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Edited Transcript of TCM.CO earnings conference call or presentation 6-Nov-19 8:30am GMT

Q3 2019 Tcm Group A/S Earnings Call

HOLSTEBRO Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Tcm Group A/S earnings conference call or presentation Wednesday, November 6, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mogens Elbrond Pedersen

TCM Group A/S - CFO

* Ole Lund Andersen

TCM Group A/S - CEO

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Conference Call Participants

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* Sindre Sørbye

Arctic Fund Management As - Portfolio Manager & Partner

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Presentation

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Ole Lund Andersen, TCM Group A/S - CEO [1]

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Yes. Good morning, ladies and gentlemen. We have been looking forward to making presentation on our Q3 report for TCM.

And I will, together with our CFO, Mogens Elbrønd Pedersen, comment on the business and financial results, after which we'll be handing over to the operator for a Q&A session.

So please turn to Page #2. Q3 was another strong quarter for TCM with a revenue growth of 17.3%, and this growth was entirely an organic growth. We are pleased to see that we continue to gain market share. Business-to-consumer is growing above market growth rates, and at the same time, business-to-business continued to have the highest growth rates. And we can see that our strategy of expanding across the business-to-business categories is successful.

Revenue for the quarter was DKK 238 million compared to DKK 202 million in Q3 last year. Adjusted EBITA increased by 19.9% to DKK 39 million, corresponding to an EBITA margin of 16.4%. This is slightly higher than the Q3 last year, which was at 16.1%.

Our net working capital ratios was minus 7.3% compared to minus 6.4% last year. And our cash conversion rate is strong at a level of 101.7%, again another strong quarter for TCM.

Please turn to Page #3. I will give you a business update for Q3.

Our view on the Danish market is unchanged. We estimate it is growing and the market is growing at a growth rate at 1% to 2%. In this perspective, our growth rate of 18.9% in Denmark in Q3 is a very strong achievement.

I will now talk a little bit about our own supply chain. At the same time with a high demand for our products, we have had challenges in our supply chain. In August, a lightning struck in 1 of our 3 factories and caused main down -- caused machine downtime during the start-up after the summer holiday. Since then, we have been working hard to come back on our normal supply chain situation, which we have achieved by the end of October. The production setback caused additional expenses of DKK 3 million, which have been presented as nonrecurring items in the Q3 report.

We continue to expand the numbers of branded stores. At the end of Q3, number of branded stores was 67 compared to 62 in Q3 last year. In addition to this, a new Tvis store will be opening up in town of Holbæk in Denmark during November, and we have communicated a new Svane store will open up in Ålesund in Norway during Q1 in 2020. And this will bring us up to 69 branded stores.

Finally, we confirm our full year guidance.

And by this, turn to the next page, I will be handing you over for Mogens to go through the financials.

Mogens?

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Mogens Elbrond Pedersen, TCM Group A/S - CFO [2]

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Thank you, Ole.

As Ole mentioned, the organic revenue growth in Q3 was 17.3%. And our adjusted EBITA increased even further and was up 19.9%, the margin slightly below last -- no, a slight increase from 16.1% to 16.4%. EBIT was impacted by nonrecurring costs in Q3 of DKK 3 million but nevertheless increased double digit by 11.3% from DKK 31 million to DKK 34 million. And the EBIT margin was 14.4% compared to Q3 last year, 15.1%.

Please turn to Page 5. For the first 9 months of 2019, revenue grew by 15%, and this is entirely organic growth. Adjusted EBITA was up DKK 14 million, and this corresponds to an increase of 14.1%. EBIT increased in the same level, meaning 14.2%, compared to last year. And the EBIT margin was slightly below last year, 14.4% versus 14.5% last year.

Please turn to Page 6. The revenue growth in the quarter was driven by the branded stores in Denmark and primarily within B2B as well as a higher share of revenue from third-party products, which is white goods and tabletops. Having said that, our B2C also outgrew the market growth rates in Q3.

Total growth in Denmark was 18.9% in the quarter, and revenue outside of Denmark was up 0.3%. This is a combination of 2 offsetting factors. The revenue through branded stores in Norway increased by 12% in Q3, but this was offset by lower sales through -- both through nonbranded DIY stores. We are committed to deliver on our strategic plan for Norway and increase our presence and market share in the Norwegian market in the coming quarters and years.

Please turn to Page 7. Gross margin in Q3 was 28.1% compared to 29.6% in Q3 last year. The decline was primarily due to the sales mix with higher growth rates within the B2B market and a higher share of third-party revenue in the quarter, both with structural lower margin levels than B2C. As you may recall, this is in line with the sales mix in our previous quarters, and it's also our overall expectation for the sales mix in Q4.

The operating expense ratio decreased by 1.9 percentage point compared to Q3 last year, dropping to 12.5%. The decrease is a result of increased leverage from growing revenue by more than 17%, combined with a relatively stable cost base.

Adjusted EBITA increased by 19.9% from DKK 32.5 million to DKK 39 million. Q3 was, as mentioned before, impacted by nonrecurring costs of DKK 3 million related to the production setback following a lightning strike in one of our factories. EBIT increased from DKK 30.6 million to DKK 34.1 million, an increase of 11.3%.

Please turn to Page 8. Net working capital improved by DKK 18 million to minus DKK 73 million. And the net working capital ratio also improved from minus 6.4% last year to minus 7.3% end of Q3. This improvement was primarily driven by lower trade receivables compared to last year and was also a result of a lower of -- lower number of outstanding debtor days at the end of Q3 compared to Q3 last year.

Net debt was DKK 119 million, and this compares to DKK 162 million Q3 last year. And this decrease is despite the significant impact from the implementation of IFRS 16. At the end of Q3, IFRS 16 increased net debt by DKK 42 million. All in all, we have a very strong balance sheet, a leverage of 0.6 compared to a leverage of 1 at the end of Q3 last year.

Please turn to Page 9. Cash flow was positively impacted by higher profit compared to last year. Depreciation increased, which was primarily due to the implementation of IFRS 16. This constitutes DKK 1.3 million of the total increase of DKK 1.6 million in the quarter. Net working capital had a positive cash flow impact in the quarter of DKK 4 million, and this compares to a positive impact of DKK 3 million in Q3 last year. Our investments was slightly higher in Q3 compared to Q3 last year, a CapEx ratio in the quarter of 1.8% of revenue, which is within our estimated CapEx ratio of 1% to 2% of revenue. The 1.8% compared to a CapEx ratio in Q3 last year of 1.3%.

Free cash flow in the quarter was DKK 40 million compared to DKK 35 million in Q3 last year. And our cash conversion is -- continues to be strong, and we have a cash conversion rate above 100%, 101.7% to be exact.

Please turn to Page 10 and the financial outlook for 2019.

We confirm our full year guidance for 2019, which is revenue in the range DKK 1 billion to DKK 1.030 billion. This corresponds to a growth year-on-year of 11% to 14%. Our guidance for adjusted EBITA is in the range DKK 160 million to DKK 170 million, growth of 8% to 15%; and EBIT in the range DKK 150 million to DKK 160 million, a growth of 9% to 16%.

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Ole Lund Andersen, TCM Group A/S - CEO [3]

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Yes. If we turn to the last page. So thank you very much, Mogens.

To summary it up. We are continuing to grow significantly above the market growth rates in Q3. EBIT grew double digits despite of the challenges we had in our supply chain. The current market is still providing tailwind to us, but in addition to this, we continued by adding new stores. And we have potential to gain further market shares both in Denmark as well as outside.

And with this, we will conclude our presentation, and we'll be handing you over for the operator for the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Sindre Sørbye of Arctic.

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Sindre Sørbye, Arctic Fund Management As - Portfolio Manager & Partner [2]

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Yes. Congratulations with a good report. But just a detail looking into fourth quarter, guidance now seems slightly conservative. Especially, in my view, you should also, starting in Q2, enjoy a raw materials tailwind now. Can you say something about the prospects for Q4 and also specifically about the price development for raw materials?

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Mogens Elbrond Pedersen, TCM Group A/S - CFO [3]

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Yes. So for Q4, if we look at the revenue outlook, there are some things that should be taken into consideration regarding Q4 last year. Q4 last year was a very strong quarter for us. We had a 17% growth compared to the Q4 previous year. So this should also be taken into consideration. Furthermore, we had a -- we owned the store in Aabenraa for that period, so that's included in the Q4 numbers last year, but that was divested in the beginning of 2019. Regarding price, material, we see that the pressure on raw prices is somewhat lower than what we have seen in the past years.

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Ole Lund Andersen, TCM Group A/S - CEO [4]

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For the -- for your information, we can only make price arrangements on raw material, meaning MDF and particle board, but only for our quarter-to-quarter. So it's very limited, the outlook that we have on that one.

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Operator [5]

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(Operator Instructions) There appear to be no further questions at this time. Please continue.

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Ole Lund Andersen, TCM Group A/S - CEO [6]

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Yes. Well, thank you very much. So Mogens and I would like to thank you all for listening in this morning, and we wish you a pleasant day. Thank you very much. Take care. Bye-bye.

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Operator [7]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect. Would the speakers please stand by?