TCM Group A/S

CSE:TCM

Earnings Call Transcript

[Operator]

Good day, and thank you for standing by. Welcome to the TCM Group Interim Q4 2021 Report. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Torben Paulin. Please go ahead, sir.

[Torben Paulin, Chief Executive Officer]

Thank you very much. Good morning, ladies and gentlemen, and welcome to the presentation of the Q4 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's start the presentation and turn to Page 2 for the business update. In Q4, we delivered organic like-for-like growth of 8%. Growth was driven across all our brands and markets with the highest growth rates within our DIY segment, which includes Nettoline and the e-commerce business. In 2021, we achieved a new revenue milestone exceeding DKK 1.1 billion. During Q4, a couple of new stores were added to the store network. Within Svane, our franchisee opened a beautiful flagship store in the very city center of Copenhagen, a strong ambassador for the entire Svane brand. Within Tvis, a new store opened in Roskilde. With the new stores, the number of branded stores increased to 93. The general situation and market conditions are heavily impacted by the unstable supply chain situation. The delivery reassurance from our suppliers went from bad to worse during Q4. Most significantly, we were met by supply chain constraints on the standard drawer system and runners. This has had a significant negative impact on our ability to deliver on time in full to our customers during Q4. The situation has led to efficiency losses in our production. And furthermore, our efforts to limit the impact on our customers has led to additional costs. The situation has also led to some customers postponing the time of delivery of their orders and, thereby, also postponing revenue and earnings in our books. Coming into 2022, the supply chain situation has not yet stabilized. Though we see some signs of improvements, we will be impacted negatively by this situation in Q1 and most likely also in Q2. Please turn to Page 3, some financial highlights for the quarter. Reported revenue grew by 4.3% in Q4, an increase from DKK 263 million in Q4 last year to DKK 274 million. Adjusted EBIT was DKK 29 million compared to DKK 36 million last year. Adjusted EBIT margin was 10.6% compared to 13.8% last year. Adjusted EBIT for the full year ended at DKK 138 million, overall on par with last year. Net working capital ratio was minus 7.4% compared to minus 11.4% last year. Cash conversion was 60.3%. I will now hand over to Mogens to go through the financial highlights.

[Mogens Elbrond Pedersen, Chief Financial Officer]

Thank you, Torben. And please turn to Page 4. The revenue growth in the Danish market was 3.3%. Reported revenue growth includes a negative impact from the divestment of the Svane store in Copenhagen to our franchisees and the merge of the e-commerce activities in kitchn.dk and Celebert. Excluding these elements, the organic like-for-like growth in Denmark in the fourth quarter was plus 7%, driven by growth in all our brands, with the highest growth rates within the DIY segment. Revenue to other countries increased by 16.3%, driven by sales to the Norwegian market, and the growth was driven both by same-store growth and growth from new stores within Svane.Please turn to Page 5. Gross margin decreased from 26.8% to 21.1% in Q4. The divestment of the Svane Køkkenet store in Copenhagen and the merge of the e-commerce activities, kitchn and Celebert, had a technical negative impact on gross margin of 2.1 percentage points in the quarter. In addition, gross margin was negatively impacted by significant increased raw material prices, the unstable supply chain situation and a change of sales mix. In the fourth quarter, we saw customers postponing delivery of high-margin orders. This revenue was replaced by revenue from third-party products, which, however, carries a lower margin. Operating expenses in Q4 were DKK 29 million compared to DKK 34 million last year and represented 10.5% of revenue compared to 12.9% in Q4 last year. The decline in operating expenses was primarily due to the divestment of the Svane store in Copenhagen and the merge of the e-commerce activities as well as lower amortizations. Please turn to Page 6. In the quarter, nonrecurring costs consisted of 2 items: costs related to COVID-19 precautions and the related supply chain disruptions increased; and the unprecedented instability in the supply chain cost of DKK 6.5 million, which compares to similar costs of DKK 3 million in Q4 last year. And the impact from the supply chain aggravated during Q4 compared to previous quarters. Furthermore, cost related to the merge of e-commerce activities in kitchn and Celebert amounted to DKK 2 million in the quarter. Please turn to Page 7. Net working capital end of Q4 was minus DKK 82 million compared to minus DKK 117 million last year. Our inventory levels remained significantly higher than last year, which is due to a combination of increased raw material prices and a management decision to establish a buffer of parts, of raw materials and components to ensure higher delivery assurance given the unstable supply of parts. Net working capital was favorably impacted by the extended credit on VAT and payroll tax as part of the stimulus packages. At the end of Q4 2021, this constituted roughly DKK 6 million, and that compares to roughly DKK 15 million end of Q4 last year. Furthermore, net working capital was negatively impacted by a change in the Danish holiday allowance obligation, which has been transferred to the government fund during 2021. And the negative impact on net working capital compared to this year from this is DKK 19 million. As a result of that, net working capital ratio declined from 11.4% to 7.4%. Net debt was DKK 200 million at the end of Q4, which compares to a net positive of DKK 43 million at the end of Q4 last year. During the quarter, net interest bank debt decreased by DKK 24 million. Compared to last year, net debt is impacted by the substantial payout through a combination of ordinary and extraordinary dividends and the share buyback program. In the fourth quarter, the impact from the share buyback program was DKK 22 million. And total as of 31st of December, this year, DKK 136 million of the DKK 150 million was carried out. Since the year-end, we have carried out the full amount of DKK 150 million during February. Please turn to Page 8. Free cash flow was DKK 29 million in Q4, which was on par with DKK 30 million in Q4 last year. The cash flow was negatively impacted by lower operating profit compared to Q4 last year, offset by lower investments, DKK 11 million compared to DKK 17 million in Q4 last year. The CapEx ratio was 2.6% of revenue compared to 3% last year. Cash conversion ratio measured over 12 months was 58.3%, which was below last year due to a change in net working capital. Please turn to Page 9. At the upcoming AGM, we will propose to distribute an ordinary dividend of DKK 6 per share. Excluding treasury shares, this corresponds to DKK 54 million. Furthermore, we will propose to the AGM that a mandate is provided to the Board of Directors with the option to distribute an extraordinary dividend during 2022 in the range DKK 25 million to DKK 75 million. Please turn to Page 10 regarding the financial outlook. And based on the present market conditions, which contains a higher level of uncertainty than normal, we estimate a full year revenue for 2022 in the range DKK 1.15 billion to DKK 1.225 billion, and this corresponds to a growth of 4% to 11%, a slightly higher like-for-like growth taking into account the merge of the e-commerce activities. Furthermore, we estimate an adjusted EBIT for 2022 in the range DKK 140 million to DKK 170 million.

[Torben Paulin, Chief Executive Officer]

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 together with our suppliers to stabilize and normalize the supply chain situation. This concludes our presentation, and we will now hand over to the operator for the Q&A session.

[Operator]

[Operator Instructions] Your first question today comes from the line of Poul Jessen from Danske Bank.

[Poul Ernst Jessen, Senior Analyst]

I would like to first ask a question about if you could quantify how much of revenue that actually was postponed from Q1 -- sorry, Q4 into the current year?

[Mogens Elbrond Pedersen, Chief Financial Officer]

Yes, it's a bit more than DKK 10 million to DKK 15 million we are talking about being pushed forward. And as Torben mentioned, the supply chain constraints are not over yet, and that means that we also expect that there will be some postponement in -- from Q1 to Q2 before the whole situation stabilizes.

[Poul Ernst Jessen, Senior Analyst]

Yes. And then on the guidance overall for '22 where you guide 4% to 11%, could you try to split it up into different factors? How much is volume, how much is price increases and mix impact? How much is coming from Celebert where you will start doing production within TCM instead of sourcing externally, so to get an impression of the different building blocks here?

[Mogens Elbrond Pedersen, Chief Financial Officer]

Yes. There will be, in 2022, a significant higher impact from price increases than normal. So I can say, the overall guidance is a -- from a flat volume growth to a roughly 7% volume growth, the remaining part coming from price and sales mix. Celebert in-sourcing is progressing, but it's also taking longer than expected, some of it partly due to the whole supply chain constraints, which is impacting the time when we are shifting, but also due to some, you can say, internal integrations that needs to be in place, which is more or less coming through in Q1.

[Poul Ernst Jessen, Senior Analyst]

And when will it be completed?

[Mogens Elbrond Pedersen, Chief Financial Officer]

It will -- we will be ready, you can say, during Q1. But then we put -- it would be shifted over time depending on when -- how far the customers are in the process.

[Poul Ernst Jessen, Senior Analyst]

Okay. And then just to get more, and that's then not quantity, but more on qualified comment on when you do the guidance overall for this year, how are you looking then on consumer reacting on gas and electricity prices and food prices moving up, interest rates moving up, which is impacting the volume of real estate? And has this week's impact in Ukraine had any change to your guidance from, let's say, a week ago and until what you are coming out with today?

[Torben Paulin, Chief Executive Officer]

Relevant question, Poul. For the first 2 months or maybe until yesterday, so far, we have not seen any impact from increased prices in energy and interest level. We measure this on the footfall, the interest into our stores. And we have what you call a kitchen weekend, both in January and February, and they were best -- better visited this year than -- the last year, the stores were closed, but then it was better than 2020.So until yesterday, we were quite optimistic when it comes to consumer confidence and demand. What happened yesterday is not built into our guidance. And of course, we are following the situation and the impact to the stores very closely over the next weeks.

[Mogens Elbrond Pedersen, Chief Financial Officer]

But you can say it adds to the overall uncertainty of the whole situation, especially in the second half of the year.

[Poul Ernst Jessen, Senior Analyst]

Okay. And then the final question from my side. On the corona impact, which you had in special items on efficiency and your production, when do you expect that to come to an end?

[Mogens Elbrond Pedersen, Chief Financial Officer]

It depends on the supply chain situation. So we expect that we will be impacted in Q1 and most likely also in Q2, and then we keep our fingers crossed that everything will normalize and recovering from there. That is our view today. But we have also learned during the last year that it's unpredictable. And the whole Ukrainian-Russian conflict is, of course, also adding to this. But our view on this is that Q1 and, to some extent, also Q2, and then hopefully, we will have a normalized situation.

[Operator]

[Operator Instructions] Your next question comes from the line of Ulrik Bak from SEB.

[Ulrik Bak, Research Analyst]

Torben and Mogens, also a couple of questions from my side. And the first one, just a follow-up on one of the other questions. This explanation you have with the postponement of deliveries, can you just elaborate a bit on what dynamics are at play here? Why are the customers postponing these orders? And are there any risk that these orders will be canceled? Yes, that's my first question.

[Torben Paulin, Chief Executive Officer]

Yes. The dynamics behind it is back to those supply chain challenges that we faced, especially in Q4. And as we cannot deliver on time in full, then at least we can try to give as much information to our stores and customers as possible even that we don't get any guarantees from our suppliers. And at a certain stage, we had an outlook that we said, as far as we can see, the last time that we are going to send out kitchens without drawer systems will be week 5. And then a week later, we realized that then a lot of orders, they were placed in week 6. So we just tried to come with an in-between service information, but it was a little bit taken as a guarantee that the challenges would end there. So therefore, some orders was placed there. And I guess it's a mix of sales consultants that don't want to disappoint his customers. And it could also be a sales consultant that had an open discussion with the customers about it. So in either ways, that there is, to my opinion, no risk that such orders, they will be canceled because the customers has taken an active choice to wait until then. So that is the dynamics and, to my opinion, no risk for cancellation.

[Ulrik Bak, Research Analyst]

Okay. But it sounds as if the postponement or the delay is driven by TCM's inability to deliver on time, and it's not a decision made by the customers. It's just how the phrasing in the report, it sounds like it's the customers who decided to postpone it.

[Mogens Elbrond Pedersen, Chief Financial Officer]

Well, it is because the way we have handled is that we have delivered kitchens without drawers and then installed the drawers at a later stage. So in that sense, the customers are, in that sense, postponing it in the hope that they would get a complete delivery at a later stage. So it's a combination of some constraints in our side, but also orders already in the books being postponed to a later delivery. And that is from the, you can say, the customer or sales consultant side. So it's a combination.

[Ulrik Bak, Research Analyst]

Okay. And on that note, do you expect to see like a pickup in deliveries? Now you mentioned Q1 and maybe also Q2 will be affected by these supply chain issues. But do you foresee that there will be a pickup and you will, yes, pick up the lost sales from Q4 within 2022 or whether it will just be a parallel shift of revenue just, yes, moving all throughout the year and into '23, so it will be lost sales? And also if there has been any impact on customer ordering because of these delays, customers simply don't wanting to buy the kitchen because of the unknown and long delivery time.

[Torben Paulin, Chief Executive Officer]

If we start with the last question first, you say by having chosen to deliver kitchens without drawer systems, then we actually have shorter delivery times compared to if we decided to deliver in full, then delivery times would have been longer. And several of our colleagues in the same industry, they have chosen the opposite. They have chosen to deliver in full, but then with a longer lead time. So I guess we have not lost orders due to lead time. That should be the opposite as we have had a faster delivery time than competitors. So -- and about the catch-up, when sufficient supply is there, then there should be a catch-up. It should not be parallel postponed throughout 2022. But it takes that the supply is getting stable, that they catch up to us so that we can catch up to our customers.

[Ulrik Bak, Research Analyst]

Right. Okay. And...

[Torben Paulin, Chief Executive Officer]

We still hope that, that will happen in Q1 and 2.

[Ulrik Bak, Research Analyst]

All right. Then a question on your gross margin bridge. Your gross margin declines 5.7 percentage points compared to Q4 last year, and you talked about this technical effect from the Svane store and Celebert. And then you mentioned raw material supply chain, increased supply chain costs and sales mix. If we take these items one by one and compare it to your guidance assumptions for 2022, what have you assumed there?

[Mogens Elbrond Pedersen, Chief Financial Officer]

You say the unstable supply chain, the sales mix and the postponement of orders are somewhat linked, all of those 3. And if we take that into account and then the price impact, the timing of when we are hit from costs -- input cost increase and when we are mitigated by sales price increase, if you take those 2, they are roughly similar in size.

[Ulrik Bak, Research Analyst]

Okay. And raw material prices, what's the current status, and energy prices for that matter?

[Mogens Elbrond Pedersen, Chief Financial Officer]

The current status is that we see cost prices continuing to increase in 2022, but you can say not at the same magnitude as we saw during 2021. But we are not seeing a declining level, and energy cost is, of course, one of the drivers of this, for sure. But we're not seeing -- we are continuing to see raw material price increases in the new year. And we also mitigate that by sales price increase in 2022, which will mitigate the second half of the year.

[Ulrik Bak, Research Analyst]

Okay. So you've already planned further price increases? And...

[Mogens Elbrond Pedersen, Chief Financial Officer]

Yes, we communicated there in the level roughly 5%, which will be implemented in Q2, but with the delayed impacts coming gradually in Q3 and Q4.

[Ulrik Bak, Research Analyst]

All right. And then to these nonrecurring items related to COVID and supply chains, you mentioned that these supply chain costs also had a negative effect on the gross margin. And then there are some costs under nonrecurring items. Can you just please elaborate what the nature of the different costs are in the cost of goods sold in these nonrecurring items?

[Mogens Elbrond Pedersen, Chief Financial Officer]

What is included in nonrecurring is the direct cost that we can measure coming in our supply chain, so on salaries, on extra freight, on extra cost for installers coming -- having to go 2 times to the customers to first install the kitchen, which is, you can say, not part of our books. But the second part is that we have an additional cost to pay for the drawer being installed at a later stage. So those are the direct related costs. What is then the next thing is that this interferes with the whole sales mix and the postponement of the deliveries. And that is also related to the unstable supply chain, but it's not something that we can directly measure and thereby adjust for.

[Ulrik Bak, Research Analyst]

Okay. And in Q4, these costs under nonrecurring items was minus DKK 6.5 million. Should we expect the same level for Q1 and Q2? Or would they gradually could decrease?

[Mogens Elbrond Pedersen, Chief Financial Officer]

We are definitely not expecting that in Q2. But you can say Q1 is improving somewhat compared to Q4 in the overall situation. Q4 was the peak when we were hit the most. So we were hit by the, you can say, the standard drawer system, which constitute the vast majority of drawers and cabinets. And going into Q1, we are into a normal low season, which means that supply is better compared to demand than it was in Q4. So I would expect still a significant impact in Q1, but then more limited in Q2. And hopefully, we will have a normalized situation during Q2, but it's difficult to predict.

[Ulrik Bak, Research Analyst]

All right. That's very clear. Then my final question related to Norway. You -- in Q3, you mentioned something about opening a new store in Oslo. Just wondering what the status is with that store.

[Torben Paulin, Chief Executive Officer]

Yes, thank you for asking. We -- or the franchisee in Oslo finally signed the lease agreement here in beginning of January, and he is getting the keys for the location handed over here by the 15th of March. And then we start the buildup of the kitchen store, and we hope we will be able to open up during June.

[Ulrik Bak, Research Analyst]

Okay. That's very clear.

[Torben Paulin, Chief Executive Officer]

It is a pleasure to be able to give a clearer answer this time.

[Operator]

[Operator Instructions] There are currently no further questions. I will hand the call back to you, sir.

[Torben Paulin, Chief Executive Officer]

Thank you very much. Thank you to all of you for participating this morning. Thank you for your time. Have a good day and a nice weekend when you get to it. Thank you very much. Bye-bye.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.