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

Good day, and thank you for standing by. Welcome to the TCM Group Interim Q4 2024 Report Conference Call and Webcast. [Operator Instructions]. Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Mr. Torben Paulin. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to the presentation of the fourth 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 fourth quarter developed as expected, with declining B2B project sales and a solid uplift in B2C sales. Due to the decline in the B2B project sales, our sales declined by only 2% compared to Q4 2023. And we are pleased to report that B2C sales increased by more than 5% in the quarter. Despite the downturn in B2B, our order intake developed positively in the quarter, again, supported by a double-digit growth in B2C orders. The gross margin improved slightly in the quarter as the positive impact from the improved sales mix was offset by increased production costs, mainly related to bottlenecks within our lacquering capacity. On the product side, Svane Køkkenet launched ARC1 and Notes Bronze in December 2024. ARC1 redefines the application of ceramic materials in kitchen design and confirms Svane Køkkenet's ability to challenge the ordinary. Please turn to Page 3. Some financial headlines for the quarter. Reported revenue was DKK 301 million, corresponding to an organic revenue decline of minus 2%. Adjusted EBIT was DKK 30 million compared to DKK 18 million in Q4 last year. Adjusted EBIT margin was 9.9% compared to 5.8% in Q4 last year. Thomas will elaborate on the underlying drivers of this development. Net working capital ratio was minus 1.2%, same as last year. Cash conversion was 84.3%. I will now hand over to Thomas to go through the financial highlights.

Thank you, Torben. Please turn to Page 4. As mentioned by Torben, revenue in Q4 decreased organically by 1.6% in the quarter. Revenue in Denmark, our main market, accounting for 81% of the group's revenue increased 1.1% year-on-year, supported by a strong growth in B2C revenue. Revenue in Norway in Q4 decreased by 10.7% due to very difficult trading conditions both in 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, where consumers often also buy white goods. Our full year revenue ended at DKK 1.2 billion compared to DKK 1.1 billion last year and thereby at the top end of our financial guidance for the year. Please turn to Page 6 -- 5, I guess. Gross margin increased from 22.3% in Q4 last year to 22.5% in Q4 2024. The underlying improvement was due to the changed sales mix where B2C sales generally attracts higher margins. However, this was partly diluted by an increased share of lower-margin third-party revenue and increased costs related to production of, for example, lacquer products due to high demand. Adjusted EBIT for the quarter was DKK 30 million compared to DKK 18 million in Q4 last year with an EBIT margin of 9.9%. EBIT in the quarter benefited from the previously announced adjustment of the contingent payment obligation related to the acquisition of AUBO of DKK 9.5 million compared to DKK 1 million in Q4 last year. Full year adjusted EBIT was DKK 90 million compared to DKK 56 million last year with a margin of 7.5%. EBIT was also at the high end of our financial guidance. Please turn to Page 6. Net working capital end of Q4 was minus DKK 14 million compared to minus DKK 13 million last year, equal to minus 1.2% of revenue and in line with last year. Inventories as a percentage of sales decreased year-on-year from 33% to 30% as a result of better inventory management. Net debt was DKK 316 million end of Q4 2024 compared to DKK 349 million at the end of last year. And as a result, the leverage ratio decreased from 4.08 last year to 2.5 end of Q4, but the group remains fully compliant with the covenants agreed in our financing agreements. Please turn to Page 7. The free cash flow in Q4 was DKK 15 million compared to DKK 60 million in Q4 last year. It should be noted that Q4 last year benefited from a high working capital reduction following the acquisition of AUBO Production. CapEx spending was reduced with a CapEx ratio of 4% compared to 2.8% in Q4 last year. The increase in investments related to the previously announced investment into a new lacquering line. Cash conversion ratio measured over 12 months was 84%. Please turn to Page 8. As we have successfully deleveraged the balance sheet with a net interest-bearing debt of 2.5x EBITDA, there is room for distribution of dividends. Our policy is to distribute between 40% and 60% of net profits, and the Board of Directors will propose to distribute the dividend of DKK 3 per share, equal to DKK 31 million or 54% of net profits for 2024. I will now hand over to Torben to discuss the potential discussion of Celebert and the financial outlook for 2025. Please turn to Page 9.

Thank you, Thomas. We expect to take full control of Celebert by acquiring the remaining 55% stake in the company during the second half of 2025. Celebert has delivered impressive revenue and earnings growth in the online market in recent years. By acquiring the remaining stake, we will gain full control of this important sales channel enabling further sales and cost synergies. In 2024, Celebert generated revenues of around DKK 150 million with an EBIT margin of around 11%. As disclosed in Note 3 in the TCM Group Annual Report, we estimate the acquisition value to be around DKK 80 million. Please turn to Page 10. We remain cautiously optimistic about the market outlook in general. While some inflationary pressures are easing and the central banks have begun to lower short-term interest rates, the full impact of interest rate adjustments on consumer confidence and the level of activity in the housing market remains uncertain. Our financial outlook for 2025 reflects this cautious optimism with anticipated revenue growth across our core markets in Denmark and Norway, driven by continued B2C recovery combined with a potential recovery in the B2B project market in the second half of the year. We expect to be able to convert the growth in sales into increased profitability through ongoing efficiency improvements and further integration synergies in our book. On the other hand, we expect continued improved cost inflation and increases in rate yields and logistic costs, which will put pressure on margins to the extent that we cannot pass on these increases through our sales prices in the short term. Based on these assumptions, the financial outlook for 2025 for the TCM Group contains fairly wide ranges, both with respect to sales and earnings, in line with last year. Our financial outlook for full year revenue for 2025 is in the range of DKK 1.25 billion to DKK 1.4 billion, with earnings, which is adjusted EBIT, in the range of DKK 90 million to DKK 120 million. The outlook assumes that Celebert will be consolidated into TCM Group during the second half of the year. Please turn to Page 11 for the Q&A session.

[Operator Instructions] The questions come from the line of [ Christian Toner ] from SEB.

Yes. So first question is regarding Celebert. Maybe first just to understand the deal. So from what I can see in Note 3, the majority owner has a put option, so can you just elaborate on the dialogue with the potential seller and how certain you is for this deal to go through? And secondly, on Celebert, can you elaborate on potential synergies, so what can you do by owning this company 100%?

Yes. When it comes to the deal, the first question, we acquired the 45% stake back in '21. And at that time, we agreed that he should have the put option, the option to sell during 2025. And reversely, we also have the option to buy. He has already now verbally confirmed that his intention is to sell his 55% stake, which is going to happen in the middle of the year. So we are quite confident that, that is what is going to happen. And the second question, what can we do? We have, of course, already cooperated so far. We are also the main supplier of his assortment, not the full supplier, but the main supplier of assortment. And by having it 100% integrated in TCM, there will be synergies maybe to further extend on assortment, but also on management and administration. And down the line, maybe also some marketing synergies in the way that we buy from the medias.

Okay. That's quite clear. Then the other topic I'd like to discuss is the B2B outlook. So in your guidance, you assume the potential for B2B growth in the second half of the year. So my question is more on your visibility and on the lead time. So when do you usually see orders come in? And how much visibility for the second half of the year do you have now for the B2B segment?

On the visibility, it is somewhere between very, very low and nonexisting. So when we base our guidance also on this, it is because we can see from the statistics that permission for new build is increasing and have been during '24. We also hear from our stores that are handling the B2B projects that they have a lot more to calculate and to offer to work with today than they had a year ago. So the 2 big questions is, what will our hit rate be on those projects? And secondly, how soon are they going to materialize? But as we are saying, we expect some of this to happen already in the end of this year. But visibility wise, it is really low.

That's quite clear. And then the last question from me. B2B sales and demand in general seems quite strong. Are you able to leverage from this in terms of improving prices and hence margins or is this predominantly volume growth you're seeing right now?

As we are coming from a period with very low demand, I will say the market -- even that there are more projects to work with, the market is still under pressure. So it's primarily volume growth that we are looking into.

The next question comes from the line of Sindre Sørbye from Arctic Asset Management.

Yes. Congratulations with good results. Just a couple of questions here. It looks like -- if you look at the cost side, it looks like administrative expenses are -- look very high in relation to [indiscernible]. Is it something special there? And I'm also very interested in how that looks in the future?

They are -- you're right, in this quarter also compares -- especially compared to last year Q4, the admin expenses are relatively high. There are sort of a number of factors. First of all, last year 2023, Q4 before benefited from us being able to make certain provisions because of a relatively low result. And this year, we have the opposite effect. There are, of course, certain costs that are related to our performance, for example, bonus provisions for employees, and that gives us the impact. They go both ways in the 2 quarters, right? And secondly, there are some amortizations on some IT development that started in Q4 this year. Going forward, I believe we'll see a level that is sort of in line, slightly higher than what we have experienced overall for this year. I mean I don't expect significant increases in the full year picture.

Okay. So in line with this year measured as a percent of sales or in nominal numbers?

Yes, nominal numbers.

Okay. Okay.

On a like for like basis. Of course with -- sorry, Sindre, of course, on a like-for-like basis, when we include Celebert ApS from second half of the year, of course, they will also contribute to an absolute growth, right?

Okay. And that also brings me to Celebert. You say in your guidance that you expect all that revenues and operating profits will be included in this second half and you also said that you expect the deal to happen at midyear. So does that mean that we should assume that 6 months of Celebert is included in the guidance?

I mean the exact timing of when we actually closing is still open. There are certain mechanisms, of course, that we have to go through, but it would be a fair assumption to assume somewhere between 5 and 6 months that we will be able to consolidate.

Okay. And I think in your annual report, you say that the revenues were DKK 150 million in Celebert and then the net profit was actually quite strong at DKK 14 million and probably EBIT is a few million higher than -- do you expect growth in Celebert for 2025?

Yes, we believe that Celebert will still be able to continue its growth rates, maybe not to the same extent as we've seen in the past years. But of course, we believe that there is still significant potential in this channel, and that's why also that we are -- we made the agreement, right, to acquire back in time. We still believe in the potential of Celebert. Of course, you should be aware if you make analysis on it that when we acquire the remaining part of Celebert, there will be some intangibles that we would have to start to amortize of goodwill or brand value or whatever it's going to be. So the current EBIT margin of 11% is probably not what we're going to see in our books in the short term, right? There will be some amortizations.

Yes. And my final question is regarding what you say about the supply chain issues. You say short term in the report. Can you allude to whether this is expected to continue into the first quarter and 2025 or is it behind us?

No, it is -- it will still impact us in Q1. The explanation to it is that we have, in the past, launched more and more products in painted colors and lacquered colors, which is super popular, has been a great success commercially. But at a certain level, we didn't have sufficient capacity to meet this demand; therefore, we decided to invest in a new lacquering equipment, and that was delivered around Christmas time, and we saw it running for the first time yesterday. So we still expect it to have an installation and to run in time during Q1. So from beginning of Q2, mid-Q2, we will be up running with it and then it will be behind us.

[Operator Instructions]. The questions come from the line of Poul Jessen from Danske Bank.

Yes. I have 2 questions. If we start by Celebert. Can you tell how much they were growing in '24?

Sorry, how much they?

Grew revenue in '24?

The revenue in '24 was around DKK 150 million.

Yes. You're asking [indiscernible] growth, we would say high double growth last year.

High double digit, that's 90%.

That is very high, right?

Probably not that high.

No.

So it's in teens?

Yes, somewhere between 25% and 50%.

Okay. That's quite a lot. But B2C is also coming back. It is mainly B2C...

It is. And the other explanation for the growth is that they also launched new products. So it's a combination of the market demand and how well they have been able to meet that, but also this assortment development that they have been doing.

Okay. And when you say that you have been delivering the majority of the product portfolio, I was wondering, one of the successful products that had in the past was smoker kitchens. Can you deliver those or are they subcontracted?

That is a subcontractor.

Yes. So coming to financials. Thomas, how should we take it? Should we just add the revenue and then the EBIT contribution or how do you make eliminations for the supplies you have done already? Just to turn that [indiscernible]?

Yes. Obviously, when we consol, it's consolidate from -- soon after we have closed and taking control of the company, let's say, somewhere in the middle of the year, we'll have to eliminate for our supplies to them, right, which is -- yes, so the impact would be maybe -- to our top line would maybe be somewhere around half of the effect, right? Because we will eliminate our current sales to them.

Yes. So on annualized base, then it's about DKK 75 million that you add on...

Maybe slightly less, maybe slightly less.

Okay. And that means you're down at about 35 for this year?

Yes.

Okay. And then you report that they have an 11% EBITDA margin. So how should we look at that into your numbers then?

Well, first, I mean, the EBIT margin is 11% currently, roughly. Of course, we expect to be able to continue the same on a stand-alone basis, right? But of course, we will have some amortizations to do on the intangibles that we acquire. And I do not have a detailed estimate for that yet, that impact, right? But there will be some amortizations. It's hard for me sort of to quantify it yet as we haven't done the purchase price allocation just yet, right?

That was the reason I asked about EBITDA, that's before the amortization.

Okay. Yes, it's higher, but I don't have the number to mind right now, Poul, sorry.

And the rest of eliminations we have to do is, we have to take out the associated income and then we have to add our finance cost of DKK 80 million?

Yes.

Okay. What about Denmark and Norway? When we look into '25, do you expect Norway to start growing again in '25 or is that continuing to be a tough market?

Yes. It is a so-called good question. We don't see any improvements on the market neither for the B2C or B2B yet. But again, like we hear from the Danish stores that they have more to work with and to calculate on. There's also at least in some regions of Norway projects coming up to calculate. So maybe in the end of the year that B2B can pick up. On the B2C side, it will probably very much depending on whether Norway will also start reducing interest rates which I think the expectations now is that, that could happen from March. But we'll see that happens...

[indiscernible] contribute positive to '25, but there are no guidance?

No. Not a lot...

I think, in general, we expect a relatively flat development compared to 2024 realized numbers for Norway.

Okay. And then I understand that you have acquired 2 stores or taking over from trusting franchisees. How much revenue is that -- it's only the margin on the retail level, but is that material or it's something we should take into account?

See, it depends. We are right now in negotiations also with a potential new franchisee to take over the stores, and that can happen maybe soon and at 1 time and maybe it will take a while where we will be the part owner of the stores. So it is -- it's too early to say exactly what is going to happen.

But if we look at the guidance you're giving on the growth rate from '24 to '25, are we talking about percentages here of revenue contribution, which we then in '26 have to take out again?

Yes, it is probably -- or hopefully, I would say it's going to happen like this. But there is also -- it's also a realistic scenario that we are part owner both in '25 and '26.

But you could say sort of in absolute term, what we've included in our guidance, Poul, there's a full year of revenue that would be eliminated partially, of course, because we are the main supplier to it, but that would be the net impact of less than 5% of our total revenue, somewhere between 2% to 3% of our total revenue.

The net impact?

Yes.

Okay. But you will be majority owner for now?

Yes, for the time being, we are. Yes.

Okay. Then [indiscernible] also reported a very strong Danish performance in their report. How do you see the Danish market in Q4? Did you take market share or [indiscernible] actually had a very solid performance and then also other competitors?

Yes. We saw the same and as we don't have real numbers to compare, it is difficult to say whether we took market share. What we can see when we look into the, for example, online KPIs, on brand search, et cetera, I'm quite confident that we are performing well in the market.

Okay. And the final one for me. When you talk about bottlenecks impacting the gross margin negatively is that the lacquering which you have to do externally in the period?

Yes. Both a lot of overtime and weekend work and also external suppliers. So it's all -- the challenge is to get more out of it than what is possible to meet demands.

If you have had sufficient capacity and if you had your lacquering internal, what are we talking about 2 percentage points on the gross margin or...

2%, that is maybe a little bit ambitious.

It's only a part of the revenue, right?

That would equal to DKK 25 million, right? And as we previously disclosed that we've going to invest somewhere between DKK 10 million to DKK 15 million, so that would be a payback of less than a year. I guess that's not -- that's maybe a little bit ambitious. I think...

[indiscernible] including the overtime and so on.

Yes, sure. But still it's not that magnitude that we've being taking about.

Just to get an indication on what we are talking about on the headwinds on the gross margin. So it's less than 1?

Yes. Somewhere between 0.5% and 1%.

[Operator Instructions]. We have no further questions at this time, I will now hand back to you for any closing remarks.

Okay. Thank you for listening in. Thank you for your questions. Have a nice day. Bye-bye.

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