Nobia AB

STO:NOBI

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Nobia Third Quarter Report 2022 Webcast Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

And now I'd like to hand the conference over to Mr. Tobias Norrby, Head of Investor Relations. Thank you. Please go ahead, sir.

[Tobias Norrby, executive]

Good morning, again, and thank you, and welcome, everyone, to this Q3 conference call for Nobia's quarterly results. We will do it in the usual way. Our CEO, Mr. Jon Sintorn, will start with an overview of the past quarter. And then our CFO, Mr. Kristoffer Ljungfelt, will dig into some of the financial details.

And with those words, Jon, please go ahead.

[Jon Sintorn, executive]

Thank you, Tobias. And once again, good morning, everyone, and thank you for calling in on this third quarter update. Slide #2, the first one with some writing on. We had organic growth this quarter, which was good. But let's start by saying, obviously, we're not pleased with the short-term results. To the extent that I decided to preannounce it, but we're pleased with the progress we're making in our strategy for mid- and long-term benefits. The third quarter was turbulent while delivering really high volumes from our factories in the Nordics. We have also had continued raw material price inflation and material availability issues and transport issues everywhere. It has put big pressure on the supply chain and especially so in our Tidaholm plant. We're addressing these bottlenecks and constraints and have introduced further initiatives to safeguard deliveries and profitability short term. And we are also pushing ahead with our state-of-the-art factory in Jonkoping, which we are ramping up already this quarter, almost 1 year ahead of plan.

In the U.K., it has been quite turbulent times during the quarter with extremely high temperatures during July and August, 2 new prime ministers and a huge swing in the British pound to mention just a few. We deem that the retail market was down double digits in the quarter. So I am pleased that we managed to grow volumes in Magnet retail, while at the same time, increasing average order values. We still have a lot to do in the U.K. to fix our project sales and consolidate volumes and we do not rule out further cost-out programs in the region to lower our fixed overheads.

Having said that, we shall continue to invest in sales-driving activities, such as adding kitchen sales designers and -- such as higher density of stores. In Central Europe, both Austria and The Netherlands are making progress. We're looking for more franchise partners in Austria. And HTH has also opened their first stores in Germany with great enthusiasm from their franchisees. We are excited about these opportunities to grow with new store formats and new franchisee colleagues.

Our large transformation projects and activities that we call Tomorrow Together Strategy are progressing really well. 2020-'21 was the time for planning, 2022 we'll start doing, and 2023 to continue to see results. As we are in the midst of executing some of these very large investments, which drives a lot of resource, we are also experiencing some difficult contemporary business fundamentals during the last couple of quarters. It has impacted our short-term results negatively. I look forward to see the results of our investments come through, and we will address the shorter-term costs as well for increased profitability.

So for the quarter, in terms of group numbers, we had net sales of SEK 3.480 million, organic growth of 4%, a gross margin of 35.8%, EBIT of SEK 78 million and a margin of 2.2%. And in summary, the organic growth was driven by higher average order value and price increases. We did experience a quite challenging or very challenging business fundamentals, leading to lower margins and profit through the continued inflationary pressure, challenges in the Nordic supply chain, and we continued investments in the U.K. sales initiatives.

We have put measures in place and expect to normalize the Nordic supply chain bottleneck by the end of the year. Our strategic initiatives are progressing well, and the new Jonkoping factory is -- project is ahead of plan and on budget. And the large transformation activities during 2022 were requiring additional resources or is, but we're expecting to see the results come through in the course of -- or during 2023.

Moving on to the next slide, kitchen, which Slide #3, kitchen market development. In the Nordics, we see the project segment holding up on the back of new housing completions. We did see some softer consumer demand and a bit more so in Denmark. U.K. was quite turbulent during the quarter, as I mentioned, the consumer segment is -- was softer and the London super premium project market remained weak. In Austria and The Netherlands, overall, a stable underlying demand.

Moving on to Slide #4. Looking at direct material impact during this quarter, continued significant inflationary pressure on direct materials. The raw material pricing -- prices are flattening out, yes, on a high level. We see a slower increase of other in other areas and in some areas, actually small decreases. All in all, in total, the on cost for this quarter was SEK 250 million. So it is a good thing that we have been pushing and driving price increases at our end as well. And the latest extraordinary price increase with materials during the second half of this year. And since the start of this more inflationary pressure started, we have a bit shy of SEK 1 billion headwind, again, which we continue to price for going out in the market. One reflection on this is also though if the demand would soften a little bit, then direct materials, we expect high material pricing to come down.

Moving on to Slide #5. This is our Tomorrow Together Strategy priorities. I will mention just a few -- a little bit of an update. As I started saying that the big new factory in Jonkoping is progressing according to plan or even ahead of plan and on budget. And we are looking forward to already by the end of this year, start doing components, and we are looking forward to consolidate on the component manufacturing to get this ramped up, which is great since we also have -- we have outsourced some or we have suppliers supplying to us, and this is one of the great opportunities we have with an early start of the Jonkoping plant.

Another thing I'd like to mention is that we are also progressing well and have taken the first step in our new -- in the implementation of our new digital platform for customer experience. It's almost 300 stores by now during -- in the course of the third quarter that has implemented it across the U.K. and Denmark. And as I also mentioned, in the selective geographical expansion area, we have our first HTH stores and franchisees up and rolling in Germany, which is great to see.

So that was a few comments on our Tomorrow Together Strategy update. And with that, I hand over to you, Kristoffer for Slide #6.

[Kristoffer Ljungfelt, executive]

Thank you, Jon. So Nordic region to Q3. And as you can see from the pie charts here, the Nordics now represents 51% of total sales in the group. Organic growth came in at 7%, mainly driven by higher average order values and a positive mix. Volumes were flat in the quarter due to component availability and some capacity constraints related mainly to the customized kitchens and the painted kitchens as we have repeatedly come back to. And these capacity constraints are especially related to the Swedish factory in Tidaholm, but to some extent also in other parts of the supply chain.

We had an organic growth in all countries in the Nordics in the period with Norway growing double digits, strong growth there. Order books remain quite strong in the Nordics, plus 13% compared to last year. And in general, we must say that the markets are holding up well in all countries in the project market. However, we could see some demand softening somewhat in Denmark, as Jon was mentioning before, and that was mainly towards the end of the quarter.

We believe we continue to take share in the retail segment as a result of the investments in the brand proposition, the customization abilities and some successful product launches, as we have mentioned before in the Nordic Nature and Nordic Experience just to mention a few.

Gross margin of 31.6% was clearly a disappointment in the quarter and the main reason for the decline in profitability. Continued headwinds from raw material costs and supply chain issues burdened the gross margin. And in addition, we have had considerable increase in transport costs, where parts of it was self-inflicted due to the supply chain issues, and parts of it is obviously a reason due to the energy bills that are going up. And just for information, the transport cost is booked in our P&L under the SG&A.

We currently see some improvements in the supply chain, and we have launched further mitigating activities to rectify the situation, as Jon was alluding to. And therefore, we expect productivity in Tidaholm to normalize towards the end of the year, but that we will still have an adverse effect of about SEK 30 million in Q4 compared to last year in this factory.

In summary, EBIT of SEK 97 million compared to SEK 196 million last year.

So over to U.K., please? U.K. now represents 36% of total sales on a rolling 12-month basis. Magnet retail had a strong period again, which is promising to see given the efforts and the investments of the -- and strengthening of the brand. We have both a higher average order value and a growing volume and then the net sales had a double-digit growth in a declining market. Also, kitchen sales in the trade channel grew somewhat in the period, albeit mainly on the back of the higher average order value, while volume was slightly down.

Project sales was down double digit in the period as we experienced a lot of postponements on the construction side. The order book for our project business in the U.K. remains healthy, and we are gradually shifting volumes away from the less profitable social housing segment. Gross margin of 43%, which we consider to be a good result given the extreme pressure on the input materials. And the material cost increase was almost mitigated by improvements in the average order values, segment mix and a positive momentum in our U.K. supply chain, which has improved considerably the last couple of years.

However, and again, repeating what Jon said, we will continue to address our fixed cost base to both cater for inflation and prepare for a possibly softer retail market, going forward. In the quarter, we have seen results from the cost-out program launched during Q2 with cost savings of about SEK 15 million. And we expect the program to generate savings of about GBP 3 million during Q4 and onwards. However, we will continue to invest in sales-driving activities, especially in store and sales designer density and especially so in front of the very important winter sales, which is starting end of December.

So over to portfolio business units, which represents 13% of group sales. And the region grew by 1%, also here mainly as a result of price increases, whilst volume was slightly down compared to last year. Austria is continuing to perform very well in both sales and profitability through mainly the brand Ewe. The Netherlands has come back strongly after a difficult Q2. But most of you know that we were hit by a quite severe cybersecurity attack and had to close production for the entirety of June. However, the Dutch operations have now recovered from the incident, and we have a strong order book of 20% compared to last year as we enter Q4.

Operations in and around London through Commodore and CIE, which supports delivery to the super premium segment has been extremely challenging. Pandemic and the war has drastically impacted construction activity in the area, and we are looking for structural alternatives for that business.

Let's move on to the financial position. Cash flow from operating activity was negative in the period mainly as a result of timing effects from Q2 working capital position, but also, obviously, the lower EBIT in the quarter. On a year-to-date basis, operating cash flow was a positive SEK 521 million. The operating cash flow, including investments was negative SEK 530 million in the period where the cash outflow is primarily related to the Jonkoping factory and again the timing on the working capital from last quarter. And that put the operating cash flow year-to-date at negative SEK 723 million. And currently, we have invested about SEK 1.5 billion in the factory in Jonkoping, which is then part of that result.

Leverage amounted to 1.6 in the way that we calculate our covenant leverage ratio.

With that, I hand over again to you, Jon.

[Jon Sintorn, executive]

Thank you. At the summary slide at the end, going forward, we will continue to drive price increases and to drive towards higher average order values, which we have been doing for some time now with good results. We will normalize the productivity in the Nordic supply chain. And the measures that we're taking, we expect coming out of that during the fourth quarter. Very important to keep the momentum in our major strategic initiatives and move into the future, so to speak, using our new digital platforms that we are implementing and progressing with the factory in Jonkoping and investing in sales driving activities, will be key also, going forward. And of course, further measures to address costs, going forward, looking into 2023.

And then let's also this piece of information that we are planning for a Capital Markets Day to be held in or around March 2023, and we would love to have it on site in Jonkoping, so everybody can really feel and touch the progress we are making in our Tomorrow Together Strategy.

So with that, thank you very much, and we open up for Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Victor Hansen from Nordea.

[Victor Hansen, analyst]

Victor, here. Quite a few questions from my side, actually, but there are also some housekeeping. So hopefully, it won't take too much of your time here. And I'll start off on the new factory. And as I've understood it, you're not moving any full production with all the steps to Jonkoping in 2023, only the first couple of production steps. But how much of your production will be moved to Jonkoping already in 2023 from Tidaholm.

[Jon Sintorn, executive]

What we have said previously according to the plan is that in the course of 2024, the full manufacturing will be in place up and running fully, so to speak, in Jonkoping. That does not necessarily mean that all the operations that we're doing, we're doing some stuff we're doing with suppliers and whatnot. But in terms of having full kitchen supply, fully plus according to plan, that is in the course of 2024. We believe that we may be able to do that a bit sooner in terms of full kitchen manufacturing, but and definitely component manufacturing, significantly sooner.

[Victor Hansen, analyst]

But no quantification on how much of your, say, component manufacturing will be done here from 2023?

[Jon Sintorn, executive]

Say again, please.

[Victor Hansen, analyst]

Yes. But you said that you're moving parts of your production to Jonkoping earlier. You mentioned the components here. Could you give any quantification on how much of your components you are moving?

[Jon Sintorn, executive]

In the course of the [indiscernible] a very significant part.

[Victor Hansen, analyst]

And then will it be possible to do a sales leaseback perhaps a little bit earlier due to you starting the factory earlier? Or is it still in sometime in 2024, we should expect that?

[Jon Sintorn, executive]

There are absolutely opportunities to do sales leaseback earlier if needed and necessary. But as it stands right now, we're still looking at 2024 for that eventuality.

[Victor Hansen, analyst]

And then you mentioned here on the call regarding the Jonkoping factory CapEx. You mentioned SEK 1.5 billion invested thus far. So I'm wondering here how much of your CapEx in Q3 was related to Jonkoping? And does this mean that there's about SEK 2 billion left for the factory?

[Kristoffer Ljungfelt, executive]

Could you repeat what you said. How much was in '23?

[Victor Hansen, analyst]

Yes. No, how much of your CapEx, SEK 400 million in CapEx roughly in Q3 was related to Jonkoping? And how much do you have left on the Jonkoping factory in CapEx?

[Kristoffer Ljungfelt, executive]

Okay. About all of the CapEx was related to Jonkoping in the quarter. And you are right about the amount. We have about SEK 2 billion left of the investment.

[Victor Hansen, analyst]

And then moving over to cash flow and net debt. I'm wondering if you could give some more flavor on what's driving the higher working capital bind. And do you expect it to improve in the near term? Or how should we view this?

[Kristoffer Ljungfelt, executive]

Yes. primarily in Q3, it was impacted by the timing effects. And if you look back at Q2, there was a big positive on that. So I think you need to look at it from a year-to-date basis. We have some good initiatives that we can see start to bear some fruit for improvements in the working capital position, especially on the payable side, but we're also looking into targets on the receivables side. So we expect continued improvement in that area as well.

[Victor Hansen, analyst]

And can you give any indications where your financial covenants are at what levels?

[Kristoffer Ljungfelt, executive]

Currently, we would not like to do that, but we are confident with our covenants and that they are well within our -- where we need to be in the -- in our financial position. And we have plenty of headroom.

[Victor Hansen, analyst]

And then is there anything meaningful impact in Q3 in net financials besides interest rates, quite a big jump year-on-year in net financials?

[Kristoffer Ljungfelt, executive]

There was a big effect from the pension scheme, the defined benefit pension scheme in the U.K., and you have probably read all about it with what's happened with the pension liabilities in the U.K., and that hit our deposit as well. However, we are quite pleased that we have managed to hedge our assets to those liabilities quite well. And therefore, the increase is not very big when this happens. So it's in a good place. We're in a good place as a company, but it's still an increase in the quarter that you see in net debt because of that.

[Victor Hansen, analyst]

And then here on savings, final question. Kristoffer, you touched upon it, but should we expect the full savings rate of about GBP 3 million quarterly here in -- from the U.K. from Q4? Or is the net savings figure lower due to new hirings on front office personnel?

[Kristoffer Ljungfelt, executive]

Yes, the net savings will be lower as we kind of move into more sales-driving activities and especially now in front of the winter sales that starts in December. So we have come down quite a bit on the fixed overheads, but will increase the variable overhead. And also, just to mention that we will be obviously very mindful of how we do that. So we will also spend to the revenue opportunities that we have. And especially so if the market moves in any direction, we are able to quickly adjust on that.

[Operator]

Our next question comes from Rasmus Engberg from Handelsbanken.

[Rasmus Engberg, analyst]

Can I just start by asking you, with regards to financial covenants that they exclude leases? Is that correctly understood?

[Jon Sintorn, executive]

Yes. They exclude leases. Yes.

[Rasmus Engberg, analyst]

So you could increase headroom through a leaseback solution.

[Jon Sintorn, executive]

Yes.

[Rasmus Engberg, analyst]

And then the second question is, what kind of -- do you expect any impact on your earnings from starting Jonkoping earlier? And how do you expect that to sort of impact, going forward?

[Jon Sintorn, executive]

There's been some small increases, you once alluded to the fact that these larger programs is pulling quite a lot of resources in that direction. However, it's not material to the results in Q3. And let's say that it's not really material for Q4 either. But as we move into Q1, it will be, and then we will come back with more details on that.

[Rasmus Engberg, analyst]

The transition?

[Jon Sintorn, executive]

The transition, yes. But we're quite positive that we can balance quite a bit of that with the benefits that we get from both insourcing of components and quite a big -- quite a large cost saving by manufacturing in the new highly automated factory.

[Rasmus Engberg, analyst]

And can you be a little bit more specific about what really happened in Tidaholm and why you think that it's going to get better towards the end of the year. So we sort of can understand it in a more hands-on way.

[Jon Sintorn, executive]

Well, let's start on the back on the pandemic, starting with high numbers of sick absences. And then with the war situation coming up, with scarcity of direct material, a lot of struggle just to get availability of components, and then you also have a more severe transport situation where you can only manufacturing so much because of space limitations and if transport systems is not in place or very scarce or very difficult, you need to come to a stop. And there's multiple reasons behind why we have had these -- well, out of the ordinary, significantly, out of the ordinary challenges that we've had in the Nordic supply chain in general, but even more so specifically. And that has been driving significant extra costs, extra shifts, extra SaaS, extra transport, extra availability costs, et cetera, et cetera, et cetera, et cetera. It's been quite -- I must say, a quite significant out of the ordinary situation the last couple of few months, I should say, starting in the second quarter.

[Rasmus Engberg, analyst]

And that is...

[Jon Sintorn, executive]

The overall situation, in terms of availability and transport and all of that obviously have improved significantly since that time. But there is a lag, if I put it that way or the aftermath of rectifying the issue and catching up and so on and so on and so on. Obviously, there is a lag on that in order to get the full productivity back on track.

[Rasmus Engberg, analyst]

And this comment about reducing the backlog, does that relate that you were risking to be quite late in some orders? Or how should we understand that comment?

[Jon Sintorn, executive]

Correct.

[Rasmus Engberg, analyst]

And then just 2 final questions. I don't think I've ever seen a loss in the U.K. in the third quarter. How soon can you come back with further savings on that business?

[Kristoffer Ljungfelt, executive]

Yes. If I start, we're obviously looking into it. And some of the parts also to say that we have never experienced also this headwind in terms of raw material costs, et cetera, which has also made it difficult to keep profitability up. But even besides that, we are not at all happy, obviously, with the negative result in the U.K. We are seeing a lot of opportunities in what we've done now in retail and trade, and we also see that, that positive mix is driving better gross margins for us. So a lot of things have happened to go to the right direction. Now we have to address the fixed costs that we will have in the U.K. And again, we believe that more of the investments should be funneled to the sales driving activities where we see that we make a lot of progress when we have, where and when we have better density in the store and the sales staffing. So we will continue to do that and also look into the project business and how we can improve that. And that will all happen during Q4 as well.

[Rasmus Engberg, analyst]

And just a final question. You have other income of plus SEK 38 million in this quarter. Is that sort of the explanation why your overhead costs are unusually low that there's some sort of FX effect or something there?

[Kristoffer Ljungfelt, executive]

Yes, it's hedging effects that come in there as well. So they actually go towards the gross margins, net of the negative currency impacts we have in the gross margin.

[Rasmus Engberg, analyst]

So there's nothing extraordinary in there, so to speak.

[Kristoffer Ljungfelt, executive]

No, there's nothing extraordinary.

[Operator]

[Operator Instructions] Our next question comes from the line of Sofia Sorling from Carnegie.

[Sofia Sörling, analyst]

Sofia Sorling here from Carnegie. So I have a follow-up question on this leaseback asset. You mentioned that we could actually proceed with this before 2024. Is that then -- would you say that you have that as an alternative now because you already are in discussions with companies that are interested to acquire this plant? Or could you give us some more details on this?

[Kristoffer Ljungfelt, executive]

It's -- first of all, it's an opportunity to do it. They are definitely investors for such an asset. And remember also that it's built as a logistics building in Jonkoping very close to a terminal. So it is an asset that should be and is actually very attractive. So we don't foresee any issues when we go to the market with it at all as of now. But we are not interested to sell it right now either.

[Jon Sintorn, executive]

But it is deliberately built as a logistics…

[Kristoffer Ljungfelt, executive]

Yes.

[Rasmus Engberg, analyst]

And also about the residual CapEx for this plant. You mentioned it's roughly SEK 2.2 billion. Could you tell us something about the CapEx schedule now and until the beginning of 2024, then, will we see a similar CapEx, higher CapEx level in the near term and then it will like fade away? Or if you could give us some kind of guidance here?

[Kristoffer Ljungfelt, executive]

I will. It's SEK 2 billion left, just to clarify that. About SEK 2 billion, let's say. And most of it will happen during 2023. Also keeping in mind now that we are pushing ahead a little bit quicker with the investment as well as we have progressed well in the factory. So we believe that the investment profile would be a little bit closer in the beginning of 2023 rather than -- there will be other parts which we expand by in Jonkoping in end of '23-'24. So some of it will run into '24. And also, I will have a little -- well, we obviously have the intention to have our suppliers to help us to finance this through longer payment terms as well. So that is not fully said on how that exact cash flow profile we could do that as well.

[Rasmus Engberg, analyst]

And also maybe just a little bit of a quick question about this luxury segment in London. What is the strategy going forward for this Commodore brand? And do you see any recovery at all? Or you mentioned structurally change in the strategy here?

[Jon Sintorn, executive]

Well, we've been quite patient with looking at if the market would bounce back. We don't really see this big -- a big bounce back anytime super soon. So we're looking into how we structurally can make sure that we have the confidence that we need for the project business. We have a lot of good talent in terms of project knowledge there and then look at how our fixed costs can be reduced.

[Rasmus Engberg, analyst]

And also, so you mentioned the Nordic market and the Nordics has been a really strong business unit for you or division. And you see that the order book is still holding on, et cetera, but we read in the news about how developers in parts of Sweden now put people on notice due to lower order intake. How do you prepare for a quite significant weaker order intake for next year, especially then in Sweden and the rest of Nordics, if you can give on…

[Jon Sintorn, executive]

Let me start by saying, I think just sharing the experiences with the vast majority of management team and business leaders as of today, I think a lot of people looking into how do we best prepare for the uncertainty of 2023 where things can go well, north and south. So I think there's plenty of people thinking about how to best prepare for 2023. And so are we. As of now, project business for our cycles coming late in the project, we have the order book. And as we see, we don't see any projects not being completed. There is a continuation or completion of projects and so on, but we also notice that as many others that the new start for development phase is not fantastic right now.

[Kristoffer Ljungfelt, executive]

Yes. And just to add to what we are saying and have everybody to remember that we look at 12 to -- or 6 to almost 24 months before we come in to the projects. And the last years of very high housing starts should bring a quite okay market on the project side, at least for yet some time. And in essence, we haven't seen either the -- a huge decline in the housing starts or request for housing starts, but probably more of a normalization compared to what happened right after COVID. So we are obviously extremely mindful of this. To Jon's point, we look into every area where we know how -- so we know how to act whenever this might happen. And we also -- I should also say, we have a lot of experience of this type of situations in the company, where we believe we have acted quite well to these type of effects.

[Operator]

[Operator Instructions] I'll now turn the conference back to Mr. Norrby for closing remarks.

[Tobias Norrby, executive]

Very good. That's it, everyone. Thank you for calling, and we welcome you all back on the 9th of February for the full-year results. Thank you.

[Kristoffer Ljungfelt, executive]

Thank you.

[Operator]

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