Nobia AB

STO:NOBI

Earnings Call Transcript 2019-Q2

[Tobias Norrby, Head of Investor Relations]

Good afternoon, everyone, and welcome to this webcasted conference call following the publication of Nobia's second quarter results earlier today. I am Tobias Norrby, recently joined Nobia as Head of Investor Relations. The presentation today will be conducted by our CEO, Mr. Morten Falkenberg; and our CFO, Mr. Kristoffer Ljungfelt. And as usual, there will be time for questions after the presentation. By that, I would like to hand over to you, Morten.

[Morten Falkenberg, President, CEO & Director]

Thanks a lot, Tobias. If we look at the highlights for Q2, first of all, a good net sales development. Organic growth of minus 1%, that is actually better when -- and Kristoffer will talk about that, if you take into account both the Easter and the Norema conversion. Gross margin, slightly lower, also Norema conversion. The result of the weaker winter sales we had in the U.K. in the retail sales and also the structural lower gross margin of our very successful acquisition in Holland, Bribus. And then operating cash flow, nicely better than last year.If we move on to next slide. The kitchen trend in Q2, not a lot has changed. The U.K. margin is still really, really tough, fierce price competition. But also the uncertainty of what is going to happen with Brexit and the polls effect and the pound effect, and it is merely a wait-and-see and for us to do what is right for the future as well because not -- we cannot see anybody really managing the process, as we speak. Nordic market is also relatively as it was before. It's deemed to be on par with previous year. But the Danish market is offsetting the slightly weaker conditions in Sweden. Central Europe region, estimated to be relatively flat. Kristoffer will take you through what we are doing with both with Bribus but also with our Austrian operation.If you move to the next slide, which we show every time, but it's really still our financial targets. Growth and organic growth over time needs to be better than 5%. Profitability, we're really striving to improve that. And it's really part of our 5-year value-creation plan that is being worked on right now and presented by Jon and his team I guess end of this year, maybe beginning of next year. But a lot of exciting stuff. And also to have our net debt below 100%. And dividend, you know about. If you move then to the strategic initiatives, and it's still the old house. I'd say it's still my house, and there will be a new house initially. But the focus also going forward is very much on supply chain footprint both in the U.K. but also in the Nordics. And then the whole product management part and also be better at coming up with new and innovative and exciting products. So that is being worked on by our team. And then I'm spending quite a lot of time on the acquisitions, and we are starting to have some very interesting prospects as well. And that is a very, very important element in the total mix going forward as well. And then, of course, the focus on people will be even more important to deliver what we have promised. But what we are looking at also going forward is really to ensure that we use the scale of being Europe's largest kitchen specialist, and that is where we will derive a lot of value from potentially going forward.With that slide, I'd like to pass on to Kristoffer who will take you through the more -- the details of the report. Kristoffer?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes. Okay. Thank you, Morten. I will start with a brief update on the markets and country and channel. And like Morten said, we estimate the Nordic market to be flat in the period, which is better than what we estimate going into this year and into the quarter. It was mainly stronger on the back of an improved retail segment compared to last year, which mitigated the decline in project market. And it's especially true for Sweden and Norway, which also then helped to mitigate fewer delivery days due to the timing of Easter.In Denmark, which constitutes 20% of our sales, as you can see, we completed a good quarter and especially project sales, whilst the retail sales was slightly down, which in turn was related to the lower-end segment. We are still pleased about the strong sales in the more premium concepts like we experienced last quarter of the Nordic Spirit and New York ranges.In Sweden, representing 12%, we saw small single-digit growth in top line, which is considerably better than expectations. It was driven by a solid retail campaign for Marbodal that both lifted sales and contributed to a positive sales mix as it improved average order values relatively well in the quarter.Norway, on the other hand, was burdened by fewer delivery days as sales and production was closed for a week during Easter. And in Norway, we have also seen the effect from converting Norema to franchise, which helped the top line growth but will over time have a positive effect on our profit margin. Finland, with 7% of sales, grew as well in both retail and project sales, even though the Finnish market looks increasingly challenging in project sales. Although we don't believe that necessarily to be bad to avoid these peaks that we have had as they are really difficult to manage from a manufacturing point of view, and it drove a lot of extra cost to -- compared to the delivery performance within Finland in the quarter.To the right, you see U.K. sales split. And as most of you know, the Magnet Retail had a great run last year, growing double-digit in a declining market. This year, however, has been a little bit more challenging during winter sales both due to looming Brexit, a weak market, but also tougher comparables. And as a result, our retail sales declined low single digits in the quarter. On the other hand, our Magnet Trade business, 21% of the sales, improved somewhat despite the fact that we discontinued some unprofitable joinery products. And in addition, our sales to the B2B market improved in the quarter, and it seems that this side of the market has stabilized somewhat after a very turbulent last year. We're also pleased that the large London projects are progressing according to plan in the quarter, and we will see the main benefits from these projects during Q3, Q4. But on the other hand, sales through the Rixonway channel declined in the period and as the total contracts business was somewhat down. Bribus, which you now see represents 5% of our sales, had a top line of SEK 200 million in Q2 with an EBIT margin of approximately 10%. And the integration is, as Morten said, going according to plan. And they do a great job now to deliver further growth for under the Nobia umbrella. I will come back on that as well. We jump to next page, the detail on the Nordics. As I said, the organic growth was negative 1%, but plus 2% if adjusting for the Norema conversion. And we are quite pleased with this given the unfavorable phasing of Easter and the challenging project markets. And then sales was mainly driven by the retail sales in Sweden, Norway, Finland, while those 3 markets actually had a decline in project sales. Gross margin declined 0.4 percentage points mainly as a result of the currency headwind, as you see, it was negative SEK 10 million; and also the Norema conversion, which took out almost 1 full percentage point of gross margins. And we mitigated most of it through higher order values and favorable mix due to growth in retail. But on the positive note, we also managed to improve productivity in our supply chain, which however was not enough to offset some of the inflationary pressure we see through mainly transport and, to some extent, labor cost as well. All in all, EBIT of SEK 275 million with a margin of 14.7%. Then jumping to U.K., organic growth, as I explained, negative 1%. Gross margin of 39.7% declined compared to last year on the back of lower volumes in Magnet Retail, which has especially higher gross margin, while we grew in low-margin business like in the B2B segment, which has a structurally lower gross margin. The pound actually helped us in the quarter, but it's unfortunately of temporary nature as the pound has weakened quite a bit again, and it's now around GBP 1.11 to the euro. And as a result, we estimate we will make further losses on the pound going into the second half of the year. And due to the volatile markets, the pound and the back of us doing a cost-out program last year, we will continue to look at the cost base in U.K. to secure the margins going forward. We will also keep an extra stock in terms of -- in order to mitigate any event of the Brexit and eventually a possible hard Brexit. In Q2, we had an EBIT of SEK 127 million with a margin of 8.3%.Moving over to our last region, the Central Europe. And again, I just mentioned that Bribus added top line here of about SEK 200 million with roughly 10% EBIT margin in the quarter. And as I said also previously, we believe that the integration is going even better than planned and it's adding a lot of benefits to us, not just financial benefits, but also industrial knowledge and great knowledge of the Dutch market where there are definitely room for further growth in the Nobia system. In Austria, we had a poor quarter in terms of sales, which explains the region's organic sales of negative 9%. It has definitely taken us a bit longer to lift Austria to the 10% we expect from this business. But on the positive side, our mix is back to healthier levels, and we have moved away from the low-end ranges. And this in total improved our margins in Austria in the quarter.The gross margin decline here is related to the Bribus with a structurally lower gross margin. On the positive side, the Austrian gross margin improved, as I said, because of the favorable mix here. EBIT of SEK 32 million with 9.2% margin.Then on the financial position. As you can see, our operating cash flow came in at SEK 244 million. This cash flow is now a bit misleading due to the IFRS 16 effect, which impacted cash flow positively by almost SEK 130 million. And if we compare to last year, excluding IFRS, our cash flow declined by roughly SEK 80 million, which is mainly related to the buildup of the Brexit stock, as we call it. And we will now see how Brexit play out before we make any further decision on whether we increase or decrease this stock level. But worth mentioning is that the stocked items are mainly components, meaning that they will not run obsolete and they will not affect our profitability if and when we need to reduce the stock again.Our net debt, excluding pensions and IFRS, was roughly SEK 1.2 billion, which equates to debt/equity ratio of 32%. So it's fair to say that we are well within our financial targets and still have plenty of room to look for further acquisitions ahead of time. With that, Morten, I leave it over to you again.

[Morten Falkenberg, President, CEO & Director]

Okay. Thank you, Kristoffer. Just it's -- this is time in my tenure. After 36 quarterly reports, this is the last one. And I think it's good to also take stock of the company and DNA, which I feel is in a good and solid shape. It's also important to say that when the dust has finally settled on Brexit and on the U.K., we will be in a great shape with everything we do.Part of the plan now is to have a 5-year value-creation plan that Jon and his team will take forward. It will very much focus on improving much more the supply chain in Nobia, the footprint, also the fixed costs to ensure that we have the adequate cost base going forward, but also the new and exciting products to market that will generate profitable growth. So I have to say that I wish Jon and his team all the best. I know that they will do well. And I can assure you that I will be a proud, long-term shareholder for many years to come. So thank you for listening in. Some of you have done it for -- a few of you have done it for 9 years, but it has been an honor for me to be the CEO of this great company. With those words, I'd like to hand over to Q&A.

[Operator]

[Operator Instructions] First question is from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, Analyst]

It's Carl here from Nordea. I have a couple of questions. First one regarding the Swedish new construction market. Do you expect trough volumes already in Q3 or Q4? Are the volumes still in trough?

[Kristoffer Ljungfelt, Chief Financial Officer]

We -- as we have communicated earlier, we still feel that the construction market in Sweden is very soft, and we still believe that we will have some decline in volumes. However, we don't want to put any type of number on it as of today.

[Carl Ragnerstam, Analyst]

Okay. And can you also update us on where we are in the efficiency program you launched in Q3? Are you still in line with that and what you communicated? And how much was sort of materialized during the quarter? And what can we expect for H2?

[Kristoffer Ljungfelt, Chief Financial Officer]

We are slightly behind schedule on it. We did perform well in Q1, having SEK 15 million roughly in the cost-out program and another SEK 10 million for this quarter, which is just slightly behind plan.

[Carl Ragnerstam, Analyst]

Okay. And where are you behind plan? On what part?

[Kristoffer Ljungfelt, Chief Financial Officer]

No, just what you were referring to the cost-out program that we did end of last year. Did I misunderstand your question?

[Carl Ragnerstam, Analyst]

No, it's okay. And the final one for me. You talked about this year's pricing situation in the U.K. Can you elaborate on where you see it in terms of channels because when talking to, for instance, Howdens there, a little bit more positive on the pricing situation?

[Morten Falkenberg, President, CEO & Director]

I can take that one, Kristoffer. I think it's really a continuation of the fierce competition and price pressures that we have seen. And it's also when we talk to our -- some of our partners, like Travis Perkins, they do see, especially with when you have the uncertainty of Brexit, that price becomes a much, much more important element in the mix. So I would say it's a continuation of a very, very price-competitive environment.

[Carl Ragnerstam, Analyst]

Okay. In terms of channels, where do you see?

[Morten Falkenberg, President, CEO & Director]

Channels, as we see it, it's very much retail. Our Magnet Retail part and with the competitors we have within that channel. Trade, to your point on Howdens, may be less, but really especially the retail environment is really tough right now.

[Operator]

Next question is from Mattias Holmberg from DNB Markets.

[Mattias Holmberg, Analyst]

And first of all, congratulations to you, Morten, for your hard work, and good luck in your future endeavors. I have a few questions. The first one, a bit technical relating to the IFRS 16 implications. If we look at the H1 impact, it seems to have boosted your EBIT by roughly SEK 16 million. And I'm just curious to know if you believe that we should see a reversal of this effect in the second half of the year or how we should think of the dynamics here.

[Kristoffer Ljungfelt, Chief Financial Officer]

No. We don't believe that it will be a reversal of this effect, no.

[Mattias Holmberg, Analyst]

Great. And also looking at your group-wide and elimination costs, it has gone up a little bit in the past quarters. Can you give us some help on what this is related to and how we should think of this line going forward as well?

[Kristoffer Ljungfelt, Chief Financial Officer]

I think we communicated also in last quarter that we might be a little bit higher on that number this quarter because of the new strategic plan that we are working on. So these are all within our own expectations, and we don't believe any large increases will occur by second half this year.

[Mattias Holmberg, Analyst]

Great. And I may have -- sorry, did I interrupt you, Morten?

[Morten Falkenberg, President, CEO & Director]

I didn't say anything, no.

[Mattias Holmberg, Analyst]

Oh, yes. I may have missed this, if you said it earlier, relating to the efficiency program. But could you give us some guidance on where you are in terms of run rate on the savings at this point?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, maybe I misunderstood the question before, but I thought we were talking about the cost-out program that we initiated by Q4 where we said we had a run rate around SEK 80 million in savings. We believe the majority of that will end up in the second half of the quarter -- sorry, second half of the year. We had a good start in Q1 with about SEK 15 million worth of savings and another additional SEK 10 million this Q2. But the Q2 was slightly behind in the program as such. But we still believe that we're in a good place on the cost side.

[Operator]

Next question is from Julius Rapeli from SEB.

[Julius Rapeli, Analyst]

Firstly, related to project market, I was just wondering how does your order book look for the project market in Finland and Denmark? I mean you mentioned in the report that project market in Finland was up despite market being quite tough. And then how much of the SEK 200 million project deliveries in U.K. did materialize during Q2? Just for us to know what to expect for H2 then.

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes. We don't disclose the size of our order books for the project market, but we have previously discussed also that we have a 12-month lag roughly when we have any decline in the market. That's why we can see also the Finnish sales in project sales being quite strong in the period. But as you know, the housing starts in Finland has come down quite a bit since then. The second part, related to the Danish project segment, it's the same here. We don't disclose our order books. But we have seen and we have communicated over time here that Denmark looks a bit more stable in terms of project market than what we are seeing in Sweden, Norway and Finland. Your third question there, if I got you right, was related to the project delivered within -- in U.K. Yes. And as I was alluding to before, we are progressing that and deliveries quite well. And we have completed roughly half of the biggest -- bigger deliveries and not everything has been put to sales yet, but it's well within the reach of being so in H2.

[Operator]

Next question is from Johan Dahl from Danske Bank.

[Johan Dahl, Analyst]

Can I just first wish Morten a big good luck here in his new role. Just a few questions. I was wondering, Morten, you talked about SEK 200 million in sales in the U.K. project channel in Q1. Can you say anything how much of that you worked off here in Q2 and how much is left? And does that forecast still -- is it still valid?

[Morten Falkenberg, President, CEO & Director]

I think I didn't call that. Was that you, Kristoffer?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes. Johan, that was the -- what I just talked about, the SEK 200 million project sales in U.K. where we have delivered for almost half of it, which means we have about half of it left for the second half of the year, yes.

[Johan Dahl, Analyst]

All right. I didn't...

[Kristoffer Ljungfelt, Chief Financial Officer]

In rough terms, yes.

[Johan Dahl, Analyst]

Yes. Secondly, on the Nordic retail sales, you're talking about inflationary pressures there. I presume everyone need to raise prices. Does your success here in the first half have anything to do with you sort of waiting to hide prices and you'll address this more aggressively in the second half? And what's the likelihood of you being successful there given the weak or sort of stable markets you're projecting?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes. First of all, I think we can have success and continue to do that. We did do some extraordinary increase when we saw the inflationary pressure from direct material tagging along, and now we've seen more so coming in from transport and, to some extent, the labor cost. So it's important for us to continue to push it on, which is also expected in the market. And I think we're not alone on that. So I think there are plenty of opportunities to do it. But of course, it's always challenging to do it and especially so in the U.K. market where you see a lot of price pressure from competition as well. So we right now can't -- we're not sure how they will act on the prices, of course.

[Johan Dahl, Analyst]

But you're not comfortable then that this strong performance in the retail channel in the Nordics in the first half is sort of a result of you being less aggressive on pricing?

[Kristoffer Ljungfelt, Chief Financial Officer]

No, actually not. I think we have done quite well in terms of the new product concepts that have been launched, which we can see have a good traction in the market and also on the back of us modernizing some of our stores through the omnichannel concepts and refurbishing more stores now the last couple of years than what we've been doing before. So it's rather an effect of that, I would say.

[Operator]

[Operator Instructions] And next question is from Kenneth Toll Johansson from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

You talked a little bit about Bribus and the supply chain there that you are investing in. Could you talk a little bit about what your plans are there, please?

[Morten Falkenberg, President, CEO & Director]

I can cover that question. I think the -- first of all, our strategy with Bribus has been to really let them run with what they're good at and which are the social housing. But the thing is -- and we now have boots on the ground in the country. And so we are looking at, with their knowledge of the market, what else can we do to expand and move into other channels as well. So that is being reviewed, as we speak. But we have a clear integration behind the scene. But also I think while learning is with new acquisitions that they can do what they do well, especially when you have a professional company with a strong management that are keeping a lot of growth. So -- but we need to, over the next few years, we get how can they assist Nobia also in becoming much more preeminent in that area as well.

[Kenneth Toll Johansson, Financial Analyst]

Are there any purchasing synergies to come?

[Morten Falkenberg, President, CEO & Director]

There are definitely some purchasing synergies in this. So -- but it's still a -- will be an important part going forward to improve their profitability even further.

[Operator]

And there are currently no further questions registered, so I'll hand the call over to your speaker, Kristoffer Ljungfelt. Please go ahead.

[Kristoffer Ljungfelt, Chief Financial Officer]

Okay. And I would just like, before we end this call, to thank you, Morten, for -- from myself and from the rest of the -- of us in Nobia and just to say that you have been a great CEO. You've done some really great things for this company. And we believe we're a much stronger company since you joined and also fundamentally different company in terms of the financial position, which has also unlocked a lot of opportunities for us in the future.So thanks a lot, Morten, for this, and good luck in the future.

[Morten Falkenberg, President, CEO & Director]

Thank you so much, Kristoffer.

[Kristoffer Ljungfelt, Chief Financial Officer]

And then Tobias, I hand over to you.

[Tobias Norrby, Head of Investor Relations]

I mean that's it from my side. So welcome back, everyone, on the 23rd of October for our Q3 report. And until then, I hope you get a nice summer break. Thank you.