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

Good day, and thank you for standing by. Welcome to the TCM Group Interim Q1 2023 Report Conference Call. [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 Q1 results for TCM Group. Presenters today are our CFO, Thomas Hjannung; 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. Due to TCM's strong B2B position sales in Q1 were resilient despite a challenging market. Sales decreased by 3% however, with variations between the brands. Revenue in Q1 was in line with our expectations, and our strong position and pipeline in B2B ensured that overall sales remained solid despite the slowdown in B2C sales. The change in sales mix compared to Q1 last year had a significant negative impact on gross margin and thereby reduced earnings. In light of the continued soft consumer demand, we made further adjustments to the organization during the first quarter, reducing both direct and staff functions. We continue to monitor the development in the market closely and production capacity is being adjusted as needed. Number of branded stores was 93 versus 94 Q1 last year. In April 2023, we opened a new Tvis Køkken store in Lyngby in the Greater Copenhagen area. We continue our focus on product innovation and in Svane Køkkenet, we launched the second new 2023 design called [ note ]. The new kitchen design is made of Vertical S3 [ veneer ] stained in a warm natural color and exclusive gray color. Both the chipboard and the [ veneered ] is FSC certified as all our kitchens are today. Please turn to Page 3. Some financial headlines for the quarter. Reported revenue was DKK 274 million, corresponding to a revenue decrease of 2.8% in our core business. Adjusted EBIT was DKK 13 million compared to DKK 26 million in Q1 last year. Adjusted EBIT margin was 4.8% compared to 9.3% in Q1 last year. Thomas will elaborate on the underlying drivers of this development. Net working capital ratio was minus 2.0% compared to minus 3.4% last year. Cash conversion was 68%. I will now hand over to Thomas to go through the financial highlights.

Thank you, Torben. Please turn to Page 4. The revenue development in Q1 was generally in line with our expectations. The reported revenue decreased by 2.8%. However, with the flagship Svane Køkkenet brand having a flat sales development in Denmark year-on-year. While we saw good growth in our private label and e-commerce business. In Norway, our sales increased by 4.4% measured in local currency. The revenue development was impacted by a lower B2C sales in the quarter as expected. However, this was largely offset by growth within B2B project sales. Please turn to Page 5. The change in the sales mix with a lower B2C sales and a higher share of the lower margin B2B project sales had a negative impact on the gross margin in the quarter. Furthermore, the gross margin was negatively impacted by significantly higher cost prices on the raw material components compared to Q1 last year. The higher input costs have been passed on to the customers through the price increases that we implemented during 2022, but of course, has a diluting effect on the relative margin. Energy and freight costs increased significantly in the quarter, adding further pressure on the gross margin. Our operating expenses increased by [ DKK 3.8 million ] the increase was primarily due to cost for dealership restructurings of DKK 3 million. The cost related to losses on accounts receivables and costs for securing suppliers to the end consumers affected by the closures. The organizational restructuring that Torben mentioned in Q1 had only limited effect on the cost base in the quarter, and hence, the increase in operating expenses is not an indicator for the development in our cost base going forward. Our adjusted EBIT ended at DKK 13 million compared to DKK 26 million in the first quarter last year. Please turn to Page 6. Our net working capital end of Q1 was minus DKK 22 million compared to minus DKK 37 million last year. We reduced our inventory levels in Q1 compared to last year as a result of reducing our profit levels that we introduced during the supply chain crisis last year. Trade receivables and other receivables increased by DKK 7 million. The increase was primarily driven by a higher amount of overdue receivables towards the end of the quarter. Trade payables and other payables declined compared to last year by DKK 18 million due to a lower purchase as a result of lowering the inventories and also an effect from the timing of supplier payments towards the end of the quarter. Net working capital ratio was minus 2% compared to minus 3.4% last year. Our net debt was DKK 315 million at the end of Q1 compared to DKK 278 million end of Q1 last year. If we exclude for the IFRS 16 liabilities, net interest-bearing debt was DKK 264 million compared to DKK 230 million in Q1 last year. Leverage ratio increased from [ 1.89% to 2.95% ] and excluding IFRS 16 effects, the ratio increased from 1.6 to 2.5x EBITDA. As previously communicated in Q1, we renegotiated our leverage covenants with our bank from 3 to 4 to ensure additional and sufficient headroom in our bank credit facility. Page 7, please. The free cash flow in Q1 was minus DKK 35 million compared to minus DKK 33 million in Q4 -- Q1 last year. The cash flow was primarily impacted by the lower earnings and the change in the working capital in the quarter compared to last year. The change in working capital was minus DKK 34 million this year versus minus DKK 43 million in Q1 last year. CapEx ratio year-to-date was 1% compared to 1.9% last year. And our cash conversion measured as a rolling 12 months was 68%. I will now hand back to Torben for discussing the financial outlook for 2023.

Thank you, Thomas. Please turn to Page 8. The outlook for 2023 remains characterized by a high degree of uncertainty with regards to the macroeconomic development and the derived effect on the demand for kitchens. While there are signs of improvement in the Danish housing market, demand from B2C remains soft, and we expect that the revenue will continue to be driven by B2B project sales with lower margins. As such, we confirm our previous revenue outlook of DKK 950 [indiscernible] to [ DKK 1.050 ] billion, but revised our EBIT guidance to DKK 60 million to DKK 90 million against previous DKK 70 million to DKK 100 million. The main reason for the adjustment in EBIT guidance is the continued unfavorable sales mix as B2C sales are recovering slower than anticipated. Cost for dealer restructurings were already included in the existing guidance with a high 1-digit amount but later in the year. We will now hand over to the operator for the Q&A session.

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

I have a couple so I'm just going to take them one by one. So firstly, it sounds like there has been a continued shift in your sales mix from Q4. So I would appreciate to maybe get your thoughts more broadly on how you expect B2C and B2B sales to develop during the rest of 2023 and perhaps also into 2024 and then also, if you could comment on what is the lower end of your guidance range to rely on. So is it based on an assumption that B2B sales will hold up? And B2C sales will trend up again for example. So a comment on that, please.

Yes. Thank you for the question, Frederikke. As we think also mentioned last time, we see still solid traffic to the stores and store consultants has a lot of customers home visits. They do drawings, they do quotations but in all 3 brands, they report that the end consumer really hold back with signing up for the new kitchen and thereby ordering it. This is -- we foresee is not going to change in the short run. And when we look into the second half of the year, we anticipate that we could get into a market looking like Q3 and Q4 last year. And when you ask to the lower part of our range, then that rely on a market that is even softer than last year for the B2C market.

Okay. So how much of your lower end of your revenue guidance is right now covered by already placed orders or projects you're sure to deliver?

We have some visibility and longer in the B2B, but we still need these orders to come in to meet our guidance in the autumn.

Okay. And just to make sure I understand, yes, you're saying B2C sales will -- your guidance realized in B2C sales being softer in the second half of '23 compared -- yes. Okay. And B2B sales the sort of increased assumption to reaching your guidance?

Nevertheless, we saw last year. But it varies through the segments because we know that the house builders, their order book will partially run out during the spring this year. So for that specific segment, we have calculated with a lower revenue to this segment.

Okay. Then if we look to Q4, it sounds like mix is a big factor in Q1 compared to Q4. But is there also an element from volumes declining within each segment?

When revenue is close to being the same level as last year, and we know that we had several price increases last year that mathematically also says that volume has been lower in Q1. Compared to Q1 last year, maybe your question was to Q4 last year.

Yes, exactly. And you also had sales price increases coming in this January. So I'm just wondering if that tells us that volumes need to be down?

Q4, Q1 volumes were generally flat.

Okay. Great. Then I noticed your cash conversion of 68% that seems stronger than comparable quarters in the past couple of years. Is that just a technical fact due to lower EBITDA? Or what's going on there?

It's mainly related to the working capital impact in Q1 this year compared to Q1 last year was better or less negative and also that the rolling LTM CapEx is significantly lower this year as compared to Q1 last year.

Okay, makes sense. And then I'm just going to take the next 2 questions also I'll jump back in the line. But if you don't mind, your net working capital, you state that the decline to both inventories and trade payables is due to reduction in buffer stock, but your inventories are down DKK 10 million payables around DKK 18 million.

Yes, correct. But you have to then basically is the double effect right on payables because we reduced our inventories by the DKK 10 million. But we also -- the means that we purchase a lot less. Last year, we had the opposite effect that we were building up stock. So we have -- we purchased more significantly more than last year than this year. And then there's also, as I said, the effect of us not utilizing cash discounts to the same extent last year as we do this year. So we pay earlier this year. But the biggest effect is from the fact that the purchase volume is lower. But as we were building up stocks this year, we've been reducing stocks.

Okay, right. Yes. That makes sense. Then just lastly on your receivables they've also increased relative to last year. And I understand this is due to your franchisees prolonging payments. So do you see any risk to losses on these receivables given the longer days on hand.

Yes. Of course, there is an increase risk when they're not paying on time. It's something we are monitoring very closely and while working with dealers [indiscernible] place for it. But yes, there is, of course, increased risk and as also, as Torben mentioned, we have included that in our guidance that there could be a more [ customer ].

We will now take our next question. And the next question comes from the line of Poul Jessen of Danske Bank.

Thank you. My question is about the B2B market. As you said, you have good traffic on B2C, but a few signings. What's the visibility on the B2B market with new projects are coming, new projects in you just delivering on the books you already have.

I think the question is yes to both. We are delivering on the order book we are having but there's also still coming new orders in new projects. And we are probably the latest part of projects. So this might be a project that has been being built during the last period and now they are ordering. We see some of those B2B orders where they are short delivery time. So it could look like that somebody has estimated that prices could go down and thereby waited as long as possible. But now they need also the kitchen for their projects. So now they order with a short lead time. So but it is still new orders coming in both for the remaining weeks of the spring and also for the second half of the year.

And on the B2C market, your comments is that only in Q1 or how you sit now into mid-May, is that still good traffic but few signatures?

Now we are getting out of our main season, you can say because when the weather is getting better, people, they look more outside the house than inside the house, there is this normal seasonality in it. But stores report that there are still good interest, but they really struggle to make the consumers to sign the order.

Okay. And then coming to the quality of the dealerships, you had these DKK 3 million in cost in the first quarter, and you have included more in the full year guidance. But how confident are you with the quality in general? Or is it just a few ones that has problems?