Nobia AB

STO:NOBI

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by, and welcome to Nobia Q2 Report 2023 Conference Call.

[Operator Instructions]

I would now like to hand the conference over to the Head of Investor Relations, Tobias Norrby. Please go ahead.

[Tobias Norrby, executive]

Thank you. And welcome, everyone, to this presentation of Nobia's Q2 results. And apologies for the small delay, had some technical issues. The presentation today will be conducted by Mr. Jon Sintorn, our CEO; and Mr. Henrik Skogsfors, our CFO. And with that short introduction, I hand over to you, Jon.

[Jon Sintorn, executive]

Thank you, Tobias. Hello, everyone, and thank you for joining the call today. So for the second quarter, on a high level, we see market demand further soften with macro fundamentals hampering consumer as well as the project segment. So the organic growth in the quarter came in at minus 13% for the group. An exception was our operations in the Netherlands that delivered growth. But here, you should remember that we had a cybersecurity in June last year holding back some sales then. But even net of that, a good momentum there.

Some positive notes or our price increases that continue to compensate for inflationary pressure and that our restructuring program that was launched earlier this year is fully on track in terms of actions and the related savings and efficiencies are being realized. Then there is a soft market rendering a significant volume drop that has impact on [ Nordic ]. EBIT for the second quarter came in at SEK 83 million, excluding SEK 22 million of [indiscernible] versus SEK 212 million last year second quarter.

On cost savings we have realized so far are at SEK 70 million in the second quarter and SEK 100 million year-to-date. In the U.K., we have 2 factories, reduced and simplified overhead resources and we are evolving the way we conduct business in the U.K. The project business there is reduced in size by exiting unprofitable segments and contracts, price adjustments, making the remaining parts financially healthy, and that is going well.

In the Trade and Retail segment, we drive more sales in the premium part of the market and higher average order values. We are seeing some results, costs are coming down, a larger share of higher value kitchens are being sold and hence positive margin is up even though gross profit is not because of the volume drop. As said at the Capital Markets update in March, we are to optimize the store network by reducing sites of our own stores and we are exploring and piloting opportunities that through asset-light models, such as franchise and other partnerships.

The construction of the new Nordic factory in r Jönköping continues to progress according to plan. We have started utilizing some of the machinery for kitchen component manufacturing to support the Nordic supply chain. And in the autumn, we will have serial production of flat tax. As per the plan, by the end of [ 2024 ], we will produce and consolidate full kitchen orders in that factory.

Operating cash flow for the quarter was lower. But there are some timing effects in working capital changes in both the second and already in the first quarter. So looking at the year-to-date June provides a better view. We do have a situation where our sector's economic downturn coincides with a temporarily elevated investment levels that we have due to the new factory, and that has resulted in an increased leverage.

Already at the time for the decision by the end of -- the investment decision at the very end of 2019 to invest in the new plant, we anticipated a large outflow in the period '22 and not least, '23 and '24. And also that the sale and leaseback of the building was addressed as an alternative. We have then and have now a good support from our banks and have adjusted -- and now adjusted business for our funding facilities to reflect the current macro and market conditions. And as we have communicated before, we are also actively pursuing with the sale and leaseback and divestment of certain assets, like sale and leaseback of the Jönköping factory and the divestment of the factory in Dewsbury, U.K.

And as a final highlight, I am very happy to announce that Henrik Skogsfors, previously head of our Group Business Control and Accounting, and has been an acting CFO for the past 6 months, has been appointed our permanent CFO, and I really much look forward to continue to work closely with you, Henrik.

And with that, over to you -- now to the next slide. Kitchen market development. I'm going to spend a little bit more time on this slide than we have done in previous calls. And let's start with the Nordic market. As we can see, there is a softer consumer and market, and we've seen for some time and also project market decline as housing starts decrease and housing completions taper off.

Well, let me say more on Nordic market situation a little bit longer. If we -- on basis on, let's call it market development, not the year-on-year sales or invoice sales, but on the market development during the second quarter, we do have some data that suggest that overall, it varies a little bit from market to market, obviously. But overall, it seems like and I'm knocking at doors I'm and careful that the consumer demand seems to flatten up.

We've had significant, obviously, decreases in some time. But it seems like it's flatting it out. And in the project market, also a bit different. But starting with -- I should put this way, starting with Denmark, where overall demand was the first one out to soften and then followed by the other countries. And it seems like, at least we have some data that suggests that the market in itself in Denmark is flattening out, and that goes both for consumer and projects.

It doesn't mean that our sales in the second quarter has flattened out, but the market development. In Sweden, which is probably hit the most in the project business, on the back of housing starts and so on, we anticipate that the course of the second half, that effect will roll out, so to speak, that gradually, we will see a lesser decrease of that market. So those have some reflections on the Nordic market. It's a tough environment, obviously, that is true. But on a year-over-year effect, gradually, the decrease should taper off.

But that's a knockable, who knows about the future. In the U.K., the retail market is clearly softer, in terms of volume. It has been softer. Trade on par or flattish with last year, a little bit down, but it's the best resilience overall in the trade market. And the project market remains weak. With that said, we have exited unprofitable segments and so on. So in terms of our Magnet project business, that is -- that business is performing better now than it did before. And then hence, market share in that market is very low for us. So not as exposed to the more green market circumstance as other sectors.

And then we're looking into Austria and Netherlands. Across the Board in Europe, retail market has been soft. But as said, that's the dominant trade to Austria. And then in Netherlands, the Netherlands project market is or has been so far stable and also a good order book.

So that was a few remarks with regards to the market and the market development. As for direct materials, obviously, a big lever in our profitability. Inflationary pressure on direct material is still high, but it's pretty stable. So sequentially, we are down from the peak fourth quarter of 2022. So we're down from Q4 2022, but the year-on-year effect, second quarter last year versus the second quarter of this year, we have a slight increase in direct material prices.

With that said, in negotiations that we have and the interactions that we have and the requirements that we put forward and as demand on the customer side is much lower now than last year, there is a decline in material prices and shall gradually have a positive impact on us starting with the next quarter and the following quarter and so on. So we see a positive trend in this area.

For the second quarter this year, the total on-cost for material, energy and transport was approximately SEK 40 million in Q2, and half of that was direct material and half was energy and transport.

So with that, over to you, Henrik.

[Henrik Skogsfors, executive]

Thank you, Jon. So let's start with Nordic for the second quarter of 2023. The organic growth came in, in the quarter at negative 17%. The price realization was good across the board and continue to support our topline, however, burdened by the volume decline, which was noticeable in all countries or in segments. The largest decline in sales was in retail with somewhat smaller drop in trade and projects. We had negative development in all countries, Nordics with a larger decline in sales coming from Denmark, followed by Sweden.

The gross margin declined by 3.8 percentage points to 31.8%. The primary reason behind the drop in gross margin is related to the decline in sales as well as the negative mix effect from revenue sales. Sales is declining more in the consumer segment compared to the professional segment.

On the positive side, as Jon just mentioned, we see sequential improvement in direct material impact. However, we still had negative impact in the year-over-year comparison compared to the second quarter last year, in addition to higher transport costs as well as higher energy bills. As mentioned in the quarterly report, we have taken SEK 19 million as items affecting comparability in the second quarter in the Nordics. The costs are related to supply chain and transition for Tidaholm and Jönköping. The savings from the restructuring cost program communicated in January is well approximately positive SEK 15 million in the second quarter.

In summary, EBIT of SEK 102 million compared to SEK 248 million last year. The main driver behind the lower result is the volume decline and the negative sales mix.

So over to region U.K. Organic growth was negative 16%, as in the Nordics, the U.K. kitchen market was soft in the quarter. In addition to a soft market, region U.K. had slightly fewer trading days, for example, Kings Coronation compared to previous year, in addition to us leaving low-margin parts of the projects segment, which had impact on our topline. The latter had a negative topline impact of around SEK 75 million in the quarter. Retail was very soft, with Trade was and is more resilient. In our U.K. transformation strategy, where we aim for the higher average order value segment, we are glad to see that the gross margin increased to [ 42 points ] up from 41.2% from last year. Higher average order values on back of a shift to more premium products, which is in line with our transformation strategy.

Examples are higher paying to order ranges, widening the ranges of premium white goods like [indiscernible] have together with normal price adjustment increased the average order value. The average order value mitigated effect from higher year-on-year direct material cost. Despite the improved gross margin, the absolute gross profit declined in the quarter on back of lower volumes.

Savings on the restructuring cost program benefited the quarter by approximately SEK 40 million, slightly better and ahead of our plan, which is the primary driver behind the lower selling and administration costs in the quarter. U.K. delivered an EBIT loss of SEK 11 million compared to positive SEK 14 million last year.

So over to the next slide, please. Portfolio business units came in with a solid 40% growth. Primarily, as Jon mentioned, on back of the cybersecurity incident in [indiscernible] that stopped production and shipments. However, even if we would adjust for the incident previous year, portfolio business units would have shown growth, however, low single digits. The market in Austria continues to be challenging, and Austria showed a small sales decline compared to previous year. [indiscernible] project in London is still a challenge. However, as mentioned in the last call, we are moving in the right direction, partly because we have a new structure in place, but also because we noticed positive signs like order intake upticks.

The gross margin improved to 31.3% from 26%. This is, of course, primarily due to the last year being heavily affected by the cyber incident. Please note that also here, adjusted for the incident, gross margin would have been higher. EBIT for the region was SEK 36 million compared to SEK 9 million last year. The main driver behind the improvement is [indiscernible] in addition to a slightly lower loss in Commodore & CIE, which were hampered by lower operating profit in Austria.

Next slide, please. Financial position. First, we have a good relationship with our core banks. As Jon said, we have adjusted the terms for the funding facilities to better reflect the current macro and market conditions. Cash flow. Small positive cash flow from inventory, mainly an effect of prior year inventory increase in addition to all entities having lower inventory current year, partly negative translation effects on back of the weak Swedish krona. The reason why working capital is much lower than last year is the timing effect from first quarter, as we mentioned in the Q1 call.

A better reference point is to view the year-to-date cash flow. All in all, cash flow from operating activities came in at SEK 66 million compared to SEK 694 million last year. The operating cash flow, including investments amounted to minus SEK 276 million, where the investments in the quarter are primarily related to the construction of the factory in Jönköping. And the investments in the quarter amounted to SEK 342 million.

Net debt, excluding leasing and pension debt increased by SEK 439 million in the quarter to SEK 2.505 billion. The increase in net debt is according to plan as we continue to build the factory. The increase in net debt in combination with the decline in EBITDA resulted in a leverage of 4.8x, which is in line with our own internal expectations. The fact that economic downturn coincides with our planned high investment level has resulted in an increase in leverage as communicated at the Capital Markets update as well as in the Q1 call. We are fully committed to reduce leverage and explore different leverage reduction options such as sale and leaseback of assets. We can confirm that there is broad interest and we are now in active discussions.

We also classified in the balance sheet and items -- assets term for sales, sorry for that. And that's the Dewsbury property, and the plan is that, that will be sold during second half of 2023.

So over to you, Jon.

[Jon Sintorn, executive]

Thank you. The last slide. Looking at priorities going forward. Let's start with the current business operational ones, the first bullet point, to even further intensify our sales activities, turning every stone in these market circumstances and drive conversion and a lot of commercial activities in order to drive topline as much as possible.

We will continue to do capacity adjustments on top of the [indiscernible] already had to continue to mirror the demand situation. And then a big lever for us, the direct material price reductions that should step by step come into play second half of this year on a year-on-year basis. And then obviously, continue and do more in the execution of our cost-out program, which are delivering on plan so far, and we are even doing this month.

And then secondly, obviously, leverage reduction. As we mentioned, there is a sale and leaseback of Jönköping the divestment of Dewsbury and other activities. And then continue to deliver according to plan to be able to produce full kitchen orders by the end of 2024 in the Jönköping factory, which is the main pillar of our strategy.

So with that, thank you very much and over to Q&A.

[Operator]

[Operator Instructions]

We are now taking the first question. And the first question from Victor Hansen from Nordea.

[Victor Hansen, analyst]

A couple of questions here from my side. And first one, so your organic sales was down 13%. I'm wondering what the year-on-year pricing effect is?

[Jon Sintorn, executive]

We -- as you know, Victor, we don't really communicate that exactly how much that one is. But we can also say that you can also notice that the volumes are down. We have significant volume decline, which means that -- and we have said that our pricing is up.

[Victor Hansen, analyst]

Yes. Okay. And then second here, would you say that you have a fair price cost balance here in the quarter? Or do you see a further [indiscernible] prices or perhaps is it more likely that you would need to lower prices to stimulate demand and increase your utilization rate?

[Jon Sintorn, executive]

So we -- fundamentally, we're looking for a higher average order value [indiscernible] strategy, making sure that we address the Nordics and the U.K., which we can call the mass premium segment. So there, we will [indiscernible] pricing as possible. On an individual transaction basis, there may or may not be smaller rebates. I think we can -- we believe we can sustain -- overall, we can sustain the pricing level. And also, we will need to get direct on down because the direct material situation does not reflect the demand situation. And that's the key lever for us at this point.

[Victor Hansen, analyst]

Yes. Okay. Next question here. By selling Dewsbury, how much cash can that give you? And how much would it increase your revenue costs annually?

[Jon Sintorn, executive]

Sorry, can you repeat the last part of the sentence?

[Victor Hansen, analyst]

Yes. So how much would your rent cost increase annually if you sold your spend also how much cash you would receive?

[Jon Sintorn, executive]

It's a freehold. So we are selling the Dewsbury factory. It's part of -- since we have exited unprofitable -- deteriorating the profit segments of the project business, we are selling Dewsbury factory.

[Henrik Skogsfors, executive]

Yes, we are the owner of that. And so there is no impact on rent. But I think we have also communicated that when we had a quarterly both in the Q1 call, but also in the Capital Markets update.

[Victor Hansen, analyst]

And then you mentioned here having adjusted the financing terms with your banks. And I'm wondering here, were you giving more headroom in terms of covenants or what are the effects from this? Any flavor here would interest me.

[Jon Sintorn, executive]

As we said in the call, we have adjusted, so it's reflecting the market development and the market outlook. And yes, we have adjusted terms with our core banks.

[Henrik Skogsfors, executive]

I think it's fair to say when the original agreement was set in place, it had took into account that the major outflows of the cash would be run by this time and the year following year. That was already set, and now understanding and seeing all the macro situations and whatnot, it's been fairly adjusted to reflect, to mirror that situation. So yes.

[Victor Hansen, analyst]

Okay. Final question here, Jon. On your backlog, you haven't stated any levels, but should we expect a clear decline in your backlog and thus lower sales sequentially going into Q3? Or what can you tell us about your backlog and the delivery timing in?

[Jon Sintorn, executive]

Your backlog, I presume that you mean order book.

[Victor Hansen, analyst]

Yes. Exactly.

[Jon Sintorn, executive]

Sometimes the backlog means delayed the orders in operational terms, but the order book. So your question again, if the order book...

[Victor Hansen, analyst]

If you can tell us the delivery timing of your order book?

[Jon Sintorn, executive]

No. If we compare with a very difficult and challenging supply chain situation that we had in the big parts of year and also into this year, we had any different demand situation also, we obviously have much longer lead times in the Nordic factories. That situation is -- that situation with long lead times is not seen effect now. So we have shorter lead times for both consumer and project business.

[Victor Hansen, analyst]

Yes. Okay. But I would guess that your book-to-bill is below 1 and -- yes. Book-to-bill. And your orders are below your sales level, I would assume that. I don't have the data, but I would assume that. And just if your order book is significantly lower now and if sales will be significantly lower in Q3 and had due to this.

[Jon Sintorn, executive]

On the year-on-year effect, the bulk of decline last year, but we had a larger order book coming into this year than we have now. I think that's fair to say. And I was trying to elaborate a little bit judging from the second quarter, not forward-looking, but judging from the patterns for the second quarter, it seems on the consumer bases starting out and...

I will interrupt it here. Sorry. So as I said, there's -- based on some patterns in the second quarter, not being forward-looking here because to be mindful of that, the decrease -- the year-on-year decrease, I think we've seen the worst the second quarter. So gradually it will taper off if that's a question.

[Operator]

We are now taking the next question. And the next question from Rasmus Engberg from SHB.

[Rasmus Engberg, analyst]

Can you just explain what it means that you have -- does it mean your negotiation with your banks, are you paying more in interest rates now but you are allowed to have a higher net debt to EBITDA and other measures? Is that what you're telling us?

[Henrik Skogsfors, executive]

What we're telling is that, yes, on your questions. And higher interest rate, it depends. We have, as all other customers, we have based on cyber, most cases in Sweden, so depending on cyber, which we cannot control. Then we have, depending on the leverage level, we have different add-ons on the margin, getting to the total interest we pay to the -- on our funding facilities. Does that answer your question, Rasmus?

[Rasmus Engberg, analyst]

Yes, I think it does. And given the material worsening in demand that we have seen, is it your opinion that let's say, leaseback and disposal of some factories that you do not use, is that enough to bring down leverage to a reasonable level? Or are you also thinking about potentially raising equity?

[Jon Sintorn, executive]

So to your first question, as instrument, we are using the tools and activities that are available for us, which is things like sales and leaseback, divestments on the factory, facing investment of the remaining machinery in Jönköping and other things in order to work on the balance sheet. And that we do, and we are mindful and we are preparing. We have different stages of activities when they can materialize if needed to materialize, we have enough activities here and now and a good support with the bank.

So we can manage the situation in a good way here and now. But obviously, we need to be prepared and mindful and look at things. That's clear. And I think that everybody understands that. In terms of the right -- share rights issue, that's obviously not a question for management, but for the owners, the shareholders. It's not ours, but it's nothing we work on.

[Rasmus Engberg, analyst]

I was just thinking that, I mean, the real estate market as such, which sale leaseback would somehow be a part of, is a bit subdued as well. So just mindful that there are other alternatives as well. The worst thing, I guess, would be to sell the factory and still do share rights issue would kind of be a bit of a waste in the current environment, I was thinking. Anyway, back to the Capital Markets update that you had this. We talked a bit there about the U.K. reaching profitability this year. Is that still doable? Or how do you see that going forward?

[Jon Sintorn, executive]

I'm not sure whether we typically give forecast for the future. But I think it's fair to say that we -- I'll put it this way, the actions we already have introduced in terms of cost savings, in change of business model and the focus on Magnet and the proposition that we developed a previous year, last year and selling more of the mass premium product and those sorts of things and addressing the central costs. Let's say that the market circumstance was not as weak as they say it is today, because it's been a significant drop, not least in the consumer segment in the U.K.

If that situation has not been, it wasn't it, but then we would have been profitable today. But now we do have -- in that sense, we have a volume challenge. But the thing -- the measures we put in place, we will do more. Absolutely, we will do more, but the measures we put in place, we can earn -- we can see it if they work.

[Rasmus Engberg, analyst]

Yes, very good. And then just a final question. Can you give us an update roughly in the second quarter what your interest rate cost was roughly so we can sort of make some sort of assumption going forward?

[Henrik Skogsfors, executive]

I think we have that in the quarter report.

[Rasmus Engberg, analyst]

Okay. How much...

[Henrik Skogsfors, executive]

To the financial items. Interest rate -- are you talking about the interest rate level?

[Rasmus Engberg, analyst]

Yes.

[Henrik Skogsfors, executive]

We don't share that information.

[Operator]

We are now taking the next question. And the next question from Sofia Sörling from Carnegie Investment Bank.

[Sofia Sörling, analyst]

Yes, this is Sofia Sörling. Can you hear me?

[Jon Sintorn, executive]

Yes.

[Sofia Sörling, analyst]

Yes. Great. So my first question is about this investment by the leaseback assets, the sale leaseback assets. You mentioned in your previous communication that it could basically just take only 12 weeks in order to sell the asset, and that has been more than 12 weeks now. What is the reason for this? Has it been more difficult would you say than you previously expected? Or is that you don't prioritize to actually make the sale? Or what is the reason for not selling the asset? That's my first question.

[Henrik Skogsfors, executive]

No, it is progressing well.

[Jon Sintorn, executive]

But in the complex transaction, obviously.

[Henrik Skogsfors, executive]

It has nothing to do that we don't have interest, et cetera, in a factory. It's more that we are not fully ready with the factory, and there is a lot of things to sort out. That's why it takes time. It would have been in -- if everything was just ready, so you have the key and hand over the keys, then it's 12 weeks. But there's a lot of things to discuss and agree for the completion of the factory.

[Sofia Sörling, analyst]

All right. So your new outlook on when you will be able to sell this asset? Is that within 12 weeks from now or within 6 months or -- what is your guidance there?

[Jon Sintorn, executive]

We're not giving guidance. And I believe we said a typical project duration would be something around 12 weeks. And we didn't specify when that process started and so on.

[Sofia Sörling, analyst]

All right. And my second question is about the remaining investment spend on this factory. And could you please repeat again what is the remaining total investment in this factory? And please also split the remaining part into land and building, i.e. the sale leaseback assets? And what is the remaining part in other assets, such as machine or project costs?

[Henrik Skogsfors, executive]

We have -- so far, we have invested around SEK 2.1 billion invested in the factory. And as we have communicated earlier, the total investment is around SEK 3.5 million. And the remaining, so to say, investment CapEx is related to the machinery. We still have [indiscernible], as mentioned just recently that we're still completing the office building and stuff like that, it still remaining, but the majority of the investments remaining are for the machinery.

[Sofia Sörling, analyst]

Okay. And is all this already agreed that you can't like limit the remaining spend in machinery? Or is it that you need to complete this total spend?

[Jon Sintorn, executive]

So obviously, quite a lot has been committed because we are progressing according to plan. And it's a big project to get all the lines machinery up and running, and you see one end of the corner, you have this all and [indiscernible] machinery and now [indiscernible] drops being installed and then final assembly line and so on, actually 3. But 1 example is facing and looking at the demand situation with some -- the next couple of 2 years or so we'll probably not be much higher than we had last year, if I put that way.

So we can postpone things like a third, final assembly line, and there is some automation, which will not be necessary at this moment in time because of capacity need and those sorts of things. So there is absolutely something to do in terms of phasing when we do. But all still need to be because we're building a good infrastructure for the factory. So the bulk -- the main figure -- the bulk of it will be but there is absolutely some room to [indiscernible].

[Sofia Sörling, analyst]

All right. Okay. And my last question is about this cost transition to the new factory. I think you raised or recognize about SEK 19 million in the Nordic spend. Is this something that you expect will continue in Q3 and Q4 with a roughly SEK 20 million in transition costs?

[Jon Sintorn, executive]

In part they tend to be exact, but round about those numbers would be.

[Operator]

There are no further questions at the moment.

[Operator Instructions]

There are no further questions at this time. I will hand back the conference for closing remarks.

[Tobias Norrby, executive]

Very good. Thank you, everyone, for calling in today and talk to you next time on November 2nd for the third quarter report.

[Operator]

That concludes the conference for today. Thank you for participating.