Earnings Call: Q3 2021

Nov 12, 2021

Good day, and thank you for standing by. Welcome to the TCM Group Interim Q3 2021 report conference call. I would now like to hand the conference over to the speaker today, Torben Paulin. Please go ahead, sir. Good morning, ladies and gentlemen, and welcome to the presentation of the Q4 results for TCM Group. Thank you for waiting. Sorry for the technical issues that made this delay. Presenters today is our CFO, Mogens Elbæk 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 our Q&A session. Let us start the presentation and turn to page two for the business update. We are satisfied with the good results in Q3. We had a good growth and an organic like-for-like growth of 10%. Customer demand in the Danish kitchen market remained solid in the quarter. Reported revenue increased by 6.1%, which included a technical negative impact from the divestment of the Svane Køkkenet store in Copenhagen and the divestment of the e-commerce activities within Kitchn.dk that is now merged into the Celebert business. The growth was driven by all our three brands, but with the highest growth rates achieved within the DIY segment, which is Nettoline and the e-commerce activities. At the end of Q3, the total number of branded stores was 91. In Q3, a Nettoline store has opened in Randers. In October, we had two important additions to our store network. The first one is in the city center of Copenhagen, a new Svane Køkkenet flagship store. The store will supplement the existing store network and is a beautiful and inspiring flagship store that will support the already strong brand positioning of the Svane brand. A similar store in Tvis Køkken, a new store opened in Roskilde, and as with the previous mentioned Svane store, the Tvis store will be a great flagship store for the Tvis brand and is a beautiful display of what we can do within the Tvis brand. Early July, we succeeded in closing an agreement with the Danish fast-growing e-commerce business, Celebert. We merged our e-commerce activities in Kitchn.dk with the activities in Celebert and team up with an online pioneer in our industry. We initially acquired a 45% stake in the merged company. Furthermore, the agreement includes a buy option for the remaining shares in Celebert. The potential in the e-commerce kitchen business is huge, and both in Denmark but also abroad, and with this merger, we have the strongest possible foundation for future growth within this channel. At the same time, we will begin to supply Celebert. This will be implemented gradually and therefore have a limited impact this year, but more significant impact next year. Please turn to page three. With my 25 years of experience within the furniture and kitchen industry, I can honestly say that the current supply chain situation is very special. We have an instability of supply of different products and raw materials, and it is a daily ongoing task to mitigate the situation. We are doing everything we can to limit the impact on our customers and thereby protecting the brand. Furthermore, earnings in Q3 were negatively impacted by significantly increased raw material prices. We have already implemented sales price increases, which will mitigate the negative impact from the raw material prices in Q4. Please turn to page four. Some financial highlights for the quarter. Revenue grew by 6.1% in Q3, an increase from DKK 247 million last year to DKK 262 million this year. Adjusted EBIT was DKK 32 million compared to DKK 33 million last year. Adjusted EBIT margin was 12.1% compared to 13.4% last year. Net working capital ratio was -4.6% compared to -8% last year. Cash conversion was 56.4%. I will now hand over to Mogens to go through the financial highlights. Thank you, Torben, and please turn to page five. The revenue growth in the Danish market was 5.4%. The organic like-for-like growth in Denmark in the quarter was 9% and driven by growth in all our brands. The difference is due to the technical impact from the divestment of the store in Copenhagen, Svane store in Copenhagen, and the kitchen activities. Revenue to other countries continued to increase in Q3 by 16.3%, driven by sales to Norway. We saw growth in both same stores and of course, from the new stores opened during last year, and also because Q3 last year was a soft comparison. Please turn to page six. The gross margin decreased from 26.2% to 21.4% in Q3 last year, compared to 21.5% in Q3 last year. This decrease was driven by different factors. There is a technical impact on gross margin of 2.2% coming from the divestment of the Svane Køkkenet store in Copenhagen and the e-commerce activities in Kitchn.dk. On top of that, we were negatively impacted by significant increased raw material prices, which reduced gross margin by 2.7 percentage points in the quarter. Operating expenses, on the other hand, declined compared to last year, from DKK 31.8 million to DKK 24.6 million, and represented 9.4% of revenue in Q3 compared to 12.9% last year. This decline was also primarily driven by the technical impact from the divestment of activities in the Svane Køkkenet stores and the e-commerce activities in Kitchn.dk. Please turn to page seven. In the quarter, we had non-recurring items, this consisted of two different items. The first one is cost related to COVID-19 precautions and COVID-19 related supply chain disruptions. This increased given the unprecedented instability in our supply chain and amounted to DKK 3.5 million in the quarter compared to DKK 1 million in Q3 last year. Furthermore, there is a non-recurring item related to the Celebert transaction, and this is a net gain in the quarter of DKK 15.5 million, coming from the divestment of the kitchen activities, and the DKK 15.5 million included cost related to the transactions of DKK 2 million. Please turn to page eight. Net working capital end of Q3 was minus DKK 50 million compared to minus DKK 82 million last year. The difference relates to different factors. One is our inventory levels, that remains higher than last year. The inventory level is also impacted from the increased raw material prices. On top of that, it is also driven by higher buffer levels on parts of raw materials. This is one mitigation to ensure higher delivery assurance despite the unstable supply. End of September, net working capital was favorably impacted by the stimulus packages with DKK 10 million, this compares to a similar positive impact from the stimulus packages last year of DKK 25 million. In the quarter, there is also an impact from a change in the Danish holiday allowance system, the obligation that we initially had has been transferred to a government fund in the quarter and impacted net working capital and cash flow negatively in the quarter with DKK 19 million. Net working capital ratio was minus 4.6%, compared to last year of minus 8%. Net debt was DKK 224 million end of Q3, compared to around zero last year. The net debt increased by DKK 71 million in the quarter. That is due to the implementation of a share buyback program, of which DKK 32 million was carried out during Q3. As of the 30th of September, a total of DKK 114 million of the total share buyback program of DKK 150 million has been carried out. Furthermore, the Celebert kitchen transaction increased net debt by DKK 23 million in the quarter. Please turn to page nine. The free cash flow in the quarter was minus DKK 12 million compared to plus DKK 25 million in Q3 last year. The decrease in free cash flow was primarily due to the change in net working capital that had a negative impact in the quarter of DKK 33 million, compared to a negative impact of DKK 7 million in Q3 last year. As mentioned earlier, this change in the holiday allowance system in Denmark had a negative impact on cash flow of DKK 19 million in the quarter. Investments in the quarter were net DKK 9 million, compared to DKK 6 million in Q3 last year. CAPEX ratio was 2.7% compared to 1.9% last year. The cash conversion was 56.4% and below last year, again, related to the change in net working capital, higher CAPEX, and compared to last year where we had a significantly higher positive impact from the stimulus packages compared to this year. Please turn to page 10. For the financial outlook, and we reiterate our revenue outlook, an estimated revenue in the range of DKK 1 billion 90 million-DKK 1 billion 120 million, corresponding to an organic like-for-like growth of 9%-12% for the full year. Furthermore, we narrow our adjusted EBIT outlook in the range DKK 148 million-DKK 155 million. That was previously DKK 148 million-DKK 162 million. Thank you, Mogens. As a closing comment, I would like to give my utmost gratitude to all our employees in our value chain for their dedicated work in a historic, unstable supply situation. We are working hard every day to limit the impact on our customers. 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, please press the pound or hash key. Your question comes from the line of Paul Giesen from Danske Bank. Please ask your question. Yes, thank you. I have a few questions. First of all, about the price increases that you are doing and the gross margin. Can you walk us through how we should look at that sequentially for Q4 and throughout the beginning of next year when we should see the impact coming? The second part of that is, should we, by the price increases, see gross margins coming back to the level of 26% or something on a full year basis, or should we not see a full compensation here? Or actually, is it possible that you'll have a positive impact versus a normalized level? Thank you. I can try to answer that, Paul. We try to push over the raw material price increases to the sales prices. That means that we will come back to the same margin levels expectedly when there's a full effect from the sales price increases. The way we implement sales price increases is with a three-month warning period, and then there's a delivery period for the stores at this, which is coming sequentially. We will see in Q4 that the negative impact will be mitigated or absolved, but we will not see the full margin impact until next year. That will come during Q1 and onwards. Will Q1 be normalized? It will- also only partly? It would be more or less normalized, and then from Q2, fully normalized. You can say that depends then on what happens with the cost price increases going forward the next three to six months. Okay. On Celebert, how should we look at you taking over deliveries from third parties? When do you expect that to be fully implemented? It will happen gradually during 2022. Celebert is having a broader product range than we are able to supply. We will never gain 100% supply to them, but we will have a majority of their source products, and that will be gradually implemented during 2022. Okay. Then on your inventories, of course, it's natural that you take more on inventory to secure your future sales. Looking into the guidance and into next year, do you feel comfortable that you can actually deliver on the demand you're getting on the order side? I think it's impossible to answer that, as we don't know what kind of challenges we will meet next year. As it is now, we are able to supply kitchens, and we are also doing that within our normal lead times. We are facing new challenges day by day, and none of our suppliers are confirming that everything will be back on track or back to normal in the beginning of new year. Most suppliers, they say this will continue into Q1, maybe even Q2. It's hard to say The final one for me, the decline in selling expenses, is that the deconsolidation of kitchen, or are you holding back on marketing and selling? No, it is the technical impact, and then lower amortizations as well. Okay. Thank you. I'll step back for now. Once again, for any questions, you may need to press star one on your telephone keypad. We have a follow-up question coming from the line of Paul Giesen again, from Danske Bank. Please ask your question. Okay. Thank you. It's apparently a one-on-one here. A question then on the market situation right now. Can you put a little more flavor on what's going on the demand side? If it's still very strong demand, or if you see a little more slowdown? I think we are coming from a strong demand to a more normal situation. Still on a relatively high level. When we look at the traffic and to the stores and the customers coming in, it's more back to normal than early on this year. On the other hand, the quality of the traffic to the stores is higher. People that are taking the time to visit our stores right now, they are coming not just looking, but because they have something in mind. We are getting back to normal on the traffic side, but still with higher quality than before. How is the high quality then, relating to your comment that it's do it yourself and e-commerce that is leading the growth? Yeah. Shouldn't we then see more action in Svane and Tvis? It's still for all three brands. During the whole COVID-19 situation or period, it looks like that the DIY segment has still performed better than the mid-market or high-end market. It's like more people in the DIY segment has been home or having time or having a budget to do something, and it's maybe also quite logical that in the DIY segment, the time is also a factor. All three brands, all market has had a good time, it's still more significant in the DIY segment. If you comment on the split between private and the business B2B segment and then also on renovation versus projects? Not really a big change in the split. Both private and B2B segment has performed well. Also on the project side, we have been a little bit afraid or concerned about if some projects would be postponed or canceled due to the increase in raw material prices and the lack of manpower in the building industry. It looks like all the projects that have been started are continuing, and there's also still a good inflow of new projects. Okay. My final question is on the guidance for the full year where you narrow it at the lower end. Is that the gross margin impact and thereby the cost increases? That's the main driver behind that? Yes, I think it's fair to say that. Okay. Now that you take the production or sourcing issues out as a special item, how much of the DKK 3.5 million is related to Corona precautiousness and how much is related to sourcing challenges? It is primarily the sourcing challenges, the DKK three and a half million. The internal precautions that we've had with separation of shifts during Q3, we have followed, you can say, the general easing of the restrictions in the Danish community, therefore also eased up on our precautions. That is a more limited cost in Q3 compared to previous quarters. The most part of the non-recurring part is the supply chain disruptions. As you take that up as a special item, can you give examples of what kind of cost is it that you take out there? Because it's about 1% or a little more on your gross margin then. Yeah. One example is our drawer systems, where we have a lack of supply, meaning that we can send out a cabinet, but it's not with a fully installed drawer, and then we need to install the drawer in a second step. That leads to additional freight cost and additional cost for installation. The installer has to go twice to the same customer. That is one example. Another example could be that when we are not getting full deliveries even though they are confirmed, then we start to mitigate in our supply chain how to, you can say, limit the impact. We have had a significant use of overtime without, you can say, selling more capacity, but simply just to limit the impact. It's more overtime, which is then not part of the revenue growth. It is actually just additional cost. Okay. Thank you. That's all for me. Once again, for any questions, you may press star one on your telephone. There are no further questions at this time. Please continue. Thank you, everybody, for spending time with us this morning. Have a very nice day and a nice weekend. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.