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

Good day, and thank you for standing by. Welcome to the TCM Group Interim Q1 2022 Report Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Torben Paulin. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to the presentation of the Q1 results for TCM Group. Presenters today are our CFO, Mogens Elbrønd Pedersen; and myself, CEO, Torben Paulin. We will comment on the business and the financial results, after which we will hand over to the operator for the Q&A sessions. Let us start for the -- let us start the presentation and turn to Page 2 for the business update. In Q1, we saw a solid demand on order intake. Underlying like-for-like growth in our core business, excluding third-party revenue was 7% compared to a strong Q1 result last year, which grew 13% compared to the year before. This was offset by a decline in low-margin revenue from the sale of third-party products impacted by unstable supply of especially white goods. The 7% growth was primarily driven by sales price increases. Volume growth was curtailed by the unstable supply chain, including a restricted flow of raw materials and components, which limited our overall production capacity in the quarter. On a more positive note, by the end of the quarter, we have managed to secure sufficient supply of components and bring the supply chain situation back to a more normal level. Having said that, the Russian invasion of Ukraine brings further uncertainties to the market situation. The impact for TCM Group from the lack of supply from Ukraine and Russia to the European market has primarily been through a further pressure on raw material prices and higher energy and transportation costs. We have already communicated a further sales price increase as a response to the new price increases on raw material. Regarding availability of critical components, we have so far been able to avoid significant impact on our supply chain from that situation. During Q1, a new Nettoline store has opened in Næstved. Furthermore, new Svane Køkkenet stores will open during Q2 and Q3 in Fredrikstad, Arendal and Oslo in Norway. And in addition, a new Svane Køkkenet store in Copenhagen [indiscernible] and a new Tvis Køkken store in Slagelse [indiscernible]. Please turn to Page 3. Some financial highlights for the quarter. Reported revenue was DKK 281 million, which was on par with Q1 last year. Adjusted EBIT was DKK 26 million compared to DKK 33 million Q1 last year. Mogens will elaborate on the underlying drivers of this development. Adjusted EBIT margin was 9.3% compared to 11.7% in Q1 last year. Net working capital ratio was minus 3.4% compared to minus 6.6% last year. Cash conversion was 60.5%. I will now hand over to Mogens to go through the financial highlights.

Thank you, Torben. Please turn to Page 4. The underlying revenue growth in the Danish market in our core business was plus 7%. The growth was driven by our DIY segment, Nettoline, and by Svane Køkkenet. The growth was offset by a decline in revenue from third-party products, meaning white goods. Revenue to other countries increased by 12.4%, driven by sales to the Norwegian market, and this constitutes both organic growth and growth from new stores within Svane. Please turn to Page 5. Gross margin decreased from 23.5% to 21.3% in Q1. The technical impact from the merger of the e-commerce activities in kitchn and Celebert had a negative impact on gross margin of 1.0 percentage point in the quarter. We have mitigated the price increases on raw materials through sales price increases. However, there is a diluting margin impact from this in the quarter. Furthermore, increased energy and logistics costs had a negative impact in the quarter. This was partly offset by a change in sales mix, where we grew revenue in our core business while sale of third-party products with a structurally lower margin fell. Operating expenses increased by DKK 0.8 million. The increase was primarily due to higher sales and marketing expenses, offset by a decline in costs as a result of the merger of the e-commerce activities mentioned before. In the quarter, the supply chain disruptions led to additional nonrecurring cost of DKK 5.4 million. The supply chain situation at the end of the quarter was back to our normal level, and therefore, we expect limited impact from supply chain disruptions going forward. Q1 last year included nonrecurring costs of DKK 3.8 million and a gain of DKK 2.5 million from the divestment of an own operated store. Adjusted EBIT ended at DKK 26 million compared to a strong Q1 last year of DKK 3 million. Please turn to Page 6. Net working capital at the end of Q1 was minus DKK 38 million compared to minus DKK 69 million last year. Our inventory levels remained significantly higher than last year, which was due to increased raw material prices and the result of a decision to establish a buffer of raw materials to ensure high delivery assurance. Compared to Q1 last year, other payables were significantly lower, which was primarily due to 2 things. The holiday allowance systems being changed and our obligation has been transferred to a government fund, impacting net working capital compared to last year with DKK 19 million. And furthermore, net working capital last year was favorably impacted by the extended credit from the stimulus packages by DKK 5 million. Net working capital ratio was minus 3.4% compared to last year of minus 6.6%. Net debt was DKK 278 million in Q1 compared to minus DKK 14 million at the end of Q1 last year. Compared to last year, net debt is impacted by the substantial payouts through both ordinary and extraordinary dividends in total DKK 130 million and the share buyback program of DKK 150 million, which is now fully exercised. And following the AGM, the TCM Group share capital has been reduced by 8.6% of the shares through a known and of the majority of the company's treasury shares. Please turn to Page 7. Free cash flow was minus DKK 33 million in Q1 compared to minus DKK 25 million in Q1 last year. And the cash flow and change in cash flow was primarily impacted by lower operating profit compared to Q1 last year. CapEx ratio was 1.9% compared to 2.8% last year, and cash conversion ratio measured over 12 months was 61%. Please turn to Page 8, regarding the financial outlook. And we reiterate our financial outlook, which is a revenue in the range DKK 1.15 billion to DKK 1.225 billion and an adjusted EBIT in the range of DKK 140 million to DKK 170 million.

Thank you, Mogens. Uncertainty is higher than normal. We are balancing a situation where demand and order intake currently is solid. And at the same time, the Russian invasion of Ukraine increased inflation and higher interest rates lead to high uncertainty on the future consumer demand. In the short term, the order pipeline, the coming 3 to 6 months is solid, providing some visibility and assurance of the short-term consumer demand. We are constantly monitoring the development in the customer behavior and demand, and we have prepared a number of initiatives, which will be put into action if necessary. A very substantial part of our cost base consists of variable costs. And therefore, we have a very flexible setup and can quickly adjust our cost base according to demand and thereby, protect our margin and profitability. This concludes our presentation, and we will now hand over to the operator for the Q&A session. Thank you.

[Operator Instructions] Your first question today comes from Benjamin Silverstone from ABG Sundal Collier.

My first question is in regards to this uncertainty that you mentioned going into after the summer. So could you just elaborate a little bit on which initiatives you are looking at or how available to mitigate a potential drop in demand? The second question is related to the price increases we are seeing. The new price increase you just announced, is that expected to cover the cost increases you are -- you expected this year? Or should we expect more price increase to come? And the last question is related to Norway. You are seeing a very, very nice growth here this quarter, and you do have a strong pipeline of new stores opening in Norway as well. Could you just give us a bit of an indication of how you see your order backlog in Norway versus Denmark and if you are having any sort of new obstacles to open new stores given the volatile macro environment?

Thank you, Ben. And let us just start with me question one. And correct, we see this higher uncertainty after the summer holiday. And when we say a part -- a huge part of our costs are variable, we mean the blue collar. We are working quite manually in our made-to-order kitchn production. And thereby, when demand is decreasing, then we can, with a relatively short notice, also reduce our manning in our production. And that is the primary cost driver that we can adjust accordingly. And secondly, then, of course, we have all the usual possibilities in the general cost base to do some savings there. Second question, the price increase that we have announced with effect of 1st of June. It was announced in end of April -- end of March. And at that time, it was covering the price increases we were seeing for this year. The question is what kind of new price increases for raw material we will be seeing from now on, and that is really hard to say in this uncertain environment that we are working in. But at the time, we announced that it was covering the raw material price increases that we saw. And then will we see more price increases? It all depends. So I think the best answer we can give is that if we are seeing further price increases, then we will also react to them the same way as we have been doing this year and last year. Norway growth. Correct, 3 new stores are coming up. One of them has already opened last week and due to come. We're still having search process also with external consultants to look for new dealers in training Norway. And we have also some candidates that we are in a dialogue with, but it's certainly not becoming easier with the uncertainty in the European macroeconomic. So I think it will be -- it is too early to say if we would be able to open up even more stores this year than the 3 that is already in progress now. And then when we have a new agreement with a new deal, then the second challenge is to find the right location. And we also know from experience that, that can take a while. So I'm not too optimistic on more Svane store openings in Norway this year.

Duly noted. Just a quick follow-up in terms of the backlog. Is there any significant difference between the backlog in Denmark versus Norway?

No. They're ordering into the same delivery time and the same capacity. And as order intake has been solid both in Norway and Denmark, and then the backlog will also be quite similar. But of course, smaller for Norway, yes, as a turnover in Norway is significantly lower than in Denmark.

Your next question comes from the line of Ulrik Bak from SEB.

I will take them one by one. And the first one is about your guidance. Implicitly, you guide for 13% adjusted EBIT growth in '22 versus '21. And now in Q1, you delivered minus 21%, suggesting an all back-end loaded year. Q2 last year was quite strong, both in terms of growth and in terms of margin. Given the headwinds we're seeing this year, I don't assume that you will be able to generate a similar margin this year. So can you maybe just talk us through your thinking about the trajectory of this adjusted EBIT development for this year, because it seems to be very back-end loaded?

Compared to last year, you're absolutely right. We compare to 2 strong quarters last year, Q1 and Q2 and 2 softer quarters, Q3 and Q4. So in that respect, you're right that, compared to last year, it will be more back-end loaded. We have also been in a process with price increases along the way, and they will also impact later in the year and thereby supporting our business more in the second half of the year than in the first half of the year.

Okay. That makes sense. And in terms of these price increases, the latest ones you announced at the end of March. I don't know if you touched upon it before. But compared to when you announced these price increases at the end of March, have input prices, energy, transportation costs, have they increased further than what you saw back then? Or is it still enough the announcement you came back with -- back then to cover those extra costs?

Right now, it's still covered by the sales price increase as we have also taken into account the expected possible cost price increases. On our own energy cost, we have fixed agreements. That means that they are secured for 1 year. So they will not be impacted by the situation with the Russian invasion. That would have a delayed impact in our business. And thereby, we will be able to pass on sales price increases to cover for that next year.

Okay. And then please remind me, when will we see the full effect of the price increases coming into effect first of June?

Like the previous price increases, you will see them coming in gradually, meaning that you will see impact from -- initial impact from -- during Q3 and increasingly from that all, and full impact from 1st of January. It is -- you can say more or less the same as the previous ones where the 1st of September is having a full impact from Q2. So it's coming gradually. And first step is to, you can say, neutralize the cost impact and then we reestablish the margin when it's fully implemented.

Understood. Then a question about your revenue growth. What is the split between volume and price? I think I saw you stated that most of it is from price, but what was the volume growth in Q1?

Very limited. There is, of course, this technical impact from the kitchn part, so it's limited volume growth in Q1. In Q1, we have been a bit limited in our production capacity due to the supply chain situation with drawers. And they have, so to speak, set that standards for our capacity rather than our normal business model where it was primarily a question of manning up to increase capacity. It hasn't made sense for us to do that since we were limited on the supply of drawers. So it has been a limitation in the first part of the year but, as Torben mentioned previously, it's now back to normal and it's not going to be a constraint from our...

Okay. And then in terms of your order pipeline, you state that it's quite strong. So what is the mix between volume and price in the order pipeline?

The order book is higher than the price increase. So there's definitely also some volume. And then there is another factor also maybe influencing it as we announce those price increases than the stores and the customers to order faster or sooner. So there might also be a timing issue in this, but even taking price increases and this trend to maybe order faster away, there's still volume growth -- significant volume growth.

Okay. Just so I understand you correctly. So the stores, they order kitchn before they sold them? Or how should...

No, no. But normally, from -- when you as a customer has signed the contract in the store, then the store still takes some time to work with the order. And if they know that there is capacity -- no limits for capacity, then they will order with us when they get to it when they're applying for it or when they need to do it because delivery is coming up. But in a situation with several price increases and limited supply, then they tend to order maybe a week or 2 or before that, they normally do. So a part of this order book might be coming from them ordering sooner than normal. They work a little bit more disciplined to make sure that they get the order on time and at the old prices.

[Operator Instructions] Your next question comes from the line of Poul Jessen from Danske Bank.

First question is just to recap on the pricing. You raised prices by 7.5% September last year and then I think it was 5% April 1 this year. And how much is it then by June?

7.5%.

Again?

Yes.

And if you then take the guidance for the remainder of the year where you increased the guide 5% to 14% growth, how much of that will then be the price?

You can say compared the last one, impacting the last quarters, is constituting maybe 2 percentage points of revenue.

Yes, but it included the hike you had in September last year, which will have an impact actually from start of this year. So if you compare that last 9 months last year with the last 9 months this year where you have an increase in the revenue guidance of 5% to 14%, how much of those 5% to 14% will then be priced?

It's a combination. It is, of course, a significant impact from the price increases, but there's also volume growth in the guidance. We -- I think we stated last quarter that organic growth was -- in the guidance was 5% to 12%, and it corresponded to a volume growth of 0% to 7%.

Okay. And then on the margin, you had -- it's a little about the question before, but you had 9% margin in the first quarter and 13% to 15% for the last 9 months implicit in the guidance. And we should assume that you're getting some white goods back. So is that the mix? Or is it the price increases that will take your margins up?

Combination in that sense. We -- compared to, you can say, previous levels, we have an expectation that third-party revenue will not constitute the same amount as historically since the supply chain situation for wide appliances is still on table. And this leads example to customers ordering wide appliances is elsewhere than through the stores or through the non-suppliers, due to the...

It remain low for the remainder of the...

It is volatile. But overall, yes, we expect to have a lower share of revenue.

And I have an estimate on the slip-up on the production that you will take over there, how much of that will be part of the revenue this year? So far it's quite limited. So how much will that add for the next 9 months?

In the first 2 quarters, it's limited and then we expect to see an increase. It's not necessarily going to be fully in the levels that we expected initially. It takes longer than we expected to get the full in-sourcing of it.

Okay. And then specialized, you said that we should expect limited impact for -- does that mean that special items for the remainder of the year will tend to 0 from Q2 and onwards?

Yes, that's the expectation. Yes.

[Operator Instructions] There are currently no further questions. Sir, I will hand the call back to you for comments.

Yes. Thank you to all of you for listening today, and thank you for your questions. Thank you for your time. Have a nice day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.