Nobia AB

STO:NOBI

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Nobia Q1 Report 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Tobias Norrby. Please go ahead.

[Tobias Norrby, executive]

Very good. Welcome, everyone, and thank you for calling into this Nobia Q1 2023 results presentation. I have with me today, of course, our CEO, Mr. Jon Sintorn; and our Acting CFO, Mr. Henrik Skogsfors. We will start with Mr. Jon Sintorn, starting with an overview of the quarter before Henrik digs into some of the financial details.And with that, I hand the word over to you, Jon.

[Jon Sintorn, executive]

Thank you, Tobias. And good morning, everyone, and thank you for joining the call today. So, for the first quarter, on a high level, we see market demand further soften with the macro fundamentals hampering consumer as well as the Project segment. The organic growth in the quarter came in at minus 6%, predominantly driven by the Consumer segment declined across the markets.On a positive note, our price increases are compensating for the inflationary pressure we have been battling for some time now. On the other hand, with the sales volume decline and mix shift has had burdened the gross margin. And hence, EBIT came in at SEK81 million for the quarter versus SEK182 million prior year, and that is excluding the items affecting comparability. As communicated earlier this year, we have launched a significant cost program, which we have been -- which is up and running and being executed on according to plan. On a cash flow basis, there was an improvement, most notably in the working capital, which also was positively impacted by timing effects.And as we have commented in previous quarters, we do have a situation where the economic downturn and macro coincides with the temporarily elevated investment levels that we have due to the construction of our new factory in Jonkoping. This has resulted in an increased leverage. And as we said at the Capital Markets update in March, the factory building in JonKoping is close to ready, and we are actively exploring sale and lease back. On that, we have made a lot of progress in our strategic agenda with this investment in the new factory being obviously the most important. Progress there is according to plan with a busy schedule for equipment installation, and we have already started to utilizing some of the machinery for kitchen component manufacturing to support our Nordic supply chain.So moving on to the next slide. Talking about the cost reduction program. The cost program will generate an annual run rate cost savings of SEK300 million by mid-2024. And the effect for this year -- the run rate effect for this year is SEK220 million by the end of 2023. And the biggest components are the restructuring of the U.K. operations as well as rightsizing certain Nordic and central Group functions. And talking about the U.K. part of it, we are exiting and have been exiting in the course of the quarter, unprofitable parts of the U.K. projects business. And we are taking out low-margin products to pursue our strategy to go for more of the mass premium and higher average order value.We are moving over to a more variable cost model in the very premium project business. And as a consequence, we closed Dewsbury and Grays, which are 2 of our U.K. manufacturing site and consolidate more into our plant in Darlington. We're also flattening and simplifying the U.K. overhead structure, continuing in our plans to empower the sales organization and have less of central administration and central costs. The total cost of the program is SEK450 million, recorded as items affecting comparability, and that was all taken in the fourth quarter of '22 and this quarter -- first quarter of '23. All the activities identified in this program have been executed on according to plan. And we see a little effect in the first quarter, but the following consecutive quarters, we will see the material effect gradually materialize.So that was on the cost program. So next slide, please, market. I think it's fair to say that compared with 1 or 2 quarters ago, it's fair to say that there has been further softening of demand given the more challenging and uncertain macro circumstances with inflation and increased interest rates, et cetera. So across all markets, there is clearly a softer consumer demand, consumer and retail demand. In terms of projects, we have longer order books. So in general, there is still many projects that are on its way to completion. And hence, there is business associated with that, but filling up the pipeline with new started projects is more challenging today, during this quarter and what we see looking forward in the short term. In terms of the Trade segment, in general, it's holding up a bit better as a segment. And I think that is the fair statement across the Nordic market, the U.K. market and our business unit portfolio markets as well.Moving on to the next slide. We talk about direct material. And as you know, it has been -- it's been a significant increase of direct material inflation and other types of inflation in the last 6, 8 quarters. What we see now is the pressure continues, but sequentially from what we see as a peak early in the fourth quarter of '22, we see a slight decrease from that level. On a year-on-year basis, in the first quarter, we're still up in direct material pricing for cost. But again, we see a sequential decrease and expect that trend to continue. The total on-cost for material, energy and transport was approximately SEK150 million in the quarter. And I should add, this is an area driving sales in this market circumstance that we are even more activity, so to speak, and addressing cost base and addressing direct material cost [ for the ] 3 main themes currently is having an significant impact on profitability.So then moving over to the next slide, with Tomorrow Together Strategy that we addressed at the Capital Markets update in March. And I don't know exactly how many of you at this call right now that was there, but I really appreciated that day. It was great to see you there, and we were very proud and very happy to also showcase this building, which is a token of the strategic transformation that we are undergoing for this company. And hopefully, we could convey and come across and see how this materially is very significantly will improve our ability to serve customers in a very good way going forward with great products, availability, lead times, quality and all of that.So what we what we addressed the 3 main themes, we did address as the update was obviously the progress on the Nordic factory construction and what benefits, that means for us and our customers and partners, both operationally, product-wise and financially. We talked about the transformation plan for the Region U.K. and how we plan to execute important changes to create a stronger, sustainable operating model in the U.K., such as driving value instead of volume, simplify with one brand, one product assortment, and one pricing structure, et cetera, cost efficiency and empowerment with more decentralized decision-making. And then thirdly, the balance sheet-related topics given the current temporarily, but still high investment levels and increased leverage.Capital Markets Day, in Jonkoping, we also made a visit to the factory, building sites, of course, to tour this, we believe, very impressive plans and give people the first, almost a preview of the first installations of our new manufacturing technology that is on its way. And we also visited a refurbished HTH brand franchisee store close to the factory to give a flavor of how nice and good products we have and an indication of our strong market positions that we do with, in this case, HTH brand. So all in all, very nice to see you there. It was a good day.So with that, so one of the highlights of the quarter is actually. So with that, over to you, Henrik.

[Henrik Skogsfors, executive]

Thank you, Jon. Let's go into Nordic region for the first quarter. Organic growth in the quarter came in at negative 7%. The volumes declined on the back of the negative development in the Consumer segment in all countries, while the Project segment held up well, especially in Finland. Our price realization was good across the board and continue to support the top line.As mentioned in the fourth quarter call, we had some supply chain capacity and output constraints, especially related to the Swedish factory in Tidaholm. The situation stabilized and improved in the first quarter. The impact in the quarter amounted to around SEK15 million. By country in the quarter, the sales increased in Sweden and in Finland, whilst they were declining in Norway and Denmark.The gross margin declined by 4 percentage points to 32.1%. The primary reason behind the drop in gross margin is related to the decline in volume, especially in the Retail segment. As Jon said earlier, we see some small signs of improvements in the direct material versus the fourth quarter. However, we had continued headwinds in the year-on-year comparison from direct materials, transport costs as well as impact from higher energy bills. In summary, EBIT of SEK105 million compared to SEK213 million last year. Please note that this is excluding the quarter's items affecting comparability of minus SEK90 million that was communicated in January.Next slide, please. Region U.K. Organic growth in U.K. was negative 5%, in line with our transformation strategy as presented on the Capital Markets update in March, we go for the higher average order value segment, which contributed positively to our top line in the quarter. However, we're not able to mitigate the volume decline. The gross margin came in at 43.4%, 0.2% lower than last -- same quarter last year. Solid price impact mitigated effect from higher year-on-year direct material costs. Despite the margin being close to flat, the absolute gross profit declined in the quarter on back of lower sales volume. We had some savings from the cost-out activities, which is the main driver behind the lower selling and administration costs in the fourth quarter in Region U.K. In summary, U.K. delivered an EBIT of SEK5 million compared to SEK0 million last year. All numbers are excluding items affecting comparability that as mentioned just a while ago. First quarter items affecting comparability amounted to SEK170 million related to the restructuring program announced in January.Over to Slide 9, please. Portfolio business units came in flat on the back of solid sales increase in the Netherlands on back of delayed effect on price increases. The positive contribution from the Netherlands was hampered by a challenging consumer market in Austria. The project market is obviously still a challenge in London and declined in the quarter. As communicated in January, we are closing the factory in Grays that is serving Commodore, and we move over to a more flexible cost model. We are moving in the right direction, and we see despite a challenging market situation, early positive indications in form of upticks in the order intake. EBIT for the region was SEK12 million compared to SEK20 million last year. Price increases were not able to offset the volume decline and the increases year-on-year from direct material. The primary reason behind the decline in profit in portfolio business unit is the project business in London. In the quarter, SEK36 million was classified as items affecting comparability in the region. The cost is related to the closure of the Grays factory serving Commodore.Next slide, please, financial position. On cash flow, positive effects in the first quarter from lower inventory in addition to improved accounts receivables, the latter back on the lower sales. Accounts payable movement is driven by timing effects. The change in working capital in the quarter more than offset lower cash flow due to the decreased profit resulting in a cash flow from operating activities of SEK318 million. Cash flow from investing activities primarily related to the construction of the factory in Jonkoping amounted to negative SEK353 million.Our net debt, excluding leasing and pension debt increased by SEK227 million in the quarter to SEK2.066 billion. The increase in net debt is according to plan as we are continuing to build a factory in Jonkoping. The increase in net debt in combination with a decline in EBITDA resulted in an increase of leverage from [ 2.36 ] in December to [ 3.11 ] for the first quarter, which was in line with our expectations. The effect that the economic downturn coincides with our planned high investment level has resulted in an increase in leverage. As communicated at the Capital Markets update, we explore different leverage reduction options such as sale leaseback of assets. We also said in March that we together with our real estate advisers have created an investment memorandum. The memorandum has been presented to a range of different investors, and we are now evaluating the outcome of those meetings.That's all from me. So back to you, Jon.

[Jon Sintorn, executive]

So the priorities we have going forward is to drive sales activities in the, call it, more challenging market circumstances. There is plenty of activities and initiatives to drive sales. And we will drive towards higher average order values rather than volume. That's an important initiative. Actively -- very actively working on direct material price reductions as demand softens, suppliers and direct material pricing of cost needs to come down. So that's an important activity as well.Execution of the cost-out program and some more across the group of the cost program and predominantly related to the U.K. and the repositioning in of our business model and position in the U.K. continues. And then, of course, the Jonkoping factory and everything associated to that means ensuring that we keep being on plan and on track. And then further exploring and taking the next steps in the sale and lease back process. So those are the priorities for us going forward.

[Tobias Norrby, executive]

Very good. Can we open up for questions, please?

[Operator]

[Operator Instructions] We will now take the first question. It comes from the line of Hanna Lindbo from DNB.

[Hanna Lindbo, analyst]

My first question is on the Nordic margin. It seems to be impacted by a number of factors. And my question is just how should we view this margin going forward?

[Jon Sintorn, executive]

Gross margin, one?

[Hanna Lindbo, analyst]

The Nordic one.

[Jon Sintorn, executive]

Yes. As mentioned, Hanna -- thanks for the call. As mentioned, the reason why we're marginally [ inclining ] in the Nordics is due to, first of all, the volume decline, but also that we have a mix shift that we are -- the decline in retail consumer is higher than the decline -- sorry, than in Professional segment. That is negative for Nobia, that mix shift, so to say. And the consumers are -- sorry?

[Hanna Lindbo, analyst]

No. No, continue.

[Jon Sintorn, executive]

And as you know that the consumers are having it quite tough now. So we see that, as we mentioned, we see the retail going down in all our markets where we have retail customers. So it's expected that there will be still be a challenge on the margin with regards to this mix.

[Hanna Lindbo, analyst]

Okay. And the project market seems to start softening a bit now as well. Is this according to your expectation, like in timing? Or do you expect it to come later on?

[Jon Sintorn, executive]

I'm not sure I understand the question.

[Hanna Lindbo, analyst]

I mean the project markets, I think we all could agree that we expected it to decline sometime in the future, but starts to happen now, if I understand you correctly? And is this according to your expectations?

[Jon Sintorn, executive]

So for the first quarter, as I said, there's still a lot of projects under -- going to completion, so to speak. So on the back of that, we have the project sales. However, within the project sales, a slightly different mix, a little bit lower end, so to speak, or slightly lower priced kitchens going through there. But for this quarter, there's still on the order book and so on for housing completion.

[Henrik Skogsfors, executive]

And -- sorry, but just to add a comment on what you're only saying now on that the Professional segment actually increased that actually during the first quarter.

[Hanna Lindbo, analyst]

Yes, I was [indiscernible] new housing.

[Jon Sintorn, executive]

Yes, Hanna. So what we will see going forward unless housing starts to stabilize, if I put it that way or get to a decent level, we will see effects later this year and so on. But it's according to expectations in that sense for the first quarter, and we haven't had any material effect of the most recent.

[Hanna Lindbo, analyst]

All right. Yes. And I know you don't comment on your covenants, but I know you mentioned, earlier it seems like you've been pretty confident in your financial position. Has that changed in some way?

[Jon Sintorn, executive]

We are confident with our financial position, and we are actively pursuing -- actually pursuing activities to make sure that we have a leverage where we need to have it. And the sale-leaseback is obviously one of those.

[Hanna Lindbo, analyst]

And when you talk about options that you explore different options on leverage reductions, is it more options than sale and leasebacks or...?

[Jon Sintorn, executive]

No. Well, no, it's the sale and leaseback, which is obviously the big thing that we're doing. But we have other types of investments and stuff that we scrutinize and looked at it.

[Henrik Skogsfors, executive]

And as we mentioned on the Capital Markets update, yes, the big one, of course, when it comes, that is obviously Jonkoping. But we also investigate in other sales-leaseback option. We have other plans to investigating to do that. On top of that one, we also mentioned that Capital Markets update that due to the fact that we are now closing our factory, for example, in Dewsbury. That property will be sold, et cetera. So we have some mitigating activities that we are executing on.

[Jon Sintorn, executive]

But you should see it in the light that the sale and leaseback activity for the Jonkoping factory the prime one, the bigger one, and then we have some others [ more or less ].

[Operator]

We will now take the next question. It comes from the line of Sofia Sorling from Carnegie.

[Sofia Sörling, analyst]

Right. This is Sofia from Carnegie. I have a couple of questions here. So I just want to start with the [ new ] items that you recognized during the quarter. If you could please give some more details on what this [ SEK90 million ] in extraordinary costs recognized in the Nordic coverage. You mentioned restructuring measures, but could you be more exclusive for this type of coverage?

[Jon Sintorn, executive]

Yes. Should we talk to that also there at present?

[Sofia Sörling, analyst]

Yes. We can talk on that one.

[Henrik Skogsfors, executive]

Yes. Yes, SEK90 million. Yes, it's restructuring and cost reduction, I would say, because restructuring is mainly related to U.K. I think that that's also what we said in our call -- sorry, our press release on January 20th. So the restructuring is primarily related to U.K. closing of the 2 factories. And then we have cost-out activities for other parts. So in the Nordic region, the majority of that is headcount reduction. And then there is also cost related to the transfer of the factory from Tidaholm to Jonkoping. It was [ up to ] SEK90 million that we have in Region Nordic.

[Sofia Sörling, analyst]

All right. But -- sorry, but the transition cost from Tidaholm wouldn't that be expected up on that type of cost like that will continue during 2023?

[Jon Sintorn, executive]

Yes. Correct.

[Sofia Sörling, analyst]

But you don't expect any other items affecting comparability during 2023?

[Henrik Skogsfors, executive]

We said already that when we informed the market about that we're going to build this factory that we probably will have around SEK100 million, SEK130 million as extraordinary costs, so to say, during the course of '23 and '24, when the transfer is actually taken place. And now we're taking -- [ hidden ] part of that is taken in the first quarter, as just mentioned, and then there will be these kind of costs also during the remaining quarters, if they will be classified as in [ effective ] comparability or not. I don't have the answer right now.

[Sofia Sörling, analyst]

All right. That was clear. And then a follow-up question on a question about annual savings. So let's see, of the SEK300 million that you expect in annual savings from the second cost saving program. Could you please give us a more color on when do you expect this annual savings in terms of proportion when we'll start to recognize in the financials, you mentioned like a major part in Q2? And also if you can give us -- you mentioned that most of it is related to the U.K. region, but could you also give more of a high level state, how much will be related to the Nordics and if also other portfolio business units for already in 2023?

[Henrik Skogsfors, executive]

Yes, I'll give you a quick one. U.K., 50% of the savings; Nordic, 4% to 5%, 5% of all the [ regions ], that's the split. And on the other -- on the first part of the question, it is -- we already had some positive effect on during the first quarter. Remember that we did some -- we did a Q4 program also. That is not into to get impact already during the first quarter. What we announced now the SEK298 million that we took in the first quarter, that's going to have effect starting Q2 and Q3 and Q4 and then it's tapering off exactly after future, I would like to say.

[Sofia Sörling, analyst]

All right. But also a follow-up question then, and if we relate to the transformation journey in the U.K. So I noticed that the gross margin is high in U.K. during the quarter. It's still around about 43%. And you removed this SEK170 million in items affecting comparability, but adjusted EBIT is still very low. Haven't you seen any -- shouldn't be a better move from the cost from the first annual savings or cost reduction program? Or how do you think about that?

[Jon Sintorn, executive]

Two things. First of all, we see the gross margin is also related to the shift that we move away from the lower-margin product, but at some volume, of course, so moving from volume to value. So we have been able to increase pricing and higher average sale price and higher average order value. That's one effect that should be. The bigger cost savings from this program will not materialize yet because it was executed upon, so to speak, during the first quarter, but it will roll out. The program you relate to some of that you see, but some of it was also investments in the market we did at the time as we also communicated. So we have more sales [ designers ] and those sorts of things. So there's a shift on where we put our cost more front end sales-oriented, less central administration related. So that was the first step in that journey.

[Sofia Sörling, analyst]

All right. And then, yes, I have 3 more questions. So this -- first of all, the investment in the Jonkoping factory. You mentioned the building was already -- the building is ready, and of the total remaining spend, how much is related then to the lease -- the assets that you're expecting to sell and how much is related to just tangible assets that you -- such as machinery and stuff? I think you mentioned that the remaining part was SEK500 million for landing, buildings prior Q4 and then SEK1.5 billion less intangible assets.

[Jon Sintorn, executive]

So first of all, just to the factory building is close to ready and then we have an administration building yet, not a huge cost that we will complete in the course of next year. That's one. But the asset related -- now is related to the building.

[Henrik Skogsfors, executive]

Around 85%.

[Jon Sintorn, executive]

Yes.

[Henrik Skogsfors, executive]

I would say on this time that we have set up for the building is fixed on. But then as Jon said, what's left is the primary thing that is left is the administration building for the work and workers, et cetera, that's going to be built in attachment to the site. Hope you may you got it that.

[Jon Sintorn, executive]

Most part you got answer to your question?

[Sofia Sörling, analyst]

Yes. And then I have some questions on when the factory -- so we see a declining market. And if volumes now decline and capacity utilization will be very low in the new factory. So how do you expect to protect profitability in the Nordics? And perhaps also during the CMD, you presented the EBITDA bridge contribution -- potential volume growth. It was an ambition EBITDA that you presented. And as Jon stated, you could -- the volume growth would then be around 50% to the Nordics, current states in the Nordic. And where do you see the 50% in volumes come from? Yes, that's my question.

[Jon Sintorn, executive]

Could you repeat that question, please? I wasn't not sure...

[Sofia Sörling, analyst]

Yes. So just to start with, the first question is about volume, as we see a volume decline, and given your new factories, which you estimate will have on 2 shifts, 300,000 kitchens that we could produce. And we estimate that the utilization will be quite low in [indiscernible]. And if you could give us some color on how you will protect profitability in the Nordics, given the low utilization rate?

[Jon Sintorn, executive]

So -- I'm not sure I understood completely, but I'll try my best to give 2 answers. One, in the current setup that we have, today, we are continuously working with volume-related adaptation adjustment. So if volumes go down, we go down, so to speak, and adapt to that in terms of our capacity and all of that. So that is what we are doing continuously in our current footprint. And that -- those type of activities, we have been conducting in the course of the quarter and expect or not expect, we will continue to do those type of activities and adjustments based on the estimate we plan that we have.In terms of the capacity for the new factory, so it's designed for 2 shifts. if everything goes -- if the market would suddenly surge and would triple or so on, we obviously have a lot of capacity to capture that growth. But if the market is really, really compressed, the capacity, as we have conveyed a few times is that we can fit all of the Nordic volumes into that factory. So we can -- theoretically, so to speak, we can consolidate all the factories that we have into that factory.

[Operator]

[Operator Instructions] We will now take the next question. It comes from the line of Rasmus Engberg from SHB.

[Rasmus Engberg, analyst]

Can you hear me?

[Hanna Lindbo, analyst]

Yes.

[Rasmus Engberg, analyst]

That's very good. I was wondering about this working capital release. Where does it come from? And perhaps, more importantly, what do you think about working capital for the full year? That's the first question.

[Henrik Skogsfors, executive]

Okay. You mean on the -- for the first quarter, is that what you're talking about, Rasmus?

[Rasmus Engberg, analyst]

Yes.

[Henrik Skogsfors, executive]

Yes. As I said, we have [ in and out ] for the reduction versus last year. And that's partly explained by, as I mentioned on the working capital market update. Yes, we have focused on reducing inventory. On top of that, on the year-on-year comparison, we also had a very, very high weaker sales order intake last year that drove inventory up. This year, it was lower than last year. So we had a positive effects on that with 2 things, high order intake as a impact in the balances last year in addition to that we are focusing to get inventory down now when we have a softer market.[indiscernible] as I mentioned, it's primarily related to that we have lower sales. That means that you tie up less in the [indiscernible] on top of that one, we have some timing effect and it sounds favor.

[Rasmus Engberg, analyst]

And for the full year, what do you think?

[Henrik Skogsfors, executive]

Yeah. It's difficult, considering the market as and what's going on and it will be quite tricky and timing effects like we have, for example, for the account payables that might -- timing is that sometimes you need to pay your payments, right? Timing effects [indiscernible]. So it's going to be -- it's a really, really tricky question to answer. But our focus will continue to be to closely monitor working capital. The inventory reduction should continue. We are tight -- we're closing and tie to our customer in their payment behavior, making sure we get to pay on time. And of course, we always negotiate with our suppliers to get the best time. So we are doing what we can do on our side, try to contribute as soon as possible working capital.

[Rasmus Engberg, analyst]

Is there any effect from lower input prices in the inventory? Or is that yet to come?

[Henrik Skogsfors, executive]

That has not yet been seen, no. But as you mentioned, we have a big focus to go out and have a serious discussions with our suppliers when it comes to raw material.

[Jon Sintorn, executive]

We see a sequential decrease, yes.

[Henrik Skogsfors, executive]

But you don't really see that effect in year-on-year.

[Rasmus Engberg, analyst]

Right. And then you had a comment about the Nordic business where you talked about the SEK15 million effect from -- I think you referred to inefficiencies or alternative, do you -- is that particularly for you and --

[Henrik Skogsfors, executive]

Yes. Correct. And I think we mentioned that also during the fourth quarter call, we mentioned. And that's what I'm referring to. That's correct.

[Rasmus Engberg, analyst]

Yes. So I think is that -- are we sort of SEK15 million isn't necessarily that much with [ RV ]sort of -- is that mostly behind us now? Or is there still a legacy effect also in Q2 from inefficiencies you think?

[Henrik Skogsfors, executive]

It's improving. We have done a really, really good work during the first quarter, and it's really, really coming down. So we expect it to improve.

[Jon Sintorn, executive]

And we are today in the significant to that situation and then we were early, a quarter ago, I hope, very much. But there's still --

[Henrik Skogsfors, executive]

There will be still some money, but we are in a positive spend right now.

[Jon Sintorn, executive]

Absolutely.

[Operator]

There are no further questions at this time. I would like to hand back over to Tobias Norrby for closing remarks. Very good. Thank you very much. And hopefully, we talk next time on the 20th of July when we report our second quarter numbers. Thank you for going.

[Rasmus Engberg, analyst]

This concludes today's conference call. Thank you for participating. You may now disconnect.