Nobia AB

STO:NOBI

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to Nobia Q3 Report 2021. [Operator Instructions]Today, I am pleased to present Tobias Norrby, Head of IR. Please go ahead with your meeting.

[Tobias Norrby, Head of Investor Relations]

Thank you, and good morning, everyone, and thank you all for calling into this Nobia Q3 2021 results presentation. We will follow the usual format over here, which means our President, Mr. Jon Sintorn, will begin with an overview of the quarter, before our CFO, Mr. Ljungfelt, digs into some of the financial details. With that, I hand the word over to you, Jon.

[Jon Sintorn, President & CEO]

Thank you, Tobias. And again, good morning, and welcome everybody to the Q3 report session. Let's start on Page 2, Slide #2. Highlights for the third quarter. And let me start on a very positive note with the strong and good performance that we've had in the Nordics and Central Europe. However, the performance in the U.K. was more mixed, where we had continued growth in the trade segment, whilst retail and project sales were below the prepandemic levels.We experienced, as many industries, a challenging supply chain in the kitchen industry as well with direct material cost inflation and availability have been challenging in the quarter. As a consequence, we have increased prices to customers to compensate for the direct material price inflation. We have a solid balance sheet for investments in future growth and efficiency improvements. And those were the main topic highlights for the third quarter.If we turn the page and going into the next slide, Slide #3, an overview of the kitchen market development. We can see that in the Nordics, the stay-at-home trend, solid housing markets and consumer confidence continues to support retail sales. We also have a stable business-to-business demand driven by the housing construction activity, and especially Denmark has been very strong, Norway slightly softer.If we look into the U.K., the traction that we had from the second quarter did not continue. So it's a slower-than-anticipated recovery in the retail/consumer segment and the London project market and social housing market remain weak.If we look into the Central Europe region, there was a strong consumer demand, supported by the stay-at-home trend. Housing shortage in the Netherlands supports new construction and B2B sales, which is obviously good for our Bribus operations. And we can see that we are -- you can see that there are, let's call it, evidence or suggest that we are taking market share in Austria.If we continue to the next slide, Slide #4, we'll spend a few moments on the direct material pricing impact. Our industry as well have seen significant upward pressure on direct material cost and components. We've had a lot of work and everyday struggle in the supply chain, making sure that we have availability for certain components. But as a consequence, we've also seen longer lead times. It has been a tough job, all our factories being able to operate and deliver in the course of the quarter. And we foresee that we will be able to do that going forward as well. But it comes with a lot of hard work, and as said, and lot of everyday struggle.We have adjusted prices to our customers, and we are expecting effect from this quarter, Q4 -- this quarter, Q4 of this year, where we will have a compensation for the lion's share of the price inflation, but not fully covered. With that said, going into the Q1, we estimate or we forecast that we will be fully covered on this price inflation, given the situation remains at a similar situation as we have today. So that was on direct material, Slide #4.Going forward to Slide #5, with these events and highlights and activities, we can see that in the P&L, where we have organic net sales increase of 3%, running a net sales of SEK 3.215 billion. That was driven by high single-digit growth in the Nordics and Central Europe, a decline in region -- or an overall decline in region U.K. and then obviously, the price increases that I just mentioned. And as a consequence of that, we can see the EBIT improved to SEK 228 million compared to SEK 195 million of last year's third quarter, and the EBIT margin increased to 7.1% compared to the 6.3% we saw third quarter of 2020.Moving on then to Slide #6. In addition to running our business every day, making sure that we deliver to our customers and sell nice, beautiful kitchens every day to consumers, trade and projects, we continue to work and deliver on our Tomorrow Together strategy. And if you highlight from that from this quarter is that we continue to do well and have traction in the trade segment. We're catapulting trade growth in the trade segment in the U.K.We worked on revitalize consumer retail, where I'd like to mention that our campaign with colors for Marbodal has continued to do really well. There is a big demand for that product range. And we're also doing really well, for example, in Denmark in the retail segment.Our Sustainability and Design Leadership ambition, I'm pleased to see that the Nordic Nature concept now have reached a big number of stores. And also in the digital and data space, we have renewed our web, for example, in the U.K. and enhanced our digital experience capabilities as well.Moving on to structural efficiency initiatives. I'll, in a second, get back to the manufacturing footprint transformation, talk about our new factory. But before that, I'm pleased to say that our product platform alignment, K2020 projects are going -- are running according to plan, which will optimize in a better way our platforms and deepen our range making it even more attractive to buy products from us. Also, the business process harmonization is doing -- is going according to plan, which is obviously a really important milestone on the back of being -- preparing for the new factory. Also, a good job in terms of getting the Nordic region working closely together for optimizing the processes.In terms of people engagement, we -- a year ago, we launched a new organization, and I'm also pleased to see that we reached next level or deeper in the U.K. organizations, specifically around the retail team, which is now being renewed, so we can take on that challenge and opportunity in an even better way. We also added some new competencies that we will need in order to continue to deliver on our Tomorrow Together strategy. Those were a few words on the overall situation with our strategy, which is obviously very exciting to work with and important.Moving on then to Slide #7. There is a slide from the Capital Markets Day depicting the new factory that we are building in Jonkoping. Obviously, a big undertaking for the company and a big investment for us, obviously, really important. So with that said, also, pleased to say that we are progressing according to plan. And to recap a little bit, we have a machine park investment of -- budget of SEK 2 billion, which we are meeting. We will not go beyond that. We have a project cost budget of SEK 200 million, which we also are on par with or in line with, I should say. And then we have the building of SEK 1.5 billion, where our main strategy for that is a sell and lease back, which we also are working on.There is a write-down and noncash of SEK 100 million. And all of that, we now have started the construction, and we have filing and starting to pour cement to build the platform. We will ramp up production second half of 2023 and will be up in full operations, not full capacity. Obviously, we'll not fill the capacity day 1, but we will be able to run full-scale manufacturing in the course of the first half of 2024. All of that, as of now, running according to the plan, where building work obviously being really important, but also machinery sourcing, purchasing for those machines with the longest lead time.This factory will render a SEK 300 million run rate savings on the back of the productivity and higher efficiency that this modern factory of highly automated with live sustainability footprint will render. And at least SEK 500 million, we calculate the value of the capacity increase, meaning if we would fill the factory -- if we would have sales to fully fill the factory, that would at least render SEK 500 million value. So those were a few words with regards to our new factory in Jonkoping, to be built in Jonkoping.With that, I hand over to you, Kristoffer.

[Kristoffer Ljungfelt, Chief Financial Officer]

Thank you, Jon. So we move over to Slide #8, where I will shed some more light on the development in the different markets. We're starting with Denmark with 23% of our sales. We continue to see very good momentum in Q3 with growth of 10% driven both by retail up double digits and project sales up high single digits. The market in Denmark has been strong for a long time, and we also see strong performance from our new product launches and believe that we continue to take share on the back of that and a strong team in Denmark.Sweden, then, 13% of sales also had a strong momentum in the quarter, especially in product sales, which grew double-digit. Consumer retail was flat in the quarter, but mainly due to capacity constraints that we have now to deliver on painted products. Coming back to the consumer campaign for Marbodal, the Jordnara farger, Earth Colors, I guess, would be the translation. That campaign continues to trade well, but again, constraints on our ability to paint have been increasingly difficult in the quarter, and we are now working intensively to get access to more capacity for painted parts. I believe it will take until the end of the year before we find appropriate solutions for that.In Norway, 10% of sales, it has been relatively soft after the easing of COVID restrictions, declined both in project market and consumer market in the quarter, however, judging by the housing starts, we believe the project market will recover in Norway by first quarter of next year. And we are, as we have stated before, not that concerned about the Norwegian market and believe that the decline is temporary.In Finland, 6% of our sales. We have seen some recovery of the project market in the quarter, which is promising after a couple of years with declining market in the project segment. Retail, also in Finland, continues to perform very well in the quarter with double-digit growth.We look then at Central Europe and Netherlands and Austria. We had another good sales period in the quarter, with the Netherlands growing high single-digits. Austria was growing low single-digit, but we also have to keep in mind that the factory was fully open the entire Q3 last year, whereas they didn't take out any vacation -- or they took out vacation earlier in the year due to the pandemic.Then moving over to U.K., which then constitutes 37% of our sales. And to the right here, you see that we are breaking down a little bit different to highlight our Magnet brand performance, and the push we're doing in the Magnet brand. So we start with Magnet Trade, 29% of sales. We performed well in the quarter, double-digit growth compared to same period, both last year and 2019. However, as Jon was alluding to, the growth was slowing somewhat from the trajectory we had in Q2. And we also start to meet tougher comparables in this area.Magnet Retail, it's also 29% of sales in the U.K. We expect to have much better momentum than we had in the quarter. We believe the market was soft compared to last year and compared to '19 as well. But having said that, we are still not satisfied really with the performance in retail, which declined single-digit compared to last year. And I will shed a little bit more light on that as well later on here.Project sales being very difficult for us and has not recovered after the pandemic. We've seen sales decline in this segment of close to 40%, which is the result of very low activity in the high-end property market in London and low activity in the social housing segment across U.K. We believe it will take another 6 months before this market starts to trend better. And, of course, our factories to these segments are running much below capacity and negatively impact our margin. And we are working hard to adjust the cost base for this.Then some extra information about our Benchmarx business. So after the Wickes demerger from Travis Perkins and following our strategic initiative to exit unprofitable business, we have decided to exit the Travis Perkins' kitchen brands Benchmarx. That resulted in a net sales decline of SEK 80 million in the quarter, but contributed positively to the U.K. profit margin. Rolling 12-month Nobia sales to Benchmarx is roughly 4%, as you can see, of the sales in the U.K., that is, which equals to roughly SEK 220 million, evenly distributed over the quarters. We will now turn our focus to Wickes business, where we see a strong growth potential. And as a result, we have recently signed a 5-year supply agreement with them as well.So, to shed some more light on the Nordic region, again, net sales increased 8%; Denmark and Sweden, driving growth; strong demand for painted kitchens; and a trend shift in the project market in Finland. We also sell at higher order values and have a favorable mix due to strong retail development, which is driving gross margin to some extent. Cost for direct material increased during the quarter, which we will price out to the market, however, with a time lag. And we believe most of it will be covered in Q4, but definitely, all of it by Q1 next year. Important to notice is that our SG&A cost position was lower in the second half of last year due to our furlough contributions and cost-cutting activities following the lockdowns. As a result, we have slightly higher cost base during the second half of 2021. And these 2 effects combined impact our drop-through. As you can see from the EBIT margin, that came in slightly below last year despite the volume growth. However, we are quite content with the EBIT of SEK 196 million, given the circumstances on the direct material.Next slide, please, Slide #10, that is on the U.K. Organic net sales down 4%; growth in Magnet Trade; retail sales below last year and 2019; and then a big drop in construction in London and social housing. Benchmarx, if we adjust for Benchmarx, the organic sales would have been 1% positive.As Jon was stating earlier, we have a new team in place in Magnet Retail and to drive the proposition and make these investments that Jon was alluding to before in digital and in the product, we did spend a little bit money in the investment in those areas. We will also continue to invest in Magnet in front of the winter sales period, which starts after Christmas, which will then drive slightly higher costs than previous years.Gross margin improvement of almost 8 percentage points was a result of better mix as we grew Magnet. We've also been successful in raising prices sufficiently to cover for the material increases for Q4. However, the jury is still out how the market would respond to the higher pricing, which might require adjustments throughout the quarter. And I'd just like to add here also that structurally, our order book in the U.K. is somewhat shorter than in the Nordics and Central Europe, and thus it's been easier to get the pricing effect earlier than in the Nordics.Central Europe. Organic net sales growth of 7%. Again, strong demand in Austria and good demand in social housing and new housing investments in Netherlands. And some gross margin decline due to the higher raw material impacts, where the price increases have not taken place yet in those areas. However, a good EBIT of SEK 34 million with over 10% EBIT margin.So let's flick over to the financial position. We had an operating cash flow of SEK 123 million in the quarter. We have done some major investments then in the factory in Jonkoping that is starting to come through in the quarter. Last year was also impacted by governmental support. And you can see in our change in working capital that it's negative due to these effects. Having said that, we have a very strong balance sheet with a financial net debt of SEK 153 million and feel that we have a very good position to make these bigger investments now for the strategic plan and not the least, the factory in Jonkoping.So Jon, I hand over to you again for the summary.

[Jon Sintorn, President & CEO]

Thank you. Well, reiterating where we started, we've had a strong and a good performance in the Nordics, in Central Europe and in trade in the U.K., whereas the retail and project performance in the U.K. was softer. We've had a challenging supply chain situation with prolonged lead times, but we've managed to get material in, even though it's been more difficult and not pleased the direct material cost inflations have had an impact. But -- and we have run -- implemented price increases to our customers to compensate for that direct material price increase, where the lion's share will be covered -- of that will be covered during Q4 and fully at Q1. And we have a solid balance sheet for investments in future growth and efficiency improvements. And we mentioned a few of those exciting initiatives that we are currently running in addition to running our everyday, 'sell, sell, sell, deliver, deliver, deliver' to our customers.So with that, thank you very much, and it's time for Q&A.

[Operator]

[Operator Instructions] We already have one question from Victor Hansen from Nordea.

[Victor Hansen, Research Analyst]

Victor here from Nordea. So my first question, on your organic sales growth, if you could please specify how much is volume and how much is price hikes?

[Jon Sintorn, President & CEO]

We don't like to go into the detail or how the organic growth is distributed between those.

[Victor Hansen, Research Analyst]

Okay. And then on the next question then, on structural efficiencies, Jon, you mentioned that they are going according to plan. Could you please try to quantify how much it added to EBIT now versus last year? Or if you have any other color to add on this?

[Jon Sintorn, President & CEO]

No, I was referring the structural efficiency initiative for our strategy is predominantly related to the new factory that we built.

[Victor Hansen, Research Analyst]

Okay. So no EBIT impact?

[Jon Sintorn, President & CEO]

For this quarter, in general, not any significant that's worth mentioning in this quarter.

[Victor Hansen, Research Analyst]

Okay. And a follow-up, because you mentioned on the CMD, you said SEK 200 million in in-sourcing due to the efficiencies across the group. Have you seen any of this yet since the CMD or when do you expect this to come, on a front or back-end loaded?

[Jon Sintorn, President & CEO]

So we continue, obviously, to run the program on getting the direct material costs down. We can see some from the value engineering that we do that we get cost out, and the K2020 platform has significantly contributed to those savings that we expect. That's trading according to plans. However, given current circumstances in terms of direct material on cost, of course, it's very difficult -- or the underlying cost has gone up so much that, of course, these savings are not coming through or they're compensated for the direct material on costs, so to say. But there's still a lot to be had in that.

[Victor Hansen, Research Analyst]

Yes. And then on the very strong gross margin in the U.K., you did provide some flavor on this, you mentioned mix effects and price hikes. But could you please elaborate on how sustainable you expect this to build? You mentioned, for instance, weak efficiency in social housing.

[Jon Sintorn, President & CEO]

Yes, absolutely. No, yes, I can shed some more light on that. Our product sales in the U.K. has a quite low gross margin with also low cost to serve, whilst the Magnet business has a considerably higher gross margin, but also a much higher cost to serve and especially so in retail. So the more we can grow with Magnet Retail, the better the gross margin will be, but also the SG&A will go up slightly. Thereafter, is trade, and product sales have, by far, the lowest gross margin.So having said that, we still believe that when we get volume through our Magnet business, we will be able to retain good and solid gross margins. But, of course, we're also pushing for the trade -- for the product to have to come back as we've been hurt by the very weak market there.

[Victor Hansen, Research Analyst]

Yes. And I understand it's a complex question, but could you provide any flavor on how large the hit actually was from the external costs and the direct material pressure from within your supply chain now in Q3?

[Jon Sintorn, President & CEO]

It's hard to put an exact number on that, and it's different from region to region as well. But there is a significant price increase that is captured in the P&L for that. And again, we saw some of the mitigating price increases or compensating price increases come through towards the end of Q3, very little, but we see them come through quite a bit now in Q4. So back to your previous question on top line, part of the top line growth would absolutely be based on price, and it was not that much based on volume. So.

[Operator]

[Operator Instructions] We have another question from Fredrik Moregard from Pareto Securities.

[Fredrik Moregard, Analyst]

So first off, question on the U.K., clearly, softer performance than you guys were planning for. Perhaps if you can tell us something about what you're seeing with regards to ordering trends? Are consumers canceling orders or has sort of order intake softened as installation capacity has been a bottleneck for you?

[Kristoffer Ljungfelt, Chief Financial Officer]

No, we don't see any canceling of orders. Our order book has been a bit, let's call it, delayed or pushed into the future on the back of installation, scarcity and you've read in the newspapers, drivers and petrol and those sorts of things. The market as such was a bit softer than we anticipated on the back of the traction we had from the second quarter. So that's another reason. And then on top of that, we're also now enhancing and putting more combination of investments and skills into the -- specifically the retail segment, where we have an opportunity to do even better.

[Fredrik Moregard, Analyst]

All right. And then when it comes to the split between trade and retail, particularly, I mean, my guess would have been that trade as well would have been impacted by lack of installation capacity, transportation and so on. Maybe you can shed some more light on how you're able to grow substantially in trade when the retail business declined.

[Kristoffer Ljungfelt, Chief Financial Officer]

Well, if I start, first, there is -- we've done quite a few things in the recent years in order to strengthen our proposition in trade, and that is paying off where we have the underlying momentum in the asset area is essential for us. That's one. There is probably a slight flow from consumer or retail to the trade, because of the availability or scarcity of the trade where we have this professional network or connection with carpenters, and this is probably maybe not huge, but at least some dream of consumers ending up in the trade segment, so to speak, because of the situation. And the tradesman, it's more his or her living and his job, whereas the consumer, it's the appetite for going out shopping and doing retailing is lesser. From the consumer perspective, it's more easy for them to wait, so to speak, than for the tradesman. So those are a couple of explanations.

[Fredrik Moregard, Analyst]

That makes a lot of sense. Then on the K2020 platform, you mentioned it's progressing according to plan. Perhaps if you can provide us with an update on the timeline and where we are in that transformation?

[Jon Sintorn, President & CEO]

Yes. So, of course, much of it, the full platform will be suited for the new factory. So we're also setting up a platform that will be optimized to go with our new factory. So then it would be 100% completed. But right now, we are implementing parts of the K20 platform across all our Nordic brands. And we are, let's say, not halfway there, but close to halfway there. And again, you can see some benefits coming through in that, that we get the reduction in SKU counts, but at the same time, get actually a bigger assortment for our brands.

[Fredrik Moregard, Analyst]

And outside the Nordics, especially in the U.K., where you've had some, I guess, issues when it comes to capacity in filling factories, if you could update us on the progress you're making with the platform in the U.K. as well.

[Jon Sintorn, President & CEO]

Yes. So the K2020 platform is foremost -- yes, it's foremost a Nordic platform. In the U.K., we're still on the K20 platform, but we are taking elements from the K2020 platform and move them into U.K.

[Kristoffer Ljungfelt, Chief Financial Officer]

Wickes anyway is now in K20. It did not use to be just one step forward.

[Jon Sintorn, President & CEO]

So we've been a little bit ahead in the Nordics to move over to the K20 platform, which is the predecessor of the K2020 platform. And therefore, it's been easier to move over in the Nordics first. There would be additional benefits when we can do this journey also in the U.K.Regarding the capacity in the factories in the U.K., I mean that we're working, as I said, very hard to get the cost base down. And we're coping with the situation. But of course, we, at the same time, expect the market to come back within 6 months or so. So we need to keep the skeleton crews there as we have it now.

[Fredrik Moregard, Analyst]

Maybe when it comes to the capacity in the U.K. and the cost savings you're looking to do that, perhaps if you can give us some sense of what types of initiatives it is that you're looking for?

[Kristoffer Ljungfelt, Chief Financial Officer]

For capacity in the U.K.?

[Fredrik Moregard, Analyst]

Yes, for reducing the cost base in the U.K.?

[Jon Sintorn, President & CEO]

Yes, but it's foremost a reduction of manning, obviously, on the back of lower volume. But it's also moving production from different sites depending on their key skills and the type of products that are being manufactured. So we have moved some of the manufacturing from the -- our Dewsbury factory, which was manufacturing from Rixonway over to Darlington as an example.I think it's fair to add to this -- it's fair to add that we are still confident that we will get the project business back at some point in time here. So it's not something that we, at all, are considering to make huge adjustment to before we get the project business back. And as you know, also, we have Magnet selling into the project segment, where we're also making investments for -- when demand starts to pick up, we should be able to deliver to the higher project demand, also with the Magnet brand. So it is still an important business for us.

[Operator]

[Operator Instructions] Well, it seems that we have no further questions.

[Jon Sintorn, President & CEO]

Okay. Dan, thank you very much. That's it for this time and welcome back on 1st of February for the Q4 numbers. Thank you.