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

Good day, and thank you for standing by. Welcome to the TCM Group Interim Q2 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 very much. Good morning, ladies and gentlemen, and welcome to the presentation of Q2 results for TCM Group. Presenters today are our CFO, Thomas Hjannung; and myself, CEO, Torben Paulin; and 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. Sales in Q2 were overall in line with our expectations with a year-on-year decrease of 19%. It should be recalled that Q2 '22 was the strongest quarter ever for the TCM Group in terms of revenue, hence a very strong comparable. B2C sales remained weak in the quarter, confirming that consumers remain cautious. Considering that sales only declined by 3.5% compared to Q1 and that the order intake in the B2B business remained stable in the quarter. We see signs of a potential recovery in the market. The change in sales mix compared to Q2 last year had a negative impact on gross margin and reduced earnings. However, gross margin improved compared to Q1. In light of the continued soft consumer demand, we made further adjustments to the production capacity towards the end of the quarter. We continue to monitor the development in the market closely and production capacity and the cost base is being adjusted as needed. Number of branded stores was 91 compared to 94 in Q2 last year. In April 2023, we opened a new Tvis Køkken store in Lyngby in the Greater Copenhagen area, closing a very important white spot. In general, we saw positive development in the Tvis Køkken brand with double-digit growth in order intake, confirming that investments in new stores and more clear defined brand profile. In June, we announced the strategic acquisition of Aubo Production, which will further strengthen our position, primarily in the Norwegian market. The transaction was closing in the beginning of July. In support of the acquisition, we completed a rights issue in the end of June, providing DKK 77 million in new equity to the group. We are very pleased with the strong support shown by several existing shareholders taking part in the rights issue. Please turn to Page 3. Some financial headlines for the quarter. Reported revenue was DKK 264 million, corresponding to a revenue decrease year-on-year of minus 19% in our core business. Adjusted EBIT was DKK 22 million compared to DKK 39 million in Q2 last year. Adjusted EBIT margin was 8.4% compared to 12% in Q2 last year. Thomas will, in a few minutes, elaborate on the underlying drivers of this development. Net working capital ratio was minus 1.1% compared to minus 2.6% last year. Cash conversion was 56%. I will now hand over to Thomas to go through the financial highlights.

Thank you, Torben. Please turn to Page 4. As Torben already mentioned, the revenue development in Q2 was overall in line with our expectations for the quarter. The reported revenue decreased by 18.7% year-on-year with the decline seen in all our brands. Again, it must be noted that Q2 '22 was the strongest quarter ever for the TCM Group in terms of revenue. However, when we compare to Q1, the revenue decline was a more modest 3.5%. In Norway, our sales decreased by 28.7% when we measure in local currency. The revenue development was mainly impacted by lower B2C sales in the quarter compared to last year. However, we did also see slightly lower B2B project sales. Please turn to Page 5. Like we reported in Q1, the change in sales mix with a lower share of B2C sales and a higher share of lower margin B2B project sales continued to have a negative impact on gross margins in the quarter when we compare to last year. Furthermore, the gross margin was again negatively impacted by the significantly higher cost prices on raw materials and components when we compare to the same period last year. The higher input cost has been passed on to the consumers -- our customers through the sales price increases that we implemented during 2022, but of course, continues to have a diluting impact on the relative margin. Energy and freight costs also remained high, again, comparing to same quarter last year, putting further pressure on our gross margin. However, the gross margin improved from 18.5% in Q1 to 20% in Q2 due to increasing average sales prices and the effect of the cost reduction measures that we took in Q1. Operating expenses remained largely flat in the quarter despite cost for dealership restructuring of DKK 2.4 million. The cost related to provisions for losses on accounts receivables and costs for securing suppliers to end consumers. Our adjusted EBIT ended at DKK 22 million compared to Q2 last year of DKK 39 million. Please turn to Page 6. Looking at our net debt and net working capital. Net working capital end of Q2 was minus DKK 12 million compared to minus DKK 29 million last year, equal to 1.1% of the revenue, where last year was 2.6% of the revenue. Our inventory levels were lower than last year as a result of us reducing the buffer levels introduced during the supply chain crisis last year but remained flat on Q1. Trade receivables and other receivables increase decreased by DKK 8 million due to the lower activity in the business. Trade payables and other payables declined compared to Q2 last year by DKK 34 million, driven by lower purchases but also due to lower payables related to sales and operations in general. Towards the end of the quarter, the TCM Group completed a rights issue ahead of the closing of the Aubo transaction in the beginning of July with net proceeds of DKK 77 million. That reduced the net debt to DKK 193 million compared to DKK 263 million at the end of last year, excluding IFRS 16 liabilities. The leverage ratio increased from 2.35% last year to 2.8% at the end of Q2. Please turn to Page 7. The free cash flow in the quarter was minus DKK 2 million compared to a positive DKK 26 million in Q2 last year. The cash flow was primarily impacted by the lower earnings that impacted by minus DKK 23 million compared to last year. CapEx ratio year-to-date was 2.2% compared to [ 1.9% ] last year, with the majorities of our investments going into digitalization and factory modernization. Our cash conversion ratio measured over 12 months was 56%. I will now hand back to Torben to discuss the financial outlook for 2023. And please turn to Page 8.

Thank you, Thomas. Reflecting the development in the first half of the year and the continued uncertainty on the macroeconomic development in the second half, we adjust our outlook for 2023 with narrower ranges. We still expect B2B sales to remain soft and a continued high share of lower-margin B2B sales. As such, we narrowed the revenue outlook to [ DKK 1.050 billion ], so DKK 1.125 billion against before DKK 1.050 billion to DKK 1.175 billion. Similarly, we revised our EBIT guidance to DKK 68 million to DKK 90 million against DKK 68 million to DKK 102 million previously communicated. We will now hand over to the operator for the Q&A session.

[Operator Instructions] We will now go to our first question. One moment, please. And your first question comes from the line of Poul Jessen from Danske Bank.

First question is about -- if you could say a little more about the split on performance on B2B and B2C, especially in Denmark. And then also, if you have any comments on what you've seen into the current quarter on order performance and traffic?

Yes. Poul, thank you for the question. When we look at Q2, it is like we are saying it's the same picture that we have been seeing for now 3 quarters where B2B sales is declining and thereby, B2B is having a higher share -- and a part of that B2B business is also the low-margin project sales. In Q2, we have lower turnover in both segments, but it is not equally weighted. So it still increase this year of the low-margin project sales. So no new development actually. When we then look into what we have experienced here during the summer, and please remind that it is small weeks. So it doesn't have the same impact on the future, like in the bigger months. But we see still traffic in the stores, end consumers, private consumers are there. And they -- also like in the spring, they are very patient. They take a lot of time to consider and the stores are building up their quotation books, but they closed very few orders. So not really a significant change in that consumer behavior. And on the B2B side, we -- you could say now we really see the drop in the house builders -- in the big house builders. We know they have sold very little new houses since last year. And that order book that we were still supplying also in the first half of this year is now really coming to an end. So kitchens for house builders for the remaining year will be very low. But on bigger projects, we are still getting orders. We are getting orders that should be delivered this year. But as normal, also a part of that is then for 2024.

And about the B2B market, when you say that the order book is [ inching ] in the coming quarters. Do you see any indications or signs that is tuning on the -- on the approach which you have or tenders out there? Or should we certainly expect that it's somewhere for 2024 the close of the [ deal time ].

It is -- I think it's too early to say anything on that, that -- but as we are saying, we had stable turnover and stable order intake on it. So the strategy there to have a mix of B2B and B2C business is proving right that this B2B business is a different cycle to the B2C business.

Can you then add some comments on the Norwegian market? Because at least on a growth perspective, it's 29% [indiscernible] also quite a hit, but also from a high level. But what are you seeing in Norway right now?

Yes. It looks like they are reacting a little bit stronger than the Danish consumers to interest increase or inflation, et cetera. But it also looks like -- and that is also the experience from the past that they are also coming back to normal a little bit faster than the Danish consumer. And I would say that it's also what we have seen over the summer that is getting more normal again.

Sorry, it was a Q2 issue.

Sorry?

It was a Q2 issue that you saw the [indiscernible].

As of now, yes, now they got an interest increase again yesterday. So yes, we'll see what -- if that has any impact.

Okay. And the final one for now. Aubo, are you headed for 6 weeks, I guess, more or less. What have you learned? And what are you seeing -- any surprises in any direction?

No. No really surprises. They -- they're the Aubo dealers in Denmark, they are looking into same environment like the Tvis and the Svane and the Nettoline dealers in Denmark. So that is quite similar. They have been performing better in Norway than the TCM old business or what we should call it, but that is probably also reflected in that where we are mainly B2C business in Norway with Nettoline and train. Aubo is mainly B2B business in Norway. And thereby, this different cycles is also counting in Aubo and especially in Norway.

Does that mean that if we take a worst case perspective, but you're just going to see it later in Norway, [ Aubo ] when you see it in your business, which is B2C.

Theoretically, yes.

It would be more normal.

No, theoretically, you are right. But the underlying business that Aubo has with [indiscernible] is also that the [indiscernible] is also growing in the Norwegian business. So they are increasing their market share. And they do that also with some of the big [indiscernible] and house builders up there. So I think they will -- if they succeed with their strategy, which they have been over the recent years, then they are still able to increase or protect their business on the Norwegian market together with [indiscernible].

Okay. I'll step back to see if there are others who loan charge otherwise, I'll come back.

We will now go to your next question. One moment, please. And your next question comes from the line of there we go. Andreas Bloom, Medium Invest.

Can you hear me?

Yes. There's perfect.

Great. All right. First off, I want to continue on with the -- with my colleagues in the questions of your new build segment. Can you comment on how much of your proportion of revenue comes from these new builds, which is halting in the next coming months?

No, we don't submit those shares. But if we say that B2B in TCM is around 60%, and it's split between 4 segments with not a huge difference in size, then you could say it could be something between 10% and 20% of the total business -- but -- and it's not like it is 0, but it is dramatically less than it was during 2022.

Yes. Yes. I understand. Also...

When it will pick up -- when it will pick up is dependent on when those house builders, they start selling houses again. And then some of those houses sold is a customer that needs to sell his existing house and thereby, they don't know when they're going to build it. And when they start building it, then we are supplying the kitchen in the end of the building process. So there will be some delay from now on until we see a bigger -- larger pickup in that segment.

Yes. Yes, of course. And also, can you give us some figures on the price and volume development during this quarter compared to quarter last year?

It is really hard to say because those price increases came at several times last year and the effect of the price increases came on different timing in different segments. So right now, we would compare with several price increases with various deadlines or implementation deadlines in various segments. So I think it's really a hard comparison.

Okay. All right, fair. And then what do you expect for Aubo production going forward? Like do you have any strategic initiatives with the integration that you are thinking about elaborating on for the future?

Yes. Well, one you can say, some of the synergies we were looking into is that Aubo is today buying both table tops and sliding doors from sub-suppliers. And as we have production of those 2 categories in our own factories, that will be some of the things we will start looking into. And then it takes some time. It needs to have the right date, at the right sales material, the IT systems, then they have a display of the existing suppliers, et cetera. So it will take a while, but it's some of the things we work on in the first place to get integrated into our own production. And then Aubo Denmark is looking to sell more through the existing dealers to open up new dealerships. There is several white spots around in Denmark. And as I already said, [indiscernible] is in Norway on a growth track -- and also for selling kitchens to all their existing customers. So we are looking for in a normal market, looking for growth in both places, both markets.

All right. My last question is we've seen a significant increase in your other intangible assets for the first half year. How much of this is related to development projects and how much is actually related to M&A?

Nothing is related to M&A in the first quarter. The increase in intangible assets is related to the IT digitalization journey that we are on.

[Operator Instructions] We will now go to our next question. One moment, please. And your next question comes from the line of Ulrik Bak from SEB.

Yes. Thomas and Torben. Also a few questions from my side. You state that the gross margin improvement in Q2 versus Q1 is driven by higher average selling prices. Is that driven by the price increases you have implemented over the past 1 to 2 years? Or is there another explanation for that? And also, what have you assumed for those average selling prices in your updated guidance?

Thank you for the question, Ulrik. The increase in the selling prices in Q2 is solely driven by the price increases that we implemented during 2022. It should be recalled that, of course, [ Q2 ] to us having a lot of B2B project sales. Our customers have locked in their selling prices, right? So it takes a while before our price increases have the full effect, and that's what we start to see in Q2. And for our forward-looking guidance, we have assumed the current price level.

Okay. That makes sense. And with Aubo now coming into your figures from Q3, is there anything we need to pay attention to in terms of gross margin, SG&A level or any ramp-up costs in that relation?

Ramp-up cost, no, not to -- nothing on ramp-up costs. And I think their margin structure is largely similar to ours, maybe slightly lower gross margin due to them having a lower share of internal production and higher share of purchase components, but that is in the final details.

Okay. That makes sense. And also on your restructuring costs of DKK 2.4 million during the quarter. Can you provide some color on those costs? How much are provisions and how much are realized losses? And is there a potential for further restructuring costs throughout the end of the year?

You could say it's roughly 50-50 split on how much is the provision and how much is actually incurred loss related to one specific store. The -- going forward, yes, we do see still a risk on, we say, this -- I wouldn't say the usual, but a certain portfolio of our stores out there that are more exposed to the decline in consumer sales than other stores are. So we do see a risk. And of course, also in the recent business, we would given that [ ahead of ] very soft -- weak second quarter. Of course, some of the Norwegian dealers would probably be more exposed to credit risk than some of the Danish dealers. So yes, we do see risk and that's also in our guidance also still includes a potential provision in the second half of the year.

Okay. And is it possible to quantify it at all? Is it DKK 2.4 million per quarter? Is that a good number? Or is it less? Is it more?

Hard to say, right? But I think we previously stated that it was a high single digit for the full year, and I think we're still within that reach.

All right. Thank you. Okay. Then in terms of your cost level, it improved a lot during the quarter. And how should we think about this cost level going into Q3 and Q4? You've done additional FTE reduction. You have Aubo coming in, but you also talked about lower input costs as we head into the second half. Yes, piling all that together, that should give you a tailwind in absolute term, [ shouldn't it ].

Yes. Well, it should, in absolute terms, give us a tailwind. Of course, you can say the FTE reduction in -- when it comes to blue-collar workers, Well, it should reflect the lower output as well. So it's not giving us a tailwind in that sense, right, because it is reflected in lower sales as well. And when it comes to the other items, I mean, we have not implemented more on the overheads than what is seen in the Q2 numbers. So very little potential there. And you also have to recall, of course, that Q2 is a more quiet time of the year when it comes to marketing activities. So probably you could say that Q2 is not necessarily completely indicative for the full year, right, in terms of SG&A expenditure.

Okay, right. Then a question on your implied guidance for the second half of the year. You -- with the updated guidance, you now guide for second half adjusted EBIT from DKK 33 million to DKK 55 million, considering that you generated DKK 22 million in Q2. And with these perhaps tailwinds from lower input costs, FTE reductions and also Aubo coming into the numbers. To me, it just looks as if generating the same amount of EBIT in Q3 and Q4 would be perhaps a bit pessimistic. What am I missing here?

I don't know what you necessarily missing. But of course, the level of consumer sales is very important for our overall margins, right. So the sales mix could have an impact on the earnings in the second half of the year. And as I said, we also typically have slightly higher marketing expenditure, especially primarily in Q4 compared to Q2. So that also dilutes the picture somewhat.

Okay. That's clear. And then a final question. I know you just executed on the M&A of Aubo Production. And I also know that your balance sheet is still quite stretched. But do you still have any appetite for further M&A in the current environment over the coming 6 to 12 months perhaps?

It is a part of our growth strategy to look for M&A opportunities. But as we also communicated when we announced the Aubo case is that there is very few potential targets in the Danish and you can say, Scandinavian market. As our industry is partly consolidated already with Nobia and [ Billingsley ] brands. So there is very, very few targets. And those targets, they are family owned and through generations and thereby, they might not be for sale. But if we hear about something, if we get invitations, we definitely look at it. And as we also communicated, we are not into any experiments with turnarounds or start-ups, we are primarily looking for business that are also already well performing.

[Operator Instructions] There are currently no further questions. I will hand the call back to yourself, Torben.

Thank you very much. Thank you for listening in. Thank you for all your questions. Have a nice day, and lovely weekend when you get to it. Thank you very much.

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