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

Good day, and thank you for standing by. Welcome to TCM Group Interim Second Quarter 2022 Report Conference Call. [Operator Instructions] After the speaker's presentation, there will be the question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Torben Paulin. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and welcome to the presentation of the Q2 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 session. Let us start the presentation and turn to Page 2 for the business update. In Q2, we saw a continued solid demand for kitchens. Underlying like-for-like growth in our core business, excluding the third-party, revenue was 11%. The growth was driven by both Nettoline and Svane in the Danish market and a strong growth in our Norwegian business, which drove the growth of 24% in other countries. The growth was a mix of volume growth and impact from the implemented sales price increases. We are pleased that the supply chain situation normalized during the quarter, and therefore, we threw a huge effort from our dedicated employees who were able to meet the demand in the quarter and delivered significant top line growth. The Russian invasion of Ukraine impacted the overall supply chain in the European market. And for TCM Group, this led to higher input costs as well as higher energy and transportation costs in the quarter. During the last 12 months, we have increased our sales prices 3 times, all of them significantly higher increases than normal, and 2 of those were inflated during Q2 with shorter notice period than normal. We are mitigating higher input costs as fast as possible. However, due to the nature of our business, the positive effect hereof comes with some delay. Input costs have now stabilized. And from the middle of Q3, the implemented sales price increases will level out the negative impact from the higher input costs. Going into Q3, the order book is solid. However, the high inflation, increasing interest levels, et cetera, creates a high level of uncertainty regarding the housing market and the future demand for kitchens. We monitor the development closely and we have prepared a number of initiatives which can be put into action if we see a drop in demand. Overall, we will adjust our capacity and thereby manning according to the demand. We have short notice periods, especially for blue collar workers if we have to man down. Number of branded stores was 94 end of Q2. During Q2, a new Svane Køkkenet opened in Fredrikstad in Norway, and shortly after, another store opened in Oslo. Please turn to Page 3. Some financial highlights for the quarter. Reported revenue was DKK 325 million, corresponding to a revenue growth of 11.7%. Adjusted EBIT was DKK 39 million compared to DKK 44 million in Q2 last year. Adjusted EBIT margin was 12% compared to 15.2% in Q2 last year. Mogens will elaborate on the underlying drivers of this development. Net working capital ratio was minus 2.6% compared to minus 7% last year. Cash conversion was 49.5%. I will now hand over to Mogens to go through the financial highlights.

Thank you, Torben, and please turn to Page 4. The revenue in Denmark grew 10.5% in the quarter. The underlying revenue growth in the Danish market in our core business was 9% in the second quarter, excluding third-party revenue. The growth was driven by our DIY segment, Nettoline, and by Svane Køkkenet. The growth was supported by a higher share of revenue from third-party products and negatively affected by the technical impact from the merge of the e-commerce activities in kitchn.dk and Celebert. And this is the last quarter where we see this technical effect in the comparison figures. Revenue through other countries increased by 23.5%, driven by sales to the Norwegian markets, both organic growth and growth from new and recently opened stores within Svane. Please turn to Page 5. Gross margin declined from 25.7% to 21.3% in Q2. The technical impact from the merger of the e-commerce activities in kitchn.dk and Celebert had a negative impact on gross margin of 0.6% in the quarter. The higher input costs have been mitigated by increased sales prices, which, however, due to the nature of our business means that the impact comes with a delay. There is a time gap from when an order is placed and agreed to the time of delivery and thereby time of impact on the implemented sales price increases. The net impact from increased prices on raw material and energy was approximately 3 percentage points in the quarter. As Torben mentioned, we expect that the implemented sales price increases will level out the negative impact on earnings from the middle of Q3. Operating expenses decreased by 0.3% (sic) [ DKK 0.3 million ] and the decrease was primarily due to the merger of the e-commerce activities within kitchn (sic) [ kitchn.dk ] and Celebert. In the second quarter, nonrecurring items consisted of a technical gain from the final settlement announced of the Celebert/kitchn (sic) [ Celebert/kitchn.dk ] transaction. Adjusted EBIT ended at DKK 39 million compared to a strong Q2 last year of DKK 44 million. Please turn to Page 6. Net working capital end of Q2 was minus DKK 29 million compared to minus DKK 76 million last year. Our inventory levels remain significantly higher than last year, which is a combination of increased raw material prices and a deliberate decision to establish a buffer of raw materials to ensure higher delivery assurance, given the unstable supply of parts and raw materials in general. Compared to Q2 last year, other payables were significantly lower, which was primarily due to a change in the holiday allowance systems. And therefore, during Q3 last year, our obligation was transferred to a government fund, impacting net working capital comparison to last year by DKK 19 million. And further to this, net working capital last year was favorably impacted by the extended credit on VAT and payroll tax as part of the stimulus packages by DKK 10 million. Net working capital ratio was minus 2.6% compared to last year, minus 7%. If we were to adjust for the impact from holiday allowance and stimulus packages, net working capital ratio last year would have been minus 4.3%. Net debt was DKK 333 million in Q2 compared to DKK 153 million at the end of the second quarter. If we exclude the liabilities related to IFRS 16, net interest-bearing debt was DKK 264 million compared to DKK 118 million in Q2 last year. Compared to last year, net debt is impacted by the payouts through ordinary dividends of DKK 54 million and the share buyback program of DKK 150 million. Leverage ratio, excluding IFRS 16, increased from 0.7 to 1.9. Following the AGM, in April TCM Group's share capital has been reduced by 8.6% of the shares through an enrollment of the vast majority of the company's treasury shares. Please turn to Page 7. Free cash flow was DKK 27 million in Q2 compared to DKK 52 million in Q2 last year. And the variance compared to last year was primarily due to the negative change in net working capital compared to Q2 last year. CapEx ratio was 1.4% compared to 2.0% last year. And cash conversion ratio measured over 12 months was 49.5%. Please turn to Page 8. And the financial outlook for the full year. Based on the current market conditions, which is subject to a high degree of uncertainty, we revised our financial outlook on EBIT. So our full year outlook is revenue in the range of DKK 1.15 billion to DKK 1.225 billion, which is unchanged and an adjusted EBIT in the range DKK 130 million to DKK 160 million, which was previously DKK 140 million to DKK 170 million.

Thank you, Mogens. Uncertainty is higher than normal. The Russian invasion of Ukraine, increased inflation and higher interest rates lead to a high uncertainty on the future consumer demand. In the short term, the order pipeline is solid, providing some visibility and assurance of the short-term customer demand. We are monitoring the development in customer behavior and demand closely, and we are prepared to put a number of initiatives into action if necessary. I would like to point out that a 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, thereby protect our margin and profitability. This concludes our presentation. And we will now hand over to the operator for the Q&A session.

[Operator Instructions] Dear speakers, please be advised there are no questions. I would like to hand over back to Torben Paulin for closing remarks.

We might face some technical issues, which is not allowing participants to get through with their questions.

[Operator Instructions] We have the line of Benjamin Silverstone from ABG. So if you have a question, Benjamin, you may -- can please ask a question.

Just checking that it's going through.

It is.