Nobia AB

STO:NOBI

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to the Nobia Second Quarter Report 2022. [Operator Instructions] Today, I am pleased to present Tobias Norrby, Head of IR. Please go ahead with your meeting.

[Tobias Norrby, executive]

Thank you and thank you, everyone, for calling into this presentation of Nobia's second quarter results. And once again, our apologies for the delay today. And we will do it the way we usually do it, so meaning starting with an overview by our President and CEO, Mr. Jon Sintorn; and then, Mr. Kristoffer Ljungfelt, our CFO, will dig into all of the financial details.

So with that introduction, please Jon, go ahead.

[Jon Sintorn, executive]

Thank you, Tobias, and welcome, everybody. That said, I will start with some general highlights for the business in the quarter and updates of some of our strategic initiatives, and then Kristoffer will run through some more details in the regions.

The second quarter, a challenging quarter on the back of world turmoil, direct material inflation and supply chain constraints, but the markets we operate in are good. Sales and price increases are coming through, and we have great momentum in our strategic structural initiatives as well as the previously announced cost program.

The market was holding up well in the quarter. Footfall was softer in April, but came back strongly towards May and June, and we see more physical than digital activity for the moment, which is a big shift from how it looked the same period of last year.

The project market continues to be strong after the strong housing starts in the last few years. Judging from our order book, our deliveries for the project market should remain strong throughout the year, also backed by the fact that kitchens are amongst the last things you install in the building.

We have a strong order book. Our net sales for the quarter were SEK 3.89 billion, and that was an organic growth of 3%. There was continued good sales momentum in the Nordics, a strong order intake as winter sales campaign in the U.K. and market price increases that gave that organic growth. Volume growth was flat in the Nordics, but the lack of volume growth is purely a result of capacity constraints and general supply chain and material problems, in foremost our Swedish factory in Tidaholm, but also to some extent in the Danish factory.

We have taken on temporary additional cost to manage the external supply chain constraints. We see some cost remain in the third quarter, but it will taper off for the fourth quarter as most of it is related to temporary effects and not run rate cost.

So again, the strategic decision and direction for the Jonkoping factory to cater for more capacity will make a big difference going forward.

Our gross profit was 36.3%. The direct material headwind in the quarter was a considerable SEK 270 million. We believe that the direct material has peaked both in terms of price and year-on-year impact on our profitability, although prices are still on that high historical level. Even if we have managed to compensate the majority of the cost through our market pricing, our most recent market price increases have not yet materialized in full.

Operating profit of SEK 212 million with a margin of 5.4%, obviously not satisfactory profit in the quarter. In the U.K., however, we are doing gradual improvements towards profitable growth. We started to address top line growth by better operating model, management and sales execution, higher average order values, more kitchen designers and sales capacity, and introducing new products such as Nordic Nature as well as improved brand building marketing.

Even if results to some extent are lagging a little bit, it is good to see the growing sales, and as an example, retail sales up 30% in the quarter, improved margins and cost reduction initiatives. We also remain bullish that our U.K. business will be able to take share in the coming quarters as the foundation for that is much improved compared to just a few years ago. A lot of work remains to be done, but a lot has been done.

The cost program that we announced in conjunction with the last quarter's call has been executed on. The new factory in Jonkoping is progressing even ahead -- slightly ahead of plan and on budget. And we have implemented the first group-wide CRM or digital sales solution for our 2 largest brands. I will get back to a little bit more on the new factory and some other strategic initiatives in a little while.

Moving on to the kitchen market development. I guess one could say for everybody everywhere, the general uncertainty has increased, but in our case, we still see in the Nordic market, stable market development in the consumer segment, project segment holding up well on the back of new housing completions. We have been operating on quite more than decent market conditions for quite some time. And in the short term, we see that enrichment to well continue.

In the U.K., market is growing in value and the trade segment is gaining share in relative other segments in the market. However, the London super-premium project market remains very weak and it has been a struggle, as you know, since quite some time by now. And in Austria and the Netherlands, we have stable underlying demand in the markets.

Getting on to the direct material impact in the second quarter. Again, continued significant inflationary pressure on the direct material, and as I said, the total on cost for material, energy and transport of about SEK 270 million in the quarter. But what we do see now is that material prices are flattening out, even though it's still on a high level. And we have done repeatedly price increases and the latest extraordinary price increase will materialize during the second half of this year.

An update on our Tomorrow Together strategy. Looking at the right-hand side, I'll give you a few examples, not all examples in every box, but a few examples. Looking at some growth initiatives, we can see that we are increasing our sales capacity, specifically in the U.K., rendering results both for the trade growth that we are pursuing, but also for the consumer retail. And here we have a new Magnet store concept that just very recently has been inaugurated, and that is on Stockton-on-Tees, if you would have the opportunity to drive by and have a great look at this great store.

We see the continued trend of paint being very positive, Marbodal, we talked about before and other Nordic brands, and as well as in the U.K. where our paints are ordered, portion of sales have gone from 5% of sales a year ago to 7%, and now rendering a 14% of sales. So that's a very positive trend for us.

In terms of selective geographical expansion, I'm pleased to announce that we have signed with 2 franchisees for HTH in Germany and each taking on the couple of stores from now, and 1 and 2 years ahead from now. And as I mentioned, the digital and data excellence, which is a good bridge into structural efficiency initiatives, is that we have the first ever group-wide digital sales solution, the CRM system, for the 2 largest brands, HTH and Magnet.

For the structural efficiency, another example is that we have a shared services center now operational in Vilnius. We have a manager and then some people starting that up. Early days still, but it is now in operations, which is great and something to build on for the future and the future efficiency.

And last but not least on this topic and slide is that the new Jonkoping factory is ahead of schedule and on budget. About 50% of the factory building is completed, and the first production machinery is being installed. And what you see on this picture is actually the first machine, it's soul. And it's 12 meters high, the wall -- the height of the wall up to the ceiling, so to speak. So it's quite a significant building and this is just a small little corner in this building.

So project progressing well both in terms of building the building, but also in terms of designing and ordering and getting the machinery, and we will have some component manufacturing to start. We plan to have that start before year-end with some real deliveries then most probably early into next year.

It's really, really great to see how this is coming to fruition and how this is materializing and it is building capabilities -- capacity, capability, lead time and other things, which we will have great benefits from this project.

And with that, I hand over to you, Kristoffer.

[Kristoffer Ljungfelt, executive]

Thank you, Jon. Let's start then with the Nordics. It represents 5% of total sales. In general, average order values were up in the quarter and the product market remained solid with reasonable stable housing completions across all countries. Consumer sales was slightly down, following tough comparables in some countries when COVID restrictions were eased last year.

If you look by country, sales in Denmark was strong with double-digit growth in product sales, driven by both value and volume. Consumer sales held up reasonably well given the extremely strong retail sales comparables, which last year grew by 100% in the quarter. And the Danish market now represents 46% of the Nordic business, and we estimate that we continue to take share in this market. Volume in Sweden-Norway declined in the period with the only reason being the capacity constraint in Tidaholm, and difficulties with the material availability. As a result, we have stronger order book when we enter Q3, which is based on then the good sales, but also on back orders from Q2.

The cost for manufacturing and dispatch is higher for the moment as we run night and weekend shifts to a much larger extent than we did in the same period last year, and we estimate this has had a negative impact on the P&L with about SEK 30 million in the quarter. And we estimate that additional production costs will continue, as Jon was alluding to for the next quarter, but then gradually taper off.

Finland is representing 12% of sales, was growing single digits, backed by good project market. Also in Finland, the product availability was a concern, but it starts to look better already towards the end of the period. Current order book in the Nordics is roughly up 20% compared to last year, and we see price increases start to come through in the back order -- in the order book as well as towards the end of the quarter. However, we strive still to get more capacity through the system and to be able to deliver on the order book and avoid the long lead times that we currently have. And actions have been taken in that direction. And amongst others, we have started to shift volumes between factories and run overtime and night shifts that I was alluding to. And these actions are impacting our margins short term, but should improve profitability in the mid- to long run.

In summary, organic growth of 6%, driven by improved pricing and product sales in foremost, Denmark, gross margin of 35.6%, burdened by increasing direct material prices and the capacity issues, while market price increase contributed positively. EBIT of SEK 248 million, margin of 11.5%.

Now over to the U.K., please. And there you can see it represents 35% of total sales. Magnet Retail had a very strong period during winter sales, with both volume growth and strong growth of average order values. The large improvement in mix also strengthened the gross margins in the period, hitting 41.2% compared to 38.5% in the same period last year despite considerable headwind on direct materials. And I'll just repeat what Jon was saying that with the sales and gross margins moving in the right direction, we found it necessary to address the cost base, and it's been instrumental now to complete the cost-out program in the quarter, which is then mainly impacting U.K.

Project sales continued to improve from very low levels during the pandemic. And judging by the housing starts last year, we believe that the project market will be stable throughout the year in the U.K., while the social housing market is still soft, however.

Magnet trade was flat in the period, mainly due to tough comparables last year, but we continue to improve and invest in our proposition to grow the -- very important for us, the trade business, and it rendered slightly additional costs in the quarter.

In summary, organic growth of 5% or 10% if we exclude the exit of the Benchmarx business. And growth was driven mainly by price and positive average order values. Gross margin improvement by 2.7% on the back of -- the higher average order values that's negatively impacted by the direct material costs.

SG&A increased in the quarter due to recruitment of more sales staff in our stores, in line with the strategy, but also on the back of the rate release we had last year from governmental backed rate release.

EBIT of SEK 40 million is obviously not where we want to be. And again, we've taken the corrective actions, namely the cost-out activities as well towards the new operating model.

And over to the portfolio business unit, which represents 12% of sales. We start with Austria, which represents about 1/3 of the region. They had another very good quarter, both with good growth and solid profitability despite the heavy direct material headwind. In Bribus, representing 43% of sales, we were, however, struggling with both growth and profitability in the quarter. First of all, the entity has been the Nobia brand with the highest direct material headwind and very long order books, with the old prices taking down the gross margin. And we now, from this point, we expect the situation to improve gradually during the second half of the year as we are materializing our extraordinary price increases in the country.

In addition, Bribus had an IT security incident in June, where we had to temporarily shut down the computers and thus were unable to manufacture and deliver kitchens for a period of time. The situation is now fixed and operations is tracking according to plan again, but top line was impacted in June by SEK 30 million. And despite this, the underlying demand remains solid in the Netherlands, and we do expect Bribus to continue to grow profitably as has been the case before since the Nobia acquisition.

Coming back to the London super-premium project. It's been extremely tough with very few completions during the quarter. And unfortunately, we do not foresee this market to come back any time soon due to the current geopolitical circumstances. All in all, the results in this region was a disappointment from the early days. But again, it was mainly due to one-off circumstances for our Bribus business.

Then moving over to financial position. Our cash flow from operating activities improved in the quarter. The change in working capital contributed positively, mainly due to improved accounts payable, which was impacted both by the higher direct material prices, but also good performance for the extended payment terms through various programs that we are running in the company. The investment in the Jonkoping shopping factory amounted to approximately SEK 300 million in the period. And in total, we have now invested north of SEK 1 billion in the new factory. And as Jon stated, we are on track with the budget despite the large headwind in material cost for the construction industry.

Net debt, excluding IFRS of about SEK 1 billion with a leverage of 0.9x, meaning that we have very solid financials and sufficient headroom for both completing our large investments and dividends going forward.

With that, Jon, I'll leave it to you again.

[Jon Sintorn, executive]

Thank you. Summing up a little bit, looking for going forward as we can see for this year, continued stable market demand. We will continue to drive price increases and drive towards higher average order values as we have done quite successfully in a lot of our brands, and also continue on our pursuit of adding sales capacity.

We will manage and further drive activities in order to mitigate the supply chain constraints that we have had. As we said, we have added cost, temporary costs. That will continue for a while, but it's not a run rate cost. It has been a difficult circumstance that we are now working on and step by step improving. And we will keep the momentum in the major strategic initiatives, which I am pleased to see or very happy to see that, for example, as you mentioned, the big investments in the factory is running really well. And we have the -- as Kristoffer mentioned as well and emphasized, the cost-out savings of SEK 140 million on an annual basis. We have executed on the program, and we are preparing and have a readiness for more if we see that the market is going in the wrong direction.

So those are some key initiatives going forward. And with that, thank you, everybody, very much, and I believe it's time for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Victor Hansen at Nordea.

[Victor Hansen, analyst]

I'll start off with -- if you could please share some details on price versus volume-driven sales growth year-on-year?

[Kristoffer Ljungfelt, executive]

Yes, I can start. Maybe Jon, you can fill in. Again, growth was mainly based on price. For the Nordic region, we -- difficult to moving more volume across the system. In U.K., the volume decline from Benchmarx' exit was compensated by volume increase in Magnet Retail.

[Victor Hansen, analyst]

Yes. Okay. And then just to clarify what you said earlier, Kristoffer, you mentioned SEK 30 million of additional, I think it was production costs in the Nordics in Q2, and you expect a similar amount in Q3 and then for it to taper off. Was that correct?

[Kristoffer Ljungfelt, executive]

Yes, correct.

[Operator]

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

[Rasmus Engberg, analyst]

Two questions. Firstly, just a clarification. You have an impairment in this quarter of SEK 42 million. Is that included in the restructuring costs? Or is that on top? That was the first question.

[Kristoffer Ljungfelt, executive]

Yes, it's included most of it, yes.

[Rasmus Engberg, analyst]

Okay. Right. And the second question, I'm trying to understand what you are trying to say about pricing. Are you expecting that you will catch up during the third or the fourth quarter in terms of the raw material cost increases in terms of your earnings? So when do we get to a sort of tipping point when you have compensated for the price increases in the first half of the year?

[Kristoffer Ljungfelt, executive]

We should be able, towards the end of Q3 to have a net -- fully get the cost increase.

[Jon Sintorn, executive]

And that's positive, so to speak for direct materials.

[Kristoffer Ljungfelt, executive]

Given that materials are at the current level, which they are at for the moment. Yes.

[Rasmus Engberg, analyst]

Yes, of course, of course. And just that extra production cost you had of SEK 30 million, is that part of the gross margin? Or is it in OpEx that we see that effect?

[Kristoffer Ljungfelt, executive]

Gross margin.

[Operator]

We have Victor Hansen of Nordea back on line.

[Victor Hansen, analyst]

I think I was cut off. Something happened. Yes. So my next question here on the U.K., Magnet Retail, up 30% organically. I was wondering if you could mention some actions behind this increase and how we should view this improvement going forward?

[Jon Sintorn, executive]

Well, there are multiple things. One should add that -- one is that we had a winter sales campaign order intake coming quite late in the campaign. So it's a little bit of spillover from first quarter as well just to be fair enough about the number as such. But we've done multiple things in the entire commercial organization in the U.K., anything from management, improved sales management. We have introduced smaller and bigger product launches. We've done marketing campaigns in a different fashion than we've done before, which have improved both in terms of brand, but also more of tactical initiatives in that area.

And as I mentioned, one token of what we're doing is the improved sales in paint order. We've changed the pricing structure -- no, not the pricing structure as such. The easiness and accessibility of getting paint order product, which has improved the ratio of sales in that area. So it's not one big silver bullet. It's multiple, small and some big initiatives driving there. And as I said, a lot of work remains to be done. But it's a big market, a good growth opportunity and a lot has been done. So I often say we're going from planning to doing and seeing results, and planning '21, doing '22, the increased results '23. That's kind of been the mantra for some time. And we now see some of it paying off. We have a few more designers as well. I should mention, which is important, which is both in cost and revenue side.

[Victor Hansen, analyst]

Yes. And then finally, if you could provide some flavor on the cost savings from the restructuring, which you announced in Q1, and mentioned on the call here as well. How we should think in terms of timing H2 '22 versus H1 next year for this?

[Jon Sintorn, executive]

We previously said a little shy of half coming through this year.

[Victor Hansen, analyst]

Yes, and that still stands, I guess?

[Jon Sintorn, executive]

Shy on half.

[Victor Hansen, analyst]

Nothing has changed?

[Jon Sintorn, executive]

Yes.

[Victor Hansen, analyst]

Okay. Right. And any estimate -- you mentioned adding some designers. Any estimates for the net savings of increased liabilities? I think you had mentioned was gross savings.

[Kristoffer Ljungfelt, executive]

Yes. But we are working now to increase the number of sales designers. But that would be a gradual move, not something that we have specifically targeted as a specific amount of sales designers. So that will be spending according to revenue as well.

[Jon Sintorn, executive]

But the logic is the decrease, let's call them regionally central cost, which was a big part of the cost program that we did. We rather call it a structural cost program, so to speak, and then use some and make sure that we increase our sales density closer to the customer.

[Operator]

And we currently have one further question in the queue. [Operator Instructions] And that's from the line of Sofia Sörling of Carnegie.

[Sofia Sörling, analyst]

I actually only have 2 questions. So first, I think you already answered about the cost program in the U.K. Is it correct that you don't expect any additional cost, except for the one that you already took now in Q2, and the savings you expect to see a little bit shy of half of the SEK 140 million already by the end of 2022. Is that correct?

[Kristoffer Ljungfelt, executive]

That is correct. But keep in mind also that we are looking at recruiting more sales designers, as Victor also mentioned. And we cannot, as of yet, say exactly to what extent we will add sales designers in Q3.

[Jon Sintorn, executive]

Yes. Since I answered the question, the actual program as such, the effect of the program shy of half by the end of the year.

[Sofia Sörling, analyst]

All right. And then I only have one more question. So given this large order book, and it's -- some of it is due to longer lead times. Have you seen any effect of canceled orders or as such?

[Kristoffer Ljungfelt, executive]

Currently, we have not seen any such thing. And again, we believe that it's a result of the completions from housing starts last year that started to kick in. And therefore, the lead times still quite long for the product business.

[Jon Sintorn, executive]

The quality of the order book is as good as every quarter, back to normal, yes.

[Operator]

We've had one further person join the queue. It's a follow-up from Rasmus Engberg of Handelsbanken.

[Rasmus Engberg, analyst]

I just wondered, the SEK 40 million financial cost, is that sort of the underlying run rate in this quarter and then presumably going up a little bit with higher interest rates and increasing asset going forward? Or is there any sort of one-off in that figure?

[Kristoffer Ljungfelt, executive]

So it's the run rate. And to your point, we expect a slightly higher run rate going forward. Because of the land base for the factory itself.

[Operator]

As there are no further questions at this time, I'll hand the floor back to our speakers for the closing comments.

[Jon Sintorn, executive]

Well, very good. Thank you, everyone, once again for calling, and see you all on the 2nd of November for our third quarter results. Until then, we wish you a great summer. Thank you.

[Kristoffer Ljungfelt, executive]

Thank you.