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

Good day, and thank you for standing by. Welcome to the TCM Group Interim First Quarter 2025 Report Webcast and 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 very much. Good morning, ladies and gentlemen, and welcome to the presentation of the first quarter results for TCM Group. Presenters today are our CFO, Thomas Hjannung; and myself, CEO, Torben Paulin. We will comment on the business and financial results, after which we will hand over to the operator for the Q&A session. Let's start the presentation and turn to Page 2 for the business update. Sales in the first quarter of 2025 developed in line with our expectations with declining B2B project sales and a robust increase in B2C sales. Due to the increase in B2C sales, revenue increased by 5% in the quarter with an organic growth of 4%. Our order intake developed positively in the quarter with growth in both B2C and B2B. Following a long period of difficult trading conditions in the Norwegian market, financially showed signs of recovery, leading to an 11% revenue growth in the quarter. The gross margin improved slightly in the quarter, driven by the inclusion of 2 Svane Køkkenet stores in the northern part of Jutland. The underlying gross margin remained stable year-on-year as the positive impact from the improved sales mix was offset by increased production costs due to ramp-up of production capacity. To mark the 40 years anniversary of AUBO, we launched Truffel as an extension to the popular Sense product line. And in Svane Køkkenet, we launched Notes Bronze, which is a new addition to our veneer assortment together with the previously announced ARC1 product line. Please turn to Page 3. Some financial headlines for the quarter. Reported revenue was DKK 308 million, corresponding to a revenue growth of 5%. Adjusted EBIT was DKK 17 million compared to DKK 16 million in Q1 last year. Adjusted EBIT margin was 5.6% compared to 5.4% in Q1 last year. Thomas will elaborate on the underlying drivers of this development. Net working capital ratio was minus 0.3% compared to minus 0.8% last year. Cash conversion was 76.8%. 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 Q1 increased organically by 3.6% but with a year-on-year increase of 5.3% due to the acquisition of the 2 Svane Køkkenet stores in Aalborg and Hjorring. Revenue in Denmark, our main market, accounting for 78% of the group's revenue, increased by 4% year-on-year with an organic growth of 2% supported by a solid growth in B2C revenue. Revenue in Norway in Q1 increased by 11.2% due to an improvement of the trading conditions after a period with very difficult trading. The share of third-party sales decreased compared to the previous quarter due to lower sales in the B2B segment. Please turn to Page 5. Gross margin increased from 20.5% in Q1 last year to 21.1% in Q1 2025. The improvement was primarily due to the acquisition of the 2 Svane Køkkenet stores in Denmark as the underlying gross margin was flat year-on-year. The benefits from the changed sales mix where B2C sales generally attracts higher margins was diluted by higher production and logistics costs. The higher production costs were driven by a decision to increase production capacity ahead of our peak season in Q2 as well as costs related to the ramp-up of the new lacquering facility. Our operating costs increased by DKK 4 million as a result of the acquisition of the 2 Svane Køkkenet stores, thus diluting the positive gross margin effect from the acquisition. EBIT for the quarter was DKK 17 million compared to DKK 16 million in Q1 last year with an EBIT margin of 5.6%. Please turn to Page 6. Our net working capital end of Q1 was minus DKK 4 million compared to minus DKK 9 million last year, equal to a minus 0.3% of revenue versus 0.8% last year. Our net working capital was negatively impacted by the increase in inventories as a result of the acquisition of the 2 Svane Køkkenet equipment stores and an increase in inventories at the factories of certain externally sourced components. Our net debt was DKK 332 million end of Q1 compared to DKK 347 million end of Q1 last year. The leverage ratio decreased from 3.7 last year to 2.6 end of Q1. Please turn to Page 7. Free cash flow in Q1 was minus DKK 4 million compared to positive DKK 13 million in Q1 last year. Our CapEx spending increased with a CapEx ratio of 2.2% compared to 1% in Q1 last year. The increase in investments primarily related to digitalization, the investment in new lacquering facility and the acquisition of 2 Svane Køkkenet stores. Compared to last year, free cash flow was also negatively impacted by earlier payment of corporate income taxes of DKK 5.6 million. Our cash conversion ratio measured over 12 months was 77%. I will now hand back to Torben for an update on the financial guidance. Please turn to Page 8.

Thank you, Thomas. While we are encouraged by the positive order intake in the quarter, we continue to closely monitor the potential negative impact of the recent geopolitical turmoil on consumer confidence and kitchen demand. In light of this renewed uncertainty, we maintain our current guidance for 2025 with fairly wide ranges. TCM Group expects full-year revenue in the range of DKK 1.25 billion to DKK 1.4 billion and adjusted EBIT of DKK 90 million to DKK 120 million. As previously communicated, this assumes full ownership of Celebert in the latter month of the year. This concludes our presentation, and we now hand over to the operator for the Q&A session.

[Operator Instructions] And now we're going to take our first question, and it comes from the line of Kristian Tornøe from SEB.

A couple of questions from my side. So I understand your cautioning around macroeconomic uncertainty, but maybe you can help us in understanding whether you have actually seen any adverse impact sort of traffic in stores going down, anything like that? Or it's more a general view because, I mean, a lot is going on out in the world and no one knows exactly what's going to happen.

Yes. Thank you, Kristian. The answer is yes and no. We still see good traffic to the stores, but the feedback, both from stores and also from some of the housebuilder clients we have is that people are hesitating to sign the contract. So the interest is there. We do a lot of quotations, et cetera, but they hesitate to make the final decision.

Okay, that makes sense. And then in terms of this increase in B2B order intake, can you elaborate a bit more on what it is you are seeing? I mean, what kind of projects is it? And what's the probability of this sort of being the start of a growing trend and not just a blip?

What we can see is that there is significant more activity in the project sales, which means we have a lot more to work on or the stores have a lot more to work on and do quotations for. Most of it is a project that is going to be started, which means it will be end of '25, probably more in '26. What we are seeing right now is both the housebuilders, that their sales of family houses is growing slowly but steadily and some smaller or smaller projects. So it will be something in between a yes or no, whether it's a blip or it is a trend. But I think it's more than a blip, it starts looking like a trend. But again, things are really changing so fast those days so that it's probably too soon to be very confident on how strong this trend is.

That's understandable. And then in terms of your guidance, if I remember correctly, last time you reported, you sort of indicated to reach the higher end of guidance, you needed to see an uptick in your B2B orders. It seems like that is actually happening now, but then it's sort of diluted by additional cautiousness around consumer confidence. Is that the way to understand it?

That is one way to interpret it. I guess we said that it would -- that we see a significant uptick in the second half of the year. And right now, we do not have any -- or have very limited visibility on the second half of the year, right? So it is true that we have had an uplift in B2B in the first quarter, right, and then also maybe going into Q2. But we do not have any more visibility on the second half of the year. That's why we -- it is still true that we will have to see that continue into the second half of the year, right.

But at the same time, we will also have to see that the B2C is keeping strong and increasing, which was what we expected for the year. And again, as we're seeing right now, that there is a little hesitation to sign also from the private consumer. So we need both of them to develop strong.

That makes sense. And then just lastly from my side, now that we are seeing an improvement in demand, is there any change into the pricing environment or is it still fairly tough out there?

The level in total is still far lower than during COVID-19, and it means most or all brands are having spare capacity and thereby the competition is quite strong still out there.

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

Just a couple of questions. First, about the 2 acquired stores. Can you elaborate on the reason for acquiring those stores? And is it your intention to keep them fully owned?

Yes, thank you. The reason for acquiring the 2 Svane stores in North Jutland was that the previous owner has been struggling for a time and finally, his bank was not willingly to support him with sufficient cash for the continued operation. And to protect the brand and the revenue in that area, it is -- Aalborg is the fourth biggest store -- city in Denmark, we decided to take them over. It is definitely not our intention to keep the stores and we do have a new potential franchisee in place, but it will take a period for him to be confident and for us to be confident in him and the financial performance of the stores and then we expect him to take over. It's clearly underlined that it's not our strategy to own and operate stores. It's only protection of brand.

Okay. Yes, it makes sense. But I guess some cost or some debt is included in your CapEx for this quarter, and you don't expect any more cash outlays on those stores in the next few quarters?

No, that's correct.

Okay, excellent. And the impact when -- are those acquisitions affecting your reported organic growth and your reported top line?

Yes, they are. That's why we now again have a difference between organic and reported growth. So the difference between the 2% organic growth in Denmark and the around 4% reported growth is the impact of these stores, right.

And the question comes from the line of Anders Preetzmann from Danske Bank.

I also have a few here. So if we can start with a question on the product mix in B2C. I was wondering if you're seeing part of the mix here where there's perhaps higher growth than expected. Are you, for instance, seeing that B2C customers are trading down to some of the more affordable kitchen lines perhaps?

I think we can say both yes and no. In our higher positioned brands, people are still looking for, you would say, what it will take to fulfill their dreams and then they are also willing to pay for it. Of course, they afterwards also ask for a discount like customers do those days. But in the better positioned brands, it's still high-end products. And then in the lower-end positioned brands, there is a tendency that they choose from the cheaper part of the assortment. So a little bit different from brand to brand.

All right. Yes, I guess that's very understandable. Then perhaps a question on -- I mean, the higher production costs here in Q1, you say it's driven by a decision to increase the production capacity ahead of the peak season in Q2. And I was wondering now that we are more than halfway through Q2, are you happy with the decision to increase capacity in Q1?

Yes, that's a good question. It's both high season in Q2, and it's also the quarter where we are having all the bank holidays. So there's both one effect to cope with those bank holidays and then also the peak that everybody wants their new kitchen before the summer holiday and also leaving some time for the installers to finalize the installation. So yes, we needed that capacity due to those 2 reasons, which is also a normal development in this time of the year.

Yes, okay. That's loud and clear. Then a question on the gross margin coming in at 21% due to higher mix for B2C and the acquisition of the 2 stores in northern Jutland. Can you maybe comment a bit on your expectation for the gross margin going forward? Should it come up for the coming quarters? Or will a potential impact from B2B may be lowered a bit? What's your thoughts there?

I mean, we will see a slight improvement in the next coming quarters, first of all, because we have a higher utilization of our production capacity in Q2 as Torben just indicated. But of course, if we now start to see a high inflow of B2B project sales in the second half, which we don't know yet, right, then that would have the opposite diluting effect in the second half of the year. So in short, I will not see sort of -- expect to see a dramatic uplift in the overall margin.

To my final question, it's on the Norwegian market. I mean, you talked about early signs of recovery, the double-digit growth on order intake. Can you please add some additional comments on the dynamics of the Norwegian market currently and what you're seeing there?

Yes. Most of our business in Norway is made in the AUBO brand and through their cooperation with Optimera, and the activity level in the building industry in Norway is growing. So the stores have a lot more to work with, to calculate and do quotes on. It will still take some time until it materialize significantly. But it's a clear trend that there's a lot more to work with and work on. And we actually see also the same development in the Svane brand. They do primarily B2C, and there, the consumers are also back in the stores, which is a significant change, you can see. And then I guess also some of our stores, Svane stores in Norway, they are doing, to a higher extent, some small projects but very exclusive projects where the builder or the landlord are looking for a high quality of their kitchen in the project. So it's both market in general but it's also Svane stores performing better in that segment.

[Operator Instructions] Dear speakers, there are no further questions at this time. I would now like to hand the conference over to your speaker, Torben Paulin for any closing remarks.

Thank you very much for participating. Thank you for your time, and have a nice day.

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