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

Good morning, everybody, and welcome to our Q3 report. Today, I'm together with our CFO, Mogens Elbrønd Pedersen; and myself, Torben Paulin. And let us start the presentation now. Please turn to Page 2 for the business update. Overall, the Danish kitchen market has been resilient despite the COVID-19 situation and the related macroeconomic uncertainty. In the quarter, revenue growth of 4.2% was driven by growth in the Danish market through the branded stores, which in Denmark include also Nettoline stores. Furthermore, we continue to see growth in our e-commerce channel, kitchn.dk. And furthermore, we saw an increase in revenue from third-party products. Our Norwegian business was softer in the quarter, which should be seen in the light that the Norwegian market was weaker than the Danish kitchen market in the quarter. Our view on the long-term potential for our Norwegian business is unchanged, and we remain committed to fully exploit the potential we have in the Norwegian market. Number of branded Svane and Tvis stores at the end of Q3 was 68 compared to 67 at the end of Q3 last year. Furthermore, we have 20 branded Nettoline stores in Denmark. Our strong brand, Svane Køkkenet, has a dedicated focus on product innovation and design. And during Q3, we launched a new S12 RAW limited edition kitchen line. That is the same one that is displayed on the front page of this presentation. S12 RAW Limited edition is based on an uncompromising design with a fully veneered frame and wooden front with a raw and [ dark ] look . We maintain our financial outlook. Please turn to Page 3. Revenue grew by 4.2% in Q3, an increase from DKK 238 million last year to DKK 247 million. EBIT was DKK 32 million compared to DKK 34 million last year. EBIT margin was 13.0% compared to 14.4% in Q3 last year. The net working capital ratio was minus 8% compared to 7 -- minus 7.3% last year. Cash conversion was 94%. I will now hand over to Mogens to go through the financial highlights.

Thank you, Torben, and please turn to Page 4. The revenue growth in the Danish market was 5.6%. As Torben mentioned, the Danish market has shown robust resilience during the COVID-19 virus outbreak. Revenue to other countries declined by 13.6%, driven by lower sales to the Norwegian market. Year-to-date, revenue was up 2.2%. Please turn to Page 5. Gross margin in Q3 was 25.8% compared to 28.1% in Q3 last year. The sales campaigns we launched to stimulate demand had a positive impact on revenue, but also a diluting impact on gross margin. Furthermore, gross margin was negatively impacted by additional costs related to COVID-19 precautions as well as a higher share of low-margin revenue from third-party products. Going forward, COVID-19 precautions will continue to impact, whereas the sales campaigns ended -- the impact from the sales campaigns ended during Q3. Operating expenses were DKK 2 million up on Q3 last year, and the increase is primarily due to costs related to projects targeted operational efficiency improvements as well as increased marketing costs related to the launch of the S12 RAW Limited edition kitchen line. Q3 last year included nonrecurring items of DKK 3 million. Please turn to Page 6. Net working capital end of Q3 was minus DKK 82 million compared to minus DKK 73 million last year. Net working capital was favorably impacted by the extended credit on VAT and payroll tax as part of the government's stimulus packages by DKK 23 million end of Q3. This was a primary driver for the increase in other payables, whereas trade payables increased due to a higher activity level. Our inventory levels remains higher than last year, which include building up buffer stock to ensure high delivery assurance. Furthermore, trade receivables increased due to calendar timing, a higher number of outstanding debtor days at the end of Q3 this year compared to the end of Q3 last year. Overall net working capital ratio was minus 8% compared to last year, minus 7.3%. Net debt was close to 0 in Q3 compared to DKK 119 million at the end of Q3 last year. At the end of Q3, net debt included DKK 37 million related to IFRS 16. And last year, IFRS 16 had an impact of DKK 42 million on net debt. Please turn to Page 7. Free cash flow was DKK 25 million in Q3 compared to DKK 40 million in Q3 last year. The development was primarily due to the change in net working capital in the quarter. Compared to Q3 last year, the variance was DKK 11 million from net working capital. In the third quarter, net working capital was negatively impacted by DKK 3 million from a reverse effect from the extended credit from the stimulus packages provided in Q2. And at the end of Q3, this extended credit amounts to DKK 23 million, which will have a reverse impact on cash flow in Q4 2020 and Q1 2021. Investments was DKK 6 million in the quarter compared to DKK 4 million in Q3 last year. And the CapEx ratio year-to-date was 1.9% compared to 1.3% last year. Cash conversion was 94%, which is below last year, but remains high. Please turn to Page 8 for the financial outlook for the full year. And based on an assumption that Denmark will not be subject to more drastic lockdown measures than the ones we have seen so far in Q4, we reiterate our full year financial outlook for 2020, which is full year revenue in the range of DKK 980 million to DKK 1,020 million. And full year EBIT in the range of DKK 135 million to DKK 145 million.

Thank you very much, Mogens. We are at the moment in the midst of the second wave of COVID-19 virus outbreak. And in that perspective, I'm very proud of all our employees and our business partners. Thanks to them and their hard work, we have been able to operate with a minimum of disruption in this extraordinary situation. This concludes our presentation. And we will now hand over to the operator for the Q&A session.

[Operator Instructions] And your first question comes from the line of Lars Topholm of Carnegie.

Yes, I do have a couple of questions here. So first of all, I wonder if you can give a more specific breakdown of the gross margin erosion. And I would like to know the specific effect from mix change, the specific effect from COVID-19 and the specific impact from discounts. And maybe for each of them, if you can comment how you're seeing that impacting Q4. I know there are no discount impact, but for the 2 others. And then about Norway, where your sales are down and you say that's because of a generally more weak market, but we saw Nobia growth in Norway in Q3. So I wonder what you base your comment on that this market is more weak. And if it's fair to assume, you are performing worse than the overall market in Norway, and how you intend to change that in the near term.

Thank you, Lars. So Mogens here. I will try to answer the first question, and Torben will take the Norway question. So the gross margin effect, the 3 points you list, you actually have to take the opposite order in terms of effect. So the most significant impact on Q3 was from the discounts from the sales campaigns. The second part was the COVID-19 impact, which will also continue into Q4 and probably to a greater extent. So far -- or previously, we've had communicated that we had no incidents in the factory. We actually have the first incident in October. But we've managed to, you can say, to deal with that in a fairly good way and with limited impact. But of course, the uncertainty going forward is that this is -- it will also be a significant impact in Q4. And regarding the mix effect, we have, overall, the same -- more or less the same mix, B2B and B2C, as we had last year. And that means that you can say the mix effect in the -- or the impact for Q3 margin was related to a higher share of third-party revenue with the lower margin.

Okay. Can you quantify how much is the impact from discount? How much is COVID-19? And how much is the mix effect in sort of either absolute numbers or if we try to bridge the margin erosion.

I would not go into the details, but you have the order to give you some kind of indication on the magnitude from the different points.

But for example, if you had an impact from discounts in Q2 and Q3 but not in Q4, how much of an improvement should that given the margin in Q4 everything else equal?

And that, of course, depends on the mix as well.

Now I'm only talking about the absence of discounts. So disregard COVID-19, disregard mix, you said there's an adverse effect from discounts, which will not be there in Q4. I just wonder how big it is. If you want to tell it, of course.

Yes. What I will say that it is the most important, or the most significant impact of the three.

But is that half of the dilution? Or can we get any closer to quantification? If we can't, you just say it. Then of course, I won't ask. It could be for competitive reasons or whatever.

Correct.

And if I should comment on the Norwegian situation. We have, since the outbreak of COVID-19, seen a very weak market in Norway. In the beginning, the market in general was also hit by decreasing oil prices and currency and the customers hesitated to order new kitchens. Over summer and autumn, the traffic to the stores has been better, but we are lower than last year. And it goes for both our branded stores and also the stores where we are in multi-brand stores. So we think it is a market -- a market trend and not only a TCM group trend.

But why would you conclude that when Nobia is growing? I just don't understand why you are so convinced it's not a company-specific issue.

Yes. And there are two answers to it. The first one is that Nobia is a lot more into the B2B market. And maybe they -- normally, we see that the orders there are more long term than the private consumer. So therefore, they can have projects that has been ordered last year or beginning of the year before the outbreak that are still being delivered now. Our share of business-to-business in Norway is very, very low, so we are more on a private part of it. And then having said that, as we have also said earlier, we have not been satisfied with our, say, our position in the Norwegian market and it is a part of our focus areas. And the first step in that direction was hiring a Norwegian country manager that started in the spring. Of course, his ways of working and the whole introduction to the company, et cetera has also been impacted by the COVID-19 and the travel restrictions. So we still have a job to be done in Norway.

Then one final question, if I may, completely unrelated. But there's a tender going on for [indiscernible] for the renovation of 1,000 residential units where 90% needs new kitchen. Can you confirm you're part of that? And do you know when there will be a decision on that tender, being part of your [indiscernible]?

No to the second. No to the second, and yes to the first one. Yes, I saw it on our list of tenders, but I don't have the detail when it's going to be decided.

To know how big the kitchen part of the contracts would be...

I don't have that detail right here. But you're right, it's one of the interesting projects going on.

And then one final one, if I may. So your full year guidance implies sales down by 1% to 17% for Q4 just mathematically. And I wonder what could make you come out in the low end and what could make you come out in the high end. And why you -- you're going to decline in Q4 because your backlog is lower than at the same time last year.

The uncertainty right now is that so far, we have only had, as Mogens said, one employee hit by COVID-19. But you know it can hit us every day. And as we are producing, it will immediately also have the effect that we are not delivering kitchen out. And therefore, there is uncertainty in many ways right now. And that is the reason for our, you can say, careful guidance.

That makes really good sense. But what is the order backlog compared to same time last year?

I don't have that figure right away.

We normally don't...

Is it higher or low?

We do not comment on the order backlog normally.

I think in previous quarters, you actually mentioned the order backlog in the statement, but not at this time. I know you don't give a specific number, but just an indication whether it's up or down would be nice.

Yes. You can say the uncertainty here is, of course, when we are going to deliver the order book, which is for Q4 and some of it also for Q1 next year. And the uncertainty ...

That I understand. I'm asking about the size of the order book, not the uncertainty of it.

I don't have the figure here.

But you don't know whether your backlog is up or down? That surprises me.

It's more the split when things are going to be delivered. We see every week or every month that some orders, both private and business to business, getting postponed a week or 2. And when it's coming to the end of the quarter and especially to the end of the year or up to a holiday, this can be more significant than normal. And that is this -- it's a little bit of moving target, you can say.

That I understand, but that's not my question. My question simply is, is the size of the order book up or down compared to the same time last year, uncertainties or not? I mean, I'm pretty sure you know if it's a positive or a negative movement.

It is up, but the issue is that we -- if you apply it for guidance for 2020, there is an uncertainty, whether it's Q4 or it's going to be in '21 deliveries.

And your next question comes from the line of Poul Jessen at Danske Bank.