Nobia AB

STO:NOBI

Earnings Call Analysis

Nobia Q3 2023 Earnings Call Analysis

The Nobia Q3 2023 earnings call discussed the company's performance amidst challenging market conditions, focusing on cost-saving measures, strategic initiatives, and financial metrics.

Operating Profit and Financial Highlights

Nobia achieved a positive operating profit of SEK 51 million, supported by cost savings and a stable gross margin despite a volume decline.

Market Trends

Sales declined across regions, with notable drops in the Nordic and U.K. markets. The Netherlands showed resilience through strategic pricing strategies.

Financial Position and Cash Flow

Improvements in cash flow and working capital management were noted, while net debt increased in line with planned investments for the Jonkoping factory.

Future Priorities

Nobia emphasized driving sales and delivery as key priorities to capitalize on business opportunities despite ongoing market challenges.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Nobia Q3 Report 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Tobias Norrby. Please go ahead.

[Tobias Norrby, executive]

Thank you. Good morning, everyone, and thank you for calling in today. And our apologies for the little technical delay. My name is Tobias Norrby [Technical Difficulty] Investor Relations. The presentation today of our Q3 results will be done by Mr. Jon Sintorn, our CEO. And the financial details will be covered by Henrik Skogsfors, our CFO.And with that, we start. So [Audio Gap]

[Jon Sintorn, executive]

[Audio Gap] And good morning, everyone, and thank you again for joining the call today.Over to Slide 2, the Nobia Group highlights of Q3. We delivered a positive operating profit in the third quarter. Given the continued weak market situation driven by poor macro fundamentals resulting in significant volume decline, I regard this as a good achievement. We are meeting the market headwind with cost reductions and taking steps to strengthening our financial position. The organic growth in the quarter came in at minus 18% for the group with substantial declines in both consumer and business-to-business project segments. An exception was our operations in the Netherlands that delivered another quarter of growth.For you, calling in today, I do not think the significant market decline and headwind is a huge surprise, given the current market macro situation. There are nonetheless several positive developments I would like to point out. Firstly, we are saving SEK 140 million in comparable currencies in SG&A expenses, whereof SEK 90 million is related to the previously announced restructuring program. Year-to-date, the program has delivered cost savings of SEK 194 million. At full effect, by mid-2024, the restructuring program will deliver cost reductions of approximately SEK 350 million. So right now, it means that we are ahead of the original plan.Furthermore, the cost of our input material is starting to decrease slightly and our price increases have effect. Additionally, our main strategic initiative, setting up a factory in Jonkoping remains on track. We are producing kitchen components for assembly in the Tidaholm facility as well as starting the first flat-pack kitchen deliveries to -- flat-pack deliveries to customers. By the end of the year, as per plan, we will have the full capability for kitchen manufacturing and order consolidation for complete kitchen orders.Group operating profit for the quarter was SEK 51 million compared to SEK 78 million last year, excluding items affecting comparability. The gross margin for the group has remained stable compared with the corresponding quarter last year despite the volume decline, which, of course, is good. Operating profit was supported by the cost savings I just mentioned, but offset by the impact from the decreasing volumes during the quarter. Operating cash flow was positive when excluding the temporarily elevated investment levels due to the construction of the Jonkoping factory that summed up to SEK 362 million in the quarter.A sale and leaseback of the Jonkoping factory is a prioritized activity for us. Some good news is that the main manufacturing building will be granted a formal approval of completion in November. We are, in parallel, reviewing other strategic options for strengthening our balance sheet, including, but not limited to, sale and leaseback transaction.So moving on to next slide, the kitchen market development, and I'll be very brief and not a lot of new news. If we look at the Nordic market, there is a softer consumer and retail market [ with ] project decline as housing starts -- the decrease of housing starts, and housing completions are tapering off. Very similar situation also in the U.K., where the retail and trade market are -- markets are softer and the project market remains weak. Also, overall, the same in Austria and the Netherlands, whereas the Austria retail market is softer; however, a more stable project market in the Netherlands. So the overall trend, as we have seen, is pretty much no significant news on that front.So with that, moving on to the next, where, you, Henrik, will add some color and flavors on the numbers.

[Henrik Skogsfors, executive]

Thank you, Jon. The Nordic region for the third quarter, the EBIT was in line with previous year's solid performance considering the volume decline. Organic sales experienced a decline of 21%. Price realization was good across the board and continue to support top line. This was counterbalanced by a notable decrease in volume, affecting sales performance in all countries and segments.The retail and project sectors observed the most significant sales decline followed by a slightly smaller drop in the trade sector. Sweden encountered the largest decline in sales trailed by Finland and Denmark. The increase in gross margin by 1.2 percentage points to 32.8% was primarily driven by price realizations and reduced direct material costs. The improvement was partly counterbalanced by adverse [Technical Difficulty] and less favorable currency mix due to sales is declining somewhat more in consumer compared to the professional segment.Reduction of sales and administrative costs benefited the result in the quarter, whereof the impact from restructuring and cost program, which was announced in January, with result savings of approximately SEK 20 million in the quarter. As outlined in the quarterly report, we accounted for SEK 27 million as items affecting comparability in the third quarter. These costs are associated with the supply chain and transition for Tidaholm and Jonkoping.In summary, EBIT margin improved 0.8 percentage points, mainly driven by cost reductions and lower direct material cost. The absolute EBIT amount that came in, SEK 93 million compared to SEK 97 million last year. The main driver behind the lower result is the volume decline and the negative sales mix.Next slide, please. Region, U.K, the organic sales declined by 18 percentage points. The U.K. kitchen market, much like the Nordics, exhibited softness during the quarter. Within the U.K. region, as communicated previously, the company is strategically withdrawing from lower margin portions of the project segment impacting overall sales. Economic headwinds, particularly affected consumer sales, leading to reduced volumes. We noticed good progress in gross margin on back of the progress in our U.K. transformation strategy with higher average order values on back of higher share of sales in the premium segment.However, the weak market and large volume decline in the third quarter with slightly higher year-on-year direct material cost could not be mitigated, which resulted in a gross margin decrease by 1.1 percentage points to 42% flat. The savings resulting from the restructuring and cost program communicated in January positively impacted the quarter by around SEK 60 million, slightly surpassing our own expectations and driving the reduction in selling and administrative costs. The positive impact from higher average order value and cost-out activities were not able to offset the volume decline, resulting in a loss of SEK 28 million compared to a loss of SEK 11 million last year. We have now finalized the sale of the Dewsbury plant as previously communicated. The sale resulted in a gain of SEK 112 million, accounted in the quarter as an item affecting comparability.So over to the next slide, please. Portfolio business units delivered stable sales and flat EBIT. Sales declined 3% organically, primarily on back of volume and mix decline, offset in part by realized price increases. In the Netherlands, the largest entity in the portfolio business units managed to offset market slowdown and higher year-over-year material prices with strategies involving price increases, advantageous product mix and strategic contracting. The Austrian market remains challenging with the sales decline attributed to a reduction in both volume and shift in product mix compared to the previous year.Price, in combination with stringent cost management, was hampered by higher input material prices and unfavorable shift in product mix, inflation alongside a decline in volume. The gross margin declined close to 1 percentage points compared to the third quarter last year. EBIT remained flat to previous year, primarily due to savings in freight and staff costs, which counterbalanced the slight decline in the gross volume.So over to the next slide, financial position, please. Cash flow from operating activities improved by [ SEK 177 million ] in the quarter on back of improved working capital. The improvement in working capital was driven by lower account receivables on back of lower sales level. Simultaneously, our focus on reducing inventory had a positive effect in the quarter. The operating cash flow, including investments amounted to minus SEK 305 million, where investments in the quarter primarily related to the construction of the factory in Jonkoping amounted to SEK 484 million.Net debt, excluding leasing and pension debt increased by SEK 534 million in the quarter to SEK 3,039 million. The increase in net debt is according to plan as we are continuing to build the factory. The increase in net debt in combination with the decline in EBITDA resulted in a leverage of 6.2, which is in line with our plan. The fact that the economic downturn coincides with our planned extraordinary investment level has resulted in an increased leverage ratio. We are fully committed to reduce leverage and explore various leverage reduction options, as Jon communicated earlier in the call.Over to you, Jon.

[Jon Sintorn, executive]

Thank you. Then rounding off the presentation, talking about priorities going forward. Even in this macro situation, the market situation, there is business to be had. So driving sales, sell, sell, sell, deliver, deliver, deliver, sell, sell, sell, that's really a priority for the organization to continue to drive sales, but also to continue to deliver on the cost-out program and beyond; working on the direct material price reduction and obviously, complete or work on the major strategic initiative, the Jonkoping factory and make sure that we continue to be on track and on plan; and then last, but not least, review strategic options for the balance sheet strengthening.And I think it's fair to say in this quarter that we, at the core, have a good business model. And even though the market circumstance at the time currently, right now, is challenging, we know that the market will come back, and it's a good market to be in. And now and going forward, we will be ready to capture those opportunities.So these were the presentation -- this was the presentation from us, from management. And with that, thank you. And we leave to Tobias and Q&A.

[Tobias Norrby, executive]

Operator, please open up for some questions.

[Operator]

[Operator Instructions] We will now take the first question from the line of Rasmus Engberg from SHB.

[Rasmus Engberg, analyst]

I was wondering to what extent the minus 18% that you recorded organically this quarter, how do you see that developing in the fourth quarter? We have no data on your order intake and so on. So can you help us, please, with that, if you think that's going to be better or worse in the fourth quarter?

[Jon Sintorn, executive]

We typically don't give forecast for the future. But in general -- as a general reflection, and we had a general reflection as well the previous quarter, I think it's fair to say that [Technical Difficulty], the largest drop in the market, we believe we [Technical Difficulty] have. It doesn't mean that we see a market pickup in the short term by no means.

[Rasmus Engberg, analyst]

Perfect. Yes. Very good. And the second question is, could you shed some light on why the sale leaseback, which I think at least was signaled during the beginning of the year or during spring, why has it taken such a long time to finish up?

[Jon Sintorn, executive]

Obviously, it's a quite large transaction or a big project as such. And with that, I think it's fair to say it's good and more simple structure, if I put it that way, that when the majority of the facility or the building is completed.

[Rasmus Engberg, analyst]

This is the main -- is that the main reason?

[Jon Sintorn, executive]

Excuse me?

[Rasmus Engberg, analyst]

Is that the main reason that the factory is not finished?

[Jon Sintorn, executive]

Let's put it that way. It's [ transactionally ] easier to have clear -- very clear milestones and completions, yes.

[Rasmus Engberg, analyst]

And did this surprise you? Or was it really a part of your plan?

[Jon Sintorn, executive]

No, I think, very simplistically, you can do such a transaction on either drawing or in the midst of anything or when it's more to completion. So again, it's large. It's a lot of things to go through and so on. But it's definitely easier to have a more clearer, probably not so complicated -- less complicated structure when buildings are completed.

[Operator]

We will now take the next question from the line of Hanna Lindbo from DNB Markets.

[Hanna Lindbo, analyst]

I have a question because you said that you will be granted a formal approval of completion in November. And I know you have talked about before that the sale and leaseback could take place within 10 to 12 weeks. Is it after this completion, we can expect that it's 10 to 12 weeks before a sale and leaseback? Or how should I think about this?

[Jon Sintorn, executive]

I think you refer to what we mentioned as the quality standard time plan for a ready building, that's the approximate time for this type of transaction. And we also mentioned it from a new start and really start working on it with a real project, so to speak.

[Hanna Lindbo, analyst]

Because my view was when all these was settled, it was 10 to 12 weeks from that? Or is it now in November that we already can expect a sale and leaseback?

[Jon Sintorn, executive]

Well, first, just for clarity, I think it's fair to say that the main manufacturing building will be granted the completion and conformance. Then we have some office and other buildings that need to be -- which is much less complicated, I should say, which is to be completed mid-2024 according to plan, just saying. But this is a very important milestone for us.

[Hanna Lindbo, analyst]

So could you comment on when we could expect to see this sale and leaseback to its close?

[Jon Sintorn, executive]

For the integrity of the process, I'd rather not give any data. I'd just reiterate and say it's a major milestone for us to have this completion and [indiscernible] a clear structure.

[Hanna Lindbo, analyst]

That's fine. And then just a question on pricing. How should I view that going forward? Are you planning on any price increases? Or are you talking about lowering prices or how's it going?

[Henrik Skogsfors, executive]

We have -- hey, Hanna, it's Henrik. We have in the past on back of the very quick and fast increases of direct material, we have increased prices to compensate for that cost inflation. That is still something that we have in our existing pricing with our customers, of course. But looking forward, it's reasonable to believe that the -- depending on the development of raw materials, of course, but looking at it as it is right now, we will see sequential decreases in direct material. It's most likely that pricing versus capital is maybe -- further on is not -- we cannot expect it to be as high as it has been in the past.

[Hanna Lindbo, analyst]

Yes, that makes sense. And maybe just a last question on like the consumer demand. You talked a bit about this, but do you sense that -- you don't sense that it's declining from here? Or is it worse in the U.K. right now than the Nordics or? If I could get some more flavor on that.

[Jon Sintorn, executive]

I believe the previous quarter, I knocked on wood, and I had a reflection on where the market is going. But if I knocked on wood again, then I think everybody appreciates the difficulty to have any forward-looking view, which is very robust, just saying. But it seems if -- we do not expect such a dramatic drop in consumer demand as we have seen. So we believe it is flattening out or at least one could have that view, it's starting to flatten out. Again, I want to reiterate, it's very difficult to have any forward-looking -- yes.

[Operator]

We will now take the next question from the line of Sofia Sorling from Carnegie.

[Sofia Sörling, analyst]

So I will focus on the U.K. So could you give us some more details regarding the cost savings plan here in U.K. and what we can expect in the short and midterm? And as I see it, at the moment, you have a negative adjusted EBIT margin, meaning that your business model -- your current business model in the U.K. is actually burning cash. So what is your plan in the short and medium term here to mitigate this risk due to the quite negative market outlook here? That's my first question.

[Henrik Skogsfors, executive]

Yes. And as you know, Sofia, in the beginning of the year [Technical Difficulty] announced a cost-out and a restructuring program, and that was primarily addressing the U.K. but also, yes, also in the Nordics. When we took the decision that we had challenges in the U.K., and we realized that we need to move forward the business model and doing the [ transformation ] that we are doing right now, meaning, for example, that we closed [ some ] factories in U.K. where Dewsbury, the facility that we sold in the third quarter was one of those, leaving parts of the [indiscernible] market where we did not manage to make any money. That's one of the steps in the transformation.But we also -- I think it's very important, I'd like to highlight that when I commented in the U.K. section that what we see is that we have positive effects in the gross margin from the strategy -- transformation strategy, where we are moving up more in the premium segment, we have positive effects there. So we still see that what we do in U.K. is actually paying off. However, in the quarter in U.K., we had negative direct material impact even though we see it sequentially slowing down, but year-over-year, it's up. We see we have positive effects here, but due to what we said, the organic sales was down by 18%, we have a volume decline that is burdening us. But what we see is that the things we are doing in U.K. is good for Nobia even though the volume is hampering us right now.

[Jon Sintorn, executive]

I think just our average order value is going up. We are addressing the right segments in that premium, and our gross margin is increasing. So what we see is, it is working. In a more normalized market, we would be on a positive number.

[Sofia Sörling, analyst]

All right. Yes. Just a follow-up question there. So given the actions that you've made in the U.K. so far, would you say that even though quite significant volume declines in the U.K., you would rather reach an EBIT breakeven in Q4? Is that what you're guiding for?

[Henrik Skogsfors, executive]

What I'm saying is that the things that we are doing in U.K. is the right thing, and we see that it's bearing effect. But considering that the volumes are challenging, that has, of course, a large effect on our profitability. But what we know is that the things that we are doing is the right thing to do and will put us in a better situation.

[Sofia Sörling, analyst]

All right. And then a question in the Nordic region. So could you just give some color on this -- the main reason for the improvement in the gross margin in Q3 this year compared to last year? If you could just go through the improvement here. And...

[Henrik Skogsfors, executive]

Yes, it's the price adjustments that were done. That's an important component. On top of that one, in Nordics, also we had actually a decrease in the raw material prices also year-over-year, that is another reason, yes. But it's the sequential improvement. That's the main driver.

[Sofia Sörling, analyst]

All right. And then my last question is regarding this transition cost. Could you just remind us how much you have spent on transition costs accumulated for Q3 and what you expect ahead?

[Henrik Skogsfors, executive]

I think it was SEK 27 million in the third quarter, and we expect around the same amount going forward also.

[Sofia Sörling, analyst]

For each quarter, until?

[Henrik Skogsfors, executive]

We don't really know exactly when that will taper off. But we will do the transition to Jonkoping ongoing, starting now going forward or not started yet or ongoing also, but it depends on when we do the final move to Jonkoping.

[Sofia Sörling, analyst]

All right. Okay. Yes. And maybe one last question. Just on your capital structure ratio there, leverage of 6.2x. Is there any risk that you will be in there to actually borrow more money in order to continue with the factory in Jonkoping or how do you view this risk?

[Jon Sintorn, executive]

So we -- it's been clear since 2020 that we have the temporarily elevated investments during this period. So that's been clear for everyone. And we have also planned with regards to [ time and money ]. And we believe that we will materially continue to do so, follow plan.

[Operator]

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

[Tobias Norrby, executive]

Well, very good. Then that's it from our side this time, and we welcome you all back on 20 February for the full year results. Thank you.

[Jon Sintorn, executive]

Thank you, everyone.

[Operator]

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