Earnings Call: Q2 2021

Aug 20, 2021

Good day, thank you for standing by. Welcome to the TCM Group Interim Q2 2021 Report conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. I would now like to hand the conference over to the speaker today, your CEO, Torben Paulin. Please go ahead. Thank you very much. Good morning, ladies and gentlemen, and welcome to the presentation of the Q2 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 us start the presentation and turn to page two for the business update. We are satisfied with the strong revenue growth in Q2, with organic growth of 14%. Revenue increased by 11.7%, which included a technical impact from the divestment of the Svane store in Copenhagen. The growth was driven by all four brands, with the highest growth rates achieved within our DIY segment, Nettoline and our e-commerce platform, Kitchn.dk. TCM Group's primary market is Denmark, which contributed with 90% of group revenue in Q2. The kitchen market in Denmark remains strong with solid customer demand. In addition, our Norway activities had a strong performance in the second quarter. There is an increasing pressure on raw material prices and challenges with raw material supply leading to higher costs. We have implemented a sales price increase absorbing the raw material price increases. The price increase will start to impact in Q4, and therefore Q3 is negatively impacted by the situation. We have delivered strong revenue growth despite challenges in the supply chain. The unreliable supply of raw material is on a so far unseen historic level. Mitigation actions are more or less done on a daily basis, leading to negative impact on productivity and delivery assurance. In the end of Q2, the total number of branded stores was 91 against 89 last year. We have signed an agreement regarding a new Svane store in Fredrikstad in Norway. Together with the planned store openings of Svane stores in Oslo and Arendal in Norway and a Tvis store in Roskilde in Denmark, this will bring the number of branded stores to 95. We are targeting that three of the new stores will open during the remaining part of 2021. Continually launching new products is an integrated part of the DNA of TCM Group. This enable us to remain the premium brands for the demanding customers in our full service segment, Svane and Tvis. In Svane Køkkenet, we have built on the success of the S19 design with four new colors offering the customers the widest selection of colors in the market. In addition, new options in solid oak, new cabinet and tabletop leg designs, in combination with a significant number of new handles, have been keeping the design at the forefront. In Tvis, we have built on the success of the Momentum we launched last year, combining solid wood fronts and laminate, and by adding more options in solid wood in combination with a significant number of new handles. Early July, we succeeded in closing an agreement with the Danish fast-growing e-commerce business, Celebert. We merged our e-commerce activity, Kitchn.dk, with the activities in Celebert and team up with 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 with this merger, we have the strongest possible foundation for future growth within the channel. At the same time, TCM Group will begin supplying to Celebert. This will be implemented gradually and therefore have limited impact this year, but more significant impact in 2022. Please turn to page three. Some financial highlights for the quarter. Revenue grew by 11.7%. Sorry. We have the capital structure first. Excuse me. We held our annual general meeting in April 13th, 2021, with a total dividend distribution of DKK 13 per share. In total, DKK 130 million was approved. In addition, the implementation of a share buyback program of up to DKK 150 million or 10% of the number of shares was approved. The share buyback program has been initiated and runs in the period up until March 11, 2022. As of 30th of June 2021, TCM Group has acquired shares with a total cost price of DKK 82.3 million and representing 4.9% of the original number of shares. This is a clear confirmation that TCM Group has a solid balance sheet and continue to generate cash, which can support shareholder value creation. We turn to page four. Some financial highlights for the quarter. Revenue grew by 11.7% in Q2, an increase from DKK 260 million in Q2 last year, to DKK 291 million this year. Adjusted EBIT was DKK 44 million, compared to DKK 41 million last year. Adjusted EBIT margin was 15.2%, compared to 15.6% last year. Net working capital ratio was -7.0%, compared to -8.8% last year, and cash conversion was 71.5%. I will now hand over to Mogens to go through the financial highlights. Please go on, Mogens. Yeah. Thank you, Torben. Please turn to page five. The revenue growth in the Danish market was 9.7% and as Torben mentioned, we achieved growth in all our four brands, but especially the DIY segment showed strong growth in the quarter. Revenue to other countries increased significantly by 34.6%, driven by sales to the Norwegian market, both organic growth and growth from new stores, but also because Q2 last year was a soft comparison. Please turn to page six. Gross margin decreased from 27.8% to 25.7% in Q2. The divestment of the Svane Køkkenet store in Copenhagen had a technical negative impact on gross margin of 0.6 percentage point in the quarter. In addition, gross margin was negatively affected by a number of challenges faced by TCM Group due to supplier-related issues and interruptions in the flow of goods. Mitigation actions within TCM Group to limit the impact on our deliveries of finished goods to our customers led to additional costs in our production of approximately DKK 3 million in the quarter, reducing gross margin by one percentage point. Operating expenses in Q2 were DKK 30.5 million, compared to DKK 31.7 million. This represents 10.5% of revenue compared to 12.2% in Q2 last year. The decline in operating expenses was driven by the divestment of the Svane Køkkenet store in Copenhagen. In Q2, non-recurring items amounted to 1.5% and included costs related to COVID-19 precautions, this compares to Q2 last year with DKK 1 million in non-recurring costs related to COVID-19 precautions. Please turn to page seven. Net working capital end of Q2 was DKK -76 million compared to DKK -89 million last year. Net working capital was favorably impacted by the extended credit on VAT and payroll tax as part of the government's stimulus packages by DKK 10 million at the end of Q2 this year, and compared to a positive impact Q2 last year of DKK 25 million. Our inventory levels remains higher than last year, which is a result of two management decisions. One, to establish a buffer of parts and raw materials to ensure higher delivery assurance, and secondly, to establish a finished goods inventory of standard cabinets in order to increase capacity during the peak season. Net working capital ratio was -7% compared to last year, -8.8%. Net debt was DKK 153 million at the end of Q2 compared to DKK 19 million at the end of Q2 last year. Net interest bank debt increased by DKK 167 million in the second quarter, primarily due to distribution of dividend of DKK 130 million and the implementation of a share buyback program, of which DKK 82 million has been carried out during the second quarter this year. Please turn to page eight. Free cash flow was DKK 52 million in Q2 compared to DKK 69 million in Q2 last year. The decrease in cash flow was primarily due to the change in net working capital, which was DKK 10 million in the second quarter compared to DKK 28 million in the second quarter last year. The change in net working capital compared to the second quarter last year should be seen in the light of the impact from the stimulus packages. This year, in Q2, we had a positive impact of DKK 5 million compared to Q2 last year, where we had a positive impact of DKK 25 million. Investments in the quarter were on par with Q2 last year, and CapEx ratio was 2% compared to 1.6% last year. Cash conversion ratio was 71.5 which was below last year and due to higher CapEx in the last 12 months and the change in the working capital, as mentioned earlier, which last year was favorably impacted by the stimulus packages. Please turn to page nine. For the financial outlook. Based on the positive development in the first half of the year and the present market conditions, we revise our financial outlook. A revenue in the range of DKK 1 billion 90 million-DKK 1 billion 120 million, which previously was DKK 1 billion 40 million-DKK 1.1 billion. This corresponds to organic growth for the full year of 9%-12%. We estimate an adjusted EBIT in the range DKK 148 million-DKK 162 million, which is compared to previous outlook of DKK 145 million-DKK 160 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 to limit the impact on our customers. As far as we can see, this situation could potentially continue the remaining part of the year. This concludes our presentation, and 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, you may press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes on the line of Ulrich Beck from SEB. Please ask your question. Yes. Good morning. A couple of questions from my side. Can you talk a bit about the supply chain issues that you mentioned that you faced during Q2. How serious are they? Is it something that you're still experiencing here in the middle of Q3? Yes, please. It is a serious challenge both for Q2 and also for the future. We have had the challenge with the wide appearance for almost a year now, and it also looks like it continues to in 2022. In 2021, we have also realized unstable supply on almost all raw material that we are using in our own production. It's chipboard, it's MDF, it is edging banding, it is drawers, fittings. We are now also seeing for the sink, for the kitchen tabletops. So far we have had very limited effect on end consumer deliveries, but the supply into our factory has been quite unstable. The way we mitigate it is that we replan our production almost on a daily basis, and we do it by reducing our production series. When we get less supply in, then we split it in more smaller series and try to hit the demand for customer deliveries. It is a huge challenge to handle this and navigate and mitigate in this in a production facility that is built to produce in bigger series. Luckily so far, customer effect has been very limited. When we are looking ahead it is still the case, we are still today getting daily updates, weekly updates from suppliers that deliveries that was confirmed for a certain day or a certain week is now being postponed. For some material also, the confirmed quantity is reduced. Their explanation is when it comes to sinks and drawers and other products made out of steel, that the supply into them is less than they needed or was confirmed to get. The other part of the explanation is this high demand all over Europe, including also U.S., has given them their challenges. There are still some COVID-19 effect also in some countries and some factories, so that they are not getting the full production capacity as planned. It is serious, and it is also ongoing in Q3 and probably also Q4. Again for the white goods appliances, it will also be 2022. Okay. Thank you. Would it be fair to assume that you would incur increased costs similar to what we saw in Q2 related to these issues? Operational, yes, probably. As it looks now and then, of course, for the raw material price increases as said We will see a negative impact in Q3 that will gradually then be equaled out by the sales price increase that has been implemented. Okay. There are two negative impacts. There's raw material price increases, and then there are your operational disturbances that lower productivity. Okay, thank you. A question to the gross margin development in Q2. It decreased by 2.2 percentage points, and you state that 0.6 percentage point was driven by the sale of your Svane store in Copenhagen, while 1 percentage point was these operational issues that you just talked about. Is it fair to assume that the remaining gross margin delta, compared to last year of 0.6 percentage point, is related to these raw material price increases? You can say the raw material prices have started to kick in also in Q2, but will gradually also increase in Q3. You can say the remaining part is to some extent mix effect. When the strongest growth rates are within our DIY segment, they have a structurally slightly lower margin than you can say the full service brands, Svane and HTH. The remaining part is more a mix issue also. Okay. The increase in raw material prices, where is that located in your explanation? Is that part of the one percentage point dilution that you relate to supply chain issues? It is part of the remaining- Right 0.56 percentage points that you mentioned. It is part of that. You can say we also introduced a price increase in December last year, and that is more or less on par with the price increases on raw material in the second quarter. Okay. That's very clear. Okay. It sounds, in terms of your different segments, Nettoline and Kitchn.dk, it sounds like you have good momentum in these segments. Can you maybe talk a bit about whether this is mainly market driven or whether it is a result of some of your initiatives? If so, what measures or initiatives have you started to facilitate this performance? I think a part of it is market driven. During COVID-19, people had a lot of spare time, so they were maybe more active in the DIY segment, which you can also see from DIY markets and their increases. I also guess that some of this released vacation money, et cetera, has a bigger impact in the DIY segment than in the full service segment. That is a part of it, so the market driven part of it. We have also in Nettoline continued what we internally call Nettoline version 2.0, where we have started branding the stores Nettoline. There's also some store openings last year, and a couple of them are among top 3 or top 5 of the store performance in Nettoline. There is also a part coming from new stores performance. I guess all stores in the Nettoline chain is also having a positive development. It's a mix of the two things. A couple of times last year, we introduced new fronts, new designs, new colors, and that has also been very successfully and a driver for this growth. Okay. Thank you so much. No further questions from my side at this point. Your next question comes from the line of Poul Jessen from Danske Bank. Please ask your question. Yes. Thank you. First question is about Norway. Could you put some more words on what's going on there? I think you had the best quarter ever in Norway this quarter. Is it actually finally performance of the stores you're opening and better locations, or is it the market which is improving? Yes, please. I think once again, the answer is, it is a mix. During 2020 and during COVID-19, we saw that the Norwegian market has a weaker, more soft performance than Denmark. A part of the explanation was that at the same time, oil prices was going down and the currency development also made it more expensive for the imported kitchen product to Norway. COVID-19 had a different life in Norway. They had, for a longer period, regions that was closed down. We didn't have the same positive effect as we saw in Denmark. Finally it looked like the Norwegian customers, they said, "Now we cannot wait any longer. Now we have to do something." They started to buy kitchens again. A part of it is a positive market development. Secondly, a part of the growth is also coming from the two new stores that we opened up during COVID-19 last year, and especially also one of the stores that was opened prior to that. Those three stores are now getting momentum and is adding to the positive development here in Q2. Therefore, we are also so focused on opening up more new stores and are happy to report that we are now having three agreements about new stores signed. One of them has a fixed rent agreement, so there we know the location and more or less the opening date. The other one is in the end negotiation on rent agreement. The third one, they are starting the negotiation now. Okay. It's again, a mix of new stores, but it's also same-store sale growth in the other existing stores. Yeah. It's a mix. Yeah. On current trading or looking into the second half of the year, are the lack of carpenters and other people a limitation on growing in the high-end products like Svane? It's definitely a challenge to get people to install kitchens. Sometimes we are getting blamed that our delivery times is too long, and that is a challenge. In those days, we hear less about that and more about the lack of sufficient manpower to install kitchens. Again, they do what they can. Some stores have own employees doing it, and some are using freelancers. I think they work as hard as they can to find people to do it, but so does all our colleagues in the industry. There is a fight about it. Okay. My final question, I guess that's for you, Mogens, about the Celebert acquisition. Can you walk us through next year? If we just assume everything else, meaning revenue and margin is unchanged, how should that impact the revenue and the operating cost lines that you deconsolidate kitchen and you take Celebert in as associated? Yeah. You're actually right. There is a technical impact from that, meaning that what used to be kitchen activity in TCM Group will be associated from 1st of July. That has, you can say, the same technical impacts as we saw with the divestment of the Svane store. A negative impact on revenue and margin, but a positive impact on the cost base. That would be partly absorbed by the supply to Celebert. We estimate that the net impact in the remaining part of this year will be limited. When we have a full year, implementation of this will happen gradually, the insourcing of both cabinets, tabletops, and sliding doors. When we have a full implementation of that, we estimate that there is a net positive impact of DKK 8 million-DKK 10 million in TCM. That's on the- Yes. Taking kitchen out of the revenue line, and the cost part out of it, and at the same time you get the revenue in as supplier to the merged organization. Is that a net impact on revenue or? It is limited, the impact in that sense, since there will be maybe a timing part where our kitchen is, you can say, out of the consolidation from 1st of July, whereas the insourcing supply to Celebert will happen gradually. Over the second half of the year, we estimate that it will be more or less a net impact of more or less zero. Okay. Next year, it should be positive because you get the full deliveries during the year? Yeah. That is the plan. We have estimated what is the full year impact, and we will of course try to insource that as fast as we can. We estimate the vast majority of that full year impact will come in 2022. Say the insourcing of the Celebert business, timing-wise is of course not the very best when we at the same time have supply challenges. We will have to do it gradually, and supply in general will also have an impact on how fast we can do it. Okay. Thank you. That's all from me. Once again, for any questions, you may press star one on your telephone keypad. Your question on the line of Ulrich Beck from SEB. Please ask your question. Yes. Hello again. Just a follow-up question. At Q1, you were talking about concerns about a softening of demand as COVID effects, they ease. In that sense, how do you view the second half of this year? What are you currently seeing in the current trading of the demand and meetings your franchise takers have with customers? Maybe some color on that would be helpful. We are still seeing a good demand and good traffic in the stores. Maybe coming to a more normal level, but it's always hard to say here right after the summer vacation because people, they have to get back to work, and this year, more people have to get back to work after COVID-19 and school start, et cetera. It's still too early really to say what it is, but our best impression right now is that there's still a good demand in the market. The question is this declining number of houses sold, but when this is also then having an impact, if or when. So far, still a good demand. Okay. Thank you. Once again, if you have questions, you may press star one on your telephone keypad. There are no further questions at this time. Please continue. Thank you for listening in today, and have a nice day. This concludes our conference call. Thank you for participating. You may now disconnect.