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Edited Transcript of VERK.HE earnings conference call or presentation 25-Oct-19 8:00am GMT

Q3 2019 Verkkokauppa.com Oyj Earnings Call

HELSINKI Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Verkkokauppa.com Oyj earnings conference call or presentation Friday, October 25, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mikko Forsell

Verkkokauppa.com Oyj - CFO

* 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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Welcome, everybody, to Verkkokauppa.com's Q3 presentation. If you have any questions, please send them to us through investors@verkkokauppa.com, and the questions will be read out loud at the end of the presentation in the Q&A section, either by me or our CFO, Mikko Forsell, who's also joining us here today.

In my -- today's agenda, I will firstly go through some highlights out of the morning's report. Then I will give our insight throughout the rest of the year and maybe next years to come. And then at the end, we will have a short summary and questions, if there are any.

Few highlights out of the morning's report. First of all, revenue, obviously, most important topic. Revenues stood at EUR 121 million, with a growth of 3%, which is a bit less than we were having before in the quarters, but still outgrowing the market slightly. So we can be pleased about that.

The second thing and the major change to the first half of the year is the profitability. The EBIT stood strong at EUR 4.3 million. And there was actually a growth of 17% to last year's performance, which was already lifted from the previous year. So on the profitability side, we can be pleased about the third quarter.

And the last one, and not that expected -- unexpected is that the -- this morning, the Board of Directors resolved to pay out a quarterly growing dividend, EUR 0.051 per share. So thank you all investors, all owners and welcome all new investors to board this great company.

If we have a deeper look into the figures, revenue we already talked about. The major change and shift comes from the gross margin, which then reflects also down to EBIT level. And there are 3 main reasons regarding the gross margin percent point being almost 1% point higher than last year. First of all, we have been taking care of our stock and cleared it throughout the year, so we are able to outsell now products with a better margin than we were able in the previous quarters.

Second of all is the sales mix. As the big categories, TV, phones and computers have headwind at the moment, we are able to outperform those with midsized and small categories. And in those categories, the average margin is higher than in the bigger categories. So throughout the sales mix, the average margin is lifted.

And obviously, third part is that as we have been growing for several, several years now, we get more and more presence and importance in the Nordic landscape. Obviously, we can utilize this as we go on to deepen our partnership with some suppliers, which means that we get better terms and better conditions and better support as well. So those 3 combined, giving a healthy margin for this quarter.

On the expense side, nothing that's spectacular. In personnel expenses, you see a slight increase, basically because the company is growing. So we need to take care that we have also all capabilities and resources to make sure that we grow also in midterm and long term. The second part of the expenses being the operating or other expenses, mainly reasoning out of the marketing campaigns and marketing budget, which is higher than it was last year. I have a few insights about that. And if you then go down, calculate them, we get an operating margin of 3.6%, which is decent for a retail player.

So all in all, if you look at the figures, a solid quarter, outperforming the market slightly, healthy margin, costs in line, lean operations, leading to a very good operational profit. And also, a thing that we are proud of, it was the 23rd consecutive quarter in a row that we have been able to grow. I don't think there are many companies like us out there.

And about the sales, a few detailed information. The big categories, like I said, were facing headwind, and we were able to out-compensate those with midsized and small-sized categories. Also, one thing significantly affecting our phone categories, obviously, the sanctions, which refer then to Huawei and Honor brands, also impacted us. And in short term, it is impossible to compensate that loss with other brands. As we go along towards the end of the year and next year, I think that will be then shifted towards other brands.

Still, we are very eager to maintain our price promise. The price fight is quite tight at the moment in Finland, so we keep on holding on to the promise probably, always cheaper prices. What didn't have that big of an effect in sales was actually the tax refunds, which are now distributed here in Finland to 4 different time periods, prior being only distributed at the beginning of December. So we need to see what that effect is for the rest of the year.

Few highlights out of the bigger marketing activities portfolio. The biggest one concerning Q3 was Habitare fair. It is one of the biggest fairs in Finland, and it is actually very nice to see that with our presence, we have the biggest display that was allowed. We were able to meet a lot of new clients out of new customer groups who didn't know us at all or, at least, didn't know how large our assortment was. So with these kind of activities, not only tactical, we are also able to tell our story and get our brand more known and therefore, also convert those into clients in the coming future.

The brand campaigning with production and TV advertising started Phase II in this quarter and will continue also in Q4. So a lot of campaigning, a lot of brand building. And that, obviously, cost some money, but we see it as investments and therefore, also expect that to have a positive impact on customer numbers.

Second thing is, those who are familiar with Finnish landscape maybe heard about it, there was a big survey done by Finnish post office for Finnish consumer landscape, and they were asked who or which web store is the best one. And we were voted the Best Finnish Webstore, which we can be pleased about. While we are not that happy about it because we were on position 2, position 1 was one international giant selling clothes, so therefore, we see there's also room even to continue to develop our performance for the coming future. We have our plans for that. We are very eager to be the best in line -- in our line of business in Nordics or in Europe. We just launched a new site, a search engine for our site, which is cloud-based, utilizing AI. So I think we will have the best personalization that we have had before, and many, many other things around that will be also implemented.

Balance sheet, shortly also tactical, we wanted to have most of the seasonal goods, the pressure on our logistics. Second of all, we wanted to have the best availability when starting into the season. And third, with this kind of purchasing mechanisms, we were also able to meet the best prices, and that will have a slight positive effect on the sales margin to come.

Cash flow, developing in a positive direction, which has then a clear impact on cash position. There's almost EUR 35 million on the bank account. And obviously, at some point, the management team and Board will make some decisions how to make that more valuable for the owners.

If you look at this year how it has been developing and what is expected from the last quarter, we have said that the profitability is higher on the latter half of the year. It has been last year like this, and it will be this year like this. So the consumer behavior is somewhat changing towards the end of the year.

The second thing for you to understand is that we have exceptionally high revenue growth ahead of us. Last year, Q4 was plus 22%. We knew it already when we started to plan for this year. So we have all plans and all preparations ending up in having a growth quarter also in the fourth one. So let's see what happens.

Something new is that we have updated our guidance for this year. When we started this year and gave a pretty -- a large bracket for revenue and EBIT, we also said we want to have all different scenarios taken in consideration. The Finnish market, the Finnish consumer, money -- market competition, what they are doing, et cetera, and all of those scenarios, we basically covered with the larger bracket.

Now that we have 3 quarters already behind us, we know that the consumer market here in Finland has been tough, we also know that competition is fighting hard and we don't expect that to change going into the last quarter. So now we have more insight about it. And therefore, we updated the revenue to be between EUR 500 million and EUR 525 million, and that goes hand-in-hand, obviously, with margin and therefore, with EBIT -- and EBIT now newly updated between EUR 11 million and EUR 15 million.

In the midterm targets, there is no need to change. We will start our strategy work by end of year. And we will be maybe coming out with a new strategy before summer or latest then after summer. And with that strategy work, we also will make changes where we want to play, what's the market we want to address and therefore, what will be our guidance going long term.

In our policy of paying out a quarterly dividend, we didn't want to make any changes. Obviously, there are no reasons for that. The financial status of the company is strong, and we want to hold on to that.

What is expected out of the rest of the year? Finnish consumer electronic market likely to be a bit tough like it has been. On a macroeconomic scale, the Finnish GDP has been expected to slow down its growth. And we expect maybe those numbers even to mellow from that. So there's no big boost in consumer behavioral changes or purchasing power to be expected, meaning that all of the growth must come out of own activities and own doing.

What we also know and expect is that Black Friday will be bigger than it was last year. And Black Friday's impact on the whole Q4 performance and especially sales will be significant. So it is crucial for retailers to have all of that taken in consideration to make that a successful one.

New categories, obviously, take or bring us new customers to the store and to the website. That will also continue at the end of the year. And what we have done with the new advertising phase, brand advertisement, probably we will get more attraction for new customer groups. But on -- besides of that, there's a lot of tactical TV campaigning already planned because the TV is quite an effective tool to reach out to large publics and large audiences, and therefore, to make sure that our assortment and our price image gets through to all consumers.

What is new and what will be disclosed in a few weeks' time, we have been working on our B2B performance, in our B2B capabilities from the website. So we will be introducing a new web store, basically done only for businesses. And that will have then a positive impact on the sales, midterm and long term. So stay tuned.

Although we are working or starting our work on a strategy going into midterm and long term, there are a few things that we already know that are in place, and we want to hold on to those. First of all, we think that our business model with a super connected omnichannel approach is the right one. So strong web presence supported by a few mega store is the business model that we will be running also in the future. We want to have the largest possible assortment. We are known to have a lot of products, a lot of categories. We still see a lot of potential there. We have internal work around few subcategories and few main categories at the moment. And it is likely that we will introduce either subcategory or main category next year also.

As a reminder, we introduced Ball Sports already at this year with 1,300 new SKUs, and that will, obviously, also evolve going into the future. And as the strategy work is still in the making, there are a few focus areas that we already know that we'll be taking in consideration. Our delivery experience and logistical solutions need development and need focus. We want to be there also forerunner.

Second of all is consumer experience, customer experience and mostly loyalty. I think we are not doing enough on that part. Hopefully, there will be something to come out next year on that topic.

And the third one is, I think, we, as a web store, or mainly web store, should be even better in utilizing data. I think there we have still a lot of homework to do.

This is an interesting slide showing the Finnish e-commerce landscape, which came out of the large survey done by Posti. There are a few highlights that I want to mention. First one, maybe a bit humoristic, there has been a lot of rumors in the Nordics, when does Amazon come into the Nordics. So we can disclose it that there's no need to rumor anymore. Amazon is already there. They are the fifth most popular website in Finland. And I mean, this is actually our point being from day 1. If you are competing in web as a -- with a web store, the competition is always international. The competition comes always somewhere abroad. And it doesn't take a national site to be there for the consumers. So people who are buying from online are totally in line of doing it also in English or other languages.

The second thing, maybe more important, is that if you look where Finnish consumers are buying at the moment from websites, there are not that many Finnish players out there. So if you take us and then look who is really the next one, only Finnish one, then you will have smaller ones, Kärkkäinen, Elisa and Motonet. And all the other players are international giants. And it is with some part of pride that we can say that we, a small Finnish player, a start-up like company, obviously having EUR 0.5 billion revenue, but still we are competing with these giants. And we are doing a very good job at the moment. And I think we can be proud of that.

And yes, I think the next slide is also very important to understand, the consumer behavior changes. This is a graph that says where have the consumers being bought or at what time have they been buying things from the Internet. We see that consumers are buying more seldom and more seldom, which is obviously a good thing for the environment. But obviously, a challenge for the retailers that it is concentrating on some periods of time. And obviously then, the price, well, fight is more fierce.

The second thing is if you look at these campaigns or time periods when consumers are buying and deduct some, which are only for 1 player, almost every time period is in the latter half of the year, Q3 or Q4. Black Friday, so that's where all the retail players need to have an eye and focus on.

So what would we like you to remember out of this morning's presentation? First of all, we were able to outgrow the market, although slightly but still. The growth this year has been 7%, which is quite decent if you look at the market situation and the competitors. Third thing is we were able to have a good profitability on the third quarter. And actually, it is our record profitability if you look at the Q3 separately. So we can be very pleased with that.

Our financial situation of the company is unchanged. It is strong. We have a lot of cash in our deposition, and we are able to have this quarterly paying out dividend, which is obviously a good introduction to new investors. And if you look to the end of the year, in Q4, we have taken all necessary actions, all necessary plans to make sure that the Q4 will be also a successful one, and we are able to have growth in the most important time of the year.

So thank you. And before I start with the questions part, it is very important to take care of your physiques. And with a lot of sports, we have heard that muscle pain is always an issue, so we have the right tool for that. It is actually MUSCLE -- I don't know what's the English word.

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Mikko Forsell, Verkkokauppa.com Oyj - CFO [2]

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HAMMER.

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Panu Porkka, Verkkokauppa.com Oyj - CEO [3]

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MUSCLE HAMMER. It is said, this is the best tool you need to have to make sure your legs stay healthy and you can enjoy having sports. So please feel free to search from our site for that product.

All right. Thank you all. And actually, I got the information that there were no questions this time. So from our side, have a nice weekend, nice Friday and all the best to the end of the year. Thank you all.