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

Good day, and thank you for standing by. Welcome to the TCM Group Interim Third Quarter 2024 Report Conference Call. [Operator Instructions] Please be advised that today's conference will be 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 third quarter 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 third quarter developed positively despite the -- as expected weak B2B kitchen market. We delivered an organic sales growth of 7%, supported by the very strong uplift in B2C sales. As expected and in line with the market, B2B sales declined, driven by the continued slowdown in the project sales market. The improvement in gross margin compared to last year Q3 was driven by 2 factors: the normalization of gross margin following last year's downward adjustment of third-party income and the improved sales mix with higher share of B2C. Despite generally challenging market conditions, 2 new Nettoline-branded stores opened in Denmark in the third quarter. At the end of the quarter, we had 114 branded stores in Denmark and in 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 regaining market share in B2C across our brand portfolio. We have seen good progress so far, even if demand slowed down over the summer months. The strong increase in orders in the first half of the year led to the 20% year-on-year increase in B2C revenue in Q3. And thus, B2C sales was the driver of behind 11% organic revenue growth in Denmark in the quarter. We expect the B2B project market to continue to decline also in Q4 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 278 million, corresponding to an organic revenue growth of 7%. Adjusted EBIT was DKK 17 million compared to DKK 3 million in Q3 last year. Adjusted EBIT margin was 6.0% compared to 1.0% in Q3 last year. Thomas will elaborate on the underlying drivers of this development. Net working capital ratio was minus 0.1% compared to 3.8% last year. Cash conversion was 120.6%. I will now hand over to Thomas to go through the financial highlights. Please turn to Page 4.

Thank you, Torben. As mentioned by Torben, Q3 revenue increased organically by 7.4%. Revenue in Denmark, however, our main markets, which accounts for 82% of the group's revenue, increased by 10.5% year-on-year, supported by a strong growth in the B2C revenue. Revenue in Norway in Q3 decreased by 4.4% due to the very difficult market conditions in both the private and the business segment. Like we've seen in recent quarters, the share of third-party sales is increasing, driven by the lift in B2C sales when the consumers often also buy, for example, white goods. Please turn to Page 6. The gross margins increased from 17.7% in Q3 last year to 20.3% in Q3 this year. Here, it is important to remember that the gross margin in Q3 last year was negatively impacted by the correction related to third-party income. But even when adjusting for this correction, gross margin improved year-on-year. The underlying improvement was due to the changed sales mix where B2C sales generally attract higher margins. However, this was partly diluted by an increased share of the lower-margin third-party revenue and increased costs related to production of, for example, lacquering products due to a high demand. Adjusted EBIT, ended at DKK 17 million compared to DKK 3 million in Q3 last year with an EBIT margin of 6%. Please turn to Page 7. Net working capital end of Q3 was minus DKK 1 million compared to DKK 40 million last year, equal to minus 0.1% of revenue compared to 3.8% last year. The deviation explained by the higher activity level, where we have leveraged especially inventory management and trade receivables. Inventories increased slightly compared to the previous quarter due to normal stock builds for the peak production months in October and November. Measured as a percentage of sales, inventories decreased from 36% in Q3 last year to 32% this year. Net debt was DKK 329 million end of Q3, compared to DKK 417 million at the end of Q3 last year. The leverage ratio increased -- decreased from 5.2 last year to 2.8 end of Q3, and the group remains fully compliant with the covenants agreed in the financing agreements. Please turn to Page 8. The free cash flow in Q3 was DKK 6 million compared to DKK 18 million in Q3 last year. It should be noted that Q3 last year benefited from a high working capital reduction following our acquisition of AUBO Production. CapEx spending was reduced with a CapEx ratio of 0.6% compared to 1.8% last year. The investments we made were into digitalization and factory modernization. Our cash conversion ratio measured over 12 months was 121%. I will now hand over to Torben for a review of the financial outlook for 2024.

Thank you, Thomas. Please turn to Page 9. We now narrow our guidance for the full year based on the results in Q3 and our expectations for the remainder of the financial year. We now expect a net revenue in the range of DKK 1.150 billion to DKK 1.2 billion and an adjusted EBIT in the range of DKK 75 million to DKK 90 million. As you might recall, part of the purchase price for AUBO was contingent upon certain targets being met and our EBIT guidance includes an expected positive effect from adjustment of contingent payment obligations related to the AUBO acquisition in the range of DKK 8 million to DKK 10 million. Please turn to Page 10. We now hand over for the Q&A session to the operator.

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

First of all, a question on your guidance. This -- in your updated guidance, you increased this earnout reversal by DKK 5 million compared to the guidance you put out in connection with Q2. So can you just let us know when these reversals will be booked in your P&L if they haven't already been booked?

This is Thomas speaking. The earnout adjustments will be booked in Q4. Nothing has been included in the Q3 figures.

Okay, okay. So a follow-up to that. So your year-to-date adjusted EBIT is DKK 60 million, DKK 61 million. And then you will get an uplift of DKK 8 million to DKK 10 million from this earn-out reversal. That means that your underlying adjusted EBIT for Q4 should be between DKK 5 million and DKK 20 million to reach the lower top end of your guidance which compares to DKK 17 million in a seasonally soft Q3. So to me, the implied Q4 guidance looks very conservative, at least if I do my math correctly here. So please put some color on why you believe that Q4 could land -- underlying earnings could be as low as DKK 5 million, which would -- with the lower end of your guidance implies?

Well, it all depends on the revenue expectations, right? I mean, if we go to the lower range of the very new expectations, then there will be some impact on the bottom line, right? Because of the cost structure that we have that these won't fall away just because revenue might not develop. So your calculations are right in that sense, right? Whether it's conservative or not, I will leave that up to other people to judge.

Okay. But is it a reflection of the order intake that you alluded to during the call or the presentation that Q3 order intake has been a bit weaker than you perhaps had hoped or expected. So -- and that is the reason why Q4 earnings will perhaps be softer than last year and compared to the first half of this year?

Yes, because obviously, with a slow order intake in Q3 and maybe especially in the summer months of Q3, if you can talk about the summer, July or August, right, that will spill into, for example, our October deliveries. So it is a reflection on as a spillover effect from maybe a soft order intake in the first part of Q3 that will have an impact on our invoice revenue in the beginning of the fourth quarter.

Understood. And can you put any flavor on current trading? So how order intake, October and November so far has looked?

I guess we can say that, as we said before, we felt that people or consumers were slow on coming back from summer holidays in July and August. We saw better activity in the stores in September. And I think we can say that, that trend has continued into October and November. So we would be a little bit more optimistic on the B2C, at least part of the business than we were in the beginning of the third quarter.

I think you might recall, Ulrik, that even that the weather during summer was not fantastic. Then in September, October, we had some very, very nice weekends. So I would say that the traffic we were mid-end September before traffic was getting normal again after the vacation.

That makes sense. Then a question on price competition. So has it become more fierce or less fierce come compared to previously?

It is definitely a hard competition. We have during the year, seen campaigns discounts by our competitors in the industry also higher than normal. And it feels like -- and we do see some examples that also here in the autumn. They are getting even more desperate. So yes, competition is at least as hard as it has been this year and maybe even a little bit worse.

And what is your approach related to this price competition? Are you matching the competitors or staying disciplined?

The decision of whether to match or not is done by our franchisees and our independent dealers as they have to negotiate with their clients. We do some support activities in different ways in the different brands. But on a, I would say, on a normal level. So we try to keep a serious offer to the customers and not just underbidding ourselves or the chains in our group.

Understood. And perhaps in this relation, you have previously booked some provisions related to a risk to your franchise stores. Is there a risk that this price pressure or intensified price pressure can increase the likelihood of seeing more provisions? Or just perhaps your view on where we are?

It is probably not the price competition that will make it, but it is the market situation that creates the price competition. So it is -- if stores they drop in revenue, and they are not capable of adjusting their cost base accordingly, then they will be challenged. I think none of them will do discounts or campaigns that will put a risk on their existence. It is from a lower market. And it's either stores that are newly opened and thereby, they don't have a financial buffer or it can also be stores that has a very high share of the project market which is really not great right now. So they lose a lot of revenue. So it's also why we recommend all our franchisees, all our dealers to have a healthy mix between the segments. And it's also why we try to improve our customer journey, the service we offer, new product launches, et cetera, et cetera. So we talk about more interesting proactive things and not price and not discounts. We cannot avoid it 100%, but we do a lot to talk about good solutions and new products instead.

That makes sense. So -- but just for your bookkeeping, did you book any provisions in Q3 in additional?

No, nonmaterial.

Okay. And then we've previously also talked about price increases, perhaps a few years back when you increase the prices quite significantly. But given the current market outlook, is it realistic to see these typical annual price increases, which normally kicks in, in December, January. Will we see that this year?

Yes, we have announced price increases in all 4 brands.

Okay. Can you share the magnitude?

Maybe around 2%.

Okay. That's clear. And then perhaps a final question on your cost base. You are ramping up and down in terms of whether there is demand or not for kitchen. So what is the latest development on the staff, starting at your facilities?

Yes, you're right. And we have ramped up a little bit because we didn't want to get in the situation that we were not able to deliver in Q4. So we can say we have sufficient capacity in general. But as I think we also have mentioned, we -- the product launches that I spoke about just before is what was the launch in earlier this year was to offer our kitchens in many new and trendy colors and not only in a normal surface but also in a matte surface. And we can say that, that was exactly the right launch at the right time because many, many customers are really into those various colors and in the matte surface. So it means we actually have a very big bottleneck in our lacquering department, which also means that we have had, yes, longer delivery times than we have for, I think the last 4 weeks, we have been sold out this year for those individual trend colors. So when I say we have, in general, capacity enough, then it doesn't count for the lacquering department. And that creates still also in some other departments noise that we try to cope with working over hours and outsourcing some operations, et cetera. So it is a mix of having enough capacity and having too little capacity on the lacquer.

Okay. That makes sense...

I think you also mentioned earlier on that we have ordered a new lacquering equipment where the first part is delivered this week and the second part is delivered before Christmas. And then we will use the first couple of months in the New Year to get that installed and up running so that by beginning of second quarter, our capacity is definitely sufficient.

Okay. But perhaps just a follow-up. So what kind of CapEx is needed for such a facility?

It would be in the level of DKK 10 million to DKK 15 million.

[Operator Instructions] And the question comes from line of Poul Jessen from Danske Bank.

Yes. I have a few questions. If I start with a follow up on Ulrik's questions. About the partner -- when you talk about partner adjustments that they have to align to a different market situation. Is that because of history or last year -- recent year being tough? Or is it because you are nervous about the outlook as B2B or project market continues to come down because revenue in the last 2 quarters has still been up 11% to 15%, so they must have a better performance right now?

Yes. I think it's -- there's always some timing in this. So even that we are not supplying a lot of kitchens for the project market, they are still building and installing those. So they will adjust in their different departments from sale to project execution in a delayed way. And some of them has had a bigger pipeline than others. And some of them has been upfront adjusting and some of them has been a little bit slower on. So it all varies. And then staffing is one part of it, then you have also rent and other costs. So that's why some of it is happening with a delay. And again, remember that some stores is having a very healthy mix of B2C and B2B. And we also have a couple of stores that has maybe a not so healthy mix because they have focused more on the project market.

And for you, part of it on the project market, you see an emptying of the backlog, but you also see that an improved margin from new activity, that's at least what we hear from a lot of areas now that it's finally getting better. When should we -- because of the timing issues see that the market is bottoming out so that it's not having a negative drag on your revenue? Do you have any idea on that?

No, unfortunately not, then a lot of things would be easier. But I guess what we can say is that we get a lot of requests for quotations for new projects now. And we haven't seen that until now, and some of those stores that are particularly focused on that area. They say that their quotations out now is higher than for a long, long period. So the market is opening up again. But to ask for a quotation to work on a project until they say now we start the project, that it's impossible to say how long that time is. So my best guess is that we will see very little of the project market in 2025. It will probably be in 2026. And then when we look at the house builders, they have had a positive sales figures during 2024. And even that we are the last part of their delivery, then I think we will start seeing that improve in '25, but from a very low level, but still a positive development. And I think that is both what we can read from the listed house builder, but also what we hear from the other players.

Okay. And then a question for Hjannung about the gross margin. You said that adjusted margin last year was lower than what you reported here. What was -- what do you calculate the adjusted margin in Q3 '23 for?

I get it at 19.9%. So slightly below this year's realized margin. That's because, Poul, some of the correction for third party also impacts revenue. So that's why you have to adjust both gross margin and revenue when you do the reset.

And when we look at [indiscernible], they had a larger gross margin improvement from last year to this year. There might be many reasons, but the reasons why you are more or less flattish is that sales prices being lowering or more competition? Or is it all related to the efficiency comments that you made?

I think to a large extent is -- I mean, we have not seen a significant fluctuation in our average sales prices. Interest costs are maybe a little bit higher because of some price increases on raw materials and, of course, also on production costs. And then unfortunately, also as we indicated in the material, right, we have some production bottlenecks of various nature, and that has had an impact on the margin, and that is probably a larger part of the explanation.

And I assume that when you are replacing the [indiscernible] of lacquering in Q1 next year, we should assume that Q1 should have a negative impact from the transition on the gross margin?

Yes. There will -- to some extent, of course, there will be a balancing act there because while we are running up -- running in the new facility, we will have to source certain lack of products externally. And of course, that comes at a cost. So -- but to quantify that right now would be a bit risky because it all depends on how we can phase in the new facility and how we can balancing the manpower during that phase in. But in theory, yes, it would have a slightly negative impact on the margin.

[Operator Instructions] Dear speakers, there are no further questions for today. I would now like to hand the conference over to the management team for any closing remarks.

Thank you very much. Thank you for participating. Thank you for your time. Have a nice day and a lovely weekend. Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.