Nobia AB

STO:NOBI

Earnings Call Transcript 2018-Q2

[Lena Schattauer, Head of Communication & Investor Relations]

Good afternoon, and welcome to Nobia's telephone conference following the publication of our Q2 and half year results. Our CEO, Morten Falkenberg; and CFO, Kristoffer Ljungfelt, will hold the presentation. And after that, there will be time for questions.Thereby, I leave the word to you, Morten.

[Morten Falkenberg, President, CEO & Director]

Thanks, Lena. If you look at the Q2 highlights, I think the headline, which we have also put in our interim report, is really that very strong, I would say, unexpectedly strong Swedish project sale caused production disruption, and it has led to a negative sales mix and also some short-term EBIT deviation. So that's really the, in isolation, the biggest explanation in the topic. If you look at the organic growth, slightly down, minus 2%. But if you take account the Battersea project that was moved slightly and also that we still have Homebase in the second quarter, actually, the organic growth is slightly positive. Gross margin, pretty flat. And the, really, the big deviation between last year's EBIT in Swedish krona and also this year is very much the SEK 20 million to SEK 25 million that came due to a disruption in the Swedish factory.I think it's important to state that this is not a general capacity issue. It's short term and, in many ways, self-inflicted, as we were kind of taken by surprise in April and May, and we had to prioritize our long-term customers. That really caused a negative margin mix and the high volume. And once in a while, that happens and machine breakdown, really gave us little spare time to handle the machine breakdowns during the weekend.And it also caused extensive overtime payment. The good news is that the benefit of K20, our global assortment, came true in a way that both [ Ewe ] was able to both supply the Swedish business and the Norwegian business. The production capacity issue has been fixed. And when we go into the third quarter, it should be all but rectified.If we look at the underlying markets, and Kristoffer will talk about that as well, the Nordic markets, in general, are still very strong. And the U.K. is also holding up pretty well. I'd like to mention that the Magnet Retail sales is strong. It, during this period, is up 18%, which, of course, we are very pleased with. And we are now focusing on improving our trade proposition as well.So all in all, which it is, once in a while, it's a mixed bag, but I think the biggest comment from our side is the disruption in the Swedish factory. If we look at the acquisition of Bribus, this is really an acquisition that came up pretty fast. They are the strongest and the biggest project supplier in Holland, in the Netherlands. And they really feel -- fit well into -- in the Nobia family, both from a cultural fit, but also the whole set-up of the factory and also the strengths within projects, where we are strong as well. We see it as a good base also to expand into B2C. And we are really pleased with the management team and are already working to start the integration in full. I have been talking about acquisitions for quite a while, and it really feels in many ways like when you fly into Heathrow, which many of you are doing, and I'm definitely doing it right now, that the airlines are lining up to be able to land. And in that analogy, where Bribus was the first of our planes to land, but we still have a couple of other airplanes that are searching for landing permission. So things are happening now, and it's really up to us to manage the acquisition pace in a good way. So we -- it's done in a proper way and that we don't overpay and that we ensure that the companies that we buy fit into the way we do business as well. And we really feel that Bribus fits that -- fit that description.If we look at the kitchen market trend in general, as you know, the U.K., in general, is something we could talk about for a long time. Still, Brexit is the uncertainty. But I think the biggest takeaway is that it's a very, very tough market right now with fierce price competition. And -- but I would say, the underlying market, as such, is still okay. We deem that it's down by a couple of percentage points. But at the same time, the British will continue to need kitchens going forward as well. So I think we are in good shape, and we are happy to be in the U.K. market. The Nordic market, in general, and I alluded to that, is very strong. I know Kristoffer will talk about it as well. But it's really the Finnish market, but also the Norwegian market, and the Danish market is coming onstream as well. And as I mentioned in the beginning, we do see also continued strength in the Swedish project market also going forward.Central Europe, it's a EWE/FM set-up. We have a new head of EWE/FM and also of the region. And actually, we are starting already now to see some good improvements. So all in all, I think it's a, from a market perspective, a pretty solid state. But U.K. remains really a tough and challenging market, but it has been like that for many years.If we look at the financial targets. Yes, it still do make growth, more than 5%, both organic and acquired. And now we are starting to show our cards in terms of the acquired part. Profitability, definitely our goal to stay above 10% EBIT. And Kristoffer will also show how strong our finances are. I think with those words, Kristoffer, I will, before I hand over to you, just again show what we do every time, our house, our strategic initiatives, still omnichannel is vital. Value for money, we see the benefit of that in the U.K. and starting to see it in the Nordics. And then where the money is, is definitely in product management and supply chain. And that is something you will hear much more of when we get into the proceeding quarters.Acquisitions, high, high on our list. I spend 30% to 40% of my time on acquisitions, and we feel that we are starting to see some good momentum as well. With those words, Kristoffer, I'd like to hand over to you.

[Kristoffer Ljungfelt, Chief Financial Officer]

Thank you, Morten. So a short update on our 6 markets. And you see on the left pie chart that U.K. now represents roughly 44% of our sales on a 12-month rolling basis. I will come back to the breakdown of that market, but first mention that Denmark, 19% of sales. We believe the market grew slightly in the quarter, but not really to the extent that we expected because of the phasing of the Easter. We think that the growth was somewhat hampered and related to the cold winter that we had with less housing completion.Sweden, being 14%, has been very strong on the project deliveries. And as Morten was alluding to, we believe that it will continue to grow to the mid-2019, after which, it will most likely normalize. We also believe that the consumer sales grew in the quarter. But of course, given the manufacturing disruption that we're mentioning before, we had to push a lot of the B2C sales into Q3. And possibly, we also lost a bit of market share in that segment.Norway at 12% has stabilized after a period of quite a bit of uncertainty and governmental regulation. But we think the higher oil price is driving some better consumer confidence. And we now estimate that both project and consumer markets are growing somewhat in the quarter. We also believe that we took a bit of market share in Norway in the quarter. Finland is absolutely the country with the best momentum right now and especially in the project markets, where you know we and Nobia stand very strong. And we had double-digit growth in Finland for Nobia this quarter.Austria market of 3%, quite a strong underlying market, we believe. And as you can see from the report, we have grown by 10% in the quarter. So we think we've taken back quite a bit of share that we lost during last year and maybe more so.Going back then to U.K. and the split between the different segments here. We start with Magnet Retail, 29% of sales. They have done a very, very strong quarter following a strong winter sales and grew by 18%, which Morten mentioned. And we also think we've taken a fair bit of share because of that.Magnet Trade, 22%, and the B2B segment representing 21%, have been far more challenging, driven by very turbulent markets for trade and builder merchants. And we still believe the underlying market is robust, but competition has been fierce and not least on price. And hardest hit is most likely the builder merchants. And you can see that by the divestment of Homebase, for example, and also, one of our largest competitors, B&Q, announcing a complete change of their kitchen sales model. Magnet Trade has weathered the storm relatively well, but still declined in the quarter.And in the B2B quadrant, we have exited Homebase, as you know, which means a negative year-over-year sales of SEK 45 million. And in addition to that, in the same quadrant, we have sales to Wickes, which is part of Travis Perkins. And it has been challenging sales to Wickes the last quarter here for the same reasons. And we have lost a little bit of momentum there. But we're working, together with the Wickes management team, now to get things up to speed again and get the momentum going.Contract sales represent 27%, and it's Commodore, CIE and Rixonway brands. And also, this quadrant is slightly down on the back of strong Battersea deliveries last year. But even if you exclude Battersea, the year has not been great in terms of sales, but it has been far better in terms of order intake. And we are very pleased to announce also in this quarter that we have won some very large projects coming through CIE. To mention a few, it's Southbank Place, Lillie Square Phase I, Battersea Phase 2 and we are also working to get Battersea Phase 3. And these projects are -- have order values ranging from GBP 5 million to over GBP 20 million per project. So we are very pleased about that. And in addition, the order book for Commodore has doubled in size compared to what it was at the same period last time. So much of this should also start to come in end of this year and during 2019 and 2020. So if we move over to the Nordics, the region grew by 1% in the quarter. And given the phasing of Easter, we would have expected higher growth. However, this is mainly related to the manufacturing disruptions in Tidaholm that drove the unfavorable mix, and the B2C then had to be postponed a bit. Also, Denmark was somewhat weaker in the quarter than expected, while Norway and Finland had strong performance. Gross margin declined 0.6 percentage points. And currency impacted negatively on the gross margin, but we fully recovered this in the currency hedges, which are not reported in the gross profit.The development of the Norwegian krone to Swedish krona has been quite good for us. But on the negative side, we have the Swedish krona towards the euro. But as of now, if the currency remains where they are, we don't expect neither gain or losses going into Q3. Material prices have climbed a little bit, mainly due to sheet materials, but also indirectly through steel prices. And as always, we will pass those prices on to our consumers. And then, all in all, EBIT of SEK 278 million with a margin of 15% in the Nordics. Okay, I'll move over to U.K. In U.K., we had the organic growth of negative 6% in the quarter. And we still had Homebase and Battersea year-on-year comparables, which represent 5% on U.K. alone. Adjusting for them then, we will be around negative 1%. And it's Retail -- Magnet Retail that's been the strong one here, and Trade and foremost B2B, where we have lost the sales. Gross margin is up 1.3 percentage points. It's driven by the fact that we have a higher gross margin in our Retail business than in the rest of the business. And -- but also, in the U.K., we see a slight pressure on the direct material, just as in the Nordics, and especially then on the sheet material. On the positive side here, also the pound is strengthening somewhat even though it's at extremely low level still. And all in all, we had an EBIT of SEK 134 million, which was SEK 20 million below last year, driven by the sales decline.Over to Central Europe, please. So this is the last quarter where we only have Austria in Central Europe because we will integrate the Bribus into this region from Q3 and onwards. But first, talking about Austria, we are pleased to see that growing -- that the growth is coming back somewhat in Austria, and productivity also is back on healthy levels. We do still have some outstanding issues regarding the product mix as we continue to sell more of the low-end range, where we have taken customers from Alno that -- most of you know that Alno went into bankruptcy last year. But now we have, as also Morten mentioned, a very strong team in place, with a new regional head, Ralph Kobsik; and also a new CFO for Austria, [ Karl Katzengriber ], who joined in July. And we will then have Bribus integrated into this region from Q3. And Bribus has a yearly turnover of EUR 65 million with roughly 10% EBIT margin. However, the Q3 is seasonally a bit smaller quarter in the Netherlands. So we believe that it would add to Nobia about EUR 14 million in sales with no profit in Q3 whereas Q4 will be a net sales of about EUR 20 million with an EBIT of EUR 2.5 million.Then finally, on our financial position. The operating cash flow was SEK 184 million, somewhat lower than last year because of the lower EBIT. It's interesting to see here the pension debt that has really declined significantly in the last year, from SEK 819 million to today SEK 383 million, and the reason being basically the changes in life expectancy in U.K. and also the increases in discount rate.Our net borrowings was SEK 442 million after Q2 closing, but this is before the acquisition of Bribus. So net borrowing as of today is about SEK 1.1 billion. And in this context, we need to mention that we have just signed a new 5-year credit facility of SEK 2 billion. And previously, we only had SEK 1 billion credit facility, and this gives us more room for acquisitions going forward. Today, after Bribus, we have a gearing of 30%, so it's well below our threshold of 100%. So still very strong financials in Nobia, both for further acquisitions but also dividend to keep the dividend policy. And I leave it for you, Morten.

[Morten Falkenberg, President, CEO & Director]

Okay. So I -- just highlighting, in conclusion, a quarter affected by the production disruption in our Swedish factory. I think we have learned a lot as well. We have a new management in place. We have a new head of the factory, Thomas Mörk. I think he's a senior guy from Autoliv. And I think it also showed us that the K20, the unified one way -- one assortment for Nobia really played a good role in having one of the factories supporting the 2 others, and that's clearly important for the future as well. There are some learnings as well on the sales and operational planning where some of it -- this should have been avoided. But I think that's a learning that we bring with us. And as I mentioned, we have fixed the issues. So when we get into Q3, we should be on a straight and narrow going forward. And some of the really interesting developments, of course, is our first acquisition in 3 years' time. And also that we see very strong order books in our project business in the U.K., which you might recall really has also a very decent margin that comes with all this volume. So all in all, slightly testing Q2, but we -- I think we are in good shape going forward.

[Lena Schattauer, Head of Communication & Investor Relations]

By that, we are ready for questions.

[Operator]

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

[Mattias Holmberg, Analyst]

I have a couple of questions, and I start with the acquisition of Bribus. I was just wondering if you expect to see any synergies coming from this acquisition. And if you do so, could you quantify this in any way, please?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, of course, we see synergies with that and foremost on the purchasing, but we would not like to quantify it explicitly.

[Mattias Holmberg, Analyst]

Okay, that's fair. And I think you mentioned a few numbers, so I just want to make sure that I got them right on what Bribus will contribute with. So was Q3 EUR 14 million on sales with no profits?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes.

[Mattias Holmberg, Analyst]

And Q4, EUR 20 million in sales with about EUR 2.5 million in profits?

[Kristoffer Ljungfelt, Chief Financial Officer]

That's correct.

[Mattias Holmberg, Analyst]

Great. Finally, on the production issues in the Nordics here in Sweden. You mentioned that you've sort of sorted this out already. But I'm wondering if there will be any sort of financial impacts on the operating profit in Q3 at all from this or if it sort of all will be isolated to Q2.

[Kristoffer Ljungfelt, Chief Financial Officer]

As we stand right now, we don't believe so. There could be some minor costs coming in because of maintenance that we do now during July. But apart from that, there wouldn't be any financial impact.

[Operator]

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

[Rasmus Engberg, Research Analyst]

I was wondering, have you given the price tag for the acquisition?

[Kristoffer Ljungfelt, Chief Financial Officer]

Sorry, the price?

[Rasmus Engberg, Research Analyst]

The price.

[Kristoffer Ljungfelt, Chief Financial Officer]

EUR 60 million, plus EUR 5 million earn-out, yes.

[Rasmus Engberg, Research Analyst]

So is it at about 1x sales or...

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, fair enough, yes.

[Rasmus Engberg, Research Analyst]

Yes, okay. Yes, very good. And the second question is, now that you've entered into the Netherlands, are you looking to complement there? Is that a good option for you?

[Morten Falkenberg, President, CEO & Director]

We see -- first of all, the strategy is clearly to do the integration, which we will be doing relatively fast. But then I think what we are also buying is, first of all, the strongest company within projects. But also, besides projects, it's really a very, very deep knowledge on the market, the kitchen market in general. So we are looking, and that will be within a year or 2, what can we do within the B2C as well. So -- but I think the trick is not to rock the boat too much with this great team we just got on board, but, together with them, look at what are some of the other opportunities. One opportunity we see already is that our EWE/FM, the Austrian company, is also selling into the Dutch market. And of course, that makes a lot of sense to see if we can combine resources as well. But we see it as only the first building block to expand into the Dutch market and probably beyond as well.

[Rasmus Engberg, Research Analyst]

And what's the production set-up of this company? Where do they manufacture? And how many factories do they have?

[Kristoffer Ljungfelt, Chief Financial Officer]

They have one factory in a town called Dinxperlo, which is far east in Holland, the eastern border to Germany.

[Operator]

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

[Predrag Savinovic, Analyst of Consumer Goods]

Also a question on the recent acquisition. Could you tell us about its historic growth rate?

[Kristoffer Ljungfelt, Chief Financial Officer]

Well, we don't comment on the historic growth rate, but we can say it has been very successful the last 5 years.

[Predrag Savinovic, Analyst of Consumer Goods]

All right. And on the project market in the U.K., it is the CIE and Commodore brands. And then what are -- what clients are there? And have you had new customers here, as in maybe the major builders in the U.K., or what's behind this?

[Kristoffer Ljungfelt, Chief Financial Officer]

No, I mean, in Commodore, it's relatively the same type of customers. In the bigger projects, different companies being set up to handle the projects individually. But of course, it's within the same network that we have. And as you know, we've already done Battersea Phase 1 and have now gotten Battersea Phase 2, and that's the same owner of that. So we also think we have a good possibility for Battersea Phase 3.

[Predrag Savinovic, Analyst of Consumer Goods]

And I know you normally don't comment on the backlog, but considering you mentioned it has doubled in the size for the U.K., also you mentioned a few projects there, some are EUR 5 million -- GBP 5 million and some are GBP 20 million, could you say anything more in the total size of it since you mentioned quite a lot of it, but not the whole scope?

[Kristoffer Ljungfelt, Chief Financial Officer]

Well, that's the reason why we didn't disclose the number that we don't see we need to be precise at this period of time. And one of the reason is also that you know that these projects could vary in time.

[Predrag Savinovic, Analyst of Consumer Goods]

On the double-digit growth in the U.K. Retail channel, how sustainable is this? And have you done anything on pricing here?

[Morten Falkenberg, President, CEO & Director]

I think this is the result of what we did in November, December last year, our plans for the winter sales. So the strong order intake then materialized in strong real sales. So yes, I think we mentioned also last quarter that price was definitely part of the equation. But also, we looked at the whole proposition and the service proposition. So I think it was a very good total mix. But definitely, price was part of it.

[Predrag Savinovic, Analyst of Consumer Goods]

And on the Nordics, on the project market there, you say you expect it to normalize in H2 2019. Is this, i.e., a flat growth or declining? And in that case, how much would you expect?

[Kristoffer Ljungfelt, Chief Financial Officer]

It's really hard to say as of now. I mean, we are 1 year before that specific date. We think a normalization would mean flat sales from H2. But we really don't know really yet.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. And finally, on a country level, Sweden would be interesting to hear in terms of the B2C channel, how that has progressed so far this year in terms of growth rates.

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes. And again, the -- our sales to B2C was hampered by the manufacturing issues we had in Tidaholm. We still think the underlying market grew somewhat and that we might have lost a little bit of market share because of that. But otherwise, the tendency on that market is that it's still growing.

[Operator]

Our next question comes from the line of [ Allison Benson ] of [ KBP Review ].

[Unknown Analyst]

Yes, I'm just keen to -- I was keen to hear a little bit more, if possible, about the U.K. Retail channel, I guess, that would be your Magnets brand, and if you had any plans for it this year, just if you were going to invest in any way or what your plans were for Magnets, if you do have any?

[Morten Falkenberg, President, CEO & Director]

I think our plan is to continue what we are doing and also be very much aware of the extreme competition we have in the U.K. So I think it wouldn't be wise for me to let everybody know what we're going to do later on. But it's definitely -- we are pleased with what we have seen so far, but we are not resting on our laurels to -- we're trying to learn from what has worked and take that forward.

[Unknown Analyst]

What has worked? What's the...

[Morten Falkenberg, President, CEO & Director]

I think what has worked is very much looking at a good mix between our [ rated ] and our Simply Magnet propositions and also looking at are there any price points where we might have been a little too high.

[Unknown Analyst]

And can I just confirm, did you say -- sorry, one last question. My last question is, can I just confirm the figure that there was a 6% drop in the sales in the U.K. business?

[Morten Falkenberg, President, CEO & Director]

No, I...

[Kristoffer Ljungfelt, Chief Financial Officer]

It's 6% drop in sales in U.K. total and it's an 18% growth in Magnet Retail.

[Operator]

Our next question comes from the line of Kenneth Toll of Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

Just a question on Bribus again. I expect, when you talk about the integration, that you mean that you will bring your product range and your maintenance system on to Bribus products. So I was curious to hear about what time frame you are seeing this materializing and also, if you expect any major costs associated with this.

[Kristoffer Ljungfelt, Chief Financial Officer]

No, we -- they already have a very well-invested manufacturing facility in the Netherlands, so we don't expect to bring our product into the country. However, they do source from a lot of the same suppliers that we do. So we see the benefits from purchasing of the components and the raw materials.

[Kenneth Toll Johansson, Financial Analyst]

Okay. So -- but in the future, you will not be able to use this plant to manufacture for other countries then or for other parts of the Nobia Group?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, well, of course, we have looked at the far distant future also, how we should use it. And it's very possible that there would be some K20 products coming into Holland, maybe in the B2C as well. It could also be that we use the manufacturing facility to expand. And we probably will most definitely expand the manufacturing capabilities in Holland because it has a very good position and also close to the German border.

[Morten Falkenberg, President, CEO & Director]

And it is really well invested. So also, relative to our other factories, I think there's a lot we can learn from them. So we're really pleased. And that's when you do acquisitions, you also buy local knowledge, but also really strong capabilities within those areas. And they're very strong on the operational and the production side.

[Operator]

And our next question is a follow-up from Rasmus Engberg of Handelsbanken.

[Rasmus Engberg, Research Analyst]

First, I was just wondering if you have any guidance on how we should pronounce this company so we agree on that. And then secondly, you say it's the leader. Can you explain a little bit of how -- roughly what type of market share? Is it a consolidated market like Sweden? What type of market share are we talking about here?

[Morten Falkenberg, President, CEO & Director]

Yes, it's Bribus. I think we should unite in that name, Bribus. And it's probably wrong, but we -- I think we, Scandinavians, can agree on that. I think that the Dutch will probably have a different pronunciation. It's quite consolidated project market in the Netherlands. We have about 30% market share with Bribus.

[Operator]

[Operator Instructions] As there seem to be no further questions, I'll hand back to our speakers for the closing comments.

[Lena Schattauer, Head of Communication & Investor Relations]

Okay, that concluded this conference call then. So thank you all for participating, and welcome back when we report our Q3 results, the 26th of October, that is. Thank you.