Earnings Call: Q1 2021

May 19, 2021

Good day, and thank you for standing by. Welcome to the TCM Group interim Q1 2021 report. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised today's conference is being recorded. If you require any further assistance, please press star 0. I'd now like to hand the conference over to your CEO, 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, 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 had a good start in Q1 with organic growth of 13%. Revenue increased by 10.6%, which included a technical negative impact from the divestment of the Svane store in Copenhagen. The highest growth rates was achieved within our DIY segment, Nettoline, and our e-commerce platform, Kitchn.dk, and within revenue from third-party products. TCM Group's primary market is Denmark, which contributed with 91% of group revenue in Q1. The kitchen market in Denmark has up to this point shown robust resilience and demand has kept up despite the lockdown of the stores in the beginning of the year. There is an increasing pressure on raw material prices and availability. Although this had had a limited impact on Q1, we will start to see the impact from raw material price increases in the coming quarters. Uncertainty is generally higher than normal. At the end of Q1, the total number of branded stores is 91 against 88 last year. During Q1, we opened two new Nettoline stores in Køge and Fjerritslev, whereas the three store in Aabenraa closed. We have signed an agreement with a dealer to open a Svane store in Arendal in Norway. The store is expected to open during Q4. Together with the planned store openings of a Svane in Oslo and a Tvis in Roskilde, this will bring the number of branded stores to 94 during 2021. We continue our success model launching new products. In Svane, we launched new trendy colors in our popular S19, and in Tvis we launched a new design combining the new Momento from last year and the classic M-line. Both new designs will be available in the stores during Q2. Please turn to page three. We held our annual general meeting on April 13, where a total dividend distribution of DKK 13 per share in total under DKK 30 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. This is a clear confirmation that TCM Group has a solid balance sheet and continue to generate cash, which can support shareholder value creation. Please turn to page four. Revenue grew by 10.6 in Q1, an increase from DKK 254 million in Q1 last year to DKK 281 million this year. Adjusted EBIT was DKK 33 million compared to DKK 30 million last year. Adjusted EBIT margin was 11.7, which is similar to Q1 last year. The net working capital ratio was -6.6 compared to -6.1 last year. Cash conversion was 83.4%. 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 11.5%. As Torben mentioned, we achieved growth within all our brands, but especially within the DIY segment and third-party revenue, we saw strong growth in the quarter. Revenue to other countries increased by 2.4%, driven by sales to the Norwegian market. Please turn to page six. Gross margin decreased from 25.7% to 23.5% in Q1. The divestment of the Svane Køkkenet store in Copenhagen had a technical negative impact on gross margin, compared to last year, of 0.8 percentage point in the quarter. In addition, gross margin was negatively impacted by a higher share of revenue from third-party products with lower margin, and additional cost in our supply chain, which relates to the replacement of our main automated board crossing and stacking solution. This new solution has been now successfully installed and been in full operation since Easter. Operating expenses in Q1 were DKK 33.1 million compared to DKK 35.6 million. This represents 11.8% of revenue, compared to 14.0% in Q1 last year. This decline is driven by the divestment of the Svane Køkkenet store in Copenhagen, and partly offset by higher marketing costs. In Q1, non-recurring items were DKK 1.3 million, and that included costs related to COVID-19 precautions, as well as restructuring costs within our supply chain organization, and again, from the divestment of the Svane Køkkenet store in Copenhagen. Please turn to page seven. Net working capital end of Q1 was minus DKK 69 million, compared to minus DKK 61 million last year. Net working capital was favorably impacted by the stimulus packages with extended credit on VAT and payroll tax by DKK 5 million at the end of Q1 2021. Our inventory levels remains higher than last year, which is the result of our decision to build up buffer stock, to ensure high delivery assurance and to create a finished good inventory to increase capacity during the high season. Net working capital ratio was minus 6.6% compared to last year, minus 6.1%. Net debt was a deposit of DKK 14 million at the end of Q1 compared to a debt of DKK 77 million at the end of Q1 last year. Please turn to page eight. Free cash flow was minus DKK 25 million in Q1 compared to minus DKK 22 million in Q1 last year. The reverse impact from these extended credits had a negative cash flow impact in the quarter of minus DKK 10 million. Furthermore, the cash flow was impacted by higher investments of DKK 8 million compared to DKK 4 million in Q1 last year. The CapEx ratio was 2.8% compared to 1.6% last year. Cash conversion was 83.4%, which was below last year, but still at a high level. Please turn to page nine. Regarding the financial outlook, we reiterate our financial outlook, which is a revenue in the range DKK 1.04 billion-DKK 1.1 billion, and an adjusted EBIT in the range DKK 145 million-DKK 160 million. Thank you very much, Mogens. This concludes our presentation. We will now hand over to Tracy for the Q&A session. Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Should you wish to cancel the request, please press the hash key. Star and one to ask a question. The first question comes from the line of Lars Topholm of Carnegie. Please ask your question. Yes. Good morning. Congrats with what looks like a fine quarter. I had a few questions regarding the raw material situation. If you maybe could explain a little bit, which raw materials in particular are causing potential issues here? What proportion of your COGS are affected? What are your thoughts on the possibility to mitigate this? For example, can you do something with price or do you have to take it on your gross margin? Secondly, if you can comment a bit on assuming prices on raw materials stay where they are today, when will we see the full impact in your reported numbers? Thank you. Thank you, Lars. Yeah, when it comes to the raw material, you could say we see price increases more or less all over the material. Not all on the same level, but definitely more than expected and more than normal. It is also impacting our business step by step. As we said, we have seen very little effect on that in Q1. It will be more in Q2 and it will be more in Q3 as far as we can see right now. Depending on what the level and the development will be, of course, we have to consider if we have to also increase our retail prices and that is one of the considerations that I guess we are sharing with our colleagues in the industry right now. So far nobody has been out with this, but some smaller third-party suppliers have been announcing it. We are waiting a little bit to see what is happening. If we do it, our agreement with our franchisees and dealers is that we have to make a three-month notice. An effect on retail prices or our selling prices will be delayed, and it means it will only have effect in the end of the year. When it comes to what kind of material also on availability, you could say the appliances, the white goods is, as we have also talked about in the end of 2020, very hard hit. We have so far been lucky to been able to mitigate the availability so far, and we also expect to be able to do that ongoing. It is not like when everything is running normal that you can count on delivery on time all the time. It takes some extra effort to mitigate with it. I wonder if you can put a percentage on or just a ballpark number on how much your average raw material costs are up compared to same time last year. Maybe also comment a bit on how we should model margins for the coming quarter. If I look at your guidance and deduct Q1, and then I compare it to Q1 2 years ago, you should give and take end at a similar or slightly lower margin. I wonder if we should assume that the margin has peaked in Q1 and then will decline in Q2, decline more in Q3 maybe, then stay or decline even more in Q4. How do you see that pattern? It's hard to put a % on. We would say that the total trend is that the increases are higher than normal and also higher than our yearly price increase. If we are not able to increase our prices, then it will have an impact on our margin. Exactly as you say, less in Q2 and more in Q3 and 4. So should we- Depends on from when we can then adjust our prices. Should we assume margins by Q4 are lower than they are for the year on average? Would that be a fair assumption? It depends on if we are making an extraordinary price increase and with effect from when. We haven't decided yet, but we are looking very much into it. Yeah. Would it be fair to assume if you make extraordinary price increases, if there's any negative impact on demand, that would probably be on the branch where you have the lowest margin? That maybe there would be a mix improvement in the sense that, I guess, Svane is less price sensitive than Nettoline. Yeah, I guess that is fair to say. Also from the point of view that the Svane competitors are probably also considering the price increase, whereas the competitors in the DIY segment might be more price-conscious and therefore not adjusting or not adjusting in the same level. That might be right. That makes good sense. A final question from my side, just on the growth in Denmark, can you comment on growth in B2B and B2C? Not a big difference in it. It's a little bit month-to-month. When the stores were closed down in January, February, the B2B business was running fairly normal. Some of the private business was catching up in March when the stores were opened again. Not a big difference. Thank you very much for taking my questions and congrats with the quarter. Thank you. Your next question comes from the line of Poul Jessen of Danske Bank. Please ask your question. Yes, thank you. A few questions from my side as well. Just coming back to the gross margin and the cost. You're not willing to give any indications, assuming that you are not hiking prices, what kind of margin impact we should look at in the coming quarters, just to have a feel of that. We have to wait and see if you change prices. If you could give an indication of the margin impact of an unchanged prices, that would be nice. About the products and the branch, you said you have growth in all, but you have more in the DIY and the white goods than you had in Svane. Is that a consequence of the stores being closed and thereby the B2C, and then we should see a catch-up in the Svane later on? Thank you. Yeah. The gross margin impact, you can say it is difficult to provide a solid guidance on that because there are certain mix effects that will impact, especially the third-party revenue will have some impact. We expect that also to continue as we also communicated initially when we guided for the full year. You can say one of the things impacting the gross margin in the first quarter was this replacement of our board cutting and sawing machine. That will be limited to Q1. On the other hand, the raw material prices will impact in Q2 and furthermore in Q3. You can say it is difficult for us to provide a solid guidance on that. The third-party revenue or the catch-up from Svane is in that sense that B2B is a majority of the revenue within our Tvis and Svane brand. That has been fairly operated normally also during the lockdown of the stores. The catch-up from the B2C was more or less, you can say, back to normal within the quarter. We had a strong March offsetting the adverse impact in January and February. Okay. You mentioned part of my next one, the board cutting machine. What was the impact from that one in the first quarter that you had to implement that? Yeah. You could say the three drivers that we also explained in our report for the gross margin development, you can say the divestment of the Svane store is we communicate the 0.8% as a technical variance, and the two remaining parts explain the remaining difference in the same order. They are somewhat similar in size. Okay. If I look at the full year guidance, now you have 13% organic growth in the first quarter. If I do an implicit estimate on how you look at the remaining nine months of the year, you must be at organic about plus one to plus eight. Do you see Q1 as a quarter where you had a catch-up, as you implicitly are expecting lower growth in the remainder of the year? I would have assumed that you would accelerate into the next quarters as stores now are open. Yeah. I think you could have various views on it, and this insecurity is why we stay with our guidance. A lot of things are happening right now. The Denmark and as well Norway are step-by-step opening up. It means that people can go back to restaurants, to culture activities, partly travel again. That means we might, maybe not, but we might have the reverse impact as when we last year saw the corona pandemic supported our business. We could have the reverse effect this time on some private projects, but also on the B2B. We could also look into that some projects are postponed due to price increases on building materials. Then there's also the other element within installation teams or craftsmen, the manpower that the building industry is not able to get their demand fulfilled right now. All of those things could give a difference impact on it. Therefore we say it's quite unsecure right now what is exactly going to happen. Even that we talk about now the country is opening up again, we are still having some COVID-19 incidents. Just this week we had three employees in our production which have children that are tested positive with corona. So far we have been lucky just to have a few incidents and nothing major breakdown in our production, but it can happen tomorrow. We still believe that it is an unsecure outlook. Okay. For various reasons that might not come true, hopefully not coming true. Yeah. We will try to say more about it after Q2, hopefully being able to be more precise there. Okay, fair enough. A final one, that's a little more looking backwards into last year because now we more or less have the full year results of all your competitors. If we look for the previous year, you have been doing quite well on the growth side. If we look into 2020, where you had 3% growth in Denmark, I think more or less all your peers had double-digit growth last year. What's your view on what happened there, and why you went out of growth last year and the others actually were doing double digit? One of the explanations is that we are producing to order. When we had the first COVID-19 lockdown in the beginning of March, we stopped building up capacity as we normally do in the spring up to the summer vacation. A month or one and a half months later, we found out that this was actually increasing demand, and then we were not able to increase capacity fast enough, and thereby we had already from the beginning of May, maybe, we were not able to meet delivery times, and soon we also had delivery times going on the other side of the summer vacation. Thereby, we were probably not getting the orders that we could have taken in the market. Competitors that are working with a stock, they were able to gain more short term. Okay. Thank you. That's all for me. Your next question comes from the line of Ulrik Bach of SEB. Please ask your question. Hi, Torben and Mogens. Also a few questions from my side. The first one on your guidance. I know you've alluded to it previously, you report Q1 revenue of DKK 281 million, which makes up more than 26% of the 2021 revenue based on the midpoint of your revenue guidance. Historically, Q1 revenue has been averaging between 24% and 25%, around 24.5%. To me, that seems a bit conservative to not upgrade your revenue guidance. That leads me to think, are you experiencing something related to demand currently which refrains you from upgrading the guidance? What is the main reasons for not upgrading it? Hi, Ulrik. Thank you for the question. It is exactly as I was trying to say before. We are just not sure what is going to happen in this market with Denmark and Norway open up again. Last year, the pandemic created a lot of interest for everything for house and garden. Rebuilding your home. It might be a concern that doesn't come true that we will have the reverse effect this year. Then on the B2B side, we have had a couple of bigger projects where the customer says, "I'm still going to do the project, but I'm not going to do it while prices are increasing that much on both material and salary. I will wait a period until I will execute on my project. If this is going to happen, either because the consumer believes it is getting too expensive or they purely can't find the manpower to do it in the building industry, whether it's the one or the other or both, it means that we could have some delay in projects and demand. We think it's too early days to say what the picture will be. Okay. It may be more too early than conservative. Right. Okay. How long is your current visibility in your order backlog? It's six to eight weeks. On projects, of course, it's a longer view, but even the projects that you have in your order books for a year or two, they can still be postponed due to delays on the building side, or as we say, that they miss manpower. Okay. Thank you. Maybe if you can elaborate a bit on which sub-segments within the B2B segment which has driven the strong revenue growth here in Q1, and if you're seeing any changes to the mix in Q2 and onwards? Like this interest for rebuilding your own house, we can also see, and then you can also see that in all the numbers published, that people are trading houses, and they are building new houses. The house builders segment has been strong in the end of 2020 and is definitely also strong in 2021. Okay. That is clear. The other segments are fairly stable. Right. Okay. A question on your inventory level. You state that you have increased the inventory level to have a buffer because of this longer delivery times and availability. Based on your current inventory level, for how long can you support sales from that? For some material, maybe 24 hours, and then for some, six months. The chipboard material, we are getting delivered every day. It's a lot of the accessories, drawers, metal fittings, et cetera, where we are keeping a higher stock. We have various suppliers. As we said, even that it has been tough maybe the last six months, then we have still been able to meet our delivery times, but with a lot of extra planning effort. You can say the inventory is two drivers. One is what Torben mentions on the buffer on raw material, that we have increased our buffer levels across different components in order to make sure that we don't end up in a situation where we are short of supply. That is one of the reasons. The other is actually going back to the previous questions on last year. To avoid the similar situation, we have kept a higher capacity during the low season than normal and building up a finished-. Sure good inventory during Q1, which is then supporting the capacity in the high season in Q2. It is leveling out the capacity more than we're used to where we were 100% order producing. Right. Is this a main concern for you, the availability and the delivery times getting longer, or is it more a concern about the increasing raw material prices? The prices is more concerning than the availability. I don't know if I dare to say it, but we strongly believe that we will be able to have the availability. Again, during this period, we have also seen some of our most stable suppliers, that they have got into challenges, and that has also hit us to some extent. There is a high demand out there. Okay. That's very clear. A final question on your Norwegian segment. When do you expect to open the store in Oslo? Maybe you can provide an indication of the sales potential of that store, how big will it be, also the new one you're planning to open in Arendal. What's the magnitude it can contribute to revenue? For both of the stores, the franchisees are looking for locations. The owner of the Oslo store has been looking for a period now. We have identified some available locations. We are really looking carefully here because the next opening in Oslo should be the right location. As much as we would like to speed it up, we are still very concerned to have the right location in it. It can happen tomorrow, and it can happen in a year. We definitely hope to be able to open up in Q4 this year. There's a lot of demand for the well-located locations. It can take time. In Arendal, it is a less competitive market, and within a short time, we have located also a number of locations there. We are quite sure that will happen no later than Q4. The impact of the Oslo store, it's the capital of the country, right? It is like one of the most potential locations in Norway, and it should therefore be the best performing store in Norway within short time. A significant impact on revenue. In Arendal, that is a smaller place, less impact. Okay. The Oslo store, would that make up 10%, 20% of Norwegian sales? If it opens up now, it will be store number 11, and therefore it should definitely be more than 10% in addition to the existing turnover. Also remember that there is some lead time. Yeah. When you open up a kitchen store from the first customers enters, it takes some time before you actually get the order and sign it, and then deliver the kitchen. There is some entry time from the opening date till the revenue impact in our business. That's very clear. Thank you so much for all your answers. No further question from my side. Thank you. Your next question comes from the line of Sindre Sørbye of Arctic Asset Management. Please ask your question. Yes. Good morning, gentlemen. Congratulations with especially a good top-line development here. Some of my questions have already been answered, but three things here. It looks like you really stepped up the pace of the do-it-yourself brands during the last couple of quarters in Kitchn.dk, DK, and Nettoline. Can you elaborate a little on how much of the total top line these brands now account for? Are you taking market share in that segment? Yeah. In the quarter, definitely. Internally, we talk a little bit also about the IKEA effect because IKEA is a competitor in the DIY segment. As their stores have been closed and closed longer than the Nettoline stores or all our stores, we believe we have had an advantage from that. A short term in the quarter, gaining market share, definitely. The question is if we can hold it on the long term. We have over last year, and also in the beginning of this quarter, been able to open up new stores in Nettoline and, of course, that also adds to the business and other stores were opened last year. I think we opened up the new Nettoline store in Skive in beginning of November last year. In March, it was the best-performing Nettoline store in the chain. Some of those new stores, they also add to this increase. You could say online is having had very good times during COVID-19. We have also seen that in Kitchn.dk. We have also added more staff so that we are able to guide customers on their kitchen solutions when buying online. That has definitely also added to the gain. How much is that of the total top line now, approximately, if you can give. We don't give numbers per brand, but increase significantly higher there so that we mentioned that it is driven by them. They are getting bigger and bigger in the group. Okay. Yeah. Would it be fair to assume that within that segment, gross margins are somewhat below the group average, but you also have lower SG&A costs? Yeah, that would be fair to assume. Not major differences, but yes. To both of your questions. Yeah. Okay, thanks. I touched that already, you're somewhat cautious with regards to the near-term development. At the same time, I clearly get the impression that March was much better than January and February. Can you in some way comment on the development in April and into May? Yeah, you can say regarding the guidance, the uncertainty is of course primarily related to the, you can say, the second half of the year because we have visibility for the second quarter, and so far it is not a question on a big change in a drop in demand or something like that in Q2. It's more a precaution on the uncertainty for the last two quarters. It means, because historically, your sales have been quite much higher in second quarter than in first quarter, so it should be logical to assume the same kind of seasonality in this year as well. Yeah. To some extent, yes. We also had a very strong quarter and Torben mentioned one of the things that might be a separate discussion for Q1 in the DIY segment that IKEA was closed a longer time than other kitchen stores. Besides that, it is the uncertainty in the second half year that is the primary reason for us to reiterate the guidance as it was. Okay. Finally, on the Norwegian operations, it is still a relatively minor share of the total, but it seems like there is at least a small turnaround there with regards to sales development. Could I ask whether at the current level, is that operation breaking even or are you actually recording a loss there? No. If we say that the sales prices and margin are similar to the Danish business, then you can say we are not really investing a lot of extra cost in Norway. That business will be as profitable as the Danish business. Also for that reason, it is our focus to grow in Norway to utilize the huge potential that we see in Norway. Okay. Thank you. I guess that was all. Thank you. Just to remind you, it's star and one if you do wish to ask a question. There are no further questions coming through on the line. Okay. Thank you, ladies and gentlemen. Thank you for participating today. Have a good day. This concludes today's conference call. Thank you for your participation. 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