Earnings Call: Q3 2020

Nov 11, 2020

Good morning, everybody, and welcome to our Q3 report. Today I'm together with our CFO, Mogens Elbæk Pedersen, and myself, Torben Paulin. Let us start the presentation now. Please turn to page two for the business update. Overall, the Danish kitchen market has been resilient despite the COVID-19 situation and the related macroeconomic uncertainty. In the quarter, revenue growth of 4.2% was driven by growth in the Danish market through the branded stores, which in Denmark include also Nettoline stores. Furthermore, we continue to see growth in our e-commerce channel, Kitchn.dk, and furthermore, we saw an increase in revenue from third-party products. Our Norwegian business was softer in the quarter, which should be seen in the light that the Norwegian market was weaker than the Danish kitchen market in the quarter. Our view on the long-term potential for our Norwegian business is unchanged, and we remain committed to fully exploit the potential we have in the Norwegian market. Number of branded Svane and Tvis stores at the end of Q3 was 68, compared to 67 at the end of Q3 last year. Furthermore, we have 20 branded Nettoline stores in Denmark. Our strong brand, Svane Køkkenet, has a dedicated focus on product innovation and design, and during Q3, we launched a new S12 RAW Limited Edition kitchen line. That is the same one that is displayed on the front page of this presentation. S12 RAW Limited Edition is based on an uncompromising design with a fully veneered frame and wooden fronts with a raw and dark look. We maintain our financial outlook. Please turn to page three. Revenue grew by 4.2% in Q3, an increase from DKK 238 million last year to DKK 247 million. EBIT was DKK 32 million, compared to DKK 34 million last year. EBIT margin was 13.0% compared to 14.4% in Q3 last year. The net working capital ratio was -8% compared to -7.3% last year. Cash conversion was 94%. I will now hand over to Mogens to go through the financial highlights. Thank you, Torben. Please turn to page four. The revenue growth in the Danish market was 5.6%. As Torben mentioned, the Danish market has shown a robust resilience during the COVID-19 virus outbreak. Revenue to other countries declined by 13.6%, driven by lower sales to the Norwegian market. Year-to-date revenue was up 2.2%. Please turn to page five. Gross margin in Q3 was 25.8% compared to 28.1% in Q3 last year. The sales campaigns we launched to stimulate demand had a supportive impact on revenue, but also a diluting impact on gross margin. Furthermore, gross margin was negatively impacted by additional costs related to COVID-19 precautions, as well as a higher share of low-margin revenue from third-party products. Going forward, COVID-19 precautions will continue to impact, whereas the impact from the sales campaigns ended during Q3. Operating expenses were DKK 2 million up on Q3 last year. The increase is primarily due to costs related to projects targeted operational efficiency improvements, as well as increased marketing costs related to the launch of the S12 RAW Limited Edition kitchen line. Q3 last year included non-recurring items of DKK 3 million. Please turn to page six. Net working capital end of Q3 was -DKK 82 million compared to -DKK 73 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 23 million end of Q3. This was a primary driver for the increase in other payables, whereas trade payables increased due to a higher activity level. Our inventory levels remains higher than last year, which include building up buffer stock to ensure high delivery assurance. Furthermore, trade receivables increased due to calendar timing, a higher number of outstanding debtor days at the end of Q3 this year compared to the end of Q3 last year. Overall, net working capital ratio was -8% compared to last year, -7.3%. Net debt was close to zero in Q3 compared to DKK 119 million at the end of Q3 last year. At the end of Q3, net included DKK 37 million related to IFRS and last year IFRS 16 had an impact of DKK 42 million on net debt. Please turn to page seven. Free cash flow was DKK 25 million in Q3, compared to DKK 40 million in Q3 last year. The development was primarily due to the change in net working capital in the quarter compared to Q3 last year, the variance was DKK 11 million from net working capital. In the third quarter, our net working capital was negatively impacted by DKK 3 million from a reversed effect from the extended credit from the stimulus packages provided in Q2. At the end of Q3, this extended credit amounts to DKK 23 million, which will have a reverse impact on cash flow in Q4 2020 and Q1 2021. Investments was DKK 6 million in the quarter compared to DKK 4 million in Q3 last year. The CapEx ratio year to date was 1.9% compared to 1.3% last year. Cash conversion was 94%, which is below last year, but remains high. Please turn to page eight. For the financial outlook for the full year and based on an assumption that Denmark will not be subject to more drastic lockdown measures than the ones we have seen so far in Q4, we reiterate our full-year financial outlook for 2020, which is full-year revenue in the range DKK 980 million-DKK 1 billion and DKK 20 million. Full-year EBIT in the range DKK 135 million-DKK 145 million. Thank you very much, Mogens. We are at the moment in the midst of the second wave of COVID-19 virus outbreak. In that perspective, I'm very proud of all our employees and our business partners. Thanks to them and their hard work, we have been able to operate with a minimum of disruption in this extraordinary situation. This concludes our presentation. We will now hand over to the operator for the Q&A session. Thank you, sir. Ladies and gentlemen, once again, if you do wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel that request, please press star two. That is star and one to ask a question. Your first question comes from the line of Lars Topholm of Carnegie. Please ask your question. I do have a couple of questions here. First of all, I wonder if you can give a more specific breakdown of the gross margin erosion. I would like to know the specific effect from mix change, the specific effect from COVID-19, and the specific impact from discounts. Maybe for each of them, if you can comment how you see that impact in Q4. I know there are no discount impact, but for the two others. About Norway, where your sales are down and you say that's because of a generally more weak market, but we saw Nobia grow in Norway in Q3. I wonder what you base your comment on that this market is more weak and if it's fair to assume you are performing worse than the overall market in Norway, and how you intend to change that in the near term? Thank you. Thank you, Lars. Mogens here. I will try to answer the first question, and Torben will take the Norway question. The gross margin effects, the three points you list, you actually have to take the opposite order in terms of effect. The most significant impact on Q3 was from the discounts from the sales campaigns. The second part was the COVID-19 impact, which will also continue into Q4 and probably to a greater extent. Far or previously we've communicated that we had no incidents in the factory. We actually have the first incident in October. We managed to, you can say, to deal with that in a fairly good way and with limited impact. Of course, the uncertainty going forward is that this will also be a significant impact in Q4. Regarding the mix effect, we have overall more or less the same mix B2B and B2C as we had last year. That means that you can see the mix effect or the impact for Q3 margin was related to a higher share of third-party revenue with a lower margin. Can you quantify how much is the impact from discounts? How much is COVID-19 and how much is the mix effect in either absolute numbers or if we try to bridge the margin erosion? I would not go into the details, but you have the order to give you some kind of indication on the magnitude from the different points. For example, if you had an impact from discounts in Q2 and Q3, but not in Q4, how much of an improvement should that give in the margin in Q4, everything else equal? That, of course, depends on the mix as well. No, I'm only talking about the absence of discounts. Disregard COVID-19, disregard mix. You said there's an adverse effect from discounts which will not be there in Q4. I just wonder how big it is. If you want to tell it, of course. Yeah. I will say that it is the most important or the most significant impact of the three. Is that half of the dilution, or can we get any closer to quantification? If we can't, just say it, then of course I won't ask for it. It could be for competitive reasons or whatever. Correct. Okay. If I should comment on the Norwegian situation, we have, since the outbreak of COVID-19, seen a very weak market in Norway. In the beginning, the market in general was also hit by decreasing oil prices and currency, and the customers hesitated to order new kitchens. Over summer and autumn, the traffic to the stores has been better, but we are lower than last year. It goes for both our branded stores and also the stores where we are in multi-brand stores. We think it is a market trend. A TCM Group trend. Why do you conclude that when Nobia is growing? I just don't understand why you are so convinced it's not a company-specific issue. Yeah. There are two answers to it. The first one is that Nobia is a lot more into the B2B market and normally we see that orders there are more long-term than the private consumer. Therefore, they can have projects that have been ordered last year or beginning of the year before the outbreak that are still being delivered right now. Our share of business to business in Norway is very low, so we are more on a private part of it. Having said that, as we have also said earlier, we have not been satisfied with our position in the Norwegian market, and it is a part of our focus areas, and the first step in that direction was hiring a Norwegian country manager that started in the spring. Of course, his ways of working and the whole introduction to the company, et cetera, has also been impacted by the COVID-19 and the travel restrictions. We still have a job to be done in Norway. One final question, if I may. Completely unrelated, there is a tender going on for Avedøre Stationsby Syd for the renovation of 1,000 residential units, where 90% needs new kitchen. Can you confirm you're a part of that, do you know when there'll be a decision on that? No to the second, yes to the first one. It's stored on our list of tenders. I don't have the detail when it's going to be decided. Do you know how big the kitchen part of the contract would be? I don't have that detail right here. You're right, it's one of the interesting projects going on. One final one, if I may. Your full year guidance implies sales down by 1% to 17% for Q4, just mathematically. I wonder what could make you come out in the low end, and what could make you come out in the high end? Why you're going to decline in Q4 because your order backlog is lower than the same time last year? The uncertainty right now is that so far we have only had, as Mogens said, one employee hit by COVID-19. It can hit us every day, and as we are producing, it will immediately also have the effect that we are not delivering kitchen out. Therefore, there is some uncertainty in many ways right now. That is the reason for our, could you say, careful guidance. That makes it a bit What is the order backlog compared to the same time last year? I don't have that figure right away. Is it higher or low? Yeah. We do not comment on the order backlog normally. I think in previous quarters you actually mentioned the order backlog in the statement, but not this time. I know you don't give a specific number, but just an indication whether it's up or down would be nice. Yeah. You can say the uncertainty here is of course when we are going to deliver the order book, which is for Q4 and some of it also for Q1 next year. The uncertainty is. That I understand. I'm asking about the size of the order book, not the uncertainty of it. Yeah. I don't have the figure here. You don't know whether your backlog is up or down? That surprises me. It's more the split when things are going to be delivered. We see every week or every month that some orders, both private and business to business, are getting postponed a week or two. When it's coming to the end of the quarter, and especially to the end of the year or up to a holiday, this can be more significant than normal. It's a little bit a moving target, you can say. That I understand, but that's not my question. My question simply is the size of the order book up or down compared to the same time last year? Uncertainties or not. I'm pretty sure you know if it's a positive or a negative movement. It is up, but the issue is that if you apply it for guidance for 2020, there is uncertainty whether it's Q4 or it's going to be in 2021 deliveries. That I fully understand and accept. Thank you very much. Thanks. Thank you. Your next question comes from the line of Poul Jensen of Danske Bank. Please ask your question. Yes. Thank you. I think most of the questions have been answered already, but I have two. One is coming somewhat back to Lars' question on the order backlog. Can you tell what's the delivery time if I go in ordering now? How long do I have to wait to get a new kitchen then? It's normal delivery time. That is? Yeah. It differs from design to design, but there are some kitchens you can get after two weeks, and there are some that take up to six or eight weeks. Okay. It's absolutely normal. It's a normal delivery time on the full assortment. Okay. Then the second one is on the market segments. Can you say a little about how the dynamics right now is in both the B2B and the B2C segments in Denmark? Yeah. Starting with the last question on the B2B, we haven't really seen any changes right now. We have same number of tenders and dialogues as normal. Very similar, I would say. On the private business, it's a little bit up and down. In the spring, traffic to the stores dropped significantly immediately by the outbreak. Now here in the autumn, it has been much closer to normal. We also see increased traffic to our website and online bookings. It's also, you could say, close to normal on the private side. We maybe see a little bit delay in when people want the products. We hear from our stores that they are short of people, technicians to install the kitchen, which might also influence it. Okay. In the subsidized housing, there's been a lot of talking about when we should see a pickup there in case that it should be counter-cyclical. Have you seen anything in that? We also still are looking for it. Okay. If you look at the project market, we see a sharp decline in the number of building permits and so on. How do you see that as well? We cannot see it in the activity, the dialogues with the developers by now. Dialogues are continuing similar to the past. Okay. Is that because you're taking share or being invited to more, or is it the market being stable? Hard to say, as all this dialogue is happening in the stores with the B2B people there. We do hear about new clients, but I guess we also lose some. If that is net more or less than normal, I would say my understanding is that it's very stable. Okay. The final one, that's on the cash flow. The state support that you got earlier in the year, when should we see the remaining part being repaid? Is that in Q4 or is it next year? That is both in Q4 and next year. You can say at year-end, if you need some guidance there, I would estimate DKK 15 million at the year-end that we will still benefit from this, and that will impact them negatively in Q1. That means about negative DKK 8 million or something in Q4? Correct. Okay. That's all for me. Thank you. Thank you. Your next question comes from the line of Sander Intman of Paragon Capital. Please ask your question. Hi. Morning, gentlemen. I had a quick one on the receivables here. I saw that your receivables, Mogens, you mentioned that they were up because of higher sales outstanding. Looks like receivables are up about 43% year-on-year. What's driving that? Are you changing your payment terms with the stores? Something like that, or what's happening there? No. It's the same payment terms. You could say the majority of the revenue is still from the Svane brand, and they have a current week plus eight days payment terms. That means that the number of outstanding days differs from month to month compared to last year, and that is the reason for the increase in trade receivables. Sorry, I didn't quite understand that last point you were trying to make. The outstanding days, sales outstanding is much higher this quarter than September 2019, the reason for that was what? It's timing. It's due on a Monday, and that means that there's more debtor days in the end of the quarter this year than was the case last year in Q4. Wow, that's a big swing from just a Monday. Okay. The current sales rate at the stores, how is that shaping up? We saw some news in the trade press. Jens-Peter Poulsen was saying that they had a record sales month in September for Kvik. Are you seeing an uptick in sales activity in the stores as well? Or do you think that that was very specific to them? Like they described it must be very specific to them and the campaigns they have been running with different discounts and add-ons, et cetera. Traffic has been stable since mid-September and until now. There's still good activity in the stores. Is the promotional activity in the overall market getting tougher? No. I would say there was some signs of it back in March and April, but in the autumn it looks similar. Now that you mention Kvik, they have been very aggressive on their discounts and marketing activities here in the autumn. Okay. Good. The final question was just to clarify whether all the stores are currently still open and operational. Yes, they are. Okay. Good. Thank you. Thank you. Your next question comes from the line of Chris Wright of HC Capital Advisors. Please ask your question. Hi, guys. Good morning. Just one quick question on comments from the last quarter, but also to this one. You mentioned that sort of had been really robust during the summer, and obviously you've been pretty much at capacity. We sort of just, I guess, talked recently about also the sort of book being, I guess, sort of up versus Q4 last year. If I'm to read into kind of the implied guidance, does that mean that, I guess, the actual sort of installation and delivery time is the holdup there, or I just kind of can't reconcile how that's been that good and then order book's been good and delivery time's been the same, but then sort of the lower end of guidance implies that there's quite a sort of negative impact there. Could you just maybe explain that? Our speaker has rejoined. Thank you. If you do wish to ask a question, please press star on your- Should I answer Chris' question? Yeah, sorry. We had a technical problem. The comment on the order book being up was overall, and that covers both Q4 but also going into 2021. The uncertainty lies whether some installation will be delayed and going out of Q4 and into Q1. Thank you, sir. Your next question comes from the line of Poul Jensen of Danske Bank. Please ask your question. Yes. Thank you. It's just a short one. I didn't know if it was part of the other ones because I had no order here. The holiday repayment that we had in September, October, have you seen a significant or any material impact from that one? Not in big numbers for the group. Our online kitchen store, kitchn.dk, did have a lot of traffic and also increased orders. My experience from visiting both own stores and other stores in the same industry and other stores in retail is that there was a lot of, how can you say, lower-end stores that got more out of it than we did. I'm still sure it stimulate the demand overall, but not as significant as electronics and DIY. Okay. Thank you. That's all for me. Thank you. There are no further questions. Please continue. Thank you, everybody, for listening today, and thank you for your questions. Have a nice day. Bye-bye.