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

Good day and thank you for standing by. Welcome to the TCM Group Interim Q4 2022 Report Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn 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 Q4 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. So let us start the presentation and turn to Page 2 for the business update. Underlying like-for-like growth in our core business, excluding third-party revenue in Q4, was 1%. Q4 was in line with expectations, which also meant that we saw a decline in high market B2B sales. Our strong position and pipeline in B2B ensured that overall sales remained solid in spite of the slowdown in B2C sales. The change in sales mix had a significant negative impact on gross margin and reduced earnings. During Q3 and Q4, we have already undertaken a number of actions to address the situation and protect the profitability going forward. From mid-September, we shut down the third shift, which was the night shift. And we have in 2 steps, restructured the white-collar organization. The restructurings were carried out to mitigate the slowdown in demand, and the first shift was discontinued as increased efficiencies at the production sites has raised the overall production capacity in the 2 remaining shifts. We continue to monitor the development in the market closely and production capacity is being adjusted as needed. Number of branded stores end of Q4 was 94 versus 93 last year. In Q4, a new unique flagship store for Svane opened in close in the Greater Copenhagen area. The store stands out compared to other kitchen stores in Denmark and Scandinavia and provides a unique customer experience. The store is surely worth a visit. A new Svane Køkkenet store opened in Andean in Norway and a new Nettoline store opened in Ranstand. During Q1 2023, a new Tvis Køkken will open in Lyngby in the Greater Copenhagen area. We continue our focus on product innovation. And in Svane Køkkenet, we launched the new 2023 design, Infinity. The new kitchen designed is based on circular design principles and renewable materials. The primary material in Infinity is chipboard, which consists of more than 90% recycled timber. Another new design notes will be launched soon. Going into 2023, it is clear that there is a really high degree of uncertainty regarding the market development and macroeconomic development. We will address this further when we get to the financial outlook. For now, please turn to Page 3. Some financial highlights for the quarter. Reported revenue was DKK 275 million, corresponding to a revenue growth of 1% in our core business. Adjusted EBIT was DKK 18 million compared to DKK 29 million in Q4 last year. Adjusted EBIT margin was 6.5% compared to 10.6% in Q4 last year. Mogens will elaborate on the underlying drivers of this development. Net working capital ratio was minus 5% compared to minus 7.4% last year. Cash conversion was 61%. I will now hand over to Mogens to go through the financial highlights.

Thank you, Torben, and please turn to Page 4. The revenue development in Q4 was relatively flat. The reported revenue increased by 0.3%, and the underlying revenue growth in our core business was up 1% in the quarter. For the full year, revenue growth in our core business was up 6%, driven by 4.5% growth in Denmark and more than 17% growth in revenue outside Denmark. The revenue development was impacted by lower B2C sales in the quarter compared to last year, which was offset by growth within B2B project sales. This led to lower average prices and thereby, a negative impact on both revenue and margins. Please turn to Page 5. The change in sales mix with lower B2C sales and higher share of lower margin B2B product sales had a negative impact on gross margin in the quarter. Furthermore, gross margin was negatively impacted by significant higher cost prices on raw materials and components. The higher input costs were passed on to our customers. We did that through multiple sales price increases during the year. However, the mitigating impact from -- on gross margin from these implemented sales price increases comes with some delay. From January 2023, the sales price increases that we implemented during 2022 will have full mitigating impact. Gross margin was 20.1% and down on Q4 last year, but up on Q3. Operating expenses increased by DKK 8.7 million compared to Q4 last year. The increase was primarily due to 3 factors: firstly, higher marketing spend driven by product launches in our different brands; secondly, higher costs related to new stores that we opened during the year and supported during the opening. And finally, an increase in the provisions made to cover potential losses on debtors given the higher macroeconomic uncertainty. And therefore, the increase in operating expenses in the quarter is not an indicator for the development in our cost base going forward. Adjusted EBIT ended at DKK 18 million compared to Q4 last year of DKK 29 million, and adjusted EBIT for the full year ended at DKK 103 million. Please turn to Page 6. Net working capital end of Q4 was minus DKK 57 million compared to minus DKK 82 million last year. Our inventories were slightly higher than last year, which was due to increased raw material prices. As we have communicated earlier, we have lowered the offer levels for inventories during the quarter as the supply of raw material and components has stabilized. Trade receivables and other receivables increased by DKK 10 million. The increase was driven by higher trade receivables due to accruals as a result of the normal production shutdown during Christmas holidays started later than previous years, which means that we have a higher number of outstanding debtor days at year-end compared to last year. Trade payables and other payables compared to last year declined by DKK 12 million compared to Q4 last year. And this was driven by lower trade payables and due to a reduction of the supply of raw materials towards the end of the year as we reduced our buffer levels on inventory. Net working capital ratio was minus 5% compared to minus 7.4% last year. Net debt was DKK 288 million end of Q4 compared to DKK 200 million at the end of Q4 last year. If we exclude liabilities related to IFRS 16, net interest bank debt was DKK 228 million compared to DKK 175 million in Q4 last year. Leverage ratio increased from 1.3% to 2.35%. excluding IFRS 16, the leverage ratio increased from 1.2% to 1.9%. We have, for some time, had a constructive dialogue with our bank regarding the leverage covenant and this proactive approach led to a renegotiated leverage covenant from 3 to 4x EBITDA. And thereby, we have ensured additional and sufficient headwind in our bank credit facility. Please turn to Page 7. The free cash flow in the quarter was plus DKK 52 million compared to plus DKK 29 million in Q4 last year. The cash flow was primarily impacted by the change in net working capital in the quarter compared to Q4 last year, a positive impact of DKK 44 million in the quarter compared to DKK 33 million in Q4 last year. The cash flow was also impacted by lower tax payments compared to Q4 last year. CapEx ratio was 2.0% of revenue compared to 2.6% last year, and cash conversion ratio measured over 12 months was 61%. I will now hand over to Torben for the financial outlook for 2023. Please turn to Page 8.

Thank you, Mogens. The outlook for 2023 is characterized by a high degree of uncertainty with regards to the macroeconomic development and the derived effect on the demand for kitchens. Macroeconomic headwind during 2022 with high inflation, among others, following the war in Ukraine, higher energy costs, higher interest rates, et cetera, has led to a slowdown of the Danish housing market with a significant drop in number of houses sold and order intake from house builders. This has impacted the kitchen market with lower demand, especially within B2C. As a consequence of this, we expect lower activity in 2023 in general, and we believe B2C sales will continue to be low going into 2023, as we have experienced during Q3 and Q4 in 2022. Based on these assumptions, we have widened our range for the financial outlook for 2023 compared to previous years. Our financial outlook for 2023 is a full year revenue in the range DKK 950 million to DKK 1.050 billion, and adjusted EBIT in the range of DKK 70 million to DKK 100 million. As a consequence of the higher degree of uncertainties, we have decided not to propose a distribution of an ordinary dividend for 2022. Instead, we will propose to the upcoming Annual General Meeting in April that a mandate is provided to the Board of Directors with the option to distribute a dividend during the second half of 2023 of up to DKK 30 million. This concludes our presentation, which will be the last one for our CFO, Mogens Elbrønd Pedersen. Next week, our new CFO, Thomas Hjannung, will join TCM Group. And after a short and swift handover to Thomas, Mogens will leave the company. I will thank Mogens for the good cooperation during my first 3 years in TCM and the strong effort for TCM during 8 years. I give Mogens my best wishes for his new position outside TCM Group. We will now hand over to the operator for the Q&A session.

[Operator Instructions] And your first question comes from the line of Frederikke Due Olsen from Carnegie.

Yes. The first one is relating to your reported revenue growth. And I was just hoping that you could give us an idea of how this is split between price increases and volume growth, and maybe to give a bit more color to my question. I'm looking at a back of the envelope calculation that assumes maybe 2 quarters lag to your announced price increases, which suggests an ASP growth around 17%. So that suggests that volumes were down by at least 15% in this quarter. Do you think that that's a fair picture? Or could you maybe provide some guidance on this?

Yes. Volume -- development in volume was on par with last year. So -- and that's my comment on the impact from the sales mix, is that, that offsets the price effect that you correctly assume, is there. The impact from the price increase that we have had in Q4 is, you can say, is not helping us in that way since the average prices is lower.

So flat ASP and flat volumes compared with Q4 last year?

Correct.

Okay. Okay. Great. And then I was wondering this flat volume development, could you provide some guidance on how this is split B2C versus B2B? And I think you mentioned that revenue was influenced by a change in the sales mix with lower B2C sales offset by growth within B2C or B2B sales. So how much growth would this be?

Yes, that's correct that we saw our B2C sales. We are not providing that exact number, but we had less significant drop in B2C sales in Q4 compared to Q3. On the other hand, we had less significant growth in B2B in Q4 compared to Q3.

Okay. Understood. Then I was wondering if you could elaborate on what assumptions your guidance relies on and maybe also how much of your guidance is covered by the current order book.

Yes. So order book is typically 6 to 8 weeks ahead. Then, of course, we have some projects in our order book for going up to 6 months ahead. But if you look at the basis for that, the order is, of course, significantly more solid for 6 to 8 weeks outlook. The assumptions is, if you look at the sales mix, we expect that we will have somewhat similar effects in the first 2 quarters as we have seen in Q3 and Q4, so with B2C sales struggling and B2B more stable. And that, of course, have a similar negative margin impact on -- gross margin impact in the first 2 quarters. On the other hand, we will get full impact from the sales price increases that we implemented during 2022. We'll have that from 1st of January. And that means that the net effect on margins on that should be a slightly upside -- slight upside to 2022.

Okay. And when you say full impact from the sales price increases, should we understand that as these between, I think it's 15% to 20% sales price increases in total since maybe late 2021 that they will come into or they will materialize in full, so we could sort of derive the implied volume decline from that number? Or is it only implemented in the part of the business that maybe affected by these challenges in your input costs?

The sales price increases has come in different steps. And therefore, year-over-year, it's not, you can say, an additional impact. If you look at the full year, it's a high single-digit number that should come from prices. And again, we would have an offset impact from the sales as we have seen in the last 2 quarters.

Okay. Understood. Then maybe just the final question. Could you give us an idea of -- I remember you said around Q3 that the split between B2B and B2C were around 70% to 30% in B2B's favor. Could you give us an idea of if that's still the same picture you're seeing?

Currently, yes, it's the same.

We will now go to our next question. And your next question comes from the line of Sindre Sørbye from Arctic Asset Management.

Yes. Do you hear me?

Loud and clear.

Okay. Good. It's Sindre Sørbye from Arctic Asset Management here. Three questions for you. First, maybe a minor topic, but it looks like both sales and administration expenses look quite elevated, both in longer terms than and then in relation to sales. So is this -- and what do you -- is this kind of affected by your restructuring and what you're struggling with now? Or how should we look into 2023 on that front?

So the 3 drivers that I mentioned, the marketing expenses that we've had came from, you can say, marketing related to the product launches. For instance, in Tvis we launched MG50 and we supported the launch by additional marketing activities. Looking ahead, marketing is one of the flexible costs in our cost base, and thereby, it's possible for us to adjust also downwards. So you should consider that to be a Q4 item and not necessarily something that you should build into your expectations for 2023. Furthermore, on selling expenses, we supported the new store openings and especially the 2 flagship stores, Svane store in Glostrup opened in Q4, and the support to the flagship store in Oslo. And the Glostrup store is considered to be a one-off contribution, whereas we believe that we would also, in the future, support our Norwegian stores for instance, with higher marketing spend and so on in the Norwegian business to build that. So that could be also continuing into the next year. And on administration costs, the increase was primarily due to higher provisions for debt for losses and thereby, it shouldn't be built into the expectations for the cost base going in -- in other words, it should make sure that, that possible debtor loss shouldn't affect the cost base going forward.

Okay. To some extent, there should be maybe a little elevated selling expenses due to -- that you have to support your business, but Q4 is definitely higher than what we should see forward. That's the conclusion?

Correct.

Okay. Good. And can you elaborate a little on the competitive picture you see now. The market is obviously weakening. But how is competition developing, especially with regards to pricing?

Yes. As you said, the market is weak, and it is the same for all of us and our colleagues in the industry. There is a timing issue on how each brand has entered the price increases. And I guess all brands have had several price increases, some earlier, some later. And those that maybe increase prices on our level or less, they have then done it later on. So in conclusion on looking backwards is that everybody has had a high level of multiple price increases, and it has not changed the competition in our segments.

Okay. But do you see any signs of, especially on the consumer side, the consumer is trading down in the sense that players like IKEA and, let's say, cheaper kitchen and flat packs are gaining market share on the expense of the mid-level and high-level segments?

Not significant. But we see in our brands that they can choose, for example, drawer systems or tabletops, they can choose a cheaper material. And we can also see that Nettoline, our brand in the DIY segment, is performing very close to last year. So that could be a signal that some are trading down. The latest figures I have heard from IKEA is that, that their market is weak as well. So it doesn't look like -- it doesn't sound like that they are catching up from the other brands.

Okay. Okay. And one other question...

If we should say something more to the consumer behavior in the business right now, there's still has been good traffic to stores. There are still customers to work with. But customers tend to consider for a little bit longer than normal before they sign for the orders. So there's still a lot of interest and they are getting quotes also on quality and mid-priced kitchens, they just consider it for a little bit longer.

Okay. And just to clarify the -- on the price increases. And did you previously say that the average selling price in Q4 '22, were comparable or at the same level as the selling price in Q4 2021?

The average prices dropped, but primarily because of the change in sales mix, meaning that you can say higher margins and high average price B2C sales were replaced by lower margin and lower average price project sales. So -- but if you compare average prices in the segments, they have increased with the price increases.

And those amounted to 10% or something throughout the year?

We had 2 price increases during 2022, and they were having a partial impact in Q4. So the impact was maybe not 10%, but in high one single-digit numbers.

Yes. And then you also said that you expected high single digit in -- from February. Is that correct?

Yes. For the full year of 2023, we expect high single-digit impact on prices.

And most of that would take effect from February this year, isn't that what you said?

Yes. Yes, we will have a impact from the 2 main price increases in 2022, we will have impact in Q1 compared to Q1 last year.

Okay. Yes. And finally, on the gross margin. Do you see -- or on the raw materials side. Obviously, we can read that lot of prices are coming down. But how is it in your pipeline and in your purchasing agreement? What do you see there?

So far, we haven't seen any significant price reductions on raw material. You are right when you look at the timber for constructions, et cetera, and steel indexes has come down. But for the reuse of wood or chipboard and for the type of steel that is used for our drawer systems, there hasn't been any reductions so far. If the market is weakening further, then we, of course, expect also input cost to go down, but we haven't seen it significantly so far.

On the other hand, it has been stable for a few quarters now. And that's, of course, the positive thing.

Okay. So that means the gross margin, when the price increases are coming through you, despite a slight negative mix impact in the first half, we should actually see increasing gross margins throughout the year?

Yes, there should be a slightly upside to the margin compared to 2022. Yes.

Okay. That was all for me. And finally, Mogens, thanks for your -- attending your last call, so wish you luck in the future.

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

I only have a few ones left. One is on the provisions that you mentioned in that and cost. So I was thinking if you could give an update on how you see the financial stability or health of franchisees? I looked in your full year report. I can't find receivables on overdue payments or what? Can you give an update on what the structure is here?

In general, the stores are all a lot more solid than they were 3 years ago as far as, 3 good years with good revenue and good profit. So in general, we believe they are healthy. The biggest risk is stores business, just been opened, they have this -- the full investment now, and then they opened up to the market this and why the reason and where the competition is getting stronger. The other factors that have an impact is that they are used to taking a high, good payment when the kitchen is ordered. And if the sales of kitchen is weakening, then the cash flow they take early in the process is not happening. So we follow their payment very closely. And of course, we have also graduated our stores into what is more strategically important to us and what is less strategically important to us.

Okay. And coming to the current tradings, we spoke before about the B2C market. But how is it looking in the project market and the subsidized housing?

Yes. The house industry, they have since, they're waiting from Ukraine, from Russia and Ukraine, they really have reported very low number of new sales. So their order pipeline will dry out during Q2 this year. Other projects, the pipeline is still on a fairly normal level and on the B2C business, there is traffic in the stores and good quality traffic. But the consumer is considering a little bit longer before they sign for a new kitchen.

Okay. A final one for me is, so far, I think you had a 3-year electricity fixed price contract, which should be renewed early this year. Have you then been signed up on the high prices we saw in the autumn? Or how are you handling that for the time being?

No, we have a flexible agreement. So we haven't fixed the costs at the peak, fortunately.

So you're flexible, right?

Yes, we are flexible. But we have included in the sales price increase, of course, some of the worst-case scenarios that could happen a lot on the electricity price, though it has been half of the [indiscernible] because of the impact increase. And then -- and we, of course, also focused on mitigating it by lowering our consumption as we have done for some years now in a row. We continue to do that. That, of course, also has a mitigating effect.

Okay. And the final one, the outlook, the high and the low range on the revenue. Can you give some insights into what your assumptions are to reach the DKK 950 million and how to reach the DKK 1.050 billion?

Yes, as you can say the overall assumption that we expect that revenue just in case will be weakening in -- compared to last year especially in the first half year. And that has, you can say, and that's on the revenue. So we also expect the activity in -- with our house builders will be weaker in 2023 compared to last year. So that is part of all the low end and the high end and then of course the low end, it should be that we continue to see a further decline in the activity level compared to what it's been so far. We have seen lower B2C sales in Q3 and Q4, and then you end up with somewhat similar revenue levels like that. But of course, our guidance indicates that we would also see some impact in the future in the year.

And your next question comes from the line of Benjamin Silverstone from ABGSC.

I have 3, if I may. And the first one is a bit of a follow-up to the previous questions in terms of the price increase/cost dynamics for 2023, and then a little bit more of a broad term question in terms of when you guys internally expect to see a normalization in the EBIT margins. So would you obviously understand that there's been a lot of costs or special cost dynamics in the last couple of years, and you also have some special price increases to mitigate this. So when are you internally looking for a normalization in the EBIT margin would be the first question? The second question is in terms of the demand outlook. So just if you can give us any indication of what triggers you are looking for internally to sort of create a normalization in especially the B2C demand and also, of course, the new builds in the B2B. And then the last question is in terms of the net financials. So we are seeing a report, I think, minus DKK 8 million this year, significantly up from the previous years. Would this be the new growing rate going forward with the higher gearing or how should we think about that?

Okay. I'll start and then maybe you just follow up, Benjamin, if we didn't catch all of your -- of this. So first one is the EBIT part. Normally, if you go some years back, of course, there was a different structure in our company with ownership of own operated stores, and we also had the kitchen web shop, kitchn.dk. So if you adjust for that, our normal gross margin level would be somewhere between 25% and 26%. Right now, we are operating on lower levels than that. And I would say that one thing is that we neutralize the input cost inflation that will happen this year. The second step needed in order to get back to those levels is that we will see an uplift in the B2C sales again. So a normal sales mix again. And when that will happen is a good question. That is, of course, very uncertain. Yes.

Yes. And if I have to say something, what we are looking at for the market and demand and in B2C especially, in our industry, we have what we call design weekends 4x in the beginning of the year and 4x in the autumn. The first design weekend, early January was really good. There was a lot of traffic that was -- appointments made at customers' home to make drawings and quotation and measuring, up on 83% of the level of '22, which was all-time high. So we are back to a more normalized level from '19, '20 and '21. What was surprisingly was that it was also good traffic and a lot of new appointments, the weekends following the design weekend. And again, in February, it was a good success with close to last year number of appointments. So the interest is there, the customers are there, but they consider for a longer time before they sign the orders. And of course, that is one of the things we are following closely. Are we -- are they giving up their projects? Are they choosing another brand? Or are they finally then signing with one of our brands? That is some of the things we are following. And then of course, we also follow the number of houses sold in the market also for the house builders as some of the indicators where this is going. And so far, as you're saying, interest is there, customers are there, but they hesitate to sign for the new kitchen. And then the second question was, what was the net financials? Mogens, I guess you will.

Yes, can you just repeat the third question, Benjamin.

Of course. So just in terms on the financials, we are seeing it this year around minus DKK 8 million, if I remember correctly. It's quite up from the previous year. So just if you can give a indication of what we should expect going forward?

Yes, you've seen an impact from increasing interest rates, especially in Q3 and Q4, but also that we have, that we have on the back of the share buyback program and dividend distribution, so we'll have a higher debt. So it's a combination of the 2. Looking forward, you should expect a similar increase in Q1 and Q2 especially. And then if the interest rates will get a further increase, that would of course, also impact Q3 and Q4 compared to 2022, but it would be more significant in the first 2 quarters.

[Operator Instructions] And your next question comes from the line of Frederikke Due Olsen from Carnegie.

I just have 2 follow-up questions. What is relating to one of these effects we were talking about previously of how we could expect consumers to behave during a recession and we spoke about that one of the effects could be a down trade from these higher priced [indiscernible] to Nettoline. And I was wondering, first if this is something that you have started to see? And then second, if you could maybe elaborate on how this down trade would impact your working capital? As a I recall, there is something different with Nettoline being made to store rather than made to order. But -- could you maybe remind us of these dynamics?

As you're saying, in the kitchen industry, you have a lot of options within the brand to sell the same look and function of a kitchen, but with a cheaper drawer system, all the fronts, cheaper tabletops. So each brand can easily handle a customer that is coming in with a lower bucket, but it's not necessarily what we are experiencing in the stores and out. People has money, it's just a question if they feel confident to sign up for it right now. But there can be a element of it, as we are saying that Nettoline in the DIY segment, they are still operating very closely through the past. But they also opened up several new stores, brand stores. So it might not be a down trade from the customers. It can also just be the effect of all the good things happening in Nettoline with better branding and better support and operating of the stores.

And then the question on net working capital. So on trade receivables, there are no big difference between the brands in that sense. So that wouldn't -- if there's any change in revenue, it shouldn't change trade receivables significantly. And you're right that in Nettoline and DIY segment, we operate with a finished good inventory, which we don't in Svane and Tvis. The question is whether the churn will simply increase and then thereby also, we expect relatively limited net working capital impact if there were to be a change in the revenue.

Okay. Understood. And then relating also to this question, I was wondering if you could take us through the same effects from having a tilt in your revenue towards B2B? I would assume that this would mean perhaps lower prepayments, which I guess, would also be bad for your net working capital. But is that true? And could you take us through these dynamics?

Yes, there's no difference. We have the same payment term towards the store, regardless whether it's B2C or B2B customer in the end, as a end customer. It is right that there is a change for the stores, cash flow in that sense that it's better to have B2C sales than -- B2C sales than B2B. But for us, there's no difference.

There are currently no further questions. I will hand the call back to you, sir.

Thank you very much. Thank you for taking the time to listening in today and thank you for all your questions. Have a nice day.

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