Good day, and thank you for standing by. Welcome to the TCM Group Interim Q1 2023 report conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a questions and answer session.
To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Torben Paulin. Please go ahead.
Thank you. Good morning, ladies and gentlemen, and welcome to the presentation of the Q1 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 two for the business update. Due to TCM's strong B2B pre-position, sales in Q1 were resilient despite a challenging market. Sales decreased by 3%, however, with variations between the brands.
Revenue in Q1 was in line with our expectations, and our strong position and pipeline in B2B ensured that overall sales remained solid despite the slowdown in B2C sales. The change in sales mix compared to Q1 last year had a significant negative impact on gross margin and thereby reduced earnings.
In light of the continued soft consumer demand, we made further adjustments to the organization during first quarter, reducing both direct and staff functions. We continue to monitor the development in the market closely, and production capacity is being adjusted as needed.
Number of branded stores was 93 versus 94 Q1 last year. In April 2023, we opened a new Tvis Køkken store in Lyngby in the greater Copenhagen area. We continue our focus on product innovation, and in Svane Køkkenet, we launched the second new 2023 design called NOTES.
The new kitchen design is made of vertical ash tree veneer, stained in a warm, natural color and an exclusive gray color. Both the chipboard and the veneer is FSC certified, as all our kitchens are today. Please turn to page three. Some financial headlines for the quarter.
Reported revenue was DKK 274 million, corresponding to a revenue decrease of 2.8% in our core business. Adjusted EBIT was DKK 13 million compared to DKK 26 million in Q1 last year. Adjusted EBIT margin was 4.8% compared to 9.3% in Q1 last year.
Thomas will elaborate on the underlying drivers of this development. Net working capital ratio was -2.0% compared to -3.4% last year. Cash conversion was 68%. I will now hand over to Thomas to go through the financial highlights.
Thank you, Torben. Please turn to page four. The revenue development in Q1 was generally in line with our expectations. The reported revenue decreased by 2.8%. With the flagship Svane Køkkenet brand having a flat sales development in Denmark year-on-year, while we saw good growth in our private label and e-commerce business.
In Norway, our sales increased by 4.4% measured in local currency. The revenue development was impacted by a lower B2C sales in the quarter as expected. This was largely offset by growth within B2B project sales. Please turn to page five.
The change in the sales mix with a lower B2C sales and a higher share of the lower margin B2B project sales had a negative impact on the gross margin in the quarter. Furthermore, the gross margin was negatively impacted by significantly higher cost prices on the raw material components compared to Q1 last year.
The higher input costs had been passed on to the customers through the price increases that we implemented during 2022, but of course has a diluting effect on the relative margin. Energy and freight costs increased significantly in the quarter, adding further pressure on the gross margin.
Our operating expenses increased by DKK 3.8 million. The increase was primarily due to costs for dealership restructurings of DKK 3 million. The costs relate to losses on account receivables and costs for securing suppliers to the end consumers affected by the closures.
The organizational restructuring that Torben mentioned in Q1 had only limited effect on the cost base in the quarter, and hence, the increase in operating expenses is not an indicator for the development in our cost base going forward.
Our adjusted EBIT ended at DKK 13 million compared to DKK 26 million in the first quarter of last year. Please turn to page six. Our net working capital in the Q1 was minus DKK 22 million compared to minus DKK 37 million last year.
We reduced our inventory levels in Q1 compared to last year as a result of reducing our buffer levels that we introduced during the supply chain crisis last year. Trade receivables and other receivables increased by DKK 7 million. The increase was primarily driven by a higher amount of overdue receivables towards the end of the quarter.
Trade payables and other payables declined compared to last year by DKK 18 million, due to a lower purchase, as a result of us lowering the inventories and also an effect from the timing of supplier payments towards the end of the quarter.
Net working capital ratio was -2% compared to -3.4% last year. Our net debt was DKK 315 million at the end of Q1, compared to DKK 278 million end of Q1 last year. If we exclude for the IFRS 16 liabilities, net interest-bearing debt was DKK 264 million compared to DKK 230 million Q1 last year. Leverage ratio increased from 1.89 to 2.95.
And excluding the IFRS 16 effects, the ratio increased from 1.6x to 2.5 x EBITDA. As previously communicated, in Q1, we renegotiated our leverage covenant with our bank, from three to four to ensure additional and sufficient headroom in our bank credit facility.
Page seven, please. The free cash flow in Q1 was -DKK 35 million compared to -DKK 33 million in Q1 last year. The cash flow was primarily impacted by the lower earnings and at the change in the working capital in the quarter compared to last year.
The change in working capital was -DKK 34 million this year versus -DKK 43 million Q1 last year. CapEx ratio year to date was 1%, compared to 1.9% last year, and our cash conversion, measured as a rolling 12 months was 68%. I'll hand back to Torben for discussing the financial outlook for 2023.
Thank you, Thomas. Please turn to page eight. The outlook for 2023 remains characterized by a high degree of uncertainty with regards to the macroeconomic development and the derived effect on the demand for kitchens. While there are signs of improvements in the Danish housing market, demand from B2C remains soft, we expect that the revenue will continue to be driven by B2B project sales with lower margins.
As such, we confirm our previous revenue outlook of DKK 950 million-DKK 1.05 billion, revise our EBIT guidance to DKK 60 million-DKK 90 million against previous DKK 70 million-DKK 100 million. The main reason for the adjustment in EBIT guidance is the continued unfavorable sales mix as B2C sales are recovering slower than anticipated. Cost for dealer restructurings were already included in the existing guidance with a high one-digit amount, but later in the year. 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 one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile a Q&A roster. Our first question comes from the line of Frederik Due Olsen of Carnegie. Frederik, your line is open.
Yes, good morning, Torben and Thomas, thank you for taking my questions. I have a couple, I'm just going to take them one by one. Firstly, it sounds like there has been a continued shift in your sales mix from Q4.
I would appreciate to maybe get your thoughts more broadly on how you expect B2C and B2B sales will develop during the rest of 2023 and perhaps also into 2024. Also if you could comment on what does the lower end of your guidance range rely on? Is it based on an assumption that B2B sales will hold up and B2C sales will trend up again, for example? A comment on that, please.
Yes. Thank you for the question, Frederik. As we, I think also mentioned last time, we see still a solid traffic to the stores and store consultants has a lot of customers' home visits. They do drawings, they do quotations. In all three brands, they report that the end consumer really hold back with signing up for the new kitchen and thereby ordering it.
This is, we foresee, is not going to change in the short run. When we look into the second half of the year, we anticipate that we could get into a market looking like Q3 and Q4 last year. When you ask to the lower part of our range, then that rely on a market that is even softer than last year for the B2C market.
How much of your lower end of your revenue guidance is right now covered by already placed orders of projects you're sure to deliver?
We have some visibility, and longer in the B2B, but we still need these orders to come in, to meet our guidance in the autumn.
Okay. Just to make sure I understand. You're saying B2C sales will. Your guidance relies on B2C sales being softer in the second half of 2023 compared to.
In the lower end of our view.
the second half of 2022.
Yeah.
Yes. Okay. And B2B sales, the sort of implicit assumption to reaching your guidance.
Level as we saw last year. It varies through the segments because we know that the house builders, their order book, will partly run out during the spring this year. For that specific segment, we have calculated with a lower revenue to this segment.
Okay. If we look to Q4, it sounds like mix is a big factor in Q1 compared to Q4, is there also an element from volumes declining within each segment?
When revenue is close to being same level as last year and we know that we have had several price increases last year, that mathematically also says that volume has been lower in Q1.
Right. Okay. That's clear.
Compared to Q1 last year. Maybe your question was to Q4 last year.
Yeah, exactly. You also had sales price increases coming in this January.
Okay.
If that tells us that volumes need to be down.
Q4 to Q1 volumes were generally flat.
Okay, great. I noticed your cash conversion of 68%, that seems stronger than comparable quarters in the past couple of years. Is that just a technical factor due to lower DA or what's going on there?
It's mainly related to that the net working capital impact Q1 this year compared to Q1 last year was better or less negative, and also that the rolling LCM CapEx is significantly lower this year as compared to last year.
Okay. makes sense. Then, yeah, I'm just gonna take the next two questions also and, jump back in the line. If you don't mind, your net working capital, you state that the decline to both inventories and trade payables, is due to reduction in buffer stock. Your inventories are down DKK 10 million-.
Yeah.
while payables are down DKK 18 million.
Yeah, correct. You have to then basically, you have the double effect, right, on payables because we reduced our inventories by DKK 10 million. We also, that means that we purchased a lot less. Last year we had the opposite effect, so we were building our stock, so we purchased more, right? Significantly more than last year than we did this year. Then there's also, as I said, the effect of us not utilizing cash discounts to the same extent last year as we do this year. We pay earlier this year. The biggest effect is from the fact that the purchase volume is lower. For last year we were building up stocks. This year we've been reducing stocks.
Okay. Right. Yeah. That makes sense. Just lastly on your receivables, they've also increased relative to last year, and I understand this is due to your franchisees prolonging payments. Do you see any risk to losses on these receivables given the longer days on hand?
Yeah, of course there is an increased risk when they're not paying on time. It's something we are monitoring very closely and while working with dealers on it, we also have security in place, of course, for it. Yes, there is of course increased risk, and as Torben mentioned, we have included that in our guidance, that there could be more cost involved.
Okay, great. Thank you so much.
Thank you. We will now take our next question. Please stand by. The next question comes from the line of Poul Jessen of Danske Bank. Poul, your line is open.
Thank you. My question is about the B2B market. As you said, you have good traffic on B2C, but few signings. What's the visibility on the B2B market? Are new projects coming in or are you just delivering on the books you already have?
I think the question is yes to both. We are delivering on the order book. There's also still coming new orders in new projects. We are probably the latest part of project. This might be a project that has been being built during the last period, and now they are ordering. We see some of those B2B orders with a short delivery time. It could look like that somebody has estimated the prices could go down and thereby waited as long as possible. Now they need also the kitchen for their projects. Now they order with a short lead time.
It is still new orders coming in both for the remaining weeks of the spring and also for the second half of the year.
On the B2C market, your comments is that only in Q1 or how is it now into mid-May? Is that still good traffic but few signatures?
Now we are getting out of our main season, you can say, because when the weather is getting better, people they look more outside the house than inside the house. There is this normal seasonality in it. But stores report that there are still good interest, but they really struggle to make the consumers to sign the order.
Coming to the quality of the dealerships, you had these, DKK 3 million in cost in the first quarter, and you have included more in the full year guidance. How confident are you with the quality in general, or is it just a few ones that has problems?
In general, we are quite comfortable with the stores. Those stores that has been operating for several years, they have had some good years recently and is thereby also having a better strength financially. Our biggest concern is actually on new open stores where the franchisee or the dealer has invested all the money they have in opening up the new store. If traffic or if business is starting slower than expected, they can get in difficulties. It is mainly new open stores, that is only a few of our store network.
Okay. Coming then to the cost cutting that you have implemented, and you did more in February. When fully implemented, how many people will you then be in the company compared to what you reported by end of the Q1?
Compared to the end of Q1, it would be five to 10 FTEs less.
About 430 or something.
Yeah.
Then about the capacity that you have both in admin sales and in production. Are you confident that you're not being cutting too much out? I just wondering if looking at, I know that they are not listed and therefore not that maybe straightforward guidance that others are giving, but the majority of, or more or less all of your peers are guiding flat or growth this year, therefore they might be too optimistic. Do you see a risk that you are cutting too much?
We, I almost say I hope we do. The reason is that we believe that the manning situation in our area is easier today than it was a year ago. If we have been cutting too much then we are confident that we can get people back relatively fast. And we might have been conservative in our cost cutting, I admit that, but it is as you also see, the effect of cost cutting always come with some delay, and thereby we have tried to be a little bit ahead this time.
Okay. on the inventories, where do you see a stable level of your inventories going forward?
Yeah. Thomas and I are looking at each other.
I mean, in terms of overall volume, I think we are more or less back to where we should be in terms of volume. Of course, as value will continue to go down, we expect a lowering of the value, right?
Yeah.
Supply is stable. There's no reason for having a buffer today.
In the value of the inventory you have, where should we see that in six months or so from now?
I would say somewhere between 3%-5% lower.
5%?
3%-5%.
Yeah. Just a clarification on your covenants, which was raised to 4 times. Is that including or excluding leasing?
Including.
Including.
Including leasing, yeah.
Okay. It's the 3x now to be compared to the 4x.
Correct.
Okay. If you get close to the 4 x, or above, what's the consequences? Is that just a step up in the interest rate?
Yeah, that is.
Okay. That was all from my side. Thank you.
Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. Please stand by. There are no further questions at this time. I will now hand the call back to Torben for closing remarks.
Thank you very much. Thank you for spending the time to listen in today, and thank you for your questions. Have a nice day.
This concludes today's conference call. Thank Thank you for participating. You may now disconnect.