Nobia AB

STO:NOBI

Earnings Call Transcript 2019-Q3

[Tobias Norrby, Head of Investor Relations]

Good afternoon, everyone, and welcome to this webcasted conference call following the publication of Nobia's third quarter results earlier today. I am Tobias Norrby, Head of Investor Relations at Nobia. The presentation today will be conducted by our CEO, Mr. Jon Sintorn and our CFO, Mr. Kristoffer Ljungfelt. And as usual, there will be time for questions after the presentation. With that, I leave the word over to you, Jon.

[Jon Sintorn, President & CEO]

Hello, there, everybody. Jon Sintorn here, and I'm very happy to be here for my very first quarterly reporting for Nobia. And I'm very happy as well to have started this exciting journey with this fine company.Some highlights for the third quarter. We had stable third quarter earnings despite uncertain and somewhat softer markets. And given that, it was very positive to see that we had organic growth in all 3 regions. And driving that predominantly -- or Denmark continues to be the predominant driver of the Nordic market. And it's also fine to see or nice to see that the sales -- we have a good sales development for the repositioned U.K. trade concept that we are on our way to launch and implement that we call Magnet Trade. Another highlight this third quarter and especially a lot of work on my side, getting on board on this company is, of course, looking at the strategic review. So we are working on the final stages on that one.Then if we go into some financial metrics. Net sales increased, as I said earlier, 3% organic, reaching SEK 3.265 billion. And the higher sales values compensated for quite significant and favorable currency impact leading to higher direct material and also some SG&A costs. Good to see stable gross margins, however, a bit lower EBIT margin predominantly due to higher OpEx because of the push of the trade in the U.K. -- or of pushing in the trade segment in the U.K. As I mentioned, quite significant and favorable currency impact of SEK 15 million, and all of that led us to an EBIT unchanged at SEK 267 million.If we briefly or shortly have a look at the various markets and the market trends where we operate during this quarter. As I said, overall, I can't say -- it's not an extremely strong market. It is a bit soft. It's a bit of a wait-and-see mode in the markets at the moment, which I believe our market share with several other markets. And if we look at a bit more in the U.K., consumer confidence is a bit compressed because of Brexit predominantly for the retail. As I mentioned before, the trade segment is doing okay for us. But in terms of market, the consumer confidence due to Brexit is waiting mode. And then we can see construction in Sweden weakening, retail segment Sweden, quite okay, and then we have a positive market in Denmark. Central Europe, again repeating myself, is a bit of a wait and see but it's estimated to be on par with previous year.On the strategic initiatives. I must say, I mean, looking at the strategy that we have on hand, currently it's very fine. It's a good strategy. But as you know, since before, we are doing a review and that review is well on its way and coming to the final stages. And obviously, as the new CEO, I want to be engaged and really take a deep look into it and be able to shape that piece, the strategy going forward. And we will communicate this exciting journey in due course. In short, there is a lot of interesting and good things that we can do going forward. So that was short and brief summary on the third quarter and some things that are going on. And then I'll hand over to Kristoffer, which is well in the saddle.

[Kristoffer Ljungfelt, Chief Financial Officer]

Thank you, Jon. Good to have you here. Just first, the financial targets from my side. We expect to drive this profitable growth of 5%, both through the strength in trade and product business in the U.K. but also through improved retail in the Nordics as Jon was alluding to also earlier. Margins, as you know, have been hard hit by currency headwinds the last 3 years but we still believe that over the business cycle, we should be above the 10% EBIT margin. And the balance sheet as of now is very strong, and we're well within the financial target on debt equity and have, as you know, also paid dividends that were exceeding our financial targets for the last couple of years. So the balance sheet is currently very strong. Tobias, if we move over to next one, just a general comment on the markets and give some more flavor to what Jon said. If we start with the Nordics, which is 46% of our business, we estimate the Nordic market to be down in the period but it's also in line with expectations. However, and as expected, the important Danish market has held up well and compensated for soft Swedish and Norwegian project market. Also, retail in general, and Jon was shedding some light on it, has been quite strong and actually quite a lot stronger than what we expected going into the year, which is helping us on our product mix perspective. What is sticking out on the negative side is the Finnish project market, which has come down a far bit from an exceptionally and probably unsustainable level last year. And we will see that running into our numbers from Q4. However, as you see from this graph here, Finland is a small market to us, representing 7%. And the last year's volatility in volume has not been great for us. So we actually believe that a more stable but low-level volume could help us on the profitable side as well. In Sweden representing 14%. We've been through some larger correction in the product market this year, which then, to a large extent, has been compensated by an improved retail sales. However, we don't rule out that the project business will continue to be somewhat soft going forward for yet some time.We also continued in the quarter to convert stores in Denmark and Norway to -- from own stores to franchise stores. And you can see from our store count in the report that we have 12 fewer stores within our own assets this year, and that has led to 1% organic drop in the Nordics as well.If we move over to U.K. then. We've changed this pie chart slightly for you that follow us every quarter. And the trade business, which you see here, represent 27% of our business. We can really see traction from the changes we have done within the trade proposition and you can now find that proposition in all our 160 trade stores. However, and as I will explain later in this presentation, it took some investments to drive through the changes, but we are now well equipped in front of the important trade season that actually has just started. Retail, 45%, is now a combination of sales through our Magnet Retail stores and our sales to the DIY customers. And this segment has by far been the hardest hit following the uncertainty around Brexit and the very low consumer confidence we have seen in the last quarter. However, we believe that although the market has been tough, we have probably managed to again, share in this situation, which we believe is quite stable and in interest of performance. The project business in U.K. represented 28%, has had a great performance in the quarter with double-digit growth mainly on the back of larger project deliveries into the London real estate developers. However, we are getting somewhat concerned that there would be project slippage in this market and -- driven then by the Brexit uncertainty. And we can understand from our customers that it is lower traction in the whole project market, especially within central London. Having said that, our order books remain very healthy in this business, and we believe this is more of a timing effect than a real effect on our performance. So then to shed even more details on the Nordics. It grew by 1% in the quarter despite having converted the stores into franchise business, which then would lead to 1 percentage point more, so 2%. Gross margin came in slightly lower than last year, both the currency headwind from the weak Swedish krona and the franchise conversion had negative impacts on the gross margins. On the positive side, we have had somewhat favorable mix and improved sales values due to the growth in retail. Manufacturing and efficiency has improved considerably since last year's poor performance, and we are quite pleased with efficiency we get out now. But the inflationary pressure unfortunately then mitigate these benefits we have in efficiency. Regarding SG&A, we have had a sound cost position in the period, which is mainly a result of last year's cost-out program, which is materializing. But also the franchise conversion is helping us on an SG&A level. All in all, we can say that this result to be quite stable with a 0.3% growth in margin and an EBIT of SEK 193 million. Over to the U.K. We are really pleased to see the high growth coming through in the U.K. with 5 percentage points. And we also believe this is then helping us take share in a market that is highly uncertain. However, and as you can see here, the gross margin declined on the back of lower shares of sales in Magnet Retail, which has structurally higher gross margins. But we also grew project sales with lower gross margins, but also lower cost to serve. So the underlying performance in the gross margin adjusted for this business mix and also adjusted for the big currency impact that we have in the gross margin, we believe, the gross margin to be stable compared to last year.The drop in profitability that you see here is mainly a result of the large OpEx investments we have done in the Magnet proposition and mostly so in the trade business. And again, and just to repeat that, we now have done these investments for 160 trade stores. And it's still early days, but we are very pleased with what we see coming through that push. The pound was weak in the period. It stabilized in -- up until end of September around EUR 1.10 to the euro, which is a bit below what we saw last year. But lately here, coming into October, things have improved somewhat and the pound to euro, as you all know, is up to around EUR 1.16, which will lead to not currency gains, but no currency losses going forward either, we don't foresee.Going forward then, we would continue to be mindful of the cost in the U.K. not the least on the back of an uncertain Brexit situation. But we will continue the efforts in the trade segment here also when we come into Q4. EBIT then came short of last year with SEK 88 million.Next one, please. Here, Central Europe and now you have Austria and the Netherlands in these numbers. And this is the first time we have the Netherlands in a like-for-like comparison in the quarter. And in general, Bribus, which is the brand we use in the Netherlands, had another strong quarter with profitable sales growth and is the main driver behind the improved performance, as you see here. But in the quarter, we had accruals related to prior periods' adjustments, which amounted to roughly SEK 10 million, which improved then the results accordingly. And also worth to remember is that we did a similar release of accruals in Bribus in Q4 last year, which was slightly below SEK 10 million but still which you need to factor in. Austria, coming back to the brand we have had a long time in our portfolio, is gradually improving from the difficulties they have had over last couple of years. We have a very strong team down there now, fully ready to move this business forward. And they have done a tremendous job this year to take out the toxic mix that we have had when we have sold into lower-spec kitchen products. And we're starting to get out of that. And we're quite convinced together with the team down there that on a long-term basis, we should be able to see the 10% EBIT margin without any structural change to the business we have down there. So all in all, going the right direction, which is good. Strong performance all in all, in the region of SEK 28 million compared to SEK 10 million last year.And the final one for me, Tobias, if we take the next one. The financial position, nothing much to mention here. We managed to get an operating cash flow of SEK 346 million. But if you adjust for the IFRS effect, it's SEK 215 million, so very much in line with last year. We have spent some extra working capital on building our stock in U.K. before the Brexit has settled, which is affecting somewhat working capital. You can also see here that we have decided to account separately the IFRS 16 leasing liabilities, which constitutes SEK 2.6 billion on our total net debt. So when looking at the comparison to last year, we have a net debt right now of SEK 4.2 billion versus SEK 1.2 billion. But of course, the SEK 2.6 million (sic) [ SEK 2.6 billion ] in terms of leases should be backed out to get the right comparison. With that, I also like to conclude that it's a very strong balance sheet we have. We have a strong free cash flow, which enables us to continue to invest in the business and not the least, invest in what Jon was mentioning, the new strategic plan and value creation of this company. But we also have plenty of headroom to look for interesting M&A across our markets. So with that, Jon?

[Jon Sintorn, President & CEO]

So thank you. Just sharing a few first impressions as the new President and CEO for Nobia. As I mentioned, I've spent significant time on the strategic review, finding some interesting opportunities where we're looking at the manufacturing footprint, sourcing and how we go-to-market, et cetera, which is really exciting work. But moreover, I have spent time to visit many of our sites, not everyone quite yet, but it's part of my introduction program to get around to all the sites. But I've met -- I've been to many of our sites, seen most of our factories, several sales offices and sale -- points of sales, meeting our people and not least, customers. And what I have found is that we are, first of all, in terms of the finances, we are on a strong financial foundation for this company to continue develop the company. I found some really fine brands and businesses, very cool products. This is -- these are cool products to work with and obviously to use. And last but absolutely not least, dedicated people, dedicated employees, a lot of good people in this company. So I am very much looking forward to, together with the team at Nobia, continue to develop this company and make it even greater. So that was a few first impressions. And I think with that, we can conclude our part or the presentation part of my first quarterly reporting and open for Q&A.

[Operator]

[Operator Instructions] Our first question is from Mattias Holmberg from DNB.

[Mattias Holmberg, Analyst]

I have 2 questions. The first one, if you please could explain a bit more about the cost accruals that you had in Central Europe in this quarter just to make sure that I understood you clearly. Was it a SEK 10 million boost to Q3 EBIT, meaning that the underlying EBIT would've been SEK 18 million without this effect?

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, you're right. Short of SEK 10 million, not really SEK 10 million.

[Mattias Holmberg, Analyst]

Okay. And you mentioned also that you had a similar effect in Q4 last year, which we then need to account for in the fourth quarter.

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, that's right.

[Mattias Holmberg, Analyst]

Perfect. And on the initiatives that you're doing in the U.K. right now, seems to be going very well, but I wonder if you could help us a little bit on perhaps quantifying or at least indicating how big the cost impact from that was in the third quarter. And also if there's any point that you can give us how we should think about that going into Q4?

[Kristoffer Ljungfelt, Chief Financial Officer]

We don't like to go into details on the cost position but rather to say that the cost was somewhat higher because of the trade business, and it's still early days. And we expect some higher costs coming into Q4 as well, but should have some benefit from the cost investments we've done already in Q3. But more details on that, we don't like to give at this moment in time. And it's still very early days for us. We are in the midst of the trade season, so we like to first see how that pan out. And it will be calibrations from our side in the way we do things as well.

[Operator]

And our next question is from Johan Dahl from Danske Bank.

[Johan Dahl, Analyst]

A question on this big strategic plans that you working on. I think previous management have released some sort of broad frames from potential effects of that. Can you just talk a little about, Jon, what you're spending time on specifically right now? How far have you come in validating those amounts that were sort of announced previously? And what's sort of your special twist will be on to that plan?

[Jon Sintorn, President & CEO]

I'm not sure I have a special twist as such. But what I can say is that we have come very far. We are in the final stages of that plan. And in -- I should be careful in saying exact dates in the future, but in pretty short in due course, we will be able to communicate further details on that plan.

[Johan Dahl, Analyst]

Yes. I have a great respect that we will see details later. But is it broadly -- the numbers are broadly in line with previous figures?

[Jon Sintorn, President & CEO]

Yes. Yes, they are.

[Johan Dahl, Analyst]

Also, Jon, just would be interesting to hear sort of your view on capital allocation in Nobia going forward. I appreciate this big project will take some resources, but then you're also -- in your presentation, were you referring to M&A? I mean share repurchases could also be, I guess, a relevant factor for shareholders. What's your view on that?

[Jon Sintorn, President & CEO]

We -- looking into the strategy as such, I think one of the avenues, which we will continue to be important for us, is obviously M&A where we're looking at good company in preferably markets where we exist today. That's one of the avenues, which is one of the key avenues.

[Kristoffer Ljungfelt, Chief Financial Officer]

And in terms of share buybacks and the likes, as you know, Johan, we're discussing those type of things with the Board. But as of now, we don't find it necessary to go out with any such information. I think like what Jon was describing here is that it's -- the M&A agenda is still -- or M&A is still very, very high up on the agenda, and we have been working with many interesting companies there for a long period of time. So that's what we, in management, would prefer to do.

[Johan Dahl, Analyst]

Okay. Cool. And just finally, on the U.K. project channel, can you update us where we are in invoicing this big order book that you had previously? Also on order inflow and what you're doing potentially to mitigate weak order inflow and weaker prospects for 2020 in the project channel in U.K.?

[Kristoffer Ljungfelt, Chief Financial Officer]

One of the main reasons why we don't disclose how much we should convert into sales in the quarter is just what has happened now in U.K. where they start to move the projects around. And we believe that Q3 was a strong quarter in terms of project deliveries, but we are worried, as I said before, that there will be project slippage. However, the order book as such is not seeing any dents. It's just more a question of timing on this, and there's really not been any larger cancellation or projects at all.

[Jon Sintorn, President & CEO]

No, not as of yet.

[Kristoffer Ljungfelt, Chief Financial Officer]

No. It's just that it -- they move further out in time. And this is something that we've been hurt by ever since the whole Brexit negotiations started that we have in our books time for delivery on sites, which is then being brought forward. And one big references...

[Johan Dahl, Analyst]

The order book is being refilled, is that, in fact, right?

[Kristoffer Ljungfelt, Chief Financial Officer]

Sorry?

[Johan Dahl, Analyst]

So the order book is being refilled then, I guess. So I had a better...

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, the order book is still very strong. And we believe that the market in London should be strong wouldn't it be for the project slippage. And of course, it's the uncertainty for the big developers that is causing this problem. Now we're the very last company to be -- to go into these projects. So of course, we need to wait for everybody else. So it's been pushed further out.

[Johan Dahl, Analyst]

But by order slippage, I guess you mean, this is just delivery plans and how -- obviously, these projects need to get started but it's impacting your order book as such, is it?

[Kristoffer Ljungfelt, Chief Financial Officer]

Exactly.

[Jon Sintorn, President & CEO]

Delays.

[Kristoffer Ljungfelt, Chief Financial Officer]

Yes, delays.

[Jon Sintorn, President & CEO]

Is a better word I'd use.

[Operator]

[Operator Instructions] Our next question is from Marcela Klang from Handelsbanken.

[Marcela Klang, Analyst]

Maybe a follow-up question on the acquisition strategy you mentioned, good companies in preferably markets where Nobia is present today. By that did you mean the Nordics and the U.K.? Or could you even mean new countries in Central Europe such as Germany, for example?

[Jon Sintorn, President & CEO]

Well, our preference is where we exist today, and that would be Austria or the Netherlands where we exist today, but preferably the Nordics and the U.K.

[Marcela Klang, Analyst]

Okay. And then a question on price increases. Obviously, we're -- had a positive impact this quarter. Was this on new models? Or was it related to some specific region? So were you able to increase prices throughout your markets?

[Kristoffer Ljungfelt, Chief Financial Officer]

As we stated many times before, the U.K. market is much tougher in terms of pricing. What we try to do is to introduce new products into the markets with higher price points and that also our customers are willing to pay for. And I think that has been a successful strategy for the last couple of years. And we have talked before about the products in Denmark being launched, which has had really good success, the Nordic Spirit and New York. But we also see now the retail business in the Nordics being strong. We also see the price points coming up from interesting products and new ranges, but also to some extent, the existing ranges. The project business as such is more different -- difficult in terms of pricing as it has always been, and I guess that's the nature of the business itself and the customer.

[Operator]

And our next question is from Geoff Lowery from Redburn.

[Geoff Lowery, Partner of Non]

Two questions on the U.K., please. Firstly, can you talk about what benefit you think you have or haven't got from B&Q ceasing to do kitchen installations? And it's just interesting on the U.K. that you flagged your caution about project sales potentially from here. Does that mean you've not seen anything to change your view about the trajectory of your trade or retail businesses in the U.K.?

[Kristoffer Ljungfelt, Chief Financial Officer]

I can start with the first one at least. In terms of B&Q, I mean the big competitor in this is Travis Perkins, and we don't want to talk too much about Travis Perkins business. But what we can say from a kitchen perspective is that we have gained some momentum that B&Q is changing the business model. It has also benefited, to some extent, the kitchen specialist, where we exist with our Magnet brand. So yes, that has been favorable to us, I would say. I didn't quite get your second question. Could you repeat that one?

[Jon Sintorn, President & CEO]

Neither did I.

[Geoff Lowery, Partner of Non]

It's more, you -- you're saying or you're expressing some caution about your projects business looking forward in the U.K. Shouldn't the same reasons be encouraging you to be more cautious about your retail and trade businesses? Or do you think the dynamic is different there?

[Kristoffer Ljungfelt, Chief Financial Officer]

No, we believe the dynamics is different and especially the project sales, we have a strong position in central London. And what we can hear from our colleagues in U.K. is that London has been the hardest hit in terms of the consumer confidence and the project deliveries. So we, again, we don't see any large problems with that business. We just see that it's going to take longer time to get the things dispatched and delivered to the sites.

[Geoff Lowery, Partner of Non]

Okay. So nothing you're worried about in terms of the exit rate from Q3 in the U.K.?

[Kristoffer Ljungfelt, Chief Financial Officer]

No. But again, the uncertainty due to Brexit, it's so close to the due date that Mr. Johnson has set. So we don't know. It's a lot of uncertainty. But so far we have seen the retail segment be compressed by it a lot, and we're seeing projects has been postponed by it a lot. And then we'll see, I mean...

[Operator]

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

[Kenneth Toll Johansson, Financial Analyst]

Just 1 year ago, you took some restructuring costs for lowering the operating expenses throughout the group since you expected, yes, some lower volumes in the Nordics and so on. And now when we look into next year, it seems like a slower residential construction continues in many countries in the Nordics and that there's a business cycle that is on the soft side. So do you see a further need to take out costs and take some restructuring cost for that? Or do -- will you include such measures in the more strategic plan that you have?

[Kristoffer Ljungfelt, Chief Financial Officer]

We never rule out any cost initiatives, and we will see how this market will pan out now. I mean we can see some -- and we alluded to it earlier in the call. I mean we can see some mitigating effects on the product -- project decline. So the retail has come back in a nice way. So we -- I think it's a little bit wait and see right now for how the market will turn out in both our regions.

[Jon Sintorn, President & CEO]

But let me add to that, that in my initial findings though, I think what strikes me is there is a good, let's call it, cost readiness in this company. That's really striking that, that readiness is in place.

[Operator]

And as there are no further questions, I will hand over back to the speakers for any final comments.

[Tobias Norrby, Head of Investor Relations]

Okay. Well, then thank you very much, everyone, for calling, and welcome back on the 4th of February for our full year results. Thank you.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.