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

Good day, and thank you for standing by. Welcome to the TCM Group Interim Q3 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.

Good morning, ladies and gentlemen, and welcome to the presentation for the Q3 results for TCM Group. We are sorry for the delay due to technical challenges. But now both presenters, our CFO, Thomas Hjannung; and myself CEO, Torben Paulin, are here, 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. As previously stated, sales in Q3 fell short of our expectations, with an organic decline of 23.5%. B2C sales remained weak in the quarter, confirming that consumers remain cautious even that we see an improvement in B2C order intake towards the end of the quarter. The improvement in underlying gross margin on both last year's Q3 and on Q2 this year was driven by the acquisition of AUBO, which, due to a different business model, has a different margin structure. In light of the continued soft consumer demand, we have in November made further adjustments to the cost base reducing the white-collar workforce with 20 FTEs. We continue to monitor the development in the market closely and production capacity and the cost base is being adjusted as needed. Following the AUBO acquisition, we have 112 branded stores in Denmark and Norway. And in addition, we have 55 dedicated AUBO shop-in-shops in Norway through the cooperation with Optimera. Please turn to Page 3. Some financial headlines for the quarter. Reported revenue was DKK 258 million corresponding to a revenue decrease year-on-year of 3% in our core business on an absolute basis. Adjusted EBIT was DKK 3 million compared to DKK 21 million Q3 last year. Adjusted EBIT margin was 1% compared to 7.8% in Q3 last year. Thomas will elaborate on the underlying drivers of this development. Net working capital ratio was 3.1% compared to minus 0.8% last year. Cash conversion was 88.1%. I will now hand over to Thomas to go through the financial highlights.

Thank you, Tom. Please turn to Page 4. Reported revenue decreased by 2.8% year-on-year with an organic decline of 23.5% in the quarter. Revenue in AUBO Production amounted to DKK 55 million in Q3. Our revenue in other countries in Q3 was up by 114%, driven by the acquisition of AUBO, which has a very strong presence in the Norwegian market. The B2B share of revenue remained high in the quarter and was on par with Q3 last year in relative terms. Please turn to Page 5. The gross margin in the third quarter was negatively impacted by the correction of transit fees related to Q1 and Q2 this year. The correction amounted to DKK 6.6 million and when adjusting for this, the underlying gross margin was 20.3% in the quarter, up from 18.7% in Q3 last year and up from 20% in Q2. The improvement in the underlying gross margin was driven by the AUBO acquisition, where it should be noted that AUBO, due to its distribution and operating model, has a different margin structure compared to the other TCM brands. Costs of raw materials and components only decreased slightly in the quarter, and we do experience some kind of price stickiness in this area. Our operating costs were negatively impacted by provisions for potential losses on trade receivables of DKK 5.4 million in the quarter. With the continued weak trading environment in mind, we have decided to increase our provisions for potential losses related to store closings. All in all, adjusted EBITDA (sic) [ EBIT ] ended at DKK 3 million compared to DKK 21 million last year. Please flip to Page 6. Net working capital end of Q3 was DKK 34 million compared to minus DKK 9 million last year. The net working capital equates to 3.1% of revenue compared to minus 0.8% last year. The acquisition of AUBO Production added inventories of DKK 34 million, hence the increase in inventories in total of DKK 16 million in the quarter was fully driven by the acquisition. During the quarter, inventories at all sites were reduced as a result of the decision to decrease stock of components and raw materials after the supplies -- the supply situation in the market has stabilized. Trade receivables and other receivables increased by DKK 64 million, where the acquisition of AUBO Production added receivables of DKK 65 million alone. Operating liabilities increased by DKK 38.6 million, where the acquisition of AUBO added operating liabilities of DKK 42 million. Net debt was DKK 417 million end of Q3 compared to DKK 335 million at the end of Q3 last year. Our net interest-bearing debt increased by DKK 158 million in the quarter, due to the acquisition of AUBO Production. The leverage ratio increased from 2.52 last year to 5.21 this year. However, the group remains compliant with all the covenants agreed in the financing agreements. Please turn to Page 7. The free cash flow in Q3 was DKK 17 million compared to minus DKK 6 million in Q3 last year. The cash flow was primarily impacted by lower earnings, which were DKK 14 million lower than last year, but this was then positively offset by the development in the net working capital that had a positive contribution of DKK 17 million compared to minus DKK 21 million last year. The CapEx ratio year-to-date was 1.6% compared to 1.4% last year with investments into digitalization and factory modernization. Our cash conversion measured over 12 months was 88%. I will now hand over to Torben for the financial outlook for 2023.

Thank you, Thomas. Please turn to Page 8. We reiterate our full year guidance according to company announcement number 181. Full year revenue guidance in the range of DKK 1.040 billion to DKK 1.090 billion and an adjusted EBIT in the range of DKK 40 million to DKK 50 million, including AUBO Production from 3rd of July 2023. This concludes our presentation, and we will now hand over to the operator for the Q&A session.

[Operator Instructions] We will now take the first question, one moment, please, from the line of Poul Jessen from Danske Bank.

Question number one is about the market. In the fourth quarter, you say that it's stabilized on the B2C from Q3 into Q4. I was just wondering how much you expect that to be from the increase we see in real estate trading activity right now and how it would have been without. I don't know if you can comment or have any views on that. And then looking into next year where we should assume that the trading activity comes down again due to the changes in tax system in Denmark. Do you have any comments?

Yes. We know that all house transaction, house and apartment transaction, will have an impact on the demand for kitchens. So the positive order intake we are seeing in B2C in this quarter is probably, to a certain extent, due to also the increasing number of houses and apartments sold. And as you point out, the tax system is changing for the new year. And thereby, we also expect that the number of houses sold will decrease again. So that's the way it works. We don't have any specific numbers on how much it is impacting us today and thereby also not what we are then missing next year. But we are aware of the situation, and it is a part of our decisions also to cut costs now.

Okay. And how is the competition in the market, let's say, in Q3 and into Q4 so far? Do you see increasing discounting activity between the companies?

Yes, definitely. There is -- in most competitor brands, there are discounting activities going on in various ways. And some of them is also doing that in a normal market situation, but the discounts that are advertised now are higher than normal. So it sends a signal that everybody is fighting for winning as many orders as possible right now.

And that's both in B2C and B2B?

It is primarily seen in the B2C market. There is definitely also the same harder competition in the B2B market. But there, you don't see it as public as you do in the B2C campaigns.

Okay. And if you then say, I was thinking, when you did the price increases in the previous 18 months aggregate it was -- it extends to more than 20%. If you look at the market right now, has they all been more or less rolled back when you do the actual trading prices today versus prior to the increase?

No. The -- on the input cost on the raw material, some crisis has decreased not to the extent that they were increased, but to a certain extent. And on sales prices, nothing has changed. But of course, with a harder competition, the stores are trying to win their fair share of the orders. And we, to a certain extent, support them in doing this job. So we do lose a little bit on the margin and increased prices.

Okay. I have 2 questions more. One is then on the gross margin. You said that the underlying gross margin were unchanged or were up year-over-year, and it was impacted by the different AUBO business model. I assume that AUBO is diluting the gross margin as they should be increasing the gross margin, I assume?

Yes, correct. AUBO is improving the overall group gross margin, as I said, because they do have a different operating business model primarily related to Norway, right, where some of the costs align in other lines in SG&A cost, right, instead of as margin reductions.

And the final question is on the cost cutting. The 20 FTEs that you take out, can you give a split on how much is coming from synergies from merging the 2 companies? And how much is additional cost cutting to drive down the cost level more or less in an organic way?

I can't say exactly what this year is. We have done something in synergy-wise and marketing and also specific in the purchase department. So -- but is it 25% or something like that, may be...

Maximum.

Maximum.

We will now take the next question from the line of Ulrik Bak from SEB.

First question on the organic growth, which was down almost 24% and Danish sales down 15%. I know you don't usually disclose the split between price, volume and mix. But I wanted to ask the question anyhow. So how much were volumes down, if you can give a hint?

In Q3, we are coming to the states where the prices are comparable to last year, may be not 100%, but to the biggest extent. So thereby the change is more volume than price.

Okay. That makes sense. Then on the sales activity since the pre-announcement. You talk about the B2C leveling out, perhaps even increasing slightly, but -- so what's the status of the B2B? And given the organic growth of minus 23.5% versus Danish only being down 15%, so Norway must be doing quite badly at the moment. So just some color here, please?

Yes. You're absolutely right that the decrease in percentage is higher in the Norwegian market than in Denmark. In real numbers, when you look at the old TCM business, Norway is not having a big share, a large share of our revenue. So thereby, in DKK, the impact is less. On the B2B side in Denmark, in the beginning of this year, we still had a high pipeline on housebuilders. But after the summer holiday, this pipeline is drying out. So right now, there's very little and also very little in the coming months. So when we look into next year, it's limited what is coming from that side. So far, we still have larger projects orders coming in. It's not new projects, but it's projects that are now coming close to be finalized and thereby, they also meet the kitchens. So we still see a stable activity on that part of it. So it's mostly the housebuilders that we are missing out right now.

Okay. And any particular cause of the weaker performance in Norway versus Denmark?

I think they have a little bit the same macroeconomic like we have in Denmark. And then they have -- on the top of that, they have the currency issue. So all imported goods is expensive, right?

Makes sense. Then a question about the implied Q4 revenue guidance of around DKK 245 million to DKK 295 million compared to the Q3 revenue at DKK 258 million. So based on the midpoint, sales should be higher in Q4 versus Q3. Is that a seasonal thing or is that due to -- down to this B2C improvement perhaps?

It's more a seasonal thing, Ulrik. But of course, a lot depends on the timing of B2B deliveries, right? And that is also why we maintain the broader range, right? Because B2B deliveries can be delayed or rescheduled with relatively short notice.

We have that every week and every month. But there you -- we don't -- it doesn't have a lot of impact. But when it's in the end of the quarter and now not only end of the quarter, but also end of the year, then the impact is, of course, higher. And as we are having a higher share of B2B right now, then the risk of orders being postponed is also higher than normal. And as Thomas said, thereby also this wider range than normal at this time of the year.

Okay. And for AUBO, what's the seasonality like here, Q4 versus Q3 and Q1 and Q2?

Yes. AUBO in total is a little bit the same as they have a very high B2B share in the Norwegian market. And they are in Norway, I guess, also this delay due to weather conditions is even a stronger part than in Denmark. So it's the same and then maybe even worse.

Okay. So -- and looking into 2024 Q1, Q2, is there any reason to believe that we should see an uptick? Actually, you alluded to that we could probably see some slowness in the B2C from the tax -- new tax rules. But are there anything that gives you hope for the first half of '24 compared to where we are now?

It's still a mixed picture. Those project orders that are coming in now will, to a certain extent, be for delivery in the first half of '24. The standard houses, the housebuilders, we will definitely miss in -- at least in the first half of next year. And then some of the B2C orders coming in now, they will be for delivery in the beginning of '24. But how all of this equals out, whether small plus or small minus, that is too early to say.

Okay. Understood. Then a question on your provisions. You increased them by DKK 5.4 million in the quarter. How do you come up with that number? And have you already during Q3 or so far in Q4 spend some of that provision?

Well, first of all, it's not a number that we sort of come up with. It is based on an individual assessment of our trade receivables, right? And where we simply look at which stores we believe could come into financial trouble because we've had an indication from them or because of their trading being weak. There was no store closures in Q3, but we can report that 2 of the stores that were provided for in Q3 have subsequently closed here in Q4. So our guesstimate was not wrong. But it is indeed based on the individual assessment of how the stores are performing.

Yes. And just with the difficult markets at the moment. So what are the assumptions about a pickup in the market? So how long do you assume the current demand environment to stay as it is when you evaluate a provision of DKK 5.4 million? Because, I guess, the longer this current situation goes on for there will be a larger and larger risk of more store closures. So how do you manage that balance?

Well, of course, we do not -- in line with our peers and other market participants, we do not see a major improvement in the market coming up in '24, right? And that is also why we are -- that is what we're using to reflect when we consider the potential losses on trade receivables, right? But we do not see a market -- significant market improvement in the next 12 months.

But on the other hand, Ulrik, I guess, all the stores have already also adjusted their cost both the manning in the stores, some have also been able to negotiate a decrease in rent. And the stores that -- the 2 stores that Thomas mentioned now, they have been on our observation list for a period. And as we have said a couple of times also, our biggest concern is on the new open stores that have invested all the money they have, and then they open up to a weak market or -- and then thereby, they didn't have the time to build up a buffer. So that will be the same also in 2024. And we do store evaluation in all brands to say which stores are strategically important to us, where we will do our utmost to keep them alive and open and other stores are maybe not that important, and they have to survive a little bit more on their own. So that as we have been doing this for, I think, already more than a year, and we will, of course, follow that as close also in the coming year.

Okay. That's clear. It's just -- so we shouldn't expect another provision in this magnitude during Q4?

Well, I think as we also stated in -- indicated in our Q -- when we released the preliminary numbers, the DKK 5.4 million that we provided for was higher than we anticipated in -- when we made our Q2 report, right, and the outlook for the rest of the year at that point in time. So I would not expect a provision in that magnitude, but there will most certainly still come provisions in Q3 -- sorry in Q4.

Okay. Understood. And then a cash flow question. I see a cash flow impact from, I guess, it's the AUBO acquisition, which is only DKK 120 million in Q2 -- in Q3. So when will the rest come -- the total EV was DKK 165 million and then there's an earn-out component and the cash value was around DKK 155 million, DKK 10 million were in shares, right? So the delta between DKK 155 million and DKK 120 million, will that come in, in Q4? Or how should we think about that?

No, no, that is not a -- it's on a long-term vendor loan note which was a 4-, 5-year period that will be disclosed in the report. So that is quite far in the Q2.

[Operator Instructions] There are no further questions at this time. I would like to turn the conference back to Torben Paulin for closing remarks.

Thank you. Thank you for listening in, everybody. And have a nice day and a nice weekend when you get to that point. Thank you, everybody. Bye-bye.

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