time. And it was a bit surprising for us that already, at this point, we are on this list.

Now the main task is to maintain on the list. But I don't see it impossible to even be on a higher level at few years to come.

If we conclude the whole year, like I said, the barrier of EUR 0.5 billion was broken, and the next barrier is obviously EUR 1 billion mark. And I can assure you that it doesn't take 28 years, but it will definitely take some years' time before we achieve that. The gross margin was actually below that of last year.

So all in all, a year where we had to invest a bit more margin to get the growth. Expenses slightly up, 8% in personnel and other operating expenses. We expect that at this point, we are in the level where we need to be. And the next coming growth will be then profitable ones.

So all in all, EBIT stood at EUR 11.3 million, which was EUR 2 million below last year, but pretty close to expectations. Because the first half of the year was more growth-driven and the second half of the year, especially the Q3 was super strong in profitability.

So what did we do in operational development last year? We said that we are going to enlarge in our assortment. We did at the beginning of last year, we introduced a new category in Ball Sports. And there was new brands and over 1,300 products implemented into our assortment. We also said that we are going to start the brand campaigning with it, and you see -- you saw some of the development that we hit the list of top 10 brands for the first time, but actually also a good measurement for the brand awareness is to visit the amount of -- on the website, and it increased last year by 28%. And we had, in total, 72 million visitors on our website. So we are really the first place to look for new products, for technologies, for product information and videos and also price comparison. So we are a bit like a search engine here in Finland, and we can utilize this position for the coming years also to convent -- convert into consumers.

Customer experience has been top priority for a few years. The major change, what we did last year, all of the web operation, the web store was transferred to cloud. And I think that was the main reason that we were able to pull through operational excellence during the peak seasons in Black Friday at a site functions without any hiccups. And I think we were much more better positioned than we were the year before and even if you compare the main competitors. Also, the stores saw some renewable, we take care of our 4 mega stores as well. In Helsinki store, we updated TV section, TV department. And in Oulu store, we improved the customer flow and also the pickup area.

We are still searching for logistical solutions. Last year, we did a major change as we shifted all the external inventory from one small warehouse into a bigger, more modern one, in Voutila that was done just before the peak season in Black Friday. And probably also one reason that the delivery promise that we have, we could maintain throughout the peak season. And that is also something that we can build on if we choose to enlarge in the assortment in the future.

And the last what we have said that we will pay out a quarterly growing dividend, and that is something that we have been doing for the last years.

Few things about the market. And here, you see analysis from Statista. And they said that the total e-commerce share of retail market worldwide, last year, was 14%, and they expect that to increase in the coming 4 years, up to 22%. So retail is going online and probably even at a faster pace that it has been doing for the last years. And we, in our position, obviously want to utilize that. So we want to have the big share of the transformation from online -- offline to online as we show e-commerce player, so we expect that the market development and the consumer development are in favor of our business model.

The other thing is, here, you see some analysis about categories in Finland. And here, for example, in building materials, back in year 2017, the market share of e-com in that segment was about 8%. In last year, '19, it was about 13%. And here, you can see the shift in the Finnish market throughout the year. So in each category, the retail is going online.

In addition, you see in those categories, where Amazon is present with Prime and local site that in those countries, the market share of e-com is extremely higher than in those markets. For example, in Finland, where they are not present. So what we wanted to say about this is that actually strong e-commerce player is Verkkokauppa.com or Amazon or Alibaba or Wish or whatever. The stronger the e-commerce is in the specific market, the higher is the share of the e-commerce of the total retail. So basically meaning that e-com is competing against offline more than e-com is competing against each other. And that will also support the transformation from our offline to online in the future.

So what do we want to be? We said, I think our business model is super in place. We really want to be the highlighted, the benchmarked retail player in the Nordics, not meaning that we will expand in other countries. But on an operational level, we want to be that one who is highlighted to be one of the top players in the retail landscape. We think that our business model with low-cost structure, with a strong local brand and with an own ecosystem, which is built from the inside out, which we can develop agilely, not with big project needed. And this kind of business model with strong prep supported by super stores on the most important market, we think that this is the business model that will take us also to higher revenue and higher profitability going into the future.

So what do we expect for this year? What are we improving in our business this year? We see a lot of potential in the product information, in the processes, in the management system. So we are investing in that. The project that already started. We expect that with this kind of job, we can actually increase the conversion on the website. And also the search engine accessibility will be higher. And this is also something which makes us even faster if we implement new products and new categories as this is automated and enriched automatically.

The other thing is our assortment and supply chain. We are looking into different kind of models, for example, drop shipment, how we can automate, digitalize our supply chain management, so that if we want to enlargen the assortment, for example, from the 70,000 that we have SKUs at the moment, to 100,000, 200,000 or 300,000. We need to have other solutions as well so that we don't have all of the assortment in our own logistical, say, chain. So that kind of project has been started, and that will support the growth in midterm coming.

The third thing is our marketing. It is functioning good, but we see a lot of potential in the marketing performance, how we can be even more active, have higher loyalty, higher customer lifetime value. And I think we can also scale down some of the cost of the acquisition that we have at the moment, if we have better tools and better management system around that.

And for, obviously, consumer and customer experiences, how to combine stores, how to build up loyalty. So we are working on smaller projects to enhance also the usability of the store and increasing loyalty and traffic on the website.

Two major backbones of our business: category, assortment, and the other one is, obviously, logistics and deliveries. Our categories is evolving constantly. We have, at the moment, several negotiations with high-end A brands, those kind of players who didn't typically want to play with the e-commerce. They needed the physical footprint. Now the game is changing, and we are expecting to implement one of those key high-end suppliers already this year. And on top of that, there's good negotiations that we are able to implement a new subcategory during the first half of the year.

Obviously, as our assortment and our revenue is growing, more and more categories come to a mature size and private label option comes more and more relevant. Because we can have the minimum order amounts to the suppliers. So this will be a nice tool also to have a positive mix on the margin and, therefore, also increase the margin in the future.

But whatever we do, it is private label A brand, high-end brand, we will always be true to the bone. We will be transparent to the consumers. We want to be the reliable partner that the customer come to our website, make purchases and know that they will have it probably always cheaper if they interact with us.

The other backbone, our logistical setup and deliveries on top of that, that we are also looking on the total architecture, we are working hard on delivery options. I think as the leading retailer, we need to have the fastest and the most reliable ways of delivering. We have already introduced, beginning of this year, new same-day delivery option with the cut-off time at 2:00 p.m. for greater Helsinki area. We are the first one to introduce that in Finland. We are working hard on guaranteed next day deliveries for Southern Finland part. That will be probably implemented in the first half of this year. We have already 3-hour speed deliveries in Helsinki area, and we did some pilots at the end of last year with green deliveries. Start, the consumer demand wasn't high, but we will not give up. We will also want to make our share in those kind of things and introduce always an option for the consumer to make those kind of decisions.

So what do we expect from the numbers? So we are guiding revenue to be between EUR 510 million and EUR 530 million. So basically having growth, EUR 20 million, EUR 30 million. Still a high amount of growth, almost the size of the next pure e-com player here in Finland. But slowly shifting our focus and emphasis on the profitability, we expect the profit to be better and higher this year and somewhere between EUR 12 million and EUR 15 million. So besides on having market share gains, we -- the first and foremost focus is to have higher profitability this year with the things that we have done last year and things that we are improving and developing this year.

And the third big milestone today, a fun fair of things, new things to implement. Last evening, the Board decided that a natural next step for the company will be the investigation to transfer to Nasdaq Helsinki's so-called main list. The company was listed in First North back in 2014. We've been growing during those years. We've been developing our internal processes. For 1 year, we've been working hard on the reporting. We implemented IFRS as one of the first players here in Finland, and we have matured now, and this is a big step. And the Board decided that it is the right time to move or start the negotiations for the movable into the main list. And this needs some work during this year, but this is also a nice news for those investors who are only investing in main list companies. So that will also add on visibility from the investor landscape in the future.

So what should you remember out of this? Well, first of all, a big barrier, a big milestone for the company, EUR 0.5 billion is broken. We will celebrate it internally. Thank you all the colleagues, all the workers who have been working around that team. I'm super proud of my staff. And the second thing is the milestone that we will be probably hitting is the main listing during this year. And third one is that the brand is in a better position that it has ever been. We are most known and most loved brand and among the top 10 brands in Finland in total. So that is a big achievement from the company.

Q4 wasn't easy, more than expected external issues, reflecting the sale. Still we -- with hard work, we were able to pull a revenue growth, and we can be happy from the year in total. From the transition -- or from the priorities, you should remember that this year, we will focus more in profitability, but still outgrowing the market. But if you would have to choose, then we will have better profitability than maximizing the growth at this point as we are already in a mature state of the company.

All right. Before we start with questions, well, I understood that there are none. So we are #1 reseller of bikes actually at the moment in Finland and in contrary to maybe other players who have problems with snow or actually problems with no snow. We don't have any problems with that because the bicycle revenue is booming. People are buying already new bikes. We have a lot of stock in that. So please come to the site, search for the best possible bike and enjoy your spring.

Thank you all. Super happy Valentine and the coming weekend. Thank you.