Nobia AB

STO:NOBI

Earnings Call Transcript 2018-Q3

[Lena Schattauer, Head of Communication & Investor Relations]

Good afternoon, and welcome to this webcasted conference call following the publication of Nobia's third quarter results today. CEO, Morten Falkenberg; and CFO, Kristoffer Ljungfelt will present the results. And after that, there will be time for questions. By that, I would like to hand over to you, Morten.

[Morten Falkenberg, President, CEO & Director]

Thanks, Lena. First of all, the net sales for the quarter was slightly up. And when we look at the organic growth, it was minus 5%, which is clearly disappointing. But if we try to dissect that and look at what is under the minus 5%, it's -- first of all, if we start at -- with the positives, a double-digit growth for Magnet Retail, which is really -- we're really pleased with that, especially in the tough market environment we have right now. If we look at the more negative side of pulling down making it a minus 5% in organic growth, it was a seasonally very, very hot summer in the Nordics; weak B2B sales in the U.K., which I think, has been communicated before by our partner; and also lower project sales relative to 2017. So we are working hard to rectify that, and it's something that we will bring back on a straightened arrow over the past -- over the next couple of quarters. If we look at it from an EBIT perspective, the Swedish factory was hampered efficiency-wise by extensive preventive maintenance, and it did hurt our profitability in general. But that was the Swedish part. But also getting the project volume in the U.K. kicking again, which we see it does in Q4. And especially in 2019, we have an order book more than 60% versus last year. And those things together is -- will bring us up to very back -- back to the normal EBIT level that we have been enjoying over the past couple of years. In addition, and really due to the fact that we see testing and uncertain marketing conditions around us, we are initiating a cost-out program in order to safeguard our profitability. And I'll talk to that in just a minute. If we look at the kitchen market, which we look at the U.K., it is -- there's a lot of trepidation and wait and see. And it is down slightly due to some of the uncertainties, both political and economic uncertainties. But the unemployment is good and the consumer confidence is holding up relatively well. But price pressure remains very high. So it's really a very, very fiercely competitive market. The Nordic market, in general, is holding up. It's slightly up versus previous year, especially the new build completions seems to drive this. Central Europe region is also holding up, so in 2 of the 3 regions. Especially when we look at the Nordics, with the Danish market and the Finnish market, it's holding up pretty well. Then we are introducing a new slide or a new overview, and it's really by request from many of you in terms of how do we see our efficiency improvement and also now, the cost-out going forward. So this is something we present to the board -- have presented right now to the board in order to give really a guidance in terms of what are the big building blocks, both in manufacturing footprint, range and purchasing and cost reduction program. If I start with the cost reduction program, I mentioned before, this is really to mitigate the short-term uncertainties. And we will be taking out quite a few white, blue -- and blue collars, both in stores and factories. This is really to ensure that we keep our profitability. And this is on top of what we're already doing, which I mentioned in the beginning, to rectify some of the challenges we had in Q3 and this year in general. So this is really over and above. Then manufacturing footprint. And you can see the time frame. From '19, so starting next year, to '22, we see a run rate impact in EBIT of SEK 250 million, and it's roughly a 2 percentage point improvement in EBIT. And right now, with the knowledge we have and the plans we have in place, we are looking at CapEx and one-offs to the tune of SEK 750 million to SEK 1 billion, so 3 to 4 years return on investment time. This is what we have at this point in time. Then range and purchasing. Again, starting with effect in '19, giving us an additional EBIT of SEK 50 million. But over the period we have indicated, over the next 3 years, we're talking about SEK 150 million in EBIT or slightly more than 1% improvement in EBIT. And then you can add the cost reduction program, which I just mentioned as well. So in total, on top of our, I would say, normal EBIT, which we have enjoyed for the past couple of years, we will be really working hard and have identified that we will add close to 4% additional EBIT during this period. But all in all, for 2019, we are talking about SEK 130 million additional EBIT or 1%. We will use this as a proxy going forward. So beginning next year, as an example, with the manufacturing footprint, when we are announcing the first factory, then you can kind of identify the size of the price. And you have an idea of what we are looking at in total and tick off the box that we are moving in the right direction. We feel it's a good way for you to follow what we do. And we will be -- as we go forward, we will have the opportunity of course to be much more transparent when we announce the different factory closures and activities as such. If we move forward, I mentioned the extremely strong order book we have in Commodore and CIE. 2018 was kind of a dry year relative to the very, very strong 2017 we had, where we enjoyed also very high EBIT in both Commodore and CIE. So you can see when -- and we haven't shown this before, but we have an order book close to -- or actually exceeding, at this point in time, some -- and of course, there will be more coming onstream. But at this point in time, we have SEK 1 billion in order book, and that is actually more than 60% versus last year. So this is what I alluded to in the beginning in order to get to -- back to our normal way of -- or normal profit level. Part of this, of course, is to get these projects up and running again. Furthermore, which we're not covering today, but I'm happy to report that there are increasingly many interesting prospects in M&A. And we're spending a lot of time on that, and we are meeting a lot of interesting people and companies. But there will be more to come. And as we have mentioned before, the acquired growth is a very important part of our total profitability but also our total makeup going forward. If we go to the next one. You have seen this. And I think this time, I tried to be a little more specific on the product management, the purchasing part but also the supply chain. We will be able, which I mentioned, to be more -- even more specific when we get closer to the different dates. But we have indicated that this is where there's a lot of benefit going forward, along with the acquisition part. Finally, our financial target is to continue to both be above 5% in organic and acquired growth. We were weak in the third quarter. But we feel, underlying, there's a lot of growth opportunities, both organic and acquired growth. And our goal is still to be above 10% EBIT margin. I think with those words, introductory words, I would like to hand over to Kristoffer.

[Kristoffer Ljungfelt, Chief Financial Officer]

Thank you, Morten. So an update first on our business by country and channel here. In the Nordics, if you add those pies, you will come to 47%. We did have a soft consumer market in the quarter and -- mainly driven, of course, by the exceptional summer we had. But in the quarter, we also converted our last Norema stores into franchise business, which had an impact on the organic growth by negative 2.5%. So adjusting for this in the Nordics, we were actually up 1.5%. And with this conversion, everything in Norway is now sold through franchisees or dealers. In Denmark, as you can see, with 19% of sales. We were also impacted by the hot summer. But also product deliveries were somewhat down compared to last year. Judging by the order book and the strong underlying economy in Denmark, we believe that the deliveries would be somewhat better going forward. In Sweden, we took shares in the consumer segment despite the declining market, but project deliveries were flat compared to last year. And as previously communicated, we believe our sales to the Swedish housing market will taper off by Q2 next year. But just to put things in perspective here, a 20% decline in the Swedish housing market, which is a likely scenario, would imply roughly 1% decline on group sales. But having said that, we will, of course, take every necessary measure on cost if and when that will happen. In the Finnish market, we have had very strong momentum. But being only 7% of our sales, it doesn't -- did not fully compensate for the decline in consumer sales elsewhere. U.K. then with 44%. We had Magnet Retail, which Morten was talking about, which now represents 1/3 of our sales. And it has just completed the third consecutive quarter of double-digit growth, so we are very pleased with that. And the new proposition, we'll hopefully roll that into the Trade proposition as well during this year. But for the other businesses here, it's been a difficult quarter, and Morten was talking about it. I reiterate that the B2B business through the builder merchants has been the hardest hit here and impacted by general market turbulence in that specific segment. But also, Magnet Trade has had a weak quarter. However, their most important period is right now in October, November. And then again, the project business or the contract business, which is 27% of our sales, has had some slippage in this quarter but has continued to accumulate the order books and had a healthy order stock going into Q4. You don't see Bribus on the list yet, since this is 12 months rolling. But they were implemented into our numbers in Q3 with sales of SEK 144 million. I will get back to that. But on this chart, it will represent roughly 5% on a 12-month rolling period. And the integration is going according to plan. And having got to know each other a little bit better now, both Morten and I believe that the business and the management team exceed all expectations we had when we acquired the company. Next page, please. So in the Nordics. I mentioned the organic growth, that was down 1%, but adjusting for Norema stores, it was actually up 1.5%. And we, in the beginning of the quarter, had to spend quite a bit of resources getting Tidaholm back in shape after the poor performance in Q2, which resulted in higher cost but delivered -- delivery compliance as of now, in September, is considerably better and actually back to full speed again. However, it did affect our gross margin negatively in the quarter. And together with negative currency headwind on the transactional currency, our gross margin fell by 2.5% roughly. We estimate that the Swedish krona will continue to burden the regional profitability by another SEK 10 million in Q4. And as we said in Q2, we can see that material prices started to inflate this year and mainly, the sheet material but also indirectly through steel prices. And we will, of course, as always, continue to pass those price increases on to consumers. But for the moment, it puts some extra pressure on our gross margin. All in all, an EBIT of SEK 185 million. So over to U.K. And again, the biggest drop here was the B2B business, and we had a negative organic growth by 9%. The gross margin is up 1.8 percentage points, as you can see, and this is mainly on the back of the Magnet Retail growing with a strong gross margin, but also somewhat higher cost.However, also in the U.K., we continued to see some pressure on the direct material, again on the sheet material, but also on joinery products, which is a well-sold product in the U.K. and all in all, as you can see, an EBIT of SEK 105 million. Over to Central Europe, and now we also include Bribus in these numbers. Austria, which then was the only company or the only country representing the organic growth here, grew by 3% in the quarter. And then on top of it, we added the SEK 144 million effect for Bribus as I was talking about. Bribus has a seasonally weak Q3 as we close production for summer break and also gear up for larger deliveries in Q4. And the seasonality affected gross margins by negatively 7% and profit margins by negative 5% in the period. For Q4, we estimate Bribus to add SEK 200 million to net sales with a profit of roughly SEK 25 million. In Austria, otherwise, we see a good traction on our turnaround initiatives on both back end and front end. And we do feel we have a strong team in Austria to deliver on those targets that we have. So over, finally for me, on the financial position. We had a fairly good operating cash flow in the period despite the EBIT decline. As you can see, it was SEK 213 million, and it was helped by a very good performance in working capital. We also have slightly higher investments on the back of manufacturing and IT, mainly timing issues. And net borrowings as of today is SEK 845 million, which means we have over SEK 1 billion in headroom on our syndicated loans still. So with that, I'd just like to say again that Nobia has very strong financials and stable cash flows, which means we also have plenty of financial headroom for more acquisitions without jeopardizing dividend policy or organic growth rates there.So over to you again, Morten.

[Morten Falkenberg, President, CEO & Director]

Thanks, Kristoffer. Finally, even though the organic growth in the quarter was disappointing, we do see very good opportunity for growth, both organically and acquired growth, going forward. And as I mentioned, due to the uncertainties we do see in some of our markets, we have initiated a cost-out program to safeguard our profitability and to increase the profitability. So with those words, I'd like to hand over to questions.

[Operator]

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

[Mattias Holmberg, Analyst]

So to begin with, on the efficiency improvement and the cost savings programs that you've depicted in the slide packet here on Slide #4, I'm just wondering how the 3.7% EBIT margin run rate that you're expecting by 2022 goes in line with an unchanged EBIT margin target of 10%. I mean, from an outside perspective, it seems like if you're expecting to be able to extract these cost savings, why don't you increase your EBIT margin target by the same magnitude?

[Morten Falkenberg, President, CEO & Director]

I think it's a very good question. And I started now more than 8 years ago when I inherited a target of 10%. And I think it -- we like to stick to our targets, which is a -- we want to do better than 10% going forward. And of course, I think the expectations from all of you, and definitely from our board, is that you will see a good improvement going forward as well. But we have agreed that we're not going to put an arbitrary number on the table. But you're right, when you look at this, and this is, of course -- what we haven't depicted is what we tried to do in terms of organic growth in gross. I think it indicates that there is a lot of opportunities, which we have talked about before, on the cost side. But things and markets go up and down as well. So the actual final net effect, we will see. But based on its face value, this is what we're going to -- this is what we have identified also with the plans we have.

[Mattias Holmberg, Analyst]

Great. And maybe a question to Kristoffer here. On 2019, where you guide for about SEK 80 million in cost savings, how should we think of this over the years? So will it be a linear, gradual extraction of these cost savings from Q1 to Q4? Or will it be more back-end heavy?

[Kristoffer Ljungfelt, Chief Financial Officer]

I would say somewhat weighted to the back end of the year. But we should start to see savings coming in already in Q1.

[Mattias Holmberg, Analyst]

And just one more question from my side before I step back in line. And if we look on the order book figure that you give for CIE and Commodore here, which is very helpful, it's quite impressive number, SEK 1 billion, given the size of that business for you. Could you help us in any way by the timing of this order book? Do you know, for instance, how much of it will be delivered in 2019? And how much is for further down the road?

[Kristoffer Ljungfelt, Chief Financial Officer]

Well, these projects are very large projects, all of them, that we have in the order book right now. And we do have a ceiling of when they will fall out. And much of that, as Morten was talking about, will be in 2019. But there will be some of these projects running up until 2021 and even onwards. So it's -- we don't communicate on a specific number for '19. But saying that, the growth in this segment will be considerably better than what we've seen this year.

[Morten Falkenberg, President, CEO & Director]

And I think what I mentioned as well was that this is just a -- you draw a line and say this is what we have right now. But of course, the team is not standing still. So there will be more orders coming in as well. But this is what we can see now. And to your point, a significant part will come in '19.

[Mattias Holmberg, Analyst]

And just to follow up on that maybe. Because when I listen to many other companies, they're talking about a quite tough U.K. market. Is that the challenge to you? Or can you still grow the project business in the U.K. given sort of aspects, such as growing outside of London and more regional expansion rather than growing with the market?

[Morten Falkenberg, President, CEO & Director]

I think you are absolutely right that there are uncertainties as well. Many of these, when you look at Battersea Power Station as well, this was where Apple chose its headquarter. And that was actually one of the reasons why our order book looked a little dry in 2018. So these are -- it's a high-end investment as well. And there is a lot of Chinese and outside U.K. investment in all of these. But definitely, right now, the U.K. is a difficult market. And some projects, like with all projects, could be moved a quarter or 2. But this is what we see and know right now.

[Operator]

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

[Predrag Savinovic, Analyst of Consumer Goods]

A follow-up question on the backlog for Commodore and CIE. You previously alluded to that the profitability here is in line with the group average. Can you confirm this? Or maybe give us a hint on the margin here?

[Morten Falkenberg, President, CEO & Director]

I think we can confirm it, and it's actually -- yes, it -- we are pleased with it, and it's definitely in line with the group.

[Predrag Savinovic, Analyst of Consumer Goods]

And will the strong market outlook in Denmark and Finland be enough to bring organic growth to the Nordic region, given that the current trends stay in the other countries, such as the residential market tapering off, et cetera?

[Kristoffer Ljungfelt, Chief Financial Officer]

The way we see it now, yes, it should. Denmark and Finland together represents 50% of the Nordic market for us. We -- well, we feel that the Swedish market will go down. Norway is a little bit more uncertain what will happen. But we still think that the Danish and Finnish economies are underlying, very, very strong.

[Predrag Savinovic, Analyst of Consumer Goods]

All right. You say that production issues impacted figures in Q3, but they were fixed in September. Could you quantify how much this impacted your EBIT in the quarter?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, we didn't this time -- as you know, from Q2, we went out with a specific number. We don't do that this time. It's not close to the SEK 20 million we had in Q2, and it's a little bit hard to estimate exactly in terms of the cost for dispatch compliance.

[Predrag Savinovic, Analyst of Consumer Goods]

And can you remind us on the deliveries to Homebase in the fourth quarter, if any?

[Kristoffer Ljungfelt, Chief Financial Officer]

There was nothing in the fourth quarter last year.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. And a final one for me. Can you say that pricing situation in the U.K. has worsened? Or is it unchanged? And have you done anything to your price up there?

[Kristoffer Ljungfelt, Chief Financial Officer]

Going back to the retail proposition we did for Magnet. Yes, we did practically change our pricing. But of course, in uncertain times, there are a lot of pressure on the price. But this is something that we have lived with in U.K. for many, many years. So it's not exceptionally. I think the hardest hit here has really been the builder merchants, where there've been a lot of changes and irrational behavior from some of the builder merchants that has affected the entire market for kitchen in that segment.

[Predrag Savinovic, Analyst of Consumer Goods]

And how much is your Trade segment down year-on-year in Q3?

[Kristoffer Ljungfelt, Chief Financial Officer]

It's about 11%.

[Operator]

Our next question comes from the line of Johan Dahl from SEB.

[Johan Dahl, Analyst]

Specifically on the builders merchants channel and the Trade channel in the U.K., could you just talk about what initiatives are ongoing, both among your Trade partners and in Nobia to turn what appears to be an extremely challenging 2018 in terms of volumes?

[Morten Falkenberg, President, CEO & Director]

I think when we look at our Trade and our Trade part, we're looking also at the joinery side of it and where we also, from a profitability standpoint, have -- are challenged as well. So -- and it really takes up a lot of space in the Trade side. So we are working hard with different -- we actually have some tests going on with quite a few stores. What can we do to get the Trade part in place? So a lot of focus is on it, and I would say, it's very much what -- the same way of looking at Trade as we did with the Retail, where we are looking at the concept as well and strengthening it versus the main buyers of it. And I think there's a lot of learnings, and I'm sure we will get that back.

[Johan Dahl, Analyst]

On the builders merchants, are you seeing initiatives there from your channels?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, the builder merchants have had troubles for a couple of quarters now, and we see a lot of activities and working very closely with us as well, since we are the kitchen expert for them, to rectify this. And we saw already from the beginning of this year, when Homebase was in big distress and got sold and B&Q changed their -- the way of trading kitchens, that it had a major impact on the kitchen market for this specific segment as well. So there's a lot of things happening now to come back to prior levels. But they've also had the market uncertainty against them, I must say.

[Johan Dahl, Analyst]

Okay. And on the efficiency improvement, could -- I appreciate your -- how you appear to be in early process here. But of the SEK 1 billion some in manufacturing footprint, I presume there's a lot of write-downs in there. But what is actually cash in that total program?

[Kristoffer Ljungfelt, Chief Financial Officer]

I think we have to detail these projects before we can put some actual figures on that.

[Johan Dahl, Analyst]

But is these validated plans for the coming 4 years? Or is it just sort of a target?

[Kristoffer Ljungfelt, Chief Financial Officer]

Well, we've been working through plans for a long period of time now, and that's why we feel confident enough to give this type of targets. But there -- the detailed plans is not something where we can communicate now.

[Morten Falkenberg, President, CEO & Director]

Johan, I think what we can say is that we have 2 parts of the manufacturing footprint: One is the Nordic and one is the U.K., where we are pretty advanced in the plans. But of course, I hope you appreciate as well, these are big changes and will affect a lot of people as well. And that's why we hold it a little close to our vest in terms of that part. But the numbers that we have indicated, both the EBIT numbers but also the range, is pretty solid, I would say. And -- but we're not going to give any -- how much is cash and how much is CapEx.

[Johan Dahl, Analyst]

And just to understand your view on your competitive set here, because, I guess, there are constantly improving productivity in the industry. How much faster will this be taking you compared to your peers? Or is it just a key part?

[Morten Falkenberg, President, CEO & Director]

No. I think the -- first of all, I think it's different from region to region. If you look at the U.K., we had done quite a few acquisitions over the past couple of years. And of course, that is different than the more solid Nordic business where we are also looking at different plans. But it's -- I would say in terms of competition, this is really for us to -- as you can see, to take our underlying efficiency and profitability to the next level. And it -- we're not looking at competition in terms of this.

[Johan Dahl, Analyst]

Okay. If you can take out this much cost, it seems as if there must be very few other kitchen companies cheaper than Nobia it seems. To what extent are you sort of considering a more of a defensive sort of share buyback strategy instead of acquisitions?

[Morten Falkenberg, President, CEO & Director]

This -- it's not really up to me. I think share buyback is really a board decision. But I think at this point in time, we are -- if we cannot get -- find anything to buy, which I doubt, we will look at other ways of using our strong -- our balance sheet and cash flow. So I cannot answer that in specific. But I think if you ask me, I -- and when looking and talking to the potential companies that we're looking at to -- for acquisitions, that would be my preferred venue.

[Operator]

Our next question comes from the line of Rasmus Engberg from Handelsbanken.

[Rasmus Engberg, Research Analyst]

Sorry if I ask something that you've already said. Please tell me if that's the case because I got late into the call. But I have 2 questions. One is when will you be able to update us more on the manufacturing footprint about what is in plan there? And the second question is, with regards to the Nordic market, have you seen revenues come back after the hot summer? And is that real -- is it real growth? Or is it stuff that was not sold in -- during summer that's being sold now? What's your take on what's going on there? Because I hear some rather different messages on that.

[Morten Falkenberg, President, CEO & Director]

I think if you start with the manufacturing footprint, when we can let you know, I can tell you something is going to happen in '19. But I'm sure you'll appreciate as well that these are big undertakings as well that you will see a lot of it coming through in '20 and '21 and some of it in '22. But it's -- that's really the trajectory and we -- I don't want to commit to a quarter where we would tell you more. But it will be a ongoing update, and I -- hopefully, we -- there will be bigger projects that we can talk about, which has longer time horizon, but also smaller ones that we will initiate really fast as well. So it's really important that we do it well. And you have to remember, when you look at the Nordics, which is part of this as well, this is a very, very profitable region as well. So when we do this, we need to do it in the right way and in the right sequence as well.

[Rasmus Engberg, Research Analyst]

I would assume that you don't -- I mean, you can't take off everything at one time. You need to sort of do it one thing at a time broadly, if we're talking about manufacturing footprint at least.

[Morten Falkenberg, President, CEO & Director]

You're right. I have this anecdotal -- my first meeting 8 years ago with some analysts, I had one young analyst that asked me, "Morten, you have so many factories. Why don't you close them all at the same time?" And I think that's unfortunately not the way -- or I would say, fortunately not the way it works. But there is a clear sense of urgency to make this happen. That's the only thing I can promise you.

[Rasmus Engberg, Research Analyst]

And on the Nordics, is it real growth? Or is it something that was not sold during summer? What do you think?

[Kristoffer Ljungfelt, Chief Financial Officer]

Well, in our industry, it's a little bit early to say how it will look like since it's not over-the-counter sales. So we like to not comment on that right now.

[Operator]

Our next question comes from the line of Charlie Campbell from Liberum.

[Charlie Campbell, Housebuilding Analyst]

Just, I think, 2 or 3 for me, please, if I can. When you were talking about Sweden, you were talking about some -- potentially kind of new build slowing down next year. Would that comment also go into the refurbishment market as well? Or could that maybe be a bit less volatile and a bit kind of more resilient? Secondly, you talked about M&A and maybe hinting that activity would pick up, where you're seeing more activity there. Was that a comment on the U.K., where things are especially difficult but there may be more opportunities come up as that happens? And then just in terms of trading generally across the group. Just wondered if you could give us an idea how the quarter went sequentially? So did -- was September a stronger month than the other 2 months? And does that strength sort of continue into October? Or are we thinking more the other way around, that September was more difficult and obviously weakening trends through the quarter? Just wondered if you could help us with that.

[Kristoffer Ljungfelt, Chief Financial Officer]

Okay. I can start with the last one maybe, the trading within the quarter. For a kitchen company, there's a strong trade season in August, and it was hit by the weather, as we believe it. So it's really hard to say how the sequence would have been in a campaign, which didn't have that period. On the refurbish market in Sweden, we don't put a forecast on that. We have decided to comment on the project market in Sweden because we can see into our order books, which we cannot do on the refurbishment market because they're not that long. And finally, on the M&A.

[Morten Falkenberg, President, CEO & Director]

Yes, I think my comment on the M&A was that when we -- it's like you -- we are opening this or you're peeling the onion and you see much more. And it's both, I would say in -- it's in all the countries that we -- where we have business as well. So it's not only U.K., but it's in most of the other business and also potentially some outside where we are currently. So a lot of interesting opportunities.

[Operator]

[Operator Instructions] And as there are no more questions registered, I will now hand back to our speakers for any closing comments.

[Lena Schattauer, Head of Communication & Investor Relations]

Okay. Well then, we will conclude this conference call. Thank you all for listening and for asking questions. We'll come back when we release our Q4 results the 6th of February. Thank you.