Nobia AB

STO:NOBI

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Nobia Q2 Report 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Tobias Norrby. Please go ahead.

[Tobias Norrby, executive]

Good afternoon, everyone, and thank you for calling in today. The presentation of our second quarter results today will be conducted by our President and CEO, Mr. Kristoffer Ljungfelt; and our CFO, Mr. Henrik Skogsfors. And with that, I leave it over to you, Kristoffer.

[Kristoffer Ljungfelt, executive]

Thank you, Tobias. Good afternoon, everybody, and welcome to this quarterly update. Let's start with a summary of the second quarter.

The kitchen market remained very challenging in the product segment across all our geographies and we do not see any signs of short-term improvement. However, we continue to see an early recovery in the retail segment and judging from the growing number of web visits and the designer concepts that we have had compared to the same period last year.

Organic growth came in at negative 3%. There are some business units that have done really well in terms of sales given the tough market situation. And amongst others, it's good to see that the U.K. is growing again in the quarter by 5%, and it's driven mainly by a successful retail campaign, where we also gained market shares with sustained gross margins. We also had a quite positive momentum in Denmark. On the opposite side, we continue to experience double-digit sales decline in the project segment in all geographies where we are present.

Improved gross margin reported in the quarter with increase in the Nordics primarily. The improvements were related to higher share of sales to the retail segment. Although we are pleased with this performance, we still target share gains and growth in our products business, which may moderate gross margins later in the year. It's also important to emphasize here that we remain committed to recovering gross margins to the levels seen prior to the pandemic as we work hard on improving our ranges, winning new customers in the mass premium segment and driving efficiency as always through our supply chain network.

SG&A was slightly higher in the quarter versus last year. Currency adjusted SG&A is actually flat. As we have reduced cost in the business, we also decided in the quarter to increase footfall driving activities through our Magnet stores and thus, SG&A in U.K. is slightly up. And to mitigate lower project volumes and cost inflation going forward, we find it necessary to launch further cost program, which was also announced in June.

EBIT came in at SEK 42 million compared to SEK 36 million prior year. Operating cash flow came in at negative SEK 53 million, which is an improvement compared to last year, but driven primarily by timing of working capital from last quarter. In this amount, we have also taken an investment of about SEK 230 million mainly relating to the Jönköping investment.

We are working significant steps in the quarter on our strategic agenda. Amongst others, we closed the share rights issue in April and announced further consolidation of manufacturing in the U.K. We are gradually increasing production of components and flat-pack cabinets in Jönköping, our new factory in Jönköping. And we are igniting a new cost out program primarily targeted to adjust our fixed cost base and drive efficiency in both the U.K. stores as well as the Nordic supply chain.

So the next slide, please. Let me reiterate some actions that we've been taking to strengthen our balance sheet as of late. I already mentioned the share rights issue that was completed in April. On top of that, we divested noncore assets in the Netherlands and Austria, and then the sale and leaseback arrangement of our building in Jönköping.

In addition, we're driving towards a much more asset-light organization by reducing cost. In Q2 2023, we launched a program to save SEK 350 million, and this was finalized and delivered ahead of plan by Q1 this year. Because of the cost program in Q2 this year, we're also facing a bit tougher comparables from this quarter and onwards and that's why we find it so necessary to drive further cost optimization, and we will do this by launching the new program in the quarter to save the run rate of SEK 200 million, primarily by consolidating manufacturing in the U.K., closing unprofitable stores, drive efficiency improvements in the Nordic supply chain. And by delivering on this cost out program, we expect that we can mitigate volume decline in project business, but we also take a very important next step in our strategic agenda and driving towards a more asset-light operating model in the U.K.

The cost out program resulted in SEK 230 million in the quarter. And looking ahead of this, we also do not rule out further cost programs, and that's partly to [indiscernible] in a soft market, but also to follow our strategy.

Next slide, please. The strategic priorities. First in the strategic priority, activities we have discussed already. Secondly, realizing the full potential in the Nordics, it's highly dependent on our go live in our new fantastic factory in Jönköping. We know our brands are very well positioned in the market with high awareness and high brand preference. Equipped with the state-of-the-art factory, it will truly set us apart from competition with regards to design, lead time, sustainability, cost position and much more.

And in June, we had a couple of great days where we first experienced the end-to-end trial that we did with the automated machinery when all of the machinery was running simultaneously. And that marked a very special moment for us at Nobia. But a lot remains to complete the manufacturing and to ramp up the manufacturing in Jönköping and consolidate the volume into the factory. And having said that, I have full trust in our very competent team in place in Jönköping that, to this point, has been on time and on budget during the entire project.

As for the U.K. transformation, we are progressing at pace. There's a lot of work that has gone by to close unprofitable stores and factories and at the same time, drive sales in the midst of a challenging market situation. And for that reason, I think that the U.K. team, spearheaded by George Dymond, has done a great job in chains management and still growing the business by 5% with stable gross margins.

Average order values, that is its own class, was up roughly 10% in the quarter, which is okay, but we had higher expectations. So we expect our consumer prices to come up slightly from current levels. Growth in both volume and average order values in retail is a testimonial, but our Magnet brands stand strong in the mass premium segment, which is also nice to see. However, and as I have alluded to a couple of times already, the cost of doing business in the U.K. is still too high. And this is something that we then address going forward also on the cost program.

So let's move to the next slide, please, on the market situation. And as you can see, and obviously, here, we track the housing starts, an early indicator to demand of kitchens. And as you can see from the graph, it's still very low levels of housing starts. And even if Sweden and Finland have recovered slightly, the levels are unprecedented low and probably unsustainably low for that market and people need housing. And on the back of this market data, we don't expect the kitchen market for the project segment to come back short term. As I was alluding to before, the retail segment in the Nordics looks slightly more promising.

If we then move over to U.K. on the next slide. And here, as you can see from the graph, the U.K. housing starts are currently also taking challenges, and it even dipped below 20,000 housing starts by the end of last year, which is a very low level. However, since our share in the project segment is quite small in the U.K., there is still ample business opportunities for us. There's also a significant pent-up demand after years of underinvestment in new builds. So we remain optimistic that there will be some new governmental backed projects that could start going about and they succeed with their promises of reducing bureaucratic hurdles for house developers. Let's see, and we will follow up on that, obviously.

In the U.K. retail segment, there are clear signs of recovery with consumer confidence rebounding from also very low levels. However, with high interest rates and among the highest interest rates in Europe, we don't expect significant improvement until financing becomes more accessible. Yes.

And with that, I leave it over to you, Henrik, to address the different regions here.

[Henrik Skogsfors, executive]

Thank you, Kristoffer. Nordic region second quarter. Organic sales experienced a double-digit decline consistent with the first quarter of 2024. Although average order values continue to support the top line, the substantial decrease in volume negatively impacted sales performance across all countries in the Nordics and segments.

On a positive note, the retail sector showed low single-digit growth that was offset by a significant sales decline in the project sector and a smaller drop in the trade sector. Finland encountered the largest decline in sales, trailed by Sweden, Norway and Denmark.

The gross margin for the quarter showed an improvement of 6.3 percentage points, reaching 38.2%, which is satisfying given the significant decline in volume. The uplift in gross margin is explained by favorable segment, country and product mix, with consumer sales holding up better than the professional segment. The improvement was partially hampered by adverse currency effect. The strong performance in Denmark was a key contributor to this gross margin improvement.

As outlined in the quarterly report, we accounted for SEK 34 million as items affecting comparability in the quarter. These costs are associated with the transition to the new factory in Jönköping as well as new measures to adapt to lower volumes, which was communicated to the market on June 27. The favorable segment country in product mix development supported EBIT, that increased from SEK 101 million to SEK 113 million in the period, with a strengthening of the EBIT margin to 7%.

Over to the next slide please. Quarter 2, region U.K. Same underlying trends as for the Nordic region where retail showed growth and project is declining. Organic sales in U.K. increased by 5%, as Kristoffer alluded to earlier. Following growth in the winter sales campaign, the retail segment displayed double-digit growth, which was partly offset by a single-digit decline in projects, and double-digit in trade. The gross margin was close to par with the previous year, which is explained by the positive contribution from retail, which was hampered by the volume decline in primarily the project segment.

Currency adjusted SG&A increased by SEK 25 million, which is to be addressed with the currently launched cost out program, and one of the reasons why we moved towards a more asset-light model. EBIT came in slightly below the previous year.

As outlined in the quarterly report, we accounted for SEK 179 of items affecting comparability. These costs are associated with primarily the closure of the Halifax manufacturing as part of the transformation of the U.K. business, as well as further measures in the transition to an asset-light model in the U.K. by closing underperforming stores that are up for lease renewal and further decentralization of operations.

Next slide, please. Financial position. Cash flow from operating activities was SEK 165 million for the quarter, an improvement of nearly SEK 100 million year-over-year. The improvement was driven by timing of working capital from the first quarter, partly offset by lower cash profit.

The operating cash flow including investments amounted to negative SEK 53 million, where our investments in the quarter primarily related to the new machinery for the factory in Jönköping amounted to SEK 227 million.

In April, we effectively executed the rights issue of close to SEK 1.26 billion, combined with the net debt reduction activities completed during the first quarter, the lease of the property in -- on the property in Jönköping and the divestments of ewe and Bribus. This has resulted in a decline in net debt. Net debt excluding leasing and pension debt decreased year-over-year by SEK 571 million to SEK 1,934 million, and a decline by SEK 900 million from end of the first quarter in 2024. Important note that we still have approximately SEK 650 million in continued outflows before the investment in the factory are completed. Upon project completion, we will receive approximately SEK 350 million from the buyer of the property.

Over to you, Kristoffer. And next slide, please.

[Kristoffer Ljungfelt, executive]

Thank you. So as you can see, there's some good momentum in part of the business, but clearly, the profitability is not where we want it to be. So we have a lot to do, but the priorities going forward are very clear to all of us in the organization.

First of all, given the recovery in the consumer segment, we would push hard for growth in that segment. And we know that we can capitalize on our brand strength, and we have a very strong sales organization to do so, so pulling investments into that area of our business.

Further on, we deliver on our cost programs and we're also investigating further opportunities for cost of measures in second half to compensate for a weak product market with no improvements expected in the short term.

And thirdly, obviously, drive efficiency improvements in our supply chain to compensate for lower volumes. And I think that, that was known for the cost out program we did this quarter and also the gross margin improvement to some extent despite the large volume reduction running through the factory.

And then we're going to focus on completing our strategic initiatives. We will maximize cost efficiency and reduction of net debt by evaluating further opportunities of cost reduction and efficiency improvements, as I was alluding to. We will realize the full Nordic potential by completing our state-of-the-art factory in Jönköping and pushing product and process optimization through that work as well.

And finally, we have a clear sight of how we should transform our U.K. business into an asset-light business model with strong partnerships and a strong decentralized organization built around strong brand and highly efficient supply chain to serve our partners and customers and consumers.

So with that, we open up for any questions that you may have.

[Operator]

[Operator Instructions] Your first question comes from the line of Anton Lund from Kepler Cheuvreux.

[Anton Lund, analyst]

Kristoffer, Henrik, a few questions from my side. First, in the working capital, is there anything in there related to order intake or down payments at all?

[Kristoffer Ljungfelt, executive]

Well, I'm not really sure I understand the question. Can you repeat that one, please?

[Anton Lund, analyst]

Yes, sure. So the working capital improved during the quarter. Is it at all related to forward like future down payments or anything forward looking?

[Kristoffer Ljungfelt, executive]

A part of it is essentially, yes, because that's the normal, particularly in the U.K. that we have prepayments. So there's nothing abnormal. It's normal things that we have in working capital. So nothing extraordinary in that one.

[Anton Lund, analyst]

Okay. And then you mentioned additional cost initiatives. What do you have in mind there?

[Kristoffer Ljungfelt, executive]

It's too early to say. I mean we are addressing our cost base in all parts of the business. And basically, we have announced the Q2 program for addressing the U.K. store network and the supply chain in the Nordics. But again, we are looking into all parts of our business to reduce costs.

[Anton Lund, analyst]

Got it. And then one last question from my side. I don't know if I missed it earlier in the presentation. But the U.K. gross margin is stable year-on-year despite the better performance in the B2C segment. Is that a result of orders taken in Q1 at lower prices? Or what's the reason that we're not seeing an improvement here?

[Kristoffer Ljungfelt, executive]

Well, primarily, we have a huge drop in volume on the project and trade side to some extent, which has impacted profitability in the supply chain network. There's a slight investment in the credit given to our consumers because of that cost basically going up from the credit insurance.

[Operator]

[Operator Instructions] There are no further questions at this time. I would like to hand back to the speakers.

[Tobias Norrby, executive]

Okay. Well, then we conclude from our side, and welcome everyone back on the 5th of November for the third quarter results. Thank you, everyone.

[Operator]

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