TCM Group A/S (TCM) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the TCM Group Interim Report Q1 2020 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, the 6th of May 2020. I would now like to hand the conference over to your speaker today, Torben Paulin. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen. I have been looking very much forward to my first quarterly report, as CEO for TCM Group. With me today is our CFO, Mogens ElbrØnd Pedersen, and we will comment on the business and the Q1 financial results. And after that, we will hand over to the operator for a Q&A session. I would like to start with some opening remarks on my first couple of months with TCM Group. I started only a few days, before the first corona incident in Denmark, and naturally, the whole situation has had a significant impact on my introduction period in the company. I'll provide further information on the current status, but the good thing with this virus outbreak is that, I have worked very closely with our management team. I got to know them a lot better and faster than else. And we have been -- had daily meetings and online meetings to establish all the precautions related to the virus. So even it's a bad situation, it has also had some positive influence on my introduction. My initial impression of the company and the brands have been confirmed so far. We definitely have strong brands that cover the entire kitchen market. And we have a strong business model, together with our franchisees and our dealers. At the same time, I can also see a significant potential to grow the business further in all 4 brands. But let me start the presentation. So please, ladies and gentlemen, turn to Page 2 for the business update. The revenue in Q1 grew by 1.8%, and it's in line with expectations. When we compare Q1 to last year, last year's Q1 was exceptionally strong with a growth of 17%. EBIT was with DKK 30 million, more or less on par with Q1 last year, where it was DKK 31 million. The EBIT margin was 11.7% compared to 12.4% in Q1 last year. Net working capital ratio was minus 6.1% compared to minus 7.3% last year, and the cash conversion was 87%. Please turn to Page 3. The virus outbreak has had limited impact on our Q1 results and is entirely related to our cost. The safety precautions has had a negative impact on the efficiency due to the separations between the shifts and among other initiatives, extensive cleaning of tools between the shifts. Furthermore, we have terminated the contract with 10 employees. It is still too early to conclude on the future impact on the virus outbreak. We are producing against the orders, and the order pipeline covers typically 6 to 8 weeks. The orders that are coming in now are, to the greater extent, from customers who have been in the process for some time. And therefore, we see a delayed impact on our business. We have comforting visibility for Q1 -- for Q2, but the future impact in Q3 and Q4 is still very uncertain. As I said, we have some short-term visibility. And together with a flexible setup that enable us to adjust the manning into the future demand situation, hereby, we can safeguard our profitability. We have experienced limited impact on the virus outbreak on our supply chain, and so far, we have had a fairly normal operation. The traffic to the brand stores has declined, but lately with an increasing trend. The traffic to the brands' websites has been relatively stable. And we also see online meetings being booked to a greater extent. In the last weeks, we are also seeing that the physical traffic to the stores are picking up again. Please turn to Page 4. The organic growth in Q1 was primarily driven by the business-to-consumer market in Denmark and in Norway. We estimate that the Danish kitchen market was relatively flat in Q1 before corona, which was in line with our expectations. During Q1, we have opened a new Svane store in Ålesund, Norway and thereby, increased the number of stores to 68 stores compared to 66 stores last year. During Q2, we will add a new Svane store in Kristiansand, also in Norway and a new Tvis store in Vejle in Denmark. The virus outbreak has not made it easier to progress with the pipeline of new candidates, but we are committed to continue our expansion of stores, for instance, Svane stores in Norway. Late March, we suspended the financial outlook for 2020, as a consequence of the COVID-19 outbreak. Due to continued uncertainty to estimate the impact on the market and our financial performance in the coming quarters, we are not able to accurately assess the magnitude of this impact. We will provide guidance, once we have more visibility, expectedly at the latest when we announce our Q2 results in August. I will now hand over to our CFO, Mogens ElbrØnd Pedersen to go through the financial highlights.

Thank you, Torben. Please turn to Page 5. As Torben mentioned, revenue grew by 1.8% in Q1, and this was in line with the expectation, given the strong comparison quarter last year. Our EBITDA was DKK 35 million and slightly below Q1 last year. EBITDA margin was 13.8% compared to 14.4% in Q1 last year. Please turn to Page 6. The revenue growth in the quarter was driven by the B2C market, and this was both in Denmark and in Norway. Revenue in Denmark grew by 1.5%, whereas revenue outside Denmark was up 4.7%. If we look at the brand stores in Norway, meaning Spain primarily, the revenue grew by 13.7% in Q1 compared to last year. Please turn to Page 7. Gross margin in Q1 was 25.7% compared to 25.4% in Q1 last year. The increase in gross margin reflected a sales mix effect, where B2C sales grew and took a higher share of the revenue, and this had a positive impact on the gross margin. This was partly offset by a loss of efficiency in the production. And due to the introduction of safety precaution measures, as Torben mentioned, segregation of production ships and extensive cleaning of tools, and this had a negative impact on the production efficiency. Operating expenses increased by DKK 3 million. The increase was primarily due to an increased marketing spend and provisions related to restructuring costs including the termination of 10 employees, as a result of the COVID-19 situation. And as a result of this, EBIT was slightly below Q1, last year. Please turn to Page 8. Net working capital was slightly below last year. It was minus DKK 61 million compared to minus DKK 68 million last year. And the change in net working capital was primarily, due to higher inventory levels, which include building up buffer stocks to ensure high delivery assurance with regards to the COVID-19 situation. The net working capital ratio was minus 6.1% compared to minus 7.3% last year. Net debt was DKK 77 million in Q1 compared to DKK 139 million at the end of Q1 last year, and this includes DKK 38 million related to the implementation of IFRS 16. And last year, this impact was DKK 47 million. So all in all, we have a strong balance sheet with a leverage of 0.4 compared to a leverage of 0.9 at Q1 last year. Please turn to Page 9. Free cash flow was minus DKK 22 million in Q1 compared to plus DKK 2 million in Q1 last year. Q1 is generally not a great cash generating quarter. And the adverse variance compared to Q1 last year was primarily due to the change in net working capital in the quarter. And besides the variance, at the end of the quarter, there is also an impact from the opening balance this year, being an all-time record. Furthermore, higher CapEx and higher tax payments also had a negative cash flow impact in the quarter. CapEx ratio was 1.6% compared to 1.4% last year and in line with our communicated expected CapEx ratio of 1% to 2% of revenue. Cash conversion ratio fell to 87%, but our cash conversion is still at a very strong level. And this concludes the financial review.

Thank you very much, Mogens, and we will hand over to the moderator for Q&A. We know that it's a very, very busy day on the Copenhagen Stock Exchange, but I still hope somebody that will use the opportunity to ask questions.

[Operator Instructions] Your first question comes from the line of André Thormann from ABG.

Just wondering, even though, I know it's very uncertain times, whether you can comment a bit on the demand effect you see on B2B versus B2C during these times, both currently? And maybe also what you potentially can see going forward without giving a guidance?

Yes. So far, we -- but that was also before that virus outbreak. We experienced a higher growth rate on business-to-consumer than on the business-to-business market. After the outbreak, we can say that we have a delayed effect, so that those longer-term business-to-business projects, they are, of course, still running, and they will be running for also the coming future. So the reaction time on business-to-consumer is probably shorter, even though, there's also a delayed effect. I think, it's too soon to see -- to say what is happening on the business-to-business part of it. We need to get into the Aulum tour to understand more about that. So far, as we're also saying, what we are seeing right now are all from customers that have been into the process for a longer period, and that goes both for business-to-consumer and business-to-business. So the defect is -- the effect is delayed, and it's still too soon to say how it will impact in the coming quarters.

Okay, okay. But I understand that the order pipeline looks in line for the next 6 to 8 weeks. That's correct, right?

That's correct. Yes. That's correct.

Okay. And that is naturally because there is this delayed effect, and you already had some orders in the pipeline, pre-corona. But I mean, looking at indications out there, I know, you look at some numbers in terms of sales from electronic companies, such as refrigerators, et cetera. I mean, do you see any indications out there in April?

Not so significant that we can use that for a kind of a guidance. We really believe, it's too soon to say more about that. It is really a delayed effect, both for business-to-consumer and business-to-business, that people that have been in the process for a long time and also the bigger projects, that they are being built and when they are ready then, then they still take the kitchens, right? So therefore, it will be further delayed until we can say anything on it.

Okay. And the split between B2B and B2C during Q1, what was that?

The growth was higher on the business-to-consumer. But again, no significant change.

Okay, okay. But was it much higher on B2C or -- just to understand.

No, no, not significant.

Okay. And then on these 10 employees, that you have dismissed. Can you elaborate a bit on why you did that? And yes, just why you did that?

Yes, you could say it's maybe a little bit pre-action when the virus outbreak came. We, of course, expected also an effect -- an impact on our business. And therefore, we tried to react, you can say, some kind of fast, also to be able to take advantage of the supporting package from the government later on, which we have not done yet. So you could say it was a little bit pre-action to make sure that we were meeting a decline in order intake. And it was all white collar. And it was various departments around in the company. So it was not a major cut anywhere, anywhere.

Okay, okay. But looking at the orders coming in now, it is your impression that these are coming from already in pipeline clients?

Yes.

Okay, okay. All right. And maybe the last thing in terms of countries, know that, of course, Denmark is the most important. But we have seen companies such as Nobia also being out, saying that Denmark had been somewhat more resilient. Is that also your impression from an international perspective where you also exposed to Norway?

Yes. I think, it's fair to say that is also goes for us, that there is, say, for the Norwegian market on top of the coronavirus, they also hit by currency channels. And I guess, that makes consumers even more resistant to start up new projects.

[Operator Instructions] There seems to be no further questions at this time. Please continue.

Okay. Then we'll say thank you very much for attending our presentation, this morning. And wish you a good day from now on. The final comment could be that, as we're saying we have a comforting visibility for Q1 and as we have options to slow down in our manning, we have a strong situation also to meet the future demand. So let that be the last comment. Thank you very much. Have a nice day.

That does conclude our conference for today. Thank you for participating. You may all disconnect.