Earnings Call: Q2 2020

Aug 18, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the interim report Q2 for TCM Group. Thank you very much. Good morning, ladies and gentlemen, and welcome to the presentation of our Q2 results for TCM Group. Today, I'm assisted by our CFO, Mogens Elbrønd Pedersen, and 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. Q2 was an extraordinary quarter in the light of the COVID-19 virus outbreak. We are therefore proud that we nevertheless managed to exceed revenue compared to Q2 last year. In the beginning of the quarter, store traffic was hit hard, but during the quarter, the store traffic has increased and thereby coming back to almost normal levels. In the beginning of the virus outbreak, with the lower store traffic, we initiated sales campaigns to stimulate demand. This has supported our store network in unpredictable times and had a positive impact on the order intake, which therefore showed an increasing trend during the quarter. The sales campaigns had an adverse impact on our gross margin in the quarter. They were phased out during Q2, will also have a negative impact on gross margin in Q3. Our supply chain has been relatively unaffected by the COVID-19 situation. Safety precautions have led to increased costs and efficiency loss in our production. Please turn to page three. We have seen a relatively high demand in the Danish kitchen market despite the COVID-19 situation and increasing macroeconomic uncertainty. The organic revenue growth of 0.8% was driven by sales in the Danish market and primarily within Nettoline towards the DIY market, as well as a higher share of revenue from third-party products. In Norway, we have seen a softer market. Norway was hit by a triple effect, not only COVID-19, but also a lower oil price and currency fluctuations impacted the market in Q2. Having said that, I'm absolutely convinced that we are not utilizing the full potential in Norway. Early July, I visited seven out of 10 Svane stores in Norway, and due to location, the size, and ownership of those stores, as well as white spots in important cities, we are not getting the full potential out of this attractive market. We will therefore revisit our go-to-market plan for Svane in Norway and implementing the success factors we know from Denmark, and hereby also taking benefit of our new country manager who started in April. During May, Svane store number 10 opened in Norway in Kristiansand, and furthermore, a new Tvis Køkken store opened in June in Vejle, a beautiful store which is a very good ambassador for the whole Tvis Køkken brand. With the new stores, we increased the number of stores to 69 compared to 66 last year. After a period with suspended guidance, we have reinstated our financial outlook. However, uncertainty is still high for the coming quarters. Mogens will elaborate on the financial outlook during his presentation of the Q2 financials. I will now hand over to Mogens to go through the financial highlights. Thank you, Torben. Turn to page four. Revenue grew by 0.8% in Q2. We consider this growth, although limited, to be quite an achievement, not only in the light of the whole COVID-19 situation, but also because Q2 last year was a strong comparison, growing 11% on the year before. EBIT was DKK 40 million, which was below Q2 last year of DKK 42 million, and the EBIT margin was 15.2% compared to 16.3% in Q2 last year. Net working capital improved to -8.8% compared to -7.1% last year, and cash conversion was 102% compared to 103% last year. Please turn to page five. The revenue growth in the Danish market was 2.2%. The growth was primarily driven by Nettoline within sales towards the DIY market, as well as a higher share of revenue from third-party products. Revenue outside of Denmark decreased by 12.8%, driven by weaker sales to Norway. As Torben mentioned, the Norwegian market was soft in Q2 and thereby weaker than the Danish market. Please turn to page six. Gross margin in Q2 was 27.4%, compared to 28.6% in Q2 last year. The decline in gross margin was primarily driven by an increase in the discounts offered as part of these temporary sales campaigns, which were put in place in order to stimulate demand. Furthermore, there was a negative margin impact from the change in sales mix with a higher share of revenue from Nettoline and from especially third-party products, both of which structurally has a lower margin. Additionally, there was cost related to the COVID-19 precautions, which had an impact of approximately DKK 1 million in the quarter. The operating expenses were on par with Q2 last year. That means that the shortfall in gross profit and gross margin therefore resulted in a similar decline in earnings, where EBIT was DKK 40 million compared to DKK 42 million last year. Please turn to page seven. Working capital was DKK 20 million below last year, minus DKK 89 million compared to minus DKK 69 million. The favorable impact on net working capital from extended credit on VAT and income taxes as part of the government's stimulus packages amounted to approximately DKK 25 million, and thereby, the primary driver of the net working capital improvement. Our inventory levels remain higher than last year, and this is due to building up buffer stocks to ensure high delivery assurance in the current situation. Net debt was DKK 19 million in Q2 compared to DKK 151 million at the end of Q2 last year. At the end of Q2, net debt includes DKK 39 million related to IFRS 16, and the impact from IFRS 16 last year was DKK 45 million. We have a strong balance sheet with a leverage of 0.1, which compares to 0.8 at the end of Q2 last year. Please turn to page eight. Free cash flow was DKK 69 million in Q2 compared to DKK 46 million in Q2 last year. Again, the improvement was primarily due to the extended credit from the stimulus packages of approximately DKK 25 million, and this will have a similar adverse impact in the coming months into Q3. Investments were DKK 4 million in the quarter compared to DKK 2 million in Q2 last year, and the CapEx ratio was 1.5% compared to 0.8% last year. Cash conversion remains strong above 100%. Please turn to page nine. Regarding the financial outlook, we have now data for the first half of the year, although visibility going forward is still limited and surrounded by more uncertainty than normal at this point in the financial year, we reinstate our financial outlook for the full year 2020. This is based on the assumption that no new total or partial lockdown of Denmark will take place in the remaining months of 2020. The full year revenue is estimated in the range DKK 980 million-DKK 1,020 million, which is at a level on par with 2019. We estimate a full year EBIT in the range DKK 135 million-DKK 145 million, which is slightly below last year. This concludes the financial highlights. Thank you, Mogens. Q2 was a quarter with an extraordinary market situation. We are proud that we managed to deliver revenue growth in these circumstances and with a strong comparison quarter last year. This concludes our presentation, and we will now hand over to the operator for the Q&A session. Thank you. Ladies and gentlemen, if you would like to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you'd like to cancel your request, you can press the hash key. That's star and one to ask a question, and the hash key to cancel. Your first question today is from the line of Lars Topholm from Carnegie. Please go ahead. Yes. Hello, gentlemen. Just a couple of questions on my side. If I look at your full year guidance, it implies, at least if I take the mid-range, a slight contraction in H2 compared to last year. My question really is, with the visibility you do have, and of course I know coronavirus, et cetera, makes that limited, but with the visibility you have, is that the trough, or should we assume further contraction into the beginning of 2021? Likewise, you being order producer, can you comment a little bit on your current order backlog, both in B2B and B2C? Thirdly, again, with the visibility you do have regarding B2B, what is the momentum in new projects coming up which could ultimately become revenue to you looking into next year? Thanks. Lars, I will try to answer the questions, and hopefully, I've listed them all down. If I start with the order backlog is somewhat similar than we see at this point. We normally say that we have a visibility of 5 to 8 weeks in the order pipeline, and that's also what is the case right now. That means that the uncertainty is of course, primarily related to the Q4. Right now, we are not making indications on next year due to the uncertainty. We also normally guide at later stage. If we look at the split B2B and B2C, we saw that in Q1, B2C was actually stronger than B2B. What we see now is that they are relatively more even in the development, which means that the increasing order take that we saw in Q2 relates both to B2C and B2B. Regarding momentum in the B2B and also projects, we normally divide B2B into 4 categories, where large projects is one of them. You can see here we have maybe the highest uncertainty on what is happening because we see somewhat a contraction in large projects, whereas the other 3 categories, so the large house builders, they still have a long lead time, a long order pipeline. Normally they have 10-12 months order pipeline. That is still the case. We haven't seen any change of momentum there. The social housing market is the most stable part. We haven't seen any change in behavior there. We haven't either seen the extra funding starting to materialize yet. The last part which is, you can say the smaller B2B partners that we have is also relatively stable. If I can just go back to what you said about backlog 5-8 weeks ahead. In absolute number, is it stable compared to the same time last year? Is it bigger or is it smaller? It's relatively stable. Okay. Then, one final question, if I may. Do you expect any particular effect from Danish getting part of their holiday money back, and how does that affect your guidance? I think it's too early to conclude on that. It's not built into guidance? No. Excellent. Thank you very much, guys. Thank you. The next question is from the line of Poul Jessen from Danske Bank. Please go ahead. Yes, thank you. My first question is on Norway, where you say that you are changing strategy. Could you elaborate on the performance of Svea versus other and what kind of changes you are planning up there? Secondly, given that you now have a net cash or net debt of 0, if we adjust for the DKK 25 million in state support, which are going to be repaid, how are you looking at the balance sheet and the canceled dividend from earlier this year? Is it much too early to consider to do an extraordinary payment in the second half of that dividend? That was two questions for now. I will start answering the first one, then Mogens will answer the second one. Looking at the Norwegian market, as we said, that market had been hit harder than the Danish market due to also currency fluctuations and lower oil prices. It's our impression that our stores has been doing at least on market level or better during this period. We have also implemented the same sales campaigns as we did in Denmark to support our Svane stores in Norway. We are not exactly changing the strategy up there. It's more coming with new and fresh eyes and looking at the market in Norway and comparing it to the success model from Denmark. Some of the stores are smaller than what we are seeing in Denmark, and some of them is also located out of the normal kitchen retail area. Not necessarily on a less good location, could be more city location, but as a new brand in town and then on a spot where people don't expect to look for a kitchen store, then the time to success is longer. Looking at Oslo as being the capital of Norway and where the colleagues in the industry are doing most of their business, and we are only. Represented in the outskirts of Oslo with a very small store, then I still think there is a huge potential there. We will go through city by city and say, what is the potential and what does it take to utilize this potential? In some cases, it might be a second store, it might be relocation, and maybe there's also a couple of franchisees that we would like to change. We will definitely look for franchisees in the Oslo area, and there's also several other white spots. Our target is still to operate between 15 and 18 stores in Norway. Just for those who don't know that from the history, until 1st of April this year, we were operating the Norwegian market with a Danish country manager located in Denmark. Now we have a Norwegian country manager located in Oslo and with experience from the kitchen industry. I'm sure that will also add to our expansion in Norway. Then Mogens, maybe you can- Yeah. Maybe there's a follow-up. Yeah. Yes, please. Go on. If I listen to you saying relocate new franchisees, second store, and so on, to me it means that it will take a long time. The second one, have you entered the Norwegian market without being especially structured? Sorry, what do you mean about that, especially structured? As if you have not investigated where to locate or to find the right franchisees. You Yeah. It might look like this looking backwards. I'm sure as for all brands that are entering into a new market, you need to try things out and there will also be, say, new potential franchisees to get when you're entering a market. With the success from Denmark and the journey we have been through here, and with a Norwegian market that loves Scandinavian or Danish design and Danish brands, I think our ambitions today can be higher than 10 years ago where we started, a little bit more self-confident, a little bit more ambitious, and a little bit more targeted on what has worked for us in Denmark and how that can be implemented in Norway, definitely also a little more investment from our side. Okay. Thank you. The balancing question to Mogens. The first comment would be that right now we believe it's too early to consider dividend distribution, extraordinary dividend, if that was the question. We communicated also at the time of the AGM that no dividend was distributed, and that was also due to the uncertainty and due to a wish to make sure we maintain the financial strength throughout the whole situation, and that is still the case. We also communicated at the same time that we maintain the dividend policy, meaning the 40%-60% of net profit. That means that we are fully aware that we have a catch-up that we need to address at a certain point. We will, of course, come back when we believe the time is right for that. We maintain the ambition in the dividend policy. Okay. The final question from me, given the full year guidance, the fourth quarter, as I understand it, you are more or less booked throughout September. The risk on the full year guidance must be on the fourth quarter. Can you say a little more about which segment is the project market? Is it uncertainty on consumers in the fourth quarter, or where is the risk to the numbers? I would say it's both. You could say if you take B2C customers, there's a normal start of a season right now. It typically starts after the summer holiday and after the Christmas holiday, then you enter into a new season. Of course, we're monitoring the customer behavior right now because that is the key indicator for Q4. For B2B projects and so on, it's also provided with some uncertainty regarding projects. Okay. Thank you. That's all from me. Thank you. The next question is from the line of Benjamin Silverstone from ABG. Please go ahead. Thank you. Hi, Torben Mogens. I hope you are well. I have a question, if I may, in regards to the campaigns initiated during Q2. We know that the growth in Q2 was primarily driven by Nettoline on the DIY market. Are you able to elaborate a bit on how the campaigns have been allocated across the segments and how the sales in branded stores have developed? Lastly, in relation to the diluted effect that these campaigns had in Q2, and as you mentioned, they will also have in Q3. As we are seeing these store traffics returning, do we know or have an indication of how long the campaigns will run for? Thank you. Yeah, I can start answer the questions and then Mogens will follow up. When we had the virus outbreak and Denmark was closed down, we were still having customers in the pipeline from January, February, beginning of March. They were so far in their projects that they wouldn't give up the project. Of course they could decide to postpone it. They could decide to buy somewhere else, or they could, of course, also decide to buy with one of our brands. That was actually the reason behind our campaigns to say everything that is still in the market, in spite of COVID-19, let us take as much as possible from that demand or those customers that we have already invested in getting so far. That was why we implemented those sales campaigns, and it was also to support our stores. We said, if this is going to be a hard dip, then the more business we can make now, the stronger our store network and we ourselves are. That was the reason behind it. Later on, you can say around Easter, mid-April, end of April, then people, they came back to the stores also with new projects. That was then when we said, okay, now those campaigns is not necessary any longer. Again, you have a postponed delivery time of the order made during the campaigns. Maybe, Mogens, you can say a little bit about where it will hit us or when it will hit us. Even though that the campaigns have been faded out during Q2, they impact deliveries until the end of August. That means that you will still see some similar impact in Q3 as we saw in Q2. From Q4 and onwards, you will have normal conditions, normal situation again. Thank you very much. Thank you. Once again, if you would like to ask any questions today, please press star and one on your keypad. To cancel your request, it's the hash key. That's star and one for any further questions. We have a question from the line of Sindre Sørbye from Arctic Asset Management. Please go ahead. Yes. Good morning. I just wonder if you could elaborate a little on trading throughout the quarter and also into July and August, into the third quarter. More specific, also the development in Norway, where actually retail sales were slower to recover than in Denmark, but actually were very quiet or were very high in at least towards the end of the quarter. If you take the Norwegian market based on different KPIs, we've seen a decline in more or less the whole quarter. Norway also going into the, you can say the whole COVID-19 situation was a bit softer than we saw in Denmark. If you take the trading and onwards, we don't guide on the different months, but what we are comparing to last year was a very strong Q3 and a somewhat softer Q4. Therefore you can say you should build your expectations on that basis. That is also included in, you can say, the more or less on par revenue guidance that we have. Okay. Thank you. Just one more question regarding Nettoline. Could you give us a ballpark number of the proportion of the revenues and EBIT coming from the Nettoline franchise? We don't comment on the individual brands, but I can maybe give you some indication by saying that the Nettoline business was roughly DKK 100 million revenue business when we took over, and that business has grown since then. Okay. Thank you. I think we can also add to that within the Nettoline business, we have our online web shop, called Kitchn.dk. As I guess we hear from everybody else operating web shops during the COVID-19, we have also seen a very positive development in our online web shop during that period, which is a part of the Nettoline business. Sure. Thank you. Thank you. There are no further questions at the moment, so I'll hand back to the speakers. Thank you very much. Thank you everybody for participating today, and thank you for all your questions, and that was all for now. Have a nice day. Thank you. Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.