Tokmanni Group Oyj (TOKMAN) Earnings Call Transcript

Hello and warm welcome to Tokmanni conference call regarding the acquisition of Dollar Store in variety discount retailers in Sweden. My name is Mika Rautiainen. And today, together with me to do the presentation is Tokmanni CFO, Mr. Tapio Arimo and Tokmanni, Head of IR, Ms. Maarit Mikkonen. Tapio will later on dig deeper with the financials, and Maarit will be coordinating the questions. If you will have questions in the end of the presentation, there are 2 options. You can basically do the questions in our chat service or join with the teams and set the questions over there. We'll come back to that a little bit later. In the previous Tokmanni Capital Markets Day, which was held 2021 we said that there's space for more than 220 Tokmanni stores in Finland. Today, we have 200 Tokmanni stores in Finland. In the same Capital Markets Day, we also said that Tokmanni will be actively evaluating the opportunity for an international expansion. And basically, today, or actually some time ago when [indiscernible] the founder and the owner of Dollar Store has decided to sell his great company, it was basically a fantastic opportunity for Tokmanni to start growing from a leading finished variety discount retailer to a leading Nordic variety discount retailer together with Dollar Store. So let's have a closer look at the transaction. So here are the figures. Dollar Store enterprise value, EUR 345 million. The purchase price is EUR 170.4 million. Multiplier 6.9x for EV to EBITDA on a stand-alone basis. EUR 15 million estimated annual net synergies and fully debt financed with closing expected on the first of August 2023. So here are the key figures. And about Dollar Store. It's one of the leading Swedish discount retail change. As you can see, it's actually 130 stores in Sweden, nationwide. Actually also several white spots in Sweden. But there is also already -- Dollar Store is also already growing in Denmark. There are 2 stores in Denmark at the moment. Dollar store market share in Sweden is -- from the discount retail market is approximately 10%. And personally, I've had more than 30 years of experience in retail business and very, very seldom have I seen this kind of sales growth as what Dollar Store has been doing. It's just fantastic figures. Dollar Store people have been making absolutely great job. It's a really great company. And when we look at the two companies, Dollar Store and Tokmanni basically, they are operationally and strategically similar companies joining forces. Basically, to start with, it's variety discount business where we're working. The low price image is extremely important for both companies. Private label shares, private label ranges are very important for both companies. And of course, doing this business is the both Dollar store, Tokmanni people altogether close to 5,500 people. With SKU level, Tokmanni has a little bit more SKUs or actually 3x more SKUs compared with Dollar Store. But Dollar Store has also informed that the future growth will be by growing the current SKU level. Obviously, Tokmanni is able to support Dollar Store with this growth path very well. And then when we look at the product groups. This is probably one of the best part also with this acquisition because the product groups are well aligned with both companies. The destination categories are practically exactly the same. Some wordings are a little bit different. But basically, there are some product groups where basically Dollar Store is extremely strong in Sweden, for example, with seasonal and party, and on the other hand, Tokmanni in Finland with yard and garden very, very strong. But obviously, the fact that both companies are having exactly the same product groups, will give a lot of promises when we think about future synergies. And if we look at the total picture, how these two companies look together. It will definitely be a leading Nordic discount retailer with combined net sales, if we look at the 2022 numbers, almost EUR 1.6 billion revenues, 5,400 employees, more than 360 stores in Finland, Sweden and Denmark, a true leader in the Nordic discount retail market. And strategic rationale for the acquisition is obviously Dollar Store has already a strong position in Sweden. And at the same time, Dollar Store has a lot of white spots for network -- store network in Sweden, which is, of course, a great story. And at the moment, Dollar Store is growing very fast in Sweden. Obviously, complementary Nordic footprint. Together, Tokmanni and Dollar Store will form one of the leading variety discount retailers in the Nordic market, and obviously, the Danish market is already very interesting. And obviously, we will definitely be looking at the Nordic market in total together with Dollar Store. The most important job that variety discounters have is to serve customers all the time better and better. With this acquisition, Tokmanni and Dollar Store will be able to better serve customers through an improved and optimized product offering, better prices and wider private label assortment. And that's, of course, very, very important part of the whole business. We will increase the benefits of scale, especially in purchasing and distribution when negotiating the prices and deciding for the future assortment. And, of course, leveraging the capabilities to accelerate the growth. Dollar Store is on a very, very good speed with the growth. So Tokmanni with a little bit let's say, more experienced kind of support and give strong capabilities for Dollar Store growth, which has already been really great. So here's like a short introduction with the acquisition. And then next thing is that Tapio will dig deeper with the figures, financial figures. We just finalized the agreement last night. So Tapio is at the moment a little bit on the road. So he won't be having -- Tapio won't be joining with the live picture but with his picture. But Tapio, please go ahead. Is the connection okay.

All right. Thanks Mika. And great to be here on the road. So like Mika said, this is a great transaction for us. And on this page, you can see a little bit of the illustrative combined financial information of the combined company. So when you look at the net sales, dollar store has a little bit less than EUR 400 million in 2022 and Tokmanni had a little bit less than EUR 1.2 billion worth of net sales. So together, the combined company is a little bit less than EUR 1.6 billion in net sales in 2022. In terms of gross profit and gross margin Dollar Store gross profit just below EUR 150 million last year, and Tokmanni's gross profit just below EUR 400 million last year. So combined, they are roughly EUR 550 million and about 35% combined gross margin percent. And in terms of EBITDA, Dollar Store had last year about EUR 50 million of EBITDA and Tokmanni had EUR 157 million of EBITDA. So together, they are a little bit more than EUR 200 million, so EUR 207 million of EBITDA last year with a 13% EBITDA margin. And in terms of EBIT, Dollar Store had just below EUR 16 million of EBIT last year and Tokmanni had about EUR 84 million worth of EBITDA. So together, the combined company last year would have had about exactly EUR 100 million of EBIT. And these numbers, of course, exclude any synergies. In terms of total net debt, Dollar Store about EUR 183 million worth of net debt last year or end of last year and Tokmanni about EUR 383 million. So together, the combined net debt last year would have been about EUR 566 million. So Maarit, if you turn to the next slide. So then going on a little bit deeper into the synergies. So like Mika said, this is a highly synergistic transaction and we have broken down the synergies here into 4 main areas. The first one is just a simple price list matching between the 2 companies. So we compare our prices from the suppliers and utilize the lower in both companies. The second one is synergies from the common suppliers. So by leveraging and aligning purchasing to the same suppliers and distribution processes we can create benefits from scale in in-sourcing and also the distribution capacity and optimize the supply chain. The third point is also very important, synergies from aligning our assortments. So like Mika said, we have very similar categories. And we will, of course, try to combine the assortment of both companies to the extent reasonable and have the same products for sale in both companies. And then the last major part is synergies from reducing wholesale. So especially Dollar Store has utilized wholesale quite a lot in the past and with our private label focus, we can definitely increase the combined portion of private label products in the combined companies. Then looking a little bit at the integration costs. So there's obviously going to be additional running costs to support the public company requirements and continued growth of Dollar Store and Tokmanni combined. And then there's going to be an amount of onetime integration-related costs. But the net effect is still very positive, and we estimate the annual synergies to be north of EUR 15 million, and we expect them to be fully realized within the next 30 months. So if you go to the next slide, Maarit. So just a little bit more detail then on the transaction structure that Mika already described. So like the enterprise value, EUR 345 million and the purchase price is the price of the -- or the value of the equity that we purchased EUR 170.4 million, and that gives an EV-to-EBITDA multiple of 2022 figures of dollar store about 6.9x. And then if you add the estimated full impact of the net synergies, the multiple drops to about 5.3x. In the financing structure, we have added a new debt facility to our existing financing agreement, which is worth EUR 180 million. And with the full debt purchase, we expect that illustrative combined net debt-to-EBITDA ratio at the end of last year to be about 3.6%. And as before our net debt to comparable EBITDA leverage target is below 3.2x, and we expect to reach that quite comfortably in the next couple of years. So I think still -- I think Mika already mentioned this, the expected closing date is the first of August, and the transaction is subject to the normal closing conditions, but we do not have to file for any regulatory approval. So there is a very high level of certainty in the transaction. And with that, I'd like to give the mic back to Mika to conclude.

Thank you, Tapio. Basically, this is -- this was just a short recap on the acquisition. As already mentioned several times, the closing will be -- will take place by the end of July. So obviously, starting from the beginning of August, we will be able to show a lot more light with our plans for the future. And of course, our -- the second quarter result presentation will take place on the fourth of August. So we will be able to come back already right in the beginning of August with our new future plans, new future growth plans. I think now it's time for questions. So Maarit, could you please help us with this?

So please, if we have no questions here online on Teams lines, please. Now you can ask the questions. It seems that we don't have any questions here online. But we have some question on chat. The first question is will purchase of Dollar Store have negative impact on dividend?

Yes. Tapio would you like to refer to this?

Not a major impact. There might be a little bit, and that obviously depends then on what the Board of Directors propose and what the shareholders ultimately then approve. So I don't expect any major impact.

Okay. How will the transaction affect the cooperation with Europris?

Well, first of all, the cooperation with Europris is very, very important for Tokmanni. And of course, we will continue the cooperation. We have 50-50 joint buying and sourcing office in Shanghai and today also in Vietnam. So we will continue working together for sure, very closely also with Europris.

Good. Will there be any need for a capital rise to finance the deal?

No, we don't foresee any need to raise equity capital. So this is a fully debt financed deal, and we expect to be able to then pay the debt down and manage the business with the cash flow that the business will generate going forward.

Okay. The next one. Dollar Store has a high gross margin, higher gross margin than Tokmanni but lower EBIT margin. What are the reasons behind that?

Well, to my understanding, Dollar Store has been growing very, very, very fast. And obviously, starting with new stores, probably Dollar Store is one of the leading companies with expansion plans in Sweden. And obviously, this is, of course, taking costs, especially in the beginning when you start a store. Even though the stores, if I've understood correct, are fully profitable starting from the first month. But anyway, of course, it takes a lot of resources, energy and also capital to start a new store. So this has, of course, an effect on Dollar Store figures. But it's true the gross margin is very good with Dollar Store. The pricing strategy is very smart. It fits very well with the Swedish market. And based on our surveys, Dollar Store has the best price image in Sweden at the moment. So it's really great.

Okay. What is the net financial cost for the deal? And where will Tokmanni's net financial cost be post the deal?

Well, obviously, this will raise the interest cost for Tokmanni from a couple of avenues. First of all, we get more IFRS 16 debt from the acquisition. Then of course, we get the new real debt, EUR 180 million that we described earlier. And then it will also have a marginal impact on our loan margins because of the higher leverage that we have as a consequence. So it will clearly raise our interest costs, but the increased interest costs will be clearly lower than the additional EBIT that we generate with this transaction. So it is a clear positive for the shareholders and should be EPS accretive pretty much immediately.

Maarit, just for your notice, I believe that there are some questions also in Teams.

Yes. Actually, it's [indiscernible]. Please, if you have a question, you can ask it now.

Thank you, Maarit. And congratulations on a sizable transaction, very interesting. I have a couple of questions. First one comes back to the previous one regarding the debt terms on the EUR 180 million additional loan that you take. Could you elaborate a bit on margins and so on?

They are very similar to our existing loans. There's a small premium on the margin compared to our existing loans. But I would say it's a very -- we got a very good rate on the financing, I would say.

And you elaborated a bit on the private label side, but could you open up a bit how it looks for Dollar Store currently?

Dollar Store, the private label share of -- private label share is 24%. With Tokmanni, it's more than -- clearly more than 30%. So private labels are very, very important for both companies. I'm 100% sure that we can benefit from both companies' private label ranges. I could believe that Tokmanni has a little bit stronger role with the private labels. And we are able to share these, of course, with Dollar Store, but it has to, of course, they have to fit the dollar store assortment, and it has to bring more value for customers. But this is obviously one of the first parts for synergies in the future.

And could you elaborate a bit on Dollar Store's logistics purchases, how much do they import from low-cost countries? And could you elaborate a bit on -- also on their logistics chain stores and on warehouses and so on?

Yes. Dollar Store has a central warehouse in Orebro, and that, of course, is working very well. This kind of warehouses are there are, of course, a little bit more difficult to share between Sweden and Finland. But when we look at the supply chain, obviously, Tokmanni will bring very good agreements with -- for freight agreements, for example, for both companies. If I've understood correct, at the moment, the direct imports, they don't play such a -- they don't -- with Dollar Store, they don't play as important role as with Tokmanni. So if I've understood correct, under [indiscernible] the CEO of Dollar Store has been visiting Far East in different countries to establish direct imports from India, Vietnam, China and so on. This obviously will, through Tokmanni operations it will, of course, open new possibilities for Dollar Store as well.

And then the last question regarding the synergies. You target at least EUR 50 million. Do you think -- I guess your purchases are somewhere around EUR 1 billion annually combined EUR 50 million is 1.5%. What kind of -- do you -- are you low balling that number? Or how should we look at it? And perhaps also on the timing of the synergies, what should we expect? Apart from the 30 months that you mentioned?

Yes, of course, we probably haven't had enough of time to study each other's assortments. And so obviously, the customers will decide what kind of products will be joint products and so on. Yes, maybe the EUR 15 million, it's a little bit careful, but we'd like to have that as a steady starting point. But yes, we do see a lot more opportunities as well. But Yes, let's wait for the deal closing and then we can start work harder with the synergies. But yes, there is a lot of potential as well.

Okay. That's all from me.

Okay. Then I will continue with the questions on chat. What has been the revenue growth drivers for Dollar Store? Have there been new stores or like-for-like growth?

Basically both. They've had a lot of new stores, but the like-for-like growth is extremely good. I could imagine it's one of the best in Sweden.

Okay. Opportunities coming in a stable base or are more front-ended or back-end loaded?

Obviously, stable base because the sourcing -- joint sourcing and joint buying will start as soon as possible. And of course, we will continue with that starting from the first of August. But of course, it will take a little bit time before we can establish the joint sourcing and buying activities.

Okay. Then a question about Swedish market. How many white spots are there in Sweden and how many stores can Dollar Store open in Sweden?

Yes. Well, let's take a reference from Tokmanni. In Finland, we have 5.6 million people. And as we have said, there is space for 220 Tokmanni stores. at the moment, there are -- in Sweden, there are 130 Dollar Stores. It's double the population, the consumption number is higher compared with Finland. So obviously, there is a lot of potential also for new stores in Sweden.

Okay. Then one question about the purchase price. Doesn't the purchase price multiple sound a little high in this interest rate environment, despite of the synergies?

Tapio, would you like to elaborate that?

Tapio, can you hear us?

Let's take the next question and Tapio will answer when he'll join again.

Then about the Nordic expansion. The question is that what does a Nordic mean really? Does Nordic mean Denmark? Or is it Norway also part of the expansion plan?

We'll come back to the expansion plans a little bit later, as soon as the deal has been closed. And when we've had enough of time to also make the necessary surveys regarding the customers and the markets and so on, and we'll come back to that a little bit later.

Okay. Can you bring any of Dollar Stores product assortments to Tokmanni stores?

Of course. There are excellent products with Dollar Store assortment, and we really look forward in having some of those products in Tokmanni stores. I can imagine they will be very successful in Finland.

Then where do you see the biggest growth opportunities for Dollar Store? Is it opening more stores in Sweden or expanding in Denmark or something else?