Nobia AB

STO:NOBI

Earnings Call Transcript 2019-Q1

[Morten Falkenberg, President, CEO & Director]

Welcome to Nobia's Q1 Report 2019. I'm Morten Falkenberg, and I'm here with CFO Kristoffer Ljungfelt. If we go straight to the report. First of all, the net sales was up driven very much by the inclusion of Bribus and also currency. Organic growth was minus 1, but if we take into account the transfer of volume from -- or to Norema in Norway, it's slightly positive. Group gross margin, down but very much affected by direct material. And finally, if you look at the operating cash flow, it's still a very strong quarter, but it's also artificially high due to the IFRS 16. If we move on to the next slide. As you might have seen today, we had a press release that I will be stepping down after 9 years and handing over the baton to Jon Sintorn, and I just have to say that it -- for me, it has been a fantastic journey. And the good news for Nobia is that the journey has only started, and I'm really pleased to welcome Jon to the company. The idea is that I will continue to be in charge until the 1st of September, and then Jon is going to take over but successively getting into the way we run the business as well. So a change but also a change where we are in a very good shape in terms of our balance sheet, in terms of our profit generation. And it's -- as it is right now for the next couple of months, it's business as usual. The kitchen market trend in Q1. The U.K. market is estimated to be down, and I know Kristoffer is going to cover that as well, as we do see the uncertainty of the ongoing show on Brexit. And of course, that really throws a curveball in terms of the consumer confidence. And also if we look at the winter sale, there was fierce price competition as such. Nordic market, relatively flat actually, but the Danish market is growing and actually offsetting a slightly weaker or softer market in Sweden. And the CE region is very much on par with the previous year. Financial targets remain the same, and we will be today proposing a dividend of up to 84%, which is slightly higher than the spread we have. But we are looking still at adhering to these financial targets as such. I mentioned the -- that we are looking at and working at a new house. This house has been a good house for the past 5 years, and we are making or creating the foundation for the next 5 years, and some of the -- still the pillars will be the supply chain where we expect a lot of benefits, product management and also acquisition as such. And then we're viewing new channels going forward as well. So we will be updating also our vision, but also some of the pillar in the Nobia house, but more to come on that front. With those introductory words, I'd like to hand over to Kristoffer to cover, first of all, the development in the Nordic region.

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes. Thank you, Morten. I will run through the regions in a little bit more detail. So first of all, the Nordics, where organic growth declined by 1% in the quarter. And the reason for the decline was related to the conversion of the Norema stores where we go from owning the stores to basically having them run by franchisees, as many of you know already. That transition was done by end of last year, but we will have some year-over-year effects on that up until Q3 roughly. And excluding the effect of this conversion, the Nordics grew by 2%. As you remember, we flagged last year that the Swedish market will become quite a bit softer in 2019, and we saw this already this quarter where Sweden was close to double-digit decline. And even though the market was very soft, it was mainly within the product segment where actually consumer sales was holding up a little bit better than what we are anticipating going into the year. But we still want to reiterate that the largest decline of the Swedish product segment will be in Q2 and Q3. And this business stands for about 5% of the total group's turnover. On the contrary then, Denmark had a very strong quarter, and we believe that we've also grown market shares on the back of our new product launches: the Nordic Spirit and New York. And as Denmark represents 20% of the Nordics, this growth did offset most of the decline we had in Sweden. Gross margins, as you can see, they were a bit lower in the quarter mainly burdened by material cost increases but also burdened by the Norema transition, which actually gives us a lower gross profit but also lower SG&A cost which mitigates it. And just to shed some more light on the Nordic supply chain, which you know, we did have some turbulence during last year. But in general, these problems have been corrected now, and we are running with much better both dispatch compliance and what we call volume productivity. However, the input cost into the supply chain in the form of wages and transport costs particularly have increased quite a bit. And thus, the productivity improvement could not compensate for these higher input costs. In terms of cost in general and SG&A in particular then, the cost-out activities are carried out according to plan in the Nordics, but we will continue to be very aggressive on the cost and keep pushing the fixed cost base down. And we will continue to do that as long as we see the market being volatile as it is now. All in all, an EBIT of SEK 214 million which is just slightly above last year. Going over to U.K., representing 42% of sales. And the sales was, as you can see, from organic growth. It was holding up quite well in the quarter, not the least after the having so much uncertainty regarding Brexit, we are quite pleased with that. Also retail did okay in the quarter. It grew somewhat. However, like Morten was alluding to, winter sales was a little bit softer with higher price pressure which impacted order intake slightly negative in the quarter. Trade and especially our revitalized trade concept has shown some very promising result in the quarter, although it's from quite small trials of around 30 stores. And now we will roll this concept out to another 120 stores, hopefully in time for the very important trade season in the September, October. Trade represents roughly 25% of U.K. business, and this concept and this development that we have there now is extremely important for us, of course, in terms of growth and profitability down the line. In terms of project sales, it declined somewhat during the quarter. However, we have a good order book, and we have now started some of the larger deliveries to keep projects in London as we also stated in the press release. Gross margin declined for the same reason as in the Nordics. It's pressure on the raw material cost. We did compensate some of that by improved product mix in retail but was still a bit down from last year. The way currency and material prices look right now, we will most likely have a flattish to hopefully positive effect after the summer. However, we will have some better clarity on that when we report Q2. Also in U.K., the cost-out program is running according to plan. And just as in the Nordics, we will be very, very mindful on the cost position now on the back of the uncertainty. And needless to say, but anyway, as we all know, the Brexit uncertainty is not yet over. It has just been postponed. So over to Central Europe. In the numbers, you have here in front of you, you see Bribus numbers consolidated into Q1 for the first time with the top line of SEK 177 million. Seasonally, the Bribus business for Q1 and Q3 is somewhat weaker in terms of profit margin. However, they came in slightly better than our expectations still in Q1. In Austria, we have decided to walk away for some low-end volume in order to considerably improve the mix. And that has temporarily led to lower volumes for Q1, but we believe the volume decline will be mitigated by somewhat stronger margins as we continue during the year. And the volume decline was also the main reason for the gross margin decline. You can see here. And all in all, a margin of 1.7% is of course not acceptable in the long run, and we are working hard as I mentioned to improve the mix here. But also it was affected then by the lower season -- the lower margins during this season for Bribus. We estimate that Bribus for the third quarter will have the top line of around SEK 200 million with a profit of around SEK 15 million to SEK 20 million. Then finally our financial position, and as Morten was describing, we had a very, very good cash flow in the quarter. One part was driven by good performance, which is the working capital and slightly improved operating profit. The other part is the IFRS 16. So excluding the effect of IFRS, we did manage to come in with the operating cash flow of SEK 115 million which is still a lot better than last year's SEK 64 million. And when you look at the balance sheet, we still believe we have a very, very strong balance sheet for the group. However, it has considerably changed because of the IFRS 16. And the net debt has risen to over SEK 4 billion and net debt/equity of 95%. But as we also state in the presentation here, the -- if you exclude this accounting change, we have a net debt of about SEK 1.2 billion, which is a very good position for this company and represents 28% of net debt to equity. So way within our financial targets.

[Morten Falkenberg, President, CEO & Director]

Thank you, Kristoffer. And yes -- and the strategy, main financial targets, it's still back to growth and efficiency and focusing on moving north on the 10% EBIT. So with those words, I would like to hand over to Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Mattias Holmberg from DNB Markets.

[Mattias Holmberg, Analyst]

I'm wondering a bit about the EBIT in Central Europe. When I try to sort of calculate backwards here assuming, say, SEK 10 million in contribution from Bribus implies a quite negative earnings or EBIT in the heritage business that you have. And when I try to look at the run rate that I have in my model, it seems to have deteriorated quite rapidly just from the previous quarter now into Q1. So could you please elaborate a bit on -- I mean, you mentioned the volume here that you've stepped away from, but is there anything else behind this what I assume to be negative EBIT in the heritage business in Central Europe? And how long do you believe it will take for that to recover?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, we did decide for this Q1 to not participate in the sales of -- in the low-end segments in Austria. And as you can see, the organic growth here was negative 7. And having stepped away from that business, it did impact our margins to some extent. But just to reiterate here, we do have a fairly new installed management team that are really doing the right things, and we have strong beliefs that throughout the year here, we will be managing much, much higher gross margins from the rigid kitchen business that we have in Austria. But you're right, it was a quarter where we took some extraordinary losses to just get out of that segment.

[Mattias Holmberg, Analyst]

And have you seen anything what may hold for Q2 in that sense?

[Kristoffer Ljungfelt, Chief Financial Officer]

We believe that Q2 will be quite a bit improved from the Q1 situation.

[Mattias Holmberg, Analyst]

And another question, where I look at the IFRS 16 implication, it seems like there's a rough 3% difference in the EBIT when we look at the norm adjusted and the sort of IFRS 16 adjusted EBIT for Q1. Would it be reasonable to assume that there will be a similar impact for the remainder of the quarter -- or sorry, for the remainder of the year?

[Kristoffer Ljungfelt, Chief Financial Officer]

We expect what you see now in terms of IFRS changes will continue to be the same impact for the entirety of the year.

[Operator]

Our next question comes from the line of Carl Ragnerstam from Nordea.

[Carl Ragnerstam, Analyst]

It's Carl Ragnerstam from Nordea. First of all, by looking at your margin, U.K. declined by 110 basis points excluding IFRS 16. What was the main reason behind that? Because looking at the gross margins all the way down by 30 basis points and organic growth is flat, so volumes should not be the main reason, right?

[Kristoffer Ljungfelt, Chief Financial Officer]

No. I mean, we have -- we do have the gross margin that has hit margins here. We do also have a bit of volume decline in terms of moving over to -- the mixing up to the rigid business in U.K. So those are the main pillars, and then you have some smaller items affecting it, but it's not material.

[Carl Ragnerstam, Analyst]

Okay, great. And could you also remind us of the cost savings programs. What initiatives have been implemented during the quarter? And can we expect -- still expect a run rate of SEK 80 million from Q2? And can you also talk about the automation initiatives including the -- you talked about the [ pave chop ] and when we can expect to see effects from them?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes. Some of the automation will come later in the year after summer as well. And regarding your other question there, can you repeat?

[Carl Ragnerstam, Analyst]

If we still expect the run rate of SEK 80 million from Q2, cost...

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes. We did from the cost reduction program, we did trial according to plan, which means we saved around SEK 15 million in the quarter. And we still believe in the SEK 80 million for a full year saving.

[Carl Ragnerstam, Analyst]

Okay. Perfect. One last for me. We have seen, for example, Binova talking about reducing costs by choosing to work with IKEA. Are you experiencing a tightening prices situation in Nordics due to that? And have you seen IKEA gaining momentum at the developers?

[Kristoffer Ljungfelt, Chief Financial Officer]

No. I mean this has been going on and off for many years now. And IKEA has had their organization also working with B2B. So this is -- I wouldn't say that it's anything new in that. We just need to be very mindful of it and keep working on selling products to the right cost, but also to -- with the right quality to that segment. And you must also remember that a big part of this sales is installation and other services which is equally important to be able to deliver. And there, you need a pretty big infrastructure. So all in all, to summarize, we are always mindful of new competition coming into the market and also with IKEA in that sense.

[Operator]

Our next question comes from the line of Johan Dahl from Danske Bank.

[Johan Dahl, Analyst]

It's Johan at Danske. I was just wondering, I think, Kristoffer, you talked about being -- getting compensation, raw materials, et cetera, by after the summer in connection -- together with currencies. Could you just elaborate a bit what gives you the confidence to claim that in a fairly weak market? And alternatively, how much volumes are you willing to sacrifice to actually raise prices to that extent?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes. We see on the back of the currency problems and the material prices we have had, of course, we have compensated by price increases. And as you know, there are some lag to it. But we also see that the volatility in the market and some discussions on the lower economic forecast is also helping us on the cost side for raw material. And especially the currency now with the British pound has showed some strength before -- or in the quarter, and we sit with hedges for an average of 6 months. So that should give us some benefit, 6 months -- with a 6-month lag.

[Johan Dahl, Analyst]

And is it more like cost is tailing off? Or is it more prices going up on your part?

[Kristoffer Ljungfelt, Chief Financial Officer]

I would say it's a little bit of both. Again, cost is not entirely linked to direct material and currency, but we are always pushing the cost increases further down to the consumer -- to our consumers. And there is a lag of 6 to 12 months on that, which is the same for the hedging, basically.

[Johan Dahl, Analyst]

Okay. And also on the U.K. DIY channel, can you sort of elaborate a little bit what's your feeling there with your trade partner? I mean it seems that they had a very weak year -- last year. Are things looking better this year? Are you able to say anything there?

[Morten Falkenberg, President, CEO & Director]

Yes. First of all, it's difficult to say -- we don't want to comment too much on our partners and their development. But I think it's fair to say that after a -- not a very good year last year, they are coming back strong. So we definitely experience a very good development for Travis Perkins, and for [ Wickes ] and Benchmarx. So we're very pleased with that, that our close partner is doing so well.

[Johan Dahl, Analyst]

Got you. And finally on -- I think you're reducing sales of joineries recently in the U.K., what was that effect? And what was sort of the full year outlook or the full year effect? If you can provide any guidance.

[Morten Falkenberg, President, CEO & Director]

We haven't given any guidance, and we don't want to. But it is a significant change where we are focusing much more on the trade kitchens and then going through with a fine comb looking at the items that are not profitable and then removing that. So I think the full effect we, as I think you mentioned Kristoffer, that we have tested 30, and now we are -- for the end of the year, we should have rolled out in 250 stores. So it's -- it will be quite a significant change for next year, starting already in Q1. But I'm not willing to give you any guidance on how much, but it's relatively significant when you take less profitable items out of the mix.

[Johan Dahl, Analyst]

Yes. Obviously, I'm just thinking about the top line effect as well. I mean, you have provided very good guidance here on the project channel which is much appreciated. Then on the other hand, you want to know the net. I was just wondering how much you're taking out? But I guess we get back to that.

[Morten Falkenberg, President, CEO & Director]

No. I think the only thing I can give you is that it will look -- when executed well, which we are doing so far, it will be quite significant for next year. Sorry about the evasiveness, but that's the best we can do.

[Operator]

Our next question comes from the line of Howard Seymour from Numis.

[Howard David Seymour, Director of Equity Analysis]

Couple for me, if I may, on the U.K. Firstly, you alluded to fierce price competition into fourth quarter of last year, but you've also mentioned that at the start of the year, you saw some sales price improvement. Just wondering really if you could sort of reconcile those 2 factors, whether you've seen a sort of change in attitude or whether that's specific to certain areas. And secondly, again in the U.K., you alluded to sort of an overall cost focus and taking cost out of the business. But you're also sort of potentially reformatting on trade. Net-net, where would you be looking at, at cost savings relative to that? I would assume that the sort of the reformatting the rolling out of the trade probably would be a cost. So whether there's savings to be had elsewhere against that.

[Morten Falkenberg, President, CEO & Director]

I think -- if I cover the last one, and then Kristoffer, you can take the first one, the first question. I think the last one on cost is you have to imagine and appreciate that we have 217 owned stores in the U.K. And with that comes a lot of fixed cost. So that, we are now reviewing how should our -- how should the dynamics and the lineup be going forward in terms of can we do things in a different way in order to get the fixed costs down. But clearly, the whole cost side and the traits project -- program that we're initiating will help us a lot. So it is very much -- it's very much costs but also ensuring that we -- when we get rid of some of the nonprofitable joinery parts, that we sell much more trade kitchens. So it's really a mix between ensuring that we get the breakeven is a wrong word, but the high cost level down and ensure that we also via some changes in manning in terms of business development people in sales can get the profitable element of the mix moving much faster.

[Kristoffer Ljungfelt, Chief Financial Officer]

And I'm not sure I fully understood your question on the U.K. market, but what we can say is that our take on the market is that it's been a bit softer in Q1 and also during the winter sales. But there's continued very high price pressure because also of the uncertainty you had in front of the Brexit we believe. On our side though, we have managed to sell a much better mix of our products. And from that perspective, we are quite pleased with the winter sales as well.

[Morten Falkenberg, President, CEO & Director]

But I think to your point, if I understood it right, it's still a very tough market from a price perspective, where you have different parties that are continuing acting the way they have done for a very long time, but there are some more -- I would say some reason within pricing is sneaking in as well with some of the other players. We see that among that, Howdens, and so it's -- I think it's a balanced picture, but still the U.K. is the most competitive market that we have in Nobia.

[Operator]

Our next question comes from the line of Marcela Klang from Handelsbanken.

[Marcela Klang, Analyst]

I have a question about the new financing that you signed last year. Can you tell us a little bit about the covenants that are connected to it? Is it connected to your debt excluding or including IFRS 16?

[Kristoffer Ljungfelt, Chief Financial Officer]

We will use frozen GAAP period where we refer the covenants to the formal way of calculating it. And then we probably look at changing that by next year when we have some history on it. So I would say for us, that's really unproblematic, the covenants.

[Marcela Klang, Analyst]

And even looking at it the old way, you have a good room to your covenants?

[Kristoffer Ljungfelt, Chief Financial Officer]

Absolutely. And that does not change with IFRS in any way.

[Marcela Klang, Analyst]

And then another question. You mentioned the report that consumer sales decreased for you in Sweden. Do you have any kind of outlook on the segment for the remainder of the year? Do you expect consumer sales in Sweden to recover throughout the year or continue to go down?

[Kristoffer Ljungfelt, Chief Financial Officer]

What I said was that the project sales was subdued quite a bit in the quarter while consumer sales was a little bit better than what we estimated, and we still don't give any guidance on that. And that will be quite unwise in such a period as we're in now as well because it is highly volatile, and we see that it shifts a lot between months and quarters.

[Marcela Klang, Analyst]

Okay. So it was better than you expected, but still in your report on Page 5, you say that consumer sales were down in the Swedish markets.

[Kristoffer Ljungfelt, Chief Financial Officer]

It was down.

[Marcela Klang, Analyst]

In the Swedish and Finnish markets, it was down.

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, it was down. It was down.

[Marcela Klang, Analyst]

But it was better than expected.

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes.

[Morten Falkenberg, President, CEO & Director]

But not as much.

[Kristoffer Ljungfelt, Chief Financial Officer]

We have before communicated also that we believe the Swedish market will be quite significantly down in 2019. And for the consumer sales, it was less severe than what we expected coming into the quarter.

[Operator]

[Operator Instructions] Our next question comes from the line of Charlie Campbell from Liberum.

[Charlie Campbell, Housebuilding Analyst]

This is Charlie Campbell at Liberum. I got a couple of questions on the U.K. really. I was intrigued by how strongly your trade business is going and just wondered if you'd give us maybe some numbers around that to get an idea of the magnitude. Also the trade concept seems to be going very well in your first 30 stores. You said there's 120. Does that mean that it will be in all of your trade stores at that point? And then just another question on the commercial projects. Just wondering if there's a risk in delivery of those big projects in terms of phasing. And just wonder how confident you are in the timing of that SEK 200 million revenue coming in the next 9 months.

[Kristoffer Ljungfelt, Chief Financial Officer]

Okay. I can start with -- on the project side. I mean we are -- there has already been some lag in deliveries to these larger projects, and you can never be certain and especially not when you have the Brexit in front of you. But we are quite confident that this SEK 200 million will now be delivered unless something happens again. And we also base it on the fact that we have started some of these deliveries already. So then in normal cases, we would continue to deliver until it's fully delivered, whenever we have the chance to step into the project. On the trade, we really don't want to comment more on the trade concept right now. Again, it's been quite small trial in 30 stores. It does mean that this concept will roll out to all our mixed stores, 150 of them, which has a trade part in them. But again, we will give you some more clarity on exactly what it consists of whenever we have trialed it in more places.

[Operator]

Thank you. And as there are no further questions registered at this point, I will hand the word back to the speakers for any closing comments.

[Kristoffer Ljungfelt, Chief Financial Officer]

We just like to thank you for this quarterly report, and we will be back in 19th of July to release the Q2 results.