Nobia AB

STO:NOBI

Earnings Call Transcript 2018-Q1

[Lena Schattauer, Head of Communication & Investor Relations]

Good afternoon, and very welcome to this webcast and conference call about Nobia's first quarter results. Our CEO, Morten Falkenberg; and CFO, Kristoffer Ljungfelt will present the results. And after that, there will be time for question and answers. By that, I hand over to you, Morten.

[Morten Falkenberg, President, CEO & Director]

Thanks, Lena. When I look at the Q1, it really solid performance. It has, though, been impacted by seasonality and onetime effects on sales, meaning when you look at the net sales, it's down organically by 6%. Kristoffer will spend some more time going through this in detail, but it's really a good mix between seasonalities and some easy to explain effects on the top line sales.I must say that I am especially proud of how Magnet Retail in the U.K. has done. Magnet Retail represent 28% of the sales in the U.K. and even more on the EBIT, and our new proposition has really gotten a very -- it has been really well received. Great traction, and we can see that we had a very strong winter sale and have clearly taken market share.When we look at the market as such, not much has changed, still the Nordic market grew and is still pretty buoyant, especially Finland is coming on stream, which is really encouraging. Denmark also has a strong underlying growth and Norway is holding up well along with Sweden as we see -- when we view the year at, at least [ 2008 ], it really looks strong. U.K. market still the same. The macroeconomics uncertainty and really some poor weather conditions in the beginning of the year has affected, especially our project sales. Then we have Central Europe region, which is very small, but has shown some pretty buoyant numbers as well.We're still keeping ahead of the 10%, which is our goal, and we will continue to improve our margin as we go, while investing for growth going forward.If we look at our financial targets, I think it's especially important to look at the dividend where we have a stated goal of heading out dividend between 40% and 60%. And in 2017, here in the -- reflecting in the first quarter, we will be handing out SEK 1,180 million -- SEK 1.2 billion and that's really totaling a total dividend of 116%. So it's a normal strong dividend, and then we added another to reflect the strong underlying business that we have. And as we haven't done any acquisitions in the year 2017, we wanted to hand back some of our profit to the shareholders as well. And we are pleased with that.If we look at our strategic initiatives, omnichannel, we have 4 omnichannels in Norway, where we see very good traction. We are still working on our value for money concept in the Danish market and are calibrating it slightly, and then really full speed ahead with identifying opportunities within supply chain and product management.Acquisitions, I have talked about it for a long time, and trust me, it is getting closer. And we will hopefully be able to show some interesting acquisitions over the next 1 year.Then based on this brief introduction, I'd like to hand over to Kristoffer.

[Kristoffer Ljungfelt, Chief Financial Officer]

Thank you, Morten. And I'd like to start by explaining the breakdown of sales in the quarter and by country. So if you look at the left-hand pie chart here, you see that U.K. now represents 44% of sales, and then Denmark, Sweden, Norway, Finland added together, is 53%. And then you have Austria and some other export countries, another 4%.If we pause U.K. for a bit and look at the Nordic countries first, we are seeing that over a couple of -- the last years, we have really been speaking about Sweden as being the part -- the growth engine for the Nordics. And so in that context, it's important to understand that Sweden only represents a quarter of the Nordic sales and only 14% on total group.So we are, of course, exposed to the negative development that we see now in the Swedish housing market, but we are still well diversified in the Nordics. And despite the softer Swedish housing market and the timing of Easter, Sweden did a very solid first quarter, both in sales and revenue. And like Morten said, that in our latest analysis, we believe that the Swedish kitchen market will still grow in 2018, but possibly flatten out by the end of this year or in the beginning of 2019.On another positive note, we expect the Danish and Finnish market to pick up considerably, after many years with modest or no growth. And those 2 markets together represent 26% of group total and half of our Nordic sales then. And we're already seeing strong growth coming in from Finland in Q1, where we had a double-digit growth, even though it was from a quite low base. Denmark was a bit softer in Q1, but mainly related to timing, after an extremely strong Q4 last year. And when we look at the Danish housing starts and consumer confidence, it looks very strong right now, and that's usually a good proxy for kitchen sales in 12 to 24 months from now.Then we have Norway, which is another 12% of the group and 25% of the Nordics, and we found it a bit harder to judge where the Norwegian market is heading, and it has historically been impacted by the oil price. But we now also have some regulatory measures that affect the market. But we still believe that the market will continue to grow somewhat this year, and it looks fairly strong also, relating to what Morten said previously.As in Denmark, the Q1 was a bit soft in Norway, but that was mainly related to the timing of Easter. So then we can look at the breakdown of the sales in the U.K, it's the right-hand pie chart. So Q1 and winter sales is an extremely important period for U.K. business, and especially so for Magnet Retail, which you can see represents 28% of the sales. And in a normal year, the winter sales make up roughly 40% of the sales, but this order intake then converts into sales in Q2, and that's why you don't see much of that growth coming in, in the first quarter.We estimate that the Retail market declined by 3% in the quarter, but that Magnet Retail was definitely one of the winners and expanding the market share considerably in the quarter. The B2B quadrant makes up 22% of sales, and this business has been heavily impacted in Q1 by the exit from the key account Homebase. And as you know now, we stepped out of that account last year, which means a negative comparable this year by approximately SEK 60 million. Then contract business representing 27%. This market has been growing quite a bit in general, but the Q1 was a bit tougher due to the cold winter affecting completions. Nobia is also facing hard comparables in the quarter, as we last year had the record deliveries to Battersea project, and the Battersea -- the second phase of the Battersea, as you know, has been postponed into next year and that also means that a large portion of the pipeline we had for CIE was postponed. And therefore, we're looking for new possibilities to fill up the pipeline there.The Trade section represents 23%. It was also a bit negatively impacted by the cool winter, but -- and in addition, then the market declined in general. We believe that as we have sustained shares in the Trade kitchens, but probably lost a little bit of ground on some adjacent product categories in that segment.All in all, the Nordic -- sorry, the U.K. organic growth was then negatively 12%, but adjusting for onetime effects, we think we are more or less flat.And the next page, please, Lena. So the Nordic organic growth came in at negative 1%, impacted then by Easter, which we believe affected the top line negatively by 3% in general, a little bit different depending on which country you look at.In general, both the consumer and product markets continue to be strong in Sweden and Finland, while Denmark and Norway then are impacted by the timing effect a little bit harder.Gross margin of 39.8% compared to 40.1%, was very much burdened by the historically weak Swedish krona to the euro, since most of our purchases are done in euro into the Nordics. And we estimate right now, that the currency, if it stays at the level we have now, we will face a headwind on the Swedish krona of roughly SEK 20 million in Q2, and another SEK 30 million during the second half of the year.The improved European economy has also put some pressure on the material prices. Some of it will be mitigating by various other measures, but some we had to absorb, already in Q1. However, our cost base was somewhat lower in the quarter as well as we have actually a bit Easter comparables this year, due to the quality issues and the launch of HTH GO, that we did during Q1 last year.All in all, pleased with the operating profit of SEK 213 million and a margin of 12.7%, despite the currency headwind and the Easter.So moving over to U.K. As I said, the growth was down 12%, but we are still very pleased with how the Retail business has developed, and especially in terms of order intake and that will possibly help us a bit in -- when we come into Q2.We do face some harder comps in Q2, still due to Homebase and Battersea, and those 2 businesses together will affect comparability by another SEK 50 million in Q2. Gross margin of 39.7% was improved by higher share retail sales and favorable mix, which improved our average order value somewhat. We had a little bit of currency headwind still on the pound, but at current rate, we believe that we have taken the entire hit on the pound/euro right now. So that's a bit positive in this.EBIT came in at SEK 79 million, which is a bit below last year, but it's also mainly driven by the volume decline that you saw.Then over to Central Europe. Here we're finally coming back on track, even if the results were slightly behind last year. We're calibrating the value proposition a bit. The mix is still leaning towards the lower-end segment, but it has stabilized quite a bit since Q4, where we saw the really huge mix effect. On the positive side, we also see some improved productivity coming through the factories again, and as you can tell by the gross margin, we still have a bit to go but all in all, it looks a bit more promising now. And EBIT of then SEK 2 million was a bit behind last year.And then going over to the next slide, the financial position. And I'd just like to reiterate that Nobia is a very financially strong company, with very healthy cash flow as well, and that's also why we had the chance to do the -- to double up on the ordinary dividend, but still have plenty of room to do acquisitions or other interesting investments in the business. So our cash flow is seasonally weaker in Q1, and we were also a bit behind on working capital in the quarter, however, it's mainly related to timing between the quarters and some Easter effect here as well. And as you can see, we ended Q1 with a net cash position of SEK 564 million.Now we did do the dividend payout in April. So just to comment on that, it was like Morten said, a payout of SEK 1.2 billion. So the net borrowings, as of today, is roughly SEK 650 million with a debt-equity ratio of only 20%. So a lot of headrooms there.And with that, I hand over to you, Morten, again.

[Morten Falkenberg, President, CEO & Director]

Yes, thank you, Kristoffer. Just to reiterate, we feel it's solid performance impacted by seasonality and onetime effects on sales.And we are looking forward to some good questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Rasmus Engberg from Handelsbanken.

[Rasmus Engberg, Research Analyst]

I have 2 questions relating to the U.K. Can you say anything about the Battersea effect in the coming quarters, as I understand that you'll continue to face that effect maybe throughout the year. Is that correct or?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, Rasmus. That is correct, that we will still face some difficult headwinds on that in Q2, yes.

[Rasmus Engberg, Research Analyst]

And it is for the second half of the year as well or?

[Kristoffer Ljungfelt, Chief Financial Officer]

No, no. I mean, the SEK 50 million headwind we have in Q2 now will be most of it. You have a little bit running into Q3, but it will be more or less done by Q2.

[Rasmus Engberg, Research Analyst]

Okay, good. And then on the overall U.K. business, if we exclude this effect. What does your order intake tell you that, can you hold your sales unless excluding the Battersea effect? Is that what you're indicating to us? Or is it still -- yes?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, it's been a little bit slow start on the product side. And you know, it's a bit lumpy business with the seasonalities, et cetera. But we believe that if you exclude the SEK 50 million from Battersea and Homebase, we believe that we would be able to hold up fairly well and those are really onetime effects.

[Rasmus Engberg, Research Analyst]

You also did very well on the margin. I thought that the Battersea revenue was pretty decent margins. So does that mean you made a loss on Homebase last year? How -- I just don't really understand, what if there are huge saving that we don't know about this quarter?

[Kristoffer Ljungfelt, Chief Financial Officer]

No, it's true that the Homebase margins were very thin. The Battersea was pretty okay margins, but within this result, you have a lot of other mix effects as well, and we also have a quite a bit better average order values coming in the business. So it's really more channel and product mix than an effect of Battersea and Homebase.

[Rasmus Engberg, Research Analyst]

Okay, right, right. And then just a final question. I noted that there's a SEK 10 million positive other in EBIT, normally is that something you sold like displays or something? Is that something we should sort of take away for next year or is it?

[Kristoffer Ljungfelt, Chief Financial Officer]

No a large portion of that is the currency headwind that we do. You have some financial instruments as well in the coming year. So there's no really -- nothing you can extrapolate.

[Operator]

Our next question comes from the line of Predrag Savinovic from Nordea.

[Predrag Savinovic, Analyst of Consumer Goods]

You're mentioning winter sales and that Magnet is having some decent momentum. Could you give us some more flavor here, what have you done to take market share, and could you quantify this in any way?

[Morten Falkenberg, President, CEO & Director]

I can give you -- try to give you a rundown of what we have done. We have, first of all, looked at the Magnet proposition in order to strengthen it vis-a-vis the consumers and spent quite a bit of money on the marketing side, both digital and marketing to convey the message we have about what kind of brand Magnet is. And then we have looked at different price points where we have tried to be a little selective in terms of -- if you look at the range going from around GBP 3,000, GBP 4,000, GBP 5,000, up to GBP 8,000, GBP 10,000, GBP 15,000. We've had some areas maybe were a little too highly priced, and there we have calibrated that slightly and that has given us really a great return.

[Predrag Savinovic, Analyst of Consumer Goods]

So all in all, you have taken down prices slightly it seems?

[Morten Falkenberg, President, CEO & Director]

We have not -- yes, not in general. So I think it has been more a -- very pointed, very selective way of looking at it. So we have spent quite a lot of time understanding the price mechanisms and where we are on the different price points and have calibrated some and actually taking off some -- the other way. So it has been a bit up and down, but it has really yielded well in terms of extra sales.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. And on the store situation now, I can see a breakdown on the U.K., specifically, and Nordics, et cetera. How many stores do you have in the U.K. right now? And what's the plan on -- going forward, are you opening new ones or doing continued overalls or?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, we have around 210 stores in the U.K. We are trialing in the U.K. the omnichannel concept, which has been very successful in the Nordic, and we're rolling that out to some locations in the U.K. And we will see how that goes. We still think there's plenty of room to increase the store network. We're now calibrating a bit on the store proposition and how it should look like in the sizes of it.

[Predrag Savinovic, Analyst of Consumer Goods]

And on the relative assemble kitchens, you mentioned in the presentation here, could you tell us about the -- anything on how much sales that generates and maybe also the margin here?

[Kristoffer Ljungfelt, Chief Financial Officer]

In the U.K?

[Predrag Savinovic, Analyst of Consumer Goods]

On the Nordics, from the slide.

[Morten Falkenberg, President, CEO & Director]

We don't want to give you specifics on it, but if you look at Denmark in isolation, what was used to be called do-it-yourself and now HTH GO is a good sizable part of the volume in Denmark as such. But it -- I think mix wise without -- Kristoffer, what can we say, it represents 30% of sales or slightly...

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, slightly less than that.

[Morten Falkenberg, President, CEO & Director]

Slightly less than that.

[Kristoffer Ljungfelt, Chief Financial Officer]

And then on top of it we have the power -- the business would power, an expert which is actually getting along quite well. We have also set up this new hub in Sweden outside the normal factory, so to say in Tidaholm, which distributes these flat packs to -- across the Nordics. And that one is running extremely efficient as well. So we still have good hopes on continued growth in that segment.

[Predrag Savinovic, Analyst of Consumer Goods]

And one final for me. The CapEx level for Q1 is a bit higher than the last year. Maybe, I missed it before but what kind of investments are these -- and maybe just represent it for the remaining quarters?

[Kristoffer Ljungfelt, Chief Financial Officer]

No, I think it was a bit higher in the quarter, but it's mainly related to timing. And we have not expressed any desire to increase the CapEx level from what we have had last year. So -- and this quarter is actually quite small quarter in terms of CapEx spend as well. So I wouldn't draw any conclusions from it. And if there are bigger things coming in, then we would be sure to tell you.

[Operator]

And our next question comes from the line of Johan Dahl from SEB.

[Johan Dahl, Analyst]

I was just wondering the -- that you're looking over factory footprints then realizing further efficiently saving. What sort of time frame were you looking on this project? If you can just give some guidance there? Secondly, I was just wondering, regarding gross margins in the Nordics, I mean, we have heard a lot of companies complaining about rising sourcing cost. To what extent is that sort of problem for Nobia currently? And what are you doing to mitigate that looking into the remainder of the year?

[Morten Falkenberg, President, CEO & Director]

Okay. I think when you look at our manufacturing footprint, both in the U.K. and in the Nordics, we are in the process of -- you can put it like, identifying the size of the price and how much we benefit, we can get out of the strategy that we are putting in place. It's also fair to say that it's -- we do have identified quite a lot of low-hanging fruits both within purchasing, both within transportation, but that's more on the SG&A side of it. But the actual footprint program will run in earnest for the next 1 to 3 years.

[Kristoffer Ljungfelt, Chief Financial Officer]

And I can take regarding the material prices here. It's -- we have the same impact. We see some increase in material prices from our suppliers, especially, the European ones. I will still say that the currency is by far the highest or the biggest problem here, not so much the prices. And of course, we -- as I said, we're looking into how to mitigate this. But it needs to carry forward to some consumers, and we're also looking for -- what Morten was eluding to just now, the purchasing improvements that we can still do on other parts and also some SG&A efficiency parts. I would say the material price increase right now, is so small that it's really not worth talking that much about.

[Operator]

And our last question comes from the line of Charlie Campbell from Liberum.

[Charlie Campbell, Housebuilding Analyst]

This is Charlie Campbell from Liberum. I just had 2 questions please on the U.K. Firstly, just wondering what the price effect was in Q1? And secondly, clearly the weather has been pretty awful in March. But just wondered, if you'd seen some better trends in April, particularly, around that trade side, which seems to be affected by the weather?

[Morten Falkenberg, President, CEO & Director]

You mentioned -- could you repeat your first question?

[Charlie Campbell, Housebuilding Analyst]

Yes, sure. What was the price effect in the U.K. in Q1?

[Kristoffer Ljungfelt, Chief Financial Officer]

We don't want to comment exactly on the price effect. We -- Morten was eluding to this before, we have done some different price calibrations, and we don't want to explain the net of that.

[Charlie Campbell, Housebuilding Analyst]

Okay, fair enough. Understood.

[Morten Falkenberg, President, CEO & Director]

Yes. But I think what we can say is that the movement within the price ranges yielded a markable uplift in volume in the first 2 months of the year.

[Kristoffer Ljungfelt, Chief Financial Officer]

And then concerning the trade and the weather. Yes, the trade would probably be kept a bit better in April and also, the completions and that is quite natural after the cold winter. So as you know, we're in the middle of April, so it's a bit early to say how that will play out.

[Operator]

And as there are no more questions registered, I'll now hand back to you, speakers.

[Lena Schattauer, Head of Communication & Investor Relations]

Okay. That was the end of this conference call then. So thank you all for participating, and welcome back next time. Our Q2 report is scheduled for release the 20th of July.