Good day, and thank you for standing by. Welcome to the TCM Group Interim Q2 2023 report conference call. 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 and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and 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 very much. Good morning, ladies and gentlemen, welcome to the presentation of Q2 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, turn to page two for the business update. Sales in Q2 were overall in line with our expectations, with a year-on-year decrease of 19%. It should be recalled that Q2 2022 was the strongest quarter ever for the TCM Group in terms of revenue, hence a very strong comparable. B2C sales remained weak in the quarter, confirming that consumers remain cautious.
Considering that sales only declined by 3.5% compared to Q1, that the order intake in the B2B business remained stable in the quarter, we see signs of a potential recovery in the market. The change in sales mix compared to Q2 last year had a negative impact on gross margin and reduced earnings. However, gross margin improved compared to Q1. In light of the continued soft consumer demand, we made further adjustments to the production capacity towards the end of the quarter. We continue to monitor the development in the market closely, and production capacity and the cost base is being adjusted as needed. Number of branded stores was 91 compared to 94 in Q2 last year. In April 2023, we opened a new Tvis Køkken store in Lyngby in the greater Copenhagen area, closing a very important white spot.
We saw positive development in the Tvis Køkken brand, with double-digit growth in order intake, confirming that investments in new stores and more clear, defined brand profile. In June, we announced the strategic acquisition of Aubo Production, which will further strengthen our position, primarily in the Norwegian market. The transaction was closing in the beginning of July. In support of the acquisition, we completed a rights issue in the end of June, providing DKK 77 million in new equity to the group. We are very pleased with the strong support shown by several existing shareholders taking part in the rights issue. Please turn to page three. Some financial headlines for the quarter. Reported revenue was DKK 264 million, corresponding to a revenue decrease year-on-year of -19% in our core business.
Adjusted EBIT was DKK 22 million, compared to DKK 39 million in Q2 last year. Adjusted EBIT margin was 8.4%, compared to 12% in Q2 last year. Thomas will, in a few minutes, elaborate on the underlying drivers of this development. Net working capital ratio was -1.1%, compared to -2.6% last year. Cash conversion was 56%. I will now hand over to Thomas to go through the financial highlights.
Thank you, Torben. Please turn to page four. As Torben already mentioned, the revenue development in Q2 was overall in line with our expectations to the quarter. The reported revenue decreased by 18.7% year-on-year, with decline seen in all our brands. Again, it must be noted that Q2 2022 was the strongest quarter ever for the TCM Group in terms of revenue. However, when we compare to Q1, the revenue decline was a more modest 3.5%. In Norway, our sales decreased by 28.7% when we measure in local currency. The revenue development was mainly impacted by lower B2C sales in the quarter compared to last year. However, we did also see slightly lower B2B project sales. Please turn to page five.
Like we reported in Q1, the change in sales mix with a lower share of B2C sales and a higher share of lower margin B2B project sales, continued to have a negative impact on gross margins in the quarter when we compare to last year. The gross margin was, again, negatively impacted by the significantly higher cost prices on raw materials and components when we compare to the same period last year. The higher input cost has been passed on to the consumers, or customers, through the sales price increases that we implemented during Q2 2022, but of course, continues to have a diluting impact on the relative margin. Energy and freight costs also remained high, again, comparing to the same quarter last year, putting further pressure on our gross margin.
However, the gross margin improved from 18.5% in Q1 to 20% in Q2, due to increasing average sales prices and the effect of the cost reduction measures that we took in Q1. Operating expenses remained largely flat in the quarter, despite cost for dealership restructurings of DKK 2.4 million. The cost relates to provisions for losses on accounts receivables and costs for securing suppliers to end consumers. Our adjusted EBIT ended at DKK 22 million, compared to Q2 last year of DKK 39 million. Please turn to page six. Looking at our net debt and net working capital.
Net working capital end of Q2 was DKK -12 million, compared to DKK -29 million last year, equal to 1.1% of the revenue, where it last year was 2.6% of the revenue. Our inventory levels were lower than last year, as a result of us reducing the buffer levels introduced during the supply chain crisis last year, but remained flat on Q1. Trade receivables and other receivables decreased by DKK 8 million due to the lower activity in the business. Trade payables and other payables declined compared to Q2 last year, by DKK 34 million, driven by lower purchases, but also due to lower payables related to sales and operations in general.
Toward the end of the quarter, the TCM Group completed a rights issue ahead of the closing of the Aubo transaction in the beginning of July, with net proceeds of DKK 77 million. That reduced the net debt to DKK 109 million, compared to DKK 263 million at the end of last year, excluding IFRS 16 liabilities. The leverage ratio increased from 2.35 last year to 2.8 at the end of Q2. Please turn to page seven. The free cash flow in the quarter was DKK -2 million, compared to a DKK +26 million in Q2 last year. The cash flow was primarily impacted by the lower earnings that impacted by DKK -23 million compared to last year.
CapEx ratio year to date was 2.2%, compared to 1.9% last year, with the majorities of our investments going into digitalization and factory modernization. Our cash conversion ratio measured over 12 months was 56%. I will now hand back to Torben to discuss the financial outlook for 2023. Please turn to page eight.
Thank you, Thomas. Reflecting the development in the first half of the year and the continued uncertainty on the macroeconomic development in the second half, we adjust our outlook for 2023 with narrower ranges. We still expect B2B sales to remain soft and a continued high share of lower margin B2B sales. As such, we narrow the revenue outlook to DKK 1 billion 50 million-DKK 1 billion 125 million, against before DKK 1 billion 50 million-DKK 1 billion 175 million. Similarly, we revise our EBIT guidance to DKK 68 million- DKK 90 million against DKK 68 million-DKK 102 million previously communicated. We will now hand over to the operator for the Q&A session.
Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, if you would like to ask a question, please press star one and one on your telephone keypad. Thank you. We will now go to our first question. One moment, please. Your first question comes from the line of Poul Jessen from Danske Bank. Please go ahead.
Yes, thank you, and good morning to you guys. First question is about, if you could say a little more about the split and performance on B2B and B2C, especially in Denmark. Then also if you have any comments on what you have seen into the current quarter, on order performance and traffic?
Yes, good morning, Poul, and thank you for the question. When we look at Q2, it is like we are saying, it's the same, same picture that we have been seeing for now three quarters, where B2B sales is declining and thereby B2B is having a higher share. A part of that B2B business is also the low margin project sales. In Q2, we have lower turnover in both segments, but it is not equally weighted. It still increase the share of the low margin project sales. No new development, actually.
We then look into what we have experienced here during, during the summer, and please remind that it is small, small weeks, so it doesn't have the same impact on, on, on the future like in the bigger months. We, we, we see still traffic in the stores, end consumers, private consumers are, are there, and they, they also like in the spring, they, they are very patient. They take a lot of time to consider and, and the stores are building up their quotation books, but, but they close very, very few orders. Not, not really a, a significant change in that consumer behavior.
On, on the B2B side, we, you could say now we really see the drop in the house builders, in the big house builders. We know they have sold very little new houses since since last year. That order book that we were still supplying also in the first half of this year is, is now really coming to an end. Kitchens for house builders for the remaining year will be very low. On, on bigger projects, we are still we are still getting, getting orders. We are getting orders that should be delivered this year, as normal, also, a part of that is then for 2024.
About the B2B market, when you say that the order book is entering in the coming quarters, do you see any indications or signs that it's turning on the, on the approaches you have or tenders out there? Or should we simply expect that it's somewhere for 2024 because of the lead time?
I think it's too early to say anything, anything on that, that. As we are saying, we had stable, stable turnover and stable order intake on it. The strategy that to have a, to have a mix of B2B and B2C business is proving proving right, that this B2B business is a different cycle to the B2C business.
Can you then add some comments on the Norwegian market? At least on a growth perspective, 29%, that was quite a hit, but also from a high level. What are you seeing in Norway right now?
Yeah, it, it looks like, they, they are, they are reacting a little bit, stronger than, than the Danish consumers to, interest increase or, inflation, et cetera. It also looks like, and that is also the experience from the past, that they are also, coming back to normal a little bit faster than the Danish, consumer. I would say that is also what we have seen over the summer, that, that it's getting more normal again.
It was a Q2 issue?
Sorry?
It was a Q2 issue that you saw the softness, and it's leveling out.
Yeah. Yeah. Yeah. That as, as, as of now, yes. Now they got an interest increase again yesterday, so, yeah, we'll see if that have any impact.
Okay. The final one for now, Aubo, now you've had it for, six weeks, I guess, more or less. What have you learned, and what are you seeing? Any surprises in any direction?
No, no, no really surprises. They, they, they, they, the, the Aubo dealers in Denmark, they, they are looking into same environment like, like the Tvis and the Svane and the Nettoline dealers in Denmark. That is quite similar. They, they have been performing better in Norway than, than, than the TCM old business or what we should call it. That is probably also reflected in that where we are mainly B2C business in Norway with Nettoline and Svane, Aubo is mainly B2B business in Norway. Thereby, this different cycles is also counting in Aubo and especially in Norway.
Does that mean that, if we take a worst case perspective, that you're just going to see it later in Norway in Aubo than you see it in your business, which is B2C?
Theoretically, yes.
It should be more normal.
No, theoretically, you, you are right. The underlying business that Aubo has with Optimera is also that Optimera is also growing in the Norwegian business. They, they are increasing their market share, and they do that also with some of the big entrepreneurs and house builders up there. I, I think they, they will... If they succeed with their strategy, which they have been over the recent years, then they are still able to, to increase or protect their business on the Norwegian market together with Optimera.
Okay. I'll step back to see if there are others who want to ask, otherwise I'll come back. Thank you.
Thank you.
Thank you. Once again, if you would like to ask a question, please press star one and one on your telephone keypad. We will now go to your next question. One moment, please. Your next question comes from the line of, there we go, Andreas Blom, Medium Invest, please go ahead.
Hi, guys. Thank you so much for taking my question. Can you hear me?
Yes, it's perfect.
Great. All right. First off, I want to continue on with the with my colleagues in the questions of your new build segment. Can you comment on how much of your proportion of revenue comes from these new builds, which is halting in the next, in the next coming months?
No, we, we, we don't, we, we, we don't, submit those, those shares. If, if we say that B2B in TCM is around 60% and, and it's split between four segments with, with not a huge difference in size, then, then you could say it could be something between 10% and 20% of the total business.
All right.
But... And, and it's not like it is zero, but it, it is dramatically less than it was during 2022.
Yeah. Yeah, understand.
When it will pick up, when it will pick up is, is dependent on when those house builders, they start selling houses again. Then, you know, some of those houses sold, there is a customer that need to sell his existing house, and thereby they don't know when they're going to build it. When they start building it, then we are supplying the kitchen in the end of the building process. There will be some delay from now on until we see a bigger, larger pickup in that segment.
Yes, yes, of course. Also, can you give us some figures on the price and volume development during this quarter compared to quarter last year?
It is really hard to say because those price increases came at several time last year. The effect of the price increases came on different timing in different segments. Right now, we would compare with several price increases with various deadlines or implementation deadlines in various segments. I think it's really a hard comparison.
Okay. All right, fair. Then what do you expect for Aubo production going forward? Like, have -- do you have any strategic initiatives with the integration that you are thinking about elaborating on for, for the future?
Yeah. Well, one, one, you can say some of, some of the synergies we, we were looking into, is that Aubo is today buying both tabletops and sliding doors from sub-suppliers. As we have production of those two categories in our own factories, that, that will be some of the things we will start looking into. Then, you know, then, then it takes some time. It need to have the right data, the right sales material, the IT systems, then they have display of the existing suppliers, et cetera. It will take, it will take a while, but, but it's some of the things we work on in, in the first place to get integrated into our own production.
Aubo, Denmark is looking to sell more through the existing dealers to open up new dealerships. There is several white spots around in Denmark. As I already said, Optimera is in Norway on a growth track, and also for selling kitchens to all their existing customers. We are looking for, in a normal market, looking for growth in both places, both markets.
All right. Thank you. My last question is, we've seen a significant increase in your other intangible assets for the first half-year. How much of this is related to development projects, and how much is actually related to M&A?
Nothing is related to M&A in Q1. The increase in intangible assets is related to the IT digitalization journey that we are on.
Okay. All right, great. That was all for me. Thank you so much for taking my questions.
You're welcome.
Thank you. Once again, if you would like to ask a question, please press star one and one on your telephone keypad. That is star one and one. We will now go to our next question. One moment, please. Your next question comes from the line of Ulrik Bak from SEB. Please go ahead.
Yes, hello, Thomas and Torben. Also, a few questions from my side. You state that the gross margin improvement in Q2 versus Q1 is driven by higher average selling prices. Is that driven by the price increases you have implemented over the past one-two years, or is there another explanation for that? Also, what have you assumed for those average selling prices in your updated guidance?
Thank you for the question, Ulrich. The increase in the selling prices in Q2 is solely driven by the price increases that we implemented during 2022. It should be recalled that, of course, due to us having a lot of B2B project sales, our customers have locked in their selling prices, right? It takes a while before our price increases have the full effect, and that's what we start to see in Q2. For our forward-looking guidance, we have assumed the current price level.
Okay, that makes sense. With Aubo now coming into your, your figures for, from Q3, is there anything we need to pay attention to in terms of gross margin, SG&A level, or, or any ramp-up costs in that relation?
Ramp-up cost. No, no, nothing on ramp-up cost. I think their margin structure is largely similar to ours. Maybe slightly lower gross margin due to them having lower share of internal production and higher share of purchase components. That, that is in the final details.
Okay, that makes sense. And also on your restructuring cost of DKK 2.4 million during the quarter, can, can you provide some color on, on those costs? How much are provisions, and how much are, are realized losses, and is there potential for further restructuring costs throughout the end of the year?
You could say it's roughly 50/50 split on how much is a provision and how much is actual incurred loss related to one specific store. Going forward, yes, we do see still a risk on, on, on, on, we say, the, the, I wouldn't say the usual, but a certain portfolio of our, of our, of our stores out there that are more exposed to the decline in consumer sales than other stores are. We do see a risk, and of course, also in the, in the recent business, we would, given that they had a very soft or weak second quarter, of course, some of the Norwegian dealers would probably be more exposed to credit risk than some of the Danish dealers. Yes.
Okay.
We do see a risk, and that's why, and we also in our guidance also still includes a potential provision in the second half of the year.
Okay, and is it possible to quantify it at all? Is it DKK 2.4 million per, per quarter? Is that a good number, or, or is it less, is it more?
Hard to say, right? I think we, we, we previously stated that it, it, it was a high single digit for the full year, and I think we're still within that range.
Right. Thank you. Okay, in terms of your, your cost level, it, it improved a lot during, during the quarter. How should we think about this, this cost level going into Q3 and Q4? You, you've done additional FTE reduction. You, you have Aalborg coming in, but you also talk about, lower input costs, as we head into the second half. Having all that together should, that should give you a tailwind, in absolute terms, shouldn't it?
Yeah, well, it should, in absolute terms, give us a tailwind. Of course, you can say the FTE reduction, when it comes to blue-collar workers, well, it should reflect the lower output as well. It's not giving us a tailwind in that sense, right? Because it is reflected in lower sales as well. When it comes to the other items, I mean, we have not implemented more on the overheads than what is seen in the Q2 numbers, very little potential there. You also have to recall, of course, that Q2 is a more quiet time of the year when it comes to marketing activities.
Probably you could say that, that Q2 is not necessarily completely indicative for the full year, right, in terms of SG&A expenditure.
Okay, right. Then a question on your implied guidance for the second half of the year. With the updated guidance, you now guide for second half adjusted EBIT from DKK 33 million- DKK 55 million. Considering that you generated DKK 22 million in Q2, with these perhaps tailwinds from the lower input costs, FTE reductions, also Aalborg coming into the numbers, to me, it just looks as if generating the same amount of EBIT in Q3 and Q4 would be perhaps a bit pessimistic. What am I missing here?
I don't know what you are necessarily missing, but of course, the level of consumer sales is very important for our overall margins, right? The sales mix could have an impact on the earnings in the second half of the year. As I said, we also typically have slightly higher marketing expenditure, especially primarily in Q4 compared to Q2. That also dilutes the picture somewhat.
Okay. That's, that's clear. Then a final question. I know you just executed on the M&A of Aubo Production A/S, and I also know that your balance sheet is still quite stretched, but...
Do you still have any appetite for, for further M&A in, in the current environment, over the coming six- 12 months, perhaps?
It, it is a part of our growth strategy to look, look, look for M&A opportunities. As we also communicated when we announced the Aubo cases, that there is very few potential targets in the Danish, and you can say Scandinavian market, as our industry is partly consolidated already with Nobia and Ballingslöv brands. There is very, very few targets and those targets, they are family-owned and through generations, and thereby, they might not be for sale. If, if we hear about something, if we get invitations, we definitely look at it. As we also communicated, we are not into any into any experiments with turnarounds or startups.
We, we are primarily looking for business that, that, that are also, already, well-performing.
That's very clear. Thank you so much, Torben and Thomas.
You're welcome.
Oh, sorry, sir. Thank you. Once again, if you would like to ask a question, please slowly press star one and one on your telephone keypad. That is star one and one on your telephone keypad. There are currently no further questions. I will hand the call back to yourself, Torben.
Thank you very much. Thank you for listening in. Thank you for all your questions. Have a nice day and a lovely weekend when you get to it. Thank you very much.
Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Speakers, please stand by.