Earnings Call: Q4 2021

Feb 25, 2022

Good day, and thank you for standing by. Welcome to the TCM Group interim Q4 2021 report. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Torben Paulin. Please go ahead, sir. Thank you very much. Good morning, ladies and gentlemen, welcome to the presentation of the Q4 results for TCM Group. Presenters today are our CFO, Mogens Elbrønd Pedersen, 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's start the presentation, turn to page two for the business update. In Q4, we delivered organic like-for-like growth of 8%. Growth was driven across all our brands and markets, with the highest growth rates within our DIY segment, which includes Netherlands and the e-commerce business. In 2021, we achieved a new revenue milestone exceeding DKK 1.1 billion. During Q4, a couple of new stores were added to the store network. Within Svane, our franchisee opened a beautiful flagship store in the very city center of Copenhagen, a strong ambassador for the entire Svane brand. Within Tvis, a new store opened in Roskilde. With the new stores, the number of branded stores increased to 93. The general situation and market conditions are heavily impacted by the unstable supply chain situation. The delivery assurance from our suppliers went from bad to worse during Q4. Most significantly, we were met by supply chain constraints on the standard drawer system and runners. This has had a significant negative impact on our ability to deliver on time in full to our customers during Q4. The situation has led to efficiency losses in our production, and furthermore, our efforts to limit the impact on our customers has led to additional costs. The situation has also led to some customer postponing the time of delivery of their orders, and thereby also postponing revenue and earnings in our books. Coming into 2022, the supply chain situation has not yet stabilized. Though we see some signs of improvements, we will be impacted negatively by this situation in Q1 and most likely also in Q2. Please turn to page three. Some financial highlights for the quarter. Reported revenue grew by 4.3% in Q4, an increase from DKK 263 million in Q4 last year to DKK 274 million. Adjusted EBIT was DKK 29 million compared to DKK 36 million last year. Adjusted EBIT margin was 10.6%, compared to 13.8% last year. Adjusted EBIT for the full year ended at DKK 138 million, overall on par with last year. Net working capital ratio was -7.4% compared to -11.4% last year. Cash conversion was 60.3%. I will now hand over to Mogens to go through the financial highlights. Thank you, Torben. Please turn to page four. The revenue growth in the Danish market was 3.3%. Reported revenue growth includes a negative impact from the divestment of the Svane store in Copenhagen to our franchisee and the merge of the e-commerce activities in kitchn.dk and Celebert. Excluding these elements, the organic like-for-like growth in Denmark in the fourth quarter was +7%, driven by growth in all our brands with the highest growth rates within the DIY segment. Revenue to other countries increased by 16.3%, driven by sales to the Norwegian market. The growth was driven both by the same-store growth and growth from new stores within Svane. Please turn to page five. Gross margin decreased from 26.8% to 21.1% in Q4. The divestment of the Svane Køkkenet store in Copenhagen and the merger of the e-commerce activities, kitchn.dk and Celebert, had a technical negative impact on the gross margin of 2.1 percentage point in the quarter. In addition, gross margin was negatively impacted by significant increased raw material prices, the unstable supply chain situation, and a change of sales mix. In the fourth quarter, we saw customers postponing delivery of high-margin orders. This revenue was replaced by revenue from third-party products, which, however, carries a lower margin. Operating expenses in Q4 were DKK 29 million compared to DKK 34 million last year, and represented 10.5% of revenue compared to 12.9% in Q4 last year. The decline in operating expenses was primarily due to the divestment of the Svane store in Copenhagen and the merger of the e-commerce activities, as well as lower amortizations. Please turn to page six. In the quarter, non-recurring costs consisted of two items, costs related to COVID-19 precautions and the related supply chain disruptions increased. The unprecedented instability in the supply chain cost of DKK 6.5 million, which compares to similar costs of DKK 3 million in Q4 last year. The impact from the supply chain aggravated during Q4 compared to previous quarters. Furthermore, costs related to the merger of e-commerce activities in kitchn.dk and Celebert amounted to DKK 2 million in the quarter. Please turn to page seven. Net working capital end of Q4 was DKK minus 82 million, compared to DKK minus 117 million last year. Our inventory levels remain significantly higher than last year, which is due to a combination of increased raw material prices and a management decision to establish a buffer of parts of raw materials and components, to ensure higher delivery assurance given the unstable supply of parts. Net working capital was favorably impacted by the extended credit on VAT and payroll tax as part of the stimulus packages. At the end of Q4 2021, this constituted roughly DKK 6 million, and that compares to roughly DKK 15 million end of Q4 last year. Furthermore, net working capital was negatively impacted by a change in the Danish holiday allowance obligation, which has been transferred to a government fund during 2021. The negative impact on net working capital compared to last year from this is DKK 19 million. As a result of that, net working capital ratio declined from 11.4% to 7.4%. Net debt was DKK 200 million at the end of Q4, which compares to a net positive of DKK 43 million at the end of Q4 last year. During the quarter, net interest bank debt decreased by DKK 24 million. Compared to last year, net debt is impacted by the substantial payouts through a combination of ordinary and extraordinary dividends and the share buyback program. In the fourth quarter, the impact from the share buyback program was DKK 22 million and total as of 31st of December this year, DKK 136 million of the DKK 150 million was carried out. Since the year-end, we have carried out the full amount of DKK 150 million during February. Please turn to page eight. Free cash flow was DKK 29 million in Q4, which was on par with DKK 30 million in Q4 last year. The cash flow was negatively impacted by lower operating profit compared to Q4 last year, offset by lower investments, DKK 11 million compared to DKK 17 million in Q4 last year. The CapEx ratio was 2.6% of revenue, compared to 3% last year. Cash conversion ratio measured over 12 months was 58.3%, which was below last year due to a change in net working capital. Please turn to page nine. At the upcoming AGM, we will propose to distribute an ordinary dividend of six DKK per share. Excluding treasury shares, this corresponds to DKK 54 million. Furthermore, we will propose to the AGM that a mandate is provided to the board of directors with the option to distribute an extraordinary dividend during 2022 in the range DKK 25 million-DKK 75 million. Please turn to page 10 regarding the financial outlook. Based on the present market conditions, which contains a higher level of uncertainty than normal, we estimate a full-year revenue for 2022 in the range DKK 1.15 billion-DKK 1.25 billion. This corresponds to a growth of 4%-11%, a slightly higher like-for-like growth, taking into account the merger of the e-commerce activities. Furthermore, we estimate an adjusted EBIT for 2022 in the range DKK 140 million-DKK 170 million. Thank you, Mogens. As a closing comment, I would like to give my utmost gratitude to all employees in our value chain for their dedicated work in a historic, unstable supply situation. We are working hard together with our suppliers to stabilize and normalize the supply chain situation. This concludes our presentation. We will now hand over to the operator for the Q&A session. Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound hash key. Once again, star and one if you would like to ask a question. Your first question today comes from the line of Poul Ernst Jessen from Danske Bank. Please go ahead. Your line is open. Yes. Thank you, and good morning to both of you. I would like to first ask a question about if you could quantify how much of the revenue that actually was postponed from Q4 into the current year? Yes. It's a bit more than DKK 10 million-DKK 15 million we're talking about being pushed forward. As Torben mentioned, the supply chain constraints are not over yet, that means that we also expect that there will be some postponement from Q1 to Q2 before the whole situation stabilizes. Yeah. On the guidance overall for 2022, where you guide 4%-11%, could you try to split it up into different factors? How much is volume? How much is price increases and mix impact? How much is coming from Sillebøll, where you will start doing production within TCM instead of sourcing externally? To get an impression of the different building blocks here. There will be, in 2022, a significantly higher impact from price increases than normal. You can say the overall guidance is from a flat volume growth to a roughly 7% volume growth, the remaining part coming from price and sales mix. At Sillebøll, the insourcing is progressing, but is also taking longer than expected. Some of it partly due to the whole supply chain constraints, which is impacting the time when we are shifting. Also due to some, you can say, internal integrations that need to be in place, which is more or less coming through in Q1. When will it be completed? We will be ready, you can say, during Q1. It will be shifted over time, depending on how far the customers are in the process. Okay. Just to get more, that's then not quantity, but more on qualified comment on when you do the guidance overall for this year, how are you looking then on consumer reacting on gas and electricity prices and food prices moving up, interest rates moving up, which is impacting the volume of real estate? Has this week's impact in Ukraine had any change to your guidance from, let's say, a week ago and until what you are coming out with today? Relevant question, Poul. For the first two months or maybe until yesterday, so far we have not seen any impact from increased prices and energy and interest level. We measure this on the footfall, the interest into our stores, and we have what you call a kitchen weekend, both in January and February, and they were better visited this year than the last year the stores were closed, but then better than 2020. Until yesterday, we were quite optimistic when it comes to consumer confidence and demand. What happened yesterday is not built into our guidance. Of course, we are following the situation and the impact to the stores very closely over the next weeks. You can say it adds to the overall uncertainty. Absolutely of the whole situation, especially in the second half of the year. Okay, the final question from my side. On the Corona impact, which you had in special items on efficiency in your production, when do you expect that to come to an end? It depends on the supply chain situation. We expect that we will be impacted in Q1 and most likely also in Q2. We keep our fingers crossed that everything will normalize and coming from there. That is our view today. What we have also learned during the last year, that it's unpredictable, and the whole Ukrainian-Russian conflict is, of course, also adding to this. Our view on this is that Q1 and to some extent also Q2, and then hopefully we will have a normalized situation. Okay. Thank you. Thank you. Your next question comes from the line of Ulrik Bach from SEB. Please go ahead. Yes. Good morning, Torben and Mogens. A couple of questions from my side. The first one, just a follow-up on one of the other questions. This explanation you have with the postponement of deliveries, can you just elaborate a bit on what dynamics are at play here? Why are the customers postponing these orders, and are there any risks that these orders will be canceled? That's my first question. Yeah. The dynamics behind it is back to those supply chain challenges that we faced, especially in Q4. As we cannot deliver on time in full, then at least we can try to give as much information to our stores and customers as possible, even that we don't get any guarantees from our suppliers. At a certain stage, we had an outlook and we said, as far as we can see, the last time that we are going to send out kitchens without drawer systems will be week five. Weeks later, we realized that then a lot of orders, they were placed in week six. We just tried to come with a in-between service information. It was a little bit taken as a guarantee that the challenges would end there. Therefore, some orders was placed there. I guess it's a mix of sales consultants that don't want to disappoint his customers, and it could also be a sales consultant that had an open discussion with the customers about it. In either ways, there is, to my opinion, no risk that such orders, they will be canceled because the customers have taken an active choice to wait until then. That is the dynamics and, to my opinion, no risk for cancellation. Okay. It sounds as if the postponement or the delay is driven by TCM's inability to deliver on time. Absolutely it's not a decision made by the customers. It's just how the phrasing. Yeah your report, it sounds like it's the customers who decide to postpone it. Well, it is, because the way we've handled it is that we've delivered kitchens without drawers and then installed the drawers at a later stage. In that sense, the customers are postponing it in the hope that they would get a complete delivery at a later stage. Right. Yeah. It's a combination of some constraints on our side, but also orders already in the books being postponed to a later delivery. That is from the, you can say, the customer or sales consultant side. It's a combination. Okay. On that note, do you expect to see a pickup in deliveries? Now you mentioned Q1 and maybe also Q2 will be affected by these supply chain issues, but do you foresee that there will be a pickup and you will pick up the lost sales from Q4 within 2022, or whether it will just be a parallel shift of revenue, just moving all throughout the year and into 2023? It will be lost sales. Also if there has been any impact on customer ordering because of these delays, customers simply don't wanting to buy the kitchen because of the unknown and long delivery time. If we start with the last question first, you say by having chosen to deliver kitchens without drawer systems, then we actually have shorter delivery times compared to if we decided to deliver in full, then delivery times would have been longer. Several of our colleagues in the same industry, they have chosen the opposite. They have chosen to deliver in full, but then with a longer lead time. I guess we have not lost orders due to lead time. That should be the opposite, as we have had a faster delivery time than competitors. About the catch-up, when sufficient supply is there, then there should be a catch-up. It should not be parallel postponed throughout 2022. It takes that supply is getting stable, that they catch up to us so that we can catch up to our customers. Right. Okay. We hope that that will happen in Q1 and Q2. All right. A question on your gross margin bridge. Your gross margin declines 5.7 percentage points compared to Q4 last year, and you talk about this technical effect from the Svane store and Celebert. You mentioned raw material supply chain, increased supply chain cost and sales mix. If we take these items one by one and compare to your guidance assumptions for 2022, what have you assumed there? You can say the unstable supply chain, the sales mix, and the postponement of orders are somewhat linked, all of those three. If you take that into account, and then the price impact, the timing of when we are hit from input cost increase, and when we are mitigated by sales price increase, if you take those two, they are roughly similar in size. Okay. Raw material prices, what's the current status? Energy prices for that matter. The current status is that we see cost prices continuing to increase in 2022. You can say not at the same magnitude as we saw during 2021. We are not seeing a declining level, and energy cost is, of course, one of the drivers of this for sure. We are continuing to see raw material price increases in the new year, and we also mitigate that by a sales price increase in 2022, which will mitigate the second half of the year. Okay, you've already planned further price increases? If so, how much? We have communicated in the level roughly 5%, which will be implemented in Q2, but with a delayed impact coming gradually in Q3 and Q4. All right. Then to these non-recurring items related to COVID and supply chain. You mentioned that these supply chain costs also have a negative effect on the gross margin, and then there are some costs under non-recurring items. Can you just please elaborate what the nature of the different costs are in the cost of goods sold from non-recurring items? What is included in non-recurring is the direct cost that we can measure coming in our supply chain. On salaries, on extra freight, on extra costs for installers having to go two times to the customers to first install the kitchen, which is you can say, not part of our books. The second part is that we have an additional cost to pay for the drawer being installed at a later stage. Those are the direct related costs. The next thing is that this interferes with the whole sales mix and the postponement of the deliveries. That is also related to the unstable supply chain, but it's not something that we can directly measure and thereby adjust for. Okay. In Q4, these costs under non-recurring items was minus DKK 6.5 million. Should we expect the same level for Q1 and Q2, or would they gradually decrease? We are definitely not expecting that in Q2. You can say Q1 is improving somewhat compared to Q4 in the overall situation. Q4 was the peak when we were hit the most. We were hit by, you can say, the standard drawer system, which constitute the vast majority of drawers in cabinets. Going into Q1, we are into a normal low season, which means that supply is better compared to demand than it was in Q4. I would expect still a significant impact in Q1, but then more limited in Q2, and hopefully, we will have a normalized situation during Q2, but it's difficult to predict. All right. That's very clear. My final question related to Norway. In Q3, you mentioned something about opening a new store in Oslo. Just wondering what the status is with that store. Yeah. Thank you for asking. The franchisee in Oslo finally signed the lease agreement here in beginning of January, and he is getting the keys for the location handed over here by the 15th of March. Then we start the build-up of the kitchen store, and we hope we will be able to open up during June. Okay. That's very clear. Thank you so much for answering all my questions. It is a pleasure to be able to give a clear answer this time. Thank you. Thank you. As a reminder, if you would like to ask a question, please press star and one on your telephone keypad. There are currently no further questions. I will hand the call back to you, sir. Thank you very much. Thank you to all of you for participating this morning. Thank you for your time. Have a good day and a nice weekend when you get to it. Thank you very much. Bye-bye. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by