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

Good day, and thank you for standing by. Welcome to the TCM Group Interim Second Quarter 2024 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 first 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, 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. Sales in the second quarter developed positively despite the expected weak B2B kitchen market. We delivered an organic sales growth of 5%, supported by a very strong uplift in B2C orders of more than 25%. As expected, and in line with the market, B2B sales declined, driven by the continued slowdown in the project sales market. Revenue increased by 30% in the quarter due to the organic sales growth and the inclusion of AUBO. On a like-for-like basis, order intake in Denmark was up 9% compared to Q2 last year. The improvement in gross margin compared to last year Q2 was driven by the change in sales mix with a higher share of B2C sales and the inclusion of AUBO. Despite generally challenging market conditions, 2 new AUBO branded stores opened in Denmark in the second quarter. And at the end of the quarter, we had 113 branded stores in Denmark and Norway. Please turn to Page 3. As we, like the rest of the market, currently face a significant macro-driven decline in demand from B2B project sales and house builders, we have put emphasis on gaining market share in B2C across our brand portfolio. We saw good progress in Q1, and this continued in Q2 with a 20% increase in order intake in Denmark. This led to the 25% year-on-year increase in B2C revenue in Q2, and thus, B2C sales was the driver behind 6% organic revenue growth in Denmark in the quarter. We expect the B2B project market to continue to decline in the second half of 2024, even if we do start to see renewed interest from project developers. However, as we benefited from the long project pipeline when the market started to slow down, we will similarly experience a slower ramp-up of actual sales once the market turns again. Please turn to Page 4. Some financial headlines for the quarter. Reported revenue was DKK 332 million, corresponding to a revenue increase year-on-year of 30% on an absolute basis. Adjusted EBIT was DKK 28 million compared to DKK 22 million in Q2 last year. Adjusted EBIT margin was 8.4% compared to 8.7% in Q2 last year. Thomas will elaborate on the underlying drivers of this development. Net working capital ratio was minus 1.3% compared to 0 -- minus 0.1% last year. Cash conversion was 94.8%. I will now hand over to Thomas to go through the financial highlights.

Thank you, Torben. Please turn to Page 6 (sic) [ Page 5 ]. In Q2, reported revenue increased by 30% year-on-year with an organic increase of 5.1%. Revenue from AUBO production amounted to DKK 63.7 million in Q2. Revenue in Denmark, our main market, accounting for 80% of the group's revenue, increased by 14.7% year-on-year with an organic growth of 5.6%. Revenue in Norway in Q2 was up 213% to DKK 62 million due to the inclusion of AUBO, which has a strong presence in Norway. Organically, the Norwegian revenue grew by 0.9% in the quarter. Please turn to Page 7 (sic) [ Page 6 ]. Gross margin increased from 20.2% in Q2 last year to 21.5% in Q2 '24. The improvement was due to the changed sales mix, where B2C sales generally attracts higher margins and a positive impact from the inclusion of AUBO. These positive effects were slightly diluted by an increased share of lower-margin third-party revenue. Adjusted EBIT ended at DKK 28 million compared to DKK 22 million in Q2 last year with an EBIT margin of 8.7%. Compared to Q2 last year, EBIT margin was negatively impacted by amortizations on intangible assets identified as part of the acquisition of AUBO. If adjusting for these amortizations, underlying EBIT in the quarter was 8.9%, thus representing an improvement compared to Q2 last year. Please turn to Page 8 (sic) [ Page 7 ]. Net working capital end of Q2 was minus DKK 16 million compared to minus DKK 1 million last year, equal to minus 1% of revenue compared to minus 0.1% last year. The deviation is explained by the high activity level, where we have leveraged especially inventory management and account payables. Inventories were unchanged compared to the previous quarter as the normal stock builds ahead of the holiday season were mitigated by improved stock management leading to a reduction in inventories as a percentage of sales from 31% in Q2 last year to 26% this year. Net debt was DKK 326 million end of Q2, compared to DKK 259 million end of Q2 last year. Leverage ratio increased from 2.8 last year to 3.2 end of Q2 as a result of the financing of the AUBO acquisition in Q3 last year. The group remains fully compliant with the covenants agreed in the financing agreements. Please turn to Page 9 (sic) [ Page 8 ]. Free cash flow in the second quarter was DKK 26 million compared to minus DKK 2 million in Q2 last year. The strong improvement in free cash flow was due to higher operating profit and improvement in net working capital. CapEx spending was reduced with a CapEx ratio of 1.3% compared to 2.3% in Q2 last year. Investments were into digitalization and factory modernization. Our cash conversion measured over 12 months was 95% supported by the positive development in net working capital. I will now hand over to Torben for review of the financial outlook for 2024. Please turn to Page 10 (sic) [ Page 9 ].

Thank you, Thomas. As announced on the 15th of August, we adjusted our guidance for the full year based on the results in Q2 and our expectations for the remainder of the financial year. We now expect a net revenue in the range of DKK 1.125 billion to DKK 1.2 billion, and an adjusted EBIT in the range of DKK 70 million to DKK 90 million. As you might recall, part of the purchase price for AUBO was contingent upon certain targets being met. Our EBIT guidance now includes an expected positive effect from adjustment of contingent payment obligations related to the AUBO acquisition in the range of DKK 3 million to DKK 5 million. Please turn to Page 11 (sic) [ Page 10 ], which is the Q&A session. So I'll now hand over to the operator for Q&A.

[Operator Instructions] And the first question comes from the line of Ulrik Bak from SEB.

Just a couple of questions from my side. First one is on the B2C development during the quarter. I remember at Q1, you stated that the premium brands were doing well, Svane and Tvis, whereas the non... [Technical Difficulty]

I believe that Ulrik's line has been compromised. Would you like to go to the next question?

Yes, please. Maybe Ulrik will come back again.

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

I also have a few questions. On the full year guidance, the high low plus 2, minus 11 in the second half, could you say a little about what would take it to the high and the low end, and eventually, what should happen if you are beating the high end? I guess there are different assumptions behind the B2C and B2B market?

Well, you can say -- first of all, thank you, Poul. To reach the high end, of course, we will have to see the very strong B2C development that we saw in the second quarter continue into Q3 and Q4, and a certain rebound or better -- high activity in the B2B market, especially projects and house builders. So that is sort of the upside scenario that things go really well there. And to the lower end, that probably expresses our concern that there are not that much B2B project sales activity out there. And maybe there was a B2C tailwind in the second quarter from the consumers, right, that might not continue to the same high extent as we saw in the second quarter.

Okay. That means that it's the B2B. I was just wondering if you mentioned the project market that there must be a lead time, meaning that if they start up projects now, then you will most likely have to be well into '25 before they start purchasing kitchens. So...

That's correct.

So why should you have the improvement in the B2B? I should more see it as being the subsidized housing or something?

That could also be, but there are also projects out there that comes with a relatively short notice. I mean, we are still only in the middle of August, right? And we're talking, in Q4 there can still come project orders in that we are not seeing yet, but our dealerships are working on, right? So it can still happen. We do not have a 5-month lead time on that necessarily, right? But of course, we have a reasonably clear view on it, but there can be more out there that's coming in, in the next couple of months, where we're still able to deliver in Q4. And other than that, of course, also subsidized housing could also be -- but we probably had high hopes at the beginning of the year for the subsidized housing. We have not seen that materialize so far. Of course, the expectation was that as building activity started to reduce in Denmark and there would be more availability of workers or companies being able to deliver, the subsidized housing market would start to pick up activity, but we have not really seen that yet.

But you see a higher activity on the project business by more projects coming to the market. But then, of course, that takes time. Then you have some -- I'm just thinking out loud now, then you have some who has been in the process, where they just have to press the button on finalizing them?

Yes. Yes. Correct. But of course, for new projects, right, they start up now, then of course, it will be late into '25 before delivery.

And are you seeing more developers reaching out to you to get some indications of the pricing for these, or are they still at very early stage on the new projects?

Still very early stages on new projects.

Then on the general competition, at least my own experience is that you more or less should just go into a store and then you get a huge discount upfront before having to negotiate. How you're looking at the price competition right now in the market in the B2C market?

I agree that there is a small war going on out there and it can both be brands and manufacturers that are supporting to win more orders, but it can also be individual stores that are tied under cash flow that are offering a good discount. So this war is definitely going on out there right now and has been also for a while. And when we look at reported results from colleagues in the industry, it is obvious that we are all having free capacity. So everybody is hungry for orders.

And it's still mainly the franchisees who have to take the discount, or are you supporting as well?

We are, say, in a small scale, also supporting it.

And the next question comes from the line of Ulrik Bak from SEB.

So my first question here is, if you can give a bit of flavor on the B2C development, because at Q1, I remember that you talked about the non-premium brands not doing too well, but it seems as if it has picked up during the quarter. So just perhaps a general color that you can give on the differences between the different segments among the B2C and how you also view that for the second half of the year, please?

Yes. Thank you, Ulrik. In the second quarter, I would say that the positive development in B2C covers all our brands. So it's the brand portfolio in total that has positive development. And to say how that will tend to develop in the autumn is really hard as this dynamic -- we need to get people back from vacation and getting over school start and then see what the activity level is after that. But we are on our toes in all brands and all stores to win as much orders as possible. So activities are going on in all our brands.

Okay. But I guess you saw an incremental improvement in the non-premium B2C segment versus Q1? Would that be a fair assumption?

Yes. But again, maybe not on quarter. It is also monthly variances and that can also be linked to support to stores, running campaigns, et cetera. So postponement of Easter holidays, et cetera, et cetera. So there's many factors playing in that game. And then as you might recall, our Nettoline brand has a very, very short delivery time. So there you can see immediate effect up and down, whereas in the more premium brands, lead times are longer and thereby the impact is also coming with a longer delay.

Understood. And second question. Back in January, we saw a large company get into financial troubles in that context and now there's been half a year since that happened. So at this point in time, how would you evaluate the risk of something similar happening during second half of the year? And this risk, has it increased or decreased over the past quarter in your view?

With the lower activity, of course, more and more companies should be more challenged. On the other side, they have now had longer time to adjust capacity and cost. And with the project pipelines running out, the activity is lower, and thereby, the risk is also lower. And I'll say that there hasn't been any or very few bigger bankruptcies in the end of the spring. So maybe it's the same, maybe it's a little bit less risk.

Okay. And then in terms of your stores, you have historically booked some provisions because you -- to be on the safe side for your stores. If you should give the direction, would you say there is risk of more provisions or potential of provision reversals based on the ones that you've already made?

I think I would pick the middle option that you didn't mention, Ulrik. Unchanged provisions. It is a volatile market. And, of course, clearly, stores that are exposed to B2B and especially projects, it's crucial that they get their cost base adjusted here or already have adjusted their cost base, right? So those, of course, are on our radar. But for the moment, we do not see any increased risk in general on our customers.

But just how -- is it very important for these stores that you have in mind that the B2B market picks up before year-end? Or just how fragile are these B2B...

No, I think it's more important that these selected few stores start to focus on B2C, right, because that is what is generating the cash with end consumers with the usual down-payments, et cetera. So that's what we are in dialogue with these, say, a handful or less than a handful of stores about that, that focus for the time being should really be, of course, adjusting their cost base where they can. And secondly, full focus on B2C now that the customer is out there rather than hoping for a B2B rebound, right?

Okay. Can you give any indication of the normal or historical split of these stores that have a higher B2B exposure? So how large a share of B2B did they have 12 months ago? I'd perhaps ask in a different way. Is it easy for these stores just to switch their priority to B2C versus B2B?

It's a mindset change, right? I mean, in general, all our stores have good locations, right, where the traffic is and can be picked up. So it's easier -- never anything is easy, because if it is, it would have been done, right? But I think with coaching from our teams and dedicated efforts also from the franchise partners and retail partners, then it is, of course, possible to pick up B2C in this market.

Okay. And then a final question on Norway. I see you have close to flat organic growth. And I guess your existing -- excluding AUBO, the existing business in Norway is predominantly B2C. It just looks quite odd to me that you can generate organic growth of 25% in the B2C segment in Denmark and flat in Norway. So the question here is, is the Norwegian market just very, so much worse in the B2C segment or is TCM underperforming here?

I'm sure that both the Norwegian and the Swedish market is harder hit and longer than the Danish market. So based on the information that we can get to, we are still on market performance in Norway.

And the next question comes from the line of Jens Betak from DetailWatch.

I have pretty much had my questions answered, but I just have a question to Torben about the kitchen market in general. So for the last couple of years, it has been quite challenging in general. But last week, you raised your guidance for the year. And it seems like the B2C sales is having a bit of a rebound. Maybe can you just give an assessment on the kitchen market in general? Yes.

Yes. It is a little bit as we have tried to describe it that there are the 2 segments, that is the B2B, which -- where the house builders and the project market are drying out. House builders report now increase in sale, but in very small steps. And in the first half of the year, this has been less bad than we expected when we made our first guidance for the year. And then when we were in the second half of '23, had very little B2C business. Then this has picked up maybe end of '23, but really in '24, and our estimate is that the private consumer is realizing the lower inflation, the lower energy prices, salary has been increasing. And with the forecast that there should also be some cut in interest rates, then the private consumer has been turning back to the stores. And as Ulrik also mentioned in the first quarter, we reported that it was especially the more wealthy private consumers for the premium brands that were back, but over spring and into Q2, it has been private consumer in general. So -- and finally, we also got this interest rate cut later and maybe less than expected prior to '24, but finally, it came. And now we are, of course, looking closely into what is happening now after the summer vacation in the second half of the year. Are the private consumer, are they still positive-minded, or are they waiting for new signals? That is the question for the second half year. But the private consumer is those that has made the growth in the first half.

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

It's just two short follow-up. Provisions on franchisees in the second quarter, how high or how much was that?

The provision was low single digits -- very low single digits.

Like in Q1, more or less?

Yes.

Okay. And the second question is how much of the total sales in Denmark is now B2C given that you are having a huge difference in growth rates on the 2 segments? So where are the B2C of the total now?

I don't think we give specific numbers on that. But of course, the B2C share, of course, is increasing, right? And I think it's back -- the ratio is one of the highest in recent quarters. But I don't think we give specific...

We might have said 60-40, 60% B2B some sort of early on. And then for a period, we have been much higher on the B2B, and now we are lower than that. So the development is, as Thomas says, maybe record high B2C share, but still being smallest part of the business.

As there are no further questions, I would like to hand back to Torben Paulin for any closing remarks.

Thank you. Thank you to everybody for listening in this morning, and thank you for questions. Have a nice day. Bye-bye.

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