Nobia AB

STO:NOBI

Earnings Call Transcript 2022-Q1

[Operator]

Hello, and welcome to Nobia's First Quarter Report 2022. [Operator Instructions]

Today I'm pleased to present Tobias Norrby, Head of IR. Please go ahead with your meeting.

[Tobias Norrby, executive]

Thank you. Good morning, everyone, and thank you for calling this -- into this presentation of Nobia's Q1 2022 results. We will do it the usual way today, starting with an overview by our President, Mr. Jon Sintorn before our CFO, Mr. Kristoffer Ljungfelt, will fill in with all of the financial details.

With that, I hand the floor over to you, Jon.

[Jon Sintorn, executive]

Thank you, Tobias, and good morning, everybody. Thank you for calling in. So starting this presentation, for the first quarter of 2022, we start as usual with a slide presenting the highlights for the first quarter of this year.

So what we've had is a continued organic growth across our markets on the back of price, a better mix, higher average order value and good market demand. In most of our markets, we have also gained market share. So that's a real positive for this quarter. However, further material supply disturbances and not least huge escalating raw material prices, we have also experienced predominantly obviously related to the very tragic war in Ukraine. It has been a huge direct material on cost north of SEK 200 million, and Kristoffer will share some more of that, but also additional costs related to securing availability and just get our operations running and be able to deliver this demand.

Our response have been further price increases, which have been very significant. And as you could see that also in the organic growth number, price is a component obviously of that. This all in all ends up in the group operating profit of SEK 182 million compared to SEK 196 million last year and a margin of 4.8% versus 5.8% as of last year. In the Nordic region, we had an 8% organic growth, again, based on price mix and a higher average order value and the market share gains. And if we look at the -- in the U.K. region, we're going from a loss last year to a breakeven result this quarter and we have an 8% -- also had an 8% organic growth. And I'd like to highlight a strong winter sales campaign at a campaign that we were able to sell more of our mass premium products and less of the lower end and also increasing our average order value by that. So that was some good news last quarter.

As we have talked about in previous calls, we are on a transformation journey with the U.K. business. I'll get back to that in a little moment. But we will continue on that plan now with a cost, both reduction and cost structure program. On our big initiatives in our Tomorrow Together strategy and Tomorrow Together plan, things such as the new factory are progressing really well. And we're moving from -- obviously we were doing a lot already last year, but we are escalating and further moving from a lot of planning into actually doing and implementing in that -- according to that plan, which is progressing really well.

We do have a strong -- a good order intake and a solid strong order book. As we communicated not so long ago, our U.K. businesses, Commodore and CIE, we have now separated from our region, U.K., and put into what we formally called Region Central Europe, now called Portfolio Business Units enabled to gain better focus both for the Commodore and CIE businesses who has better opportunities and challenges as well as emphasizing the focus on our Magnet business in that region, U.K. So those were some highlights for this first quarter.

So let's first then get into more of the details with regards to the region U.K. transformation. As you may remember from previous calls, we've talked about that we have put a new management team in place and building on their knowledge and insights and what we know since before, we put a new plan into place, which we call the U.K. transformation or Magnet Transformation Plan, which in short is to put further focus on the Magnet brand and in parallel having the OEM sales to Wickes, where we separated or divested or went out of the Benchmarx business previously and have a better solid profitability in this channel. But our focus on Magnet continues, building a kitchen specialist, focusing on that -- on the Magnet business a bit more. And as I just mentioned, the Commodore and CIE has been transferred to other units in order so we can fully focus on Magnet.

And what we want to achieve is to leverage on our renewed Magnet brand proposition, where we have a focus on retail, but also even further focus on trade as well as project. We want to implement something we call the Church Tower Principle, which is more of empowerment in the local markets, having more sales designers in the local market addressing these 3 segments: Retail, trade and projects. So as a consequence, we will put more of the money where the strategy is, so we will invest in customer-facing activities even more. Again building, attracting the best kitchen designers, increase the density of designers, meaning getting more designers, sales and design tools.

We also, on the back of our increased trade focus and efforts, we're increasing the availability and service levels for our trade customers and more frequent deliveries to our stores. On the back of that and continuing on our plan to get Magnet both growing and increased profitability, we are today launching a cost program. And the cost program is, as I said, in line with putting the money where the strategy is. So the program is proposed to scale down the U.K. central support functions in order to invest more in the customer-facing organization and very importantly, also improve the profitability for the Magnet business. And this is all in line with Magnet's new revised operating model.

This cost program, both cost reduction and having another structure of our costs will give an annual run rate saving of approximately SEK 150 million. Related to this program, there is a onetime cost of SEK 130 million to SEK 150 million, which will be charged to the income in the second quarter. Regrettably, around 200 employees will be impacted and that is obviously subject to customary union negotiations. All in all this is predominantly referred to the U.K., but will have some smaller or other effects elsewhere in the organization as well, predominantly group functions.

So that's about the cost program. Moving on then to the kitchen market development. I've mentioned it already. The Nordic market continued to be favorable developments in consumer as well as project markets and knock on wood, so far we haven't seen any immediate impact on the market demand from the war in Ukraine and so on. The U.K. market is growing in value and the trade segment is taking a larger share. The London super-premium project market and social housing remained weak as we have communicated for quite some time now. And in that sense, it's pretty much the same. And if you talk about the London super-premium market, the geopolitical situation has not improved that situation at least.

And same goes for Austria and the Netherlands where we have a good underlying demand. But specifically in the Netherlands, we've had challenges in terms of installers and projects being delayed because of shortage of material and so those sorts of things, which by the way, minor or major, but some of those effects, we see -- absolutely see across our markets. It's a bit more turbulent in trying to reschedule projects and so on because of lack of installers or availability -- with our customers' availability of materials and those sorts of things as part of the turbulence in the delivery situation as of now.

So that was a bit about the kitchen market development. If we move on then to our Tomorrow Together strategy and talk about our priorities there. You remember, we have growth acceleration. We have structural efficiency. We have people engagement and at the heart, we have sustainability and design leadership ambitions. Those are themes that we are driving with various initiatives and one of them we just talked about is the U.K. transformation having a firmer focus on Magnet, getting the Magnet business into profitable growth.

Other ones, if I'm going to mention 2. One is the structural efficiency initiative, which is the big new factory in Jonkoping which is now progressing really well according to plan both in time and budget. And it's really nice to see how we absolutely already last year, but now definitely moving from a lot of planning into actually doing, and you can see concrete things happening. And there is now part of the building being raised in Jonkoping, and it's about half of it. It's a big one. But it is half and then the first production equipment is being installed in roughly, let's say 20% of the building. There is an area where we can start installing a big saw, which is being done as we speak. So that's progressing really well.

And next, I'd like to highlight our design and sustainability leadership ambition that is a part of the strategy. And our concept, which we internally call Nordic Nature has won the Ideal Home Kitchen of the Year award. So that's really confident. I mean it's, I believe, the largest home magazine there is in the U.K. We won this award, both in terms of that having great design, obviously, but it's also very nice to see that this Nordic Nature and sustainability spirit is coming across in a good way. So this is really a nice recognition for our product Nordic Nature.

That was a bit of an introduction and some highlights from the first quarter, and now I hand over to you, Kristoffer.

[Kristoffer Ljungfelt, executive]

Thank you, Jon. So summarizing the quarter, organic growth of 6%, mainly driven by growth in average order values, gross margin improvement of 3%, mainly driven by the price increases in the U.K. where we managed to more than offset the cost inflation. Transport costs, which is a component in our SG&A or below gross margin, increased considerably on the back of soaring energy costs. Also SG&A increases in Magnet on the back of increased marketing and sales activities as the store network was closed last year. EBIT in total of SEK 182 million with a margin of 4.8%.

Now let me -- if you take next slide, please. Let me shed some light on the material cost here because it's been a very exceptional quarter for Nobia in terms of direct material hit. As Jon was alluding to, the year-on-year on cost is approximately SEK 220 million, which is obviously huge in a company of our size. And I can just reiterate what Jon also said that the fast action taken on price increases back in fall 2021 and at the year-end has just been absolutely necessary for us.

Given further inflation that we have seen as of late, we have increased price quite considerably also during Q1 this year. Currently, our purchases amount to about SEK 6 billion on a run rate basis, where about 50% is related to components from the wood industry, like the sheet material, you can see here 17%, frontals and cabinets, this is also where we have seen the highest impact coming through for the direct material increases. And as of now, it's too early to tell how these prices will evolve going forward.

However, on a positive note, we get indications that availability is improving gradually from the COVID situation. And as of now, we don't foresee any immediate shortages of direct material nor of components. Having said that, oak in particular has been very impacted by the war in Ukraine as Ukraine is one of the world's largest supplier of oak and we are currently and successfully finding new alternative routes to that supply. In addition, the lead times from some of our suppliers on the bought in goods, like white goods and things like that, etc. is very long for the moment, but also this is possible to handle.

If we take next slide, let me shed some light on the market. And if we start with the Nordics, it represents 45% of Nobia's sales. We have had a good momentum in all of the Nordic countries in the quarter, both in terms of sales and order intake. Norway and Finland grew double digits in the quarter, whilst both Denmark and Sweden grew single digit, and we can clearly see the product market coming back strongly across the Nordics, whilst retail was somewhat softer in the quarter, although we still have a good foothold coming into our stores.

We have managed to increase average order values across the Nordic markets and in all segments, and we will continue to do so due to our order book, the price increase this year will take up to 3 months before they get full effect into our books and into our P&L. We also deemed the Nordic market to be strong in both retail and foremost projects for the short term here. It is too early to tell, though, what the long-term market will look like given the impact from inflation and interest rate hike that we've seen as of late.

Region U.K. represents 33%, where Magnet delivered a very strong winter sales with double-digit growth in all segments. Average order values were exceptionally strong, driven by volume growth of more premium kitchens, higher penetration of bought in products and the more general price increases that we also did. Volumes of our low-end Simply Magnet products declined, which is in line with our strategy, which also that led to some better mix into our stores. It's also positive to see that the product business start to grow again in the U.K. after a long and as you know, a long and tough situation during the COVID.

Magnet trade now represents 34%. So it's one of our, obviously, the largest segment in U.K., but also one of our largest segments in entire [indiscernible], which requires even more increased focus.

Then for next slide, looking at the Nordic P&L. Growth in the quarter was 8%, mainly as a result of the higher average order values. However, extraordinary direct material increases did impact the margins and our extraordinary price increases we did last year did not compensate for the last material price increases we saw beginning of this year. And as a result, the gross margin dropped by 3%.

In addition, the impact from Omicron was actually quite severe in the beginning of the year for our factories. And it resulted in very high sick leaves which has to be compensated by overtime and weekend shift production in basically all our factories in the Nordic. Just to mention again that to cover for the inflationary pressure, all our brands in the Nordics have done extraordinary price increases also in Q1. Below gross margin, we also booked our transport cost. We normally don't comment on it. But given the pressure on energy cost, the transport cost has actually eroded 1% of our margins in the Nordics. Apart from that, the G&A or the sales and marketing was pretty much in line with last year.

Moving over to the P&L for the U.K. Organic sales increased 8%. But if we back out the exit of Benchmarx, the U.K. region was up 17% in the quarter. All segments in Magnet and our OEM business was growing. And I was already talking about the average order value, what that consists of. Gross margins were up as we continue to exit unprofitable low gross margin business. And in the U.K., we also successfully managed to compensate for the inflationary pressure. So a good growth of gross margin of almost 6% here.

Most of you remember that our store network was completely closed for the same period last year. And obviously for this year, we have incurred higher marketing costs. From a cost position, we believe that we are at the right levels for sales and marketing as a percentage of sales. But the proposed cost program will address the non-sales driving cost in the U.K. structure, as Jon was talking about.

All in all, breakeven in the quarter, which is an improvement for last year, where stores were closed, but obviously, it's far behind our long-term ambitions. Then moving over to our portfolio of business units, the very new region that we have, you can say, where we declined in organic growth in the quarter with 7%, basically driven by soft project markets in both Netherlands, but especially so in London, where the market is very, very soft in our super premium end of the market. Austria continues to perform well in terms of growth and it's very much similar to the Nordic businesses. Gross margins were up due to the higher average order values, but also country mix contributed to the slight increase here in gross margins. EBIT ended at SEK 20 million with a margin of 4.3%.

Then over to our financial position. Operating profit pretty much, again, in line with last year, as were the working capital position. However, our investment in fixed assets has obviously increased quite a bit and it's obviously a result of our investment in the factory and Jon will show you some pictures how it starts to come alive and then also we will consume cash on it. As a result, our financial net debt was SEK 700 million in the quarter or ended the quarter with SEK 700 million, which still leaves us with a lot of headroom and a solid balance sheet with a good leverage according to ourselves.

So with that, Jon, I'll hand it over to you again.

[Jon Sintorn, executive]

Thank you. So a very short summary for the first quarter. We've had good market conditions and done a good job overall in the market. We have implemented significant price increases to the market, also facing significant headwind on direct material. That was in short the first quarter.

We now looking -- going forward, we're seeing continued good market conditions, at least in the short-term. So we can see that the good market conditions continues. But we also see that material price increases is expected to continue, arguably not to the same speed of increases as we saw on the background of the war in Ukraine.

So with that, we will continue to have significant price increases to the market in order to mitigate this situation. Our average order value improvements improvement is expected to continue as well, that we will continue to work on our mass premium product ranges, which is in line with our strategy. And we will deliver on the cost program that we just talked about, and we will continue to be mindful with cost during this circumstance and that goes overall.

And we will continue to invest in our Tomorrow Together strategy and make sure that we continue to progress as well as we do in all these major and big initiatives that we have, such as the new factory. So that was a bit about Nobia first quarter and a little bit on what's going on or what we can expect going forward.

So with that, thank you very much, and time for Q&A. Operator please open up for questions.

[Operator]

[Operator Instructions] The first question today comes from the line of Victor Hansen from Nordea.

[Victor Hansen, analyst]

Couple of questions from me. On organic sales growth, up 6% for the group. How much of this would you say is price driven?

[Kristoffer Ljungfelt, executive]

Almost all of it.

[Victor Hansen, analyst]

Yes, makes sense.

[Kristoffer Ljungfelt, executive]

Price and higher order value, meaning better product, so to speak. Yes. So price.

[Victor Hansen, analyst]

More premium products also, yes. And also you mentioned higher orders, Jon. Perhaps you can say anything about how much better they are year-on-year. And also what you think of the price level in your backlog, given the ongoing cost inflation, do you think that they are in a decent level or should we expect it to lead to negative margin effects in the near term?

[Kristoffer Ljungfelt, executive]

Okay. Let me see if I got your questions right, Victor. But one thing which Jon also mention here, the average order value is going up if the profitable volume, so to say, is increasing in Magnet primarily on the back of low end volume, so to say. And we expect that to continue across. We also have talked before about our ability to quickly increase prices in Magnet because of the somewhat shorter order book, we would see a faster effect in U.K. as well. As for the Nordics, it will be a very similar situation to what we had when between Q4 last year and Q1 this year because of the lag in the order books really. So the extraordinary price increases now in Q1 will materialize towards the end of Q2 instead. So there will be a gross margin effect on that, which is quite similar to the Q1 effect. Did that answer the question?

[Jon Sintorn, executive]

So in short, we were able to compensate the previous increases by this quarter. But now with the additional direct material increases, there will be a similar lag as we had the last time around, so to speak.

[Victor Hansen, analyst]

Yes. That answers the second half of my questions very well. But on the first part of the question, high orders, if you can say anything, how much higher they are year-on-year?

[Kristoffer Ljungfelt, executive]

We don't want to comment on how much higher our order book is, if that was the question, but yes it is clear that we have an order book which makes us confident in the short-term market growth.

[Victor Hansen, analyst]

Yes. Yes. I think I heard something in the background, yes. Okay, next question. You mentioned replacing central headcount primarily in the U.K. with customer facing, and it would be interesting to know the net headcount reduction.

[Jon Sintorn, executive]

As we said, this is obviously subject to customary and union negotiations and labor laws and all those sorts of things. But we are estimating an approximately 200 for the program.

[Victor Hansen, analyst]

Okay. So that's the net effect, 200 people?

[Jon Sintorn, executive]

Yes.

[Victor Hansen, analyst]

Okay. So the gross one for assumption must be way higher then, okay, understood.

[Kristoffer Ljungfelt, executive]

Let me put it this way. The growth in this case is the same. Then we will spend money to revenue by also in the future adding sales staff and potentially also marketing spend. But again, that is as a ratio of the revenue that we will make as well.

[Victor Hansen, analyst]

All right. And then when do you expect this restructuring to start to have an effect on your earnings and when will it reach the full effect -- the full run rate?

[Jon Sintorn, executive]

So a little shy of 50% second half of this year and the rest first half of next year.

[Victor Hansen, analyst]

Okay, of the total SEK 150 million.

[Jon Sintorn, executive]

A little shy of 50%.

[Victor Hansen, analyst]

Okay.

[Jon Sintorn, executive]

Yes, round about that. And remember, these are proposals, we need to be also respect union negotiations and labor law process into this. But yes, it is high of 50%.

[Victor Hansen, analyst]

Yes. Understood, and then looking at your CapEx, almost SEK 390 million in the quarter. How much is related to the new factory?

[Kristoffer Ljungfelt, executive]

The majority of that is the new factory. So it takes us close to SEK 300 million is the new factory that moment.

[Victor Hansen, analyst]

Okay. And then I'm approaching the end of my questions here, so bear with me.

[Jon Sintorn, executive]

No worries. We like talking about Nobia.

[Victor Hansen, analyst]

Yes. So do I. But for the Nordics, it would be interesting to hear what your thoughts are on the housing starts going forward since there are some worries here.

[Jon Sintorn, executive]

We have the same view at the banks.

[Kristoffer Ljungfelt, executive]

Yes. We have the same views as the bank. The only thing that we could eventually comment is, again, on the order book for the short-term deliveries, it still looks solid. So we suggest that the available information out there on housing starts is [indiscernible] than we are to predict the future on that.

[Victor Hansen, analyst]

Yes, makes sense. And a final question. So the material energy and transport costs you mentioned, SEK 220 million. And just to clarify here, is this what it's up year-on-year in Q1 or how do you calculate this?

[Kristoffer Ljungfelt, executive]

It's the year-on-year cost increase for Q1.

[Operator]

And your next question comes from the line of Rasmus Engberg of Handelsbanken.

[Rasmus Engberg, analyst]

I had 2 questions remaining. Just can you remind us roughly how long your order book is typically? What is the time lag until it materializes so we can sort of try and figure out if it's different in the Nordics to the U.K., etc.?

[Kristoffer Ljungfelt, executive]

Yes. It's in the Nordic, it is longer than in the U.K. In the Nordics, we normally talk about 2 to 6 months of order book and currently it's been quite long from a historical point of view. In the U.K., we talk more about 1 to 3 months of order book.

[Rasmus Engberg, analyst]

Okay. Very good. And then just a question. Easter, is that going to have any impact on the second quarter compared to last year. Is there any sort of difference in scheduling that has a significant impact on the earnings or is it similar?

[Kristoffer Ljungfelt, executive]

Now in '22 we don't see any -- there's no major change compared to '21 in terms of EBIT.

[Operator]

[Operator Instructions] We don't seem to have any further questions -- just one more question comes from the line of Sofia Sorling from Carnegie.

[Sofia Sörling, analyst]

Thank you for the presentation. Sofia here. I have one question on Nordics. Could you please just give some color on why you had or that you were better to successfully compensate for higher inflation costs in the U.K. and the Austrian, Netherlands compared to the Nordics. That's my first question.

[Kristoffer Ljungfelt, executive]

Yes. If I start and then you can fill in, Jon. There's a couple of effects. First and foremost, like Rasmus was alluding to, the order book in U.K. is shorter. So obviously, we had a quicker impact for the price increases. Secondly, we've successfully managed to move the more premium products in the U.K. compared to the low-end product that we were selling in U.K. prior years as well. So that's a positive mix effect, you could say. And thirdly, we have been very successful in selling adjacent products together with a more premium product in the U.K.

And in a way, also, number 4 is that in U.K., we also see more sales in the Magnet system, which is improving our mix in terms of brands. So all in all, we're very pleased that we managed in the U.K. to increase to those type of levels, but the order book also helped us in that. We should also mention that the extraordinary price increases in Nordic has been also very high, and we start to see the increases we made end of last year coming through in the order books strongly now in Q1, but it's just a lag that we foresee now for up until the end of Q2, the latest direct material price…

[Sofia Sörling, analyst]

And maybe if you can give your view on your expectation on this London super premium market, the outlook here?

[Jon Sintorn, executive]

Well, very early in the quarter, we started to be slightly more optimistic about the outlook in the super premium in London. But on the back of the war outbreak, etc., are optimistic are starting to be optimistic outlook change to be same as before. There is still some business, but it's not at all to the level that we saw some years back since pre-COVID.

[Sofia Sörling, analyst]

All right. Okay. And this extraordinary cost of SEK 130 million in the U.K. due to the layoff of people is the discussion with the union or the union customer discussions are costs related to these discussions, are they included in this estimated amount of SEK 130 million.

[Jon Sintorn, executive]

I'm not sure I understood that question, really. I mean we launched.

[Sofia Sörling, analyst]

So maybe it wasn't -- but the question is that you said that you had an estimated onetime charge of around SEK 130 million in Q2 due to the laying of people. But you also said that it was subject to this union customary discussions. But do you see any risk with additional costs due to the discussions here with the union or are those included in the SEK 130 million?

[Jon Sintorn, executive]

So first of all, there's a range of SEK 130 million to SEK 150 million to ensure that we can deliver on this program in a good way and in a respectable way. So that's one aspect of it. But all in all, this is obviously a proposal that we need to deal with in a good legal fashion, so to speak. Again, that's a customer union negotiation and those sorts of activity. But the range that we gave and the level of the cost program, we absolutely believe is what's going to happen and it's going to cover it.

[Operator]

[Operator Instructions] We don't have any further questions coming to us at this time. I'll now hand back for any closing remarks. Thank you.

[Tobias Norrby, executive]

Very good. Then that's it from our side today, and we welcome you all back on the 19th of July for our half year results. Thank you.

[Operator]

Thank you. That does conclude our conference for today. Thank you all for participating, and you may now disconnect.