Nobia AB

STO:NOBI

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Nobia Q3 Report 2024 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, Head of Investor Relations. Please go ahead.

[Tobias Norrby, executive]

Thank you, and welcome, everyone, and thank you for calling in to this presentation of Nobia's third quarter results. The presentation today will be done by our CEO, Mr. Kristoffer Ljungfelt; and our CFO, Mr. Henrik Skogsfors.

And with those words, please, Kristoffer, I hand it to you.

[Kristoffer Ljungfelt, executive]

Thank you, Tobias. Good morning, everybody, and welcome to this quarterly update, where we start with a summary of quarter 3, which was a mixed quarter for us. Here we go. On the one hand, we are confident enough to say that the consumer market has started to grow again in our most important markets and especially so in Denmark. This has resulted in growing number of design appointments and more activity in general in the store network, albeit this is still from a historical low point.

On the other hand, we have had continuously large headwind in the project market, where the lack of housing completions is impacting volumes, which in turn is leading to some underabsorption in our business. Given our dependency on the new build market, this is impacting profitability, and we are strengthening our efforts to adjust the company accordingly.

In total, organic sales was down 6% in the quarter, with the Nordics declining 11% on the back of a softer project market, and volumes in that market were down double digits. Whilst in the U.K., we had flat sales after strong performance again in consumer sales, while the trade and project sales was very soft in the quarter.

Gross margin improved despite the shortfall in volume, and we are pleased about the gross margin performance in the Nordics, where basically all operational levers trended well in the quarter. Average order values were up. Productivity was up. Savings were up, and kitchen delivery on time in full was very good. And that's also including Tidaholm, where we have had some issues over time. And we are now confident that we can keep this going, the strong momentum that we're having.

In the U.K., we had slightly a decline in gross margin, mainly due to the volume-driven underabsorption and a slight decline in average order values in the consumer sales. And our strategy here is to remain improving the average order values, and we are now implementing further initiatives to strengthen our premium product proposition in front of winter sell season.

We are also pushing ahead with our cost reduction programs. And even if we have tougher comps, we have managed to reduce costs quite considerably. Having said that, we will continue to do more to cost reductions until market recovers fully. So in the quarter, we have executed a new cost-out program in connection with our reorganization, which I will come back to a little bit later.

Currency adjusted, the SG&A declined by 6% in the period. EBIT then came in at SEK 19 million, with a margin of 0.8%. Operating cash flow came in at SEK 154 million negative. The cash outflow is mainly related to investments in Jönköping and seasonal changes in working capital. And Henrik will come back to that later with more details and describe how we intensify our efforts in working capital improvement and cash flow improvement.

We're also advancing on our strategic priorities. After 5 years of intense work, we are very close to getting Jönköping operational, which will be a breakthrough not just for us, but we believe it will be a breakthrough for the entire industry. It has, with no doubt, been a challenging environment to deliver these large programs in the midst of COVID and hyperinflation and demand shock, et cetera, and we are not yet fully done, but we are pleased about the progression on the program, and we will be very well positioned when they are fully concluded.

We have also done a major reorganization in the quarter, as just mentioned. We want to push out more accountability to our local entity and [ give ] responsibility to act freely within the framework and making decisions much closer to our customers. We believe this will further strengthen our operational excellence, and we have seen encouraging results already. And I believe that the organization has taken it on with large engagement and drive, especially centered around our strong brands.

If we take the next slide, please. And here, we go through our strategic priorities, where we will still have the cost initiative on top of our agenda. And again, we'll have that as long as it takes, and the organization is very well set up for this.

From our previous programs, we have lowered run rate cost by a total of SEK 400 million, which is slightly above our target. And in the quarter, we launched a new program addressing mainly Nordic sales organization and taking further steps in transitioning U.K. to an asset-light model. The program will be booked as items affecting comparability in the quarter and generate savings of SEK 85 million, which in total then with the Q2 program, will be an additional saving in the group of about SEK 300 million.

Then to realize full Nordic potential, we work intensively to get Jönköping operational and start transferring volume from Tidaholm to Jönköping. In this transfer, we're also harmonizing the entire range of products in the Nordics, which will give further benefits in sourcing and complexity reduction over time.

In U.K., the transformation is going according to plan, where the U.K. team has done a good job in closing manufacturing in Halifax and stepped out of another 20 unprofitable stores this year, and we are currently evaluating further store closures. We continue to drive improvement in higher average order values. But in the quarter, this was mainly the result of better segment mix as we grow the consumer sales, and Henrik will talk a little bit more about that. And as stated before, we need to improve proposition for our premium products in front of winter sales, which starts soon, and we will also do selective price increases.

Take the next slide, and we'll go through some of the market developments. If we start with consumer segment in the Nordics, this segment starts to look slightly better, however, again then from the very low starting point. With interest rates now coming down and house prices stabilizing and house transactions picking up in our important markets, we are more optimistic now that the recovery is gradually coming about in the consumer sales. However, as for the project market, we do not see any signs of a more general recovery.

Denmark is looking slightly better than Sweden and Norway. And we are not concerned about the construction market coming back in those markets. We believe now that it's more a [indiscernible]. We also know that when consumers start to be more confident, we will get the trade segment picking up, which is a very important segment where we have a strong proposition in the Nordic market. However, we are concerned about the recovery in the Finnish construction market, where it seems to be more structural issues that could impact housing for a little bit longer than in the rest of the markets.

If we go to the U.K. And here, you will see it's very similar trends as for the Nordics, with the consumer market is clearly picking up from low levels. Also, macroeconomics is starting to help the market recovery in the U.K. with the lower mortgage rates and increasing number of housing transactions. However, as for the Nordics, the housing starts in the U.K. remain on very low levels. We are cautiously optimistic that we will see a gradual recovery in housing starts from now. And we also have seen that the government is initiating very concrete initiatives to ignite the housing starts again. And so far, we've not seen it come through the numbers, but it's been a very low activity during fall. However, long term, we know that there's a big shortage of housing in the U.K., which will be beneficial in the long run.

So we wanted to give you some more highlights on our strategic initiatives. So if we move to the next slide. First of all, the state-of-the-art new Jönköping factory. And we are obviously very excited about getting our factory operational. The building is now 100% completed in accordance with all the high sustainability standards that we set for the building. Most machinery is in place, and most of the machinery are operating on a stand-alone basis.

The final push we do now is to get the end-to-end process for the Marbodal rigid kitchen operational. We have managed to do so with a flatpack range in the Nordics. So roughly 10% for the Nordic volume is already today being manufactured in Jönköping. And the next big step for us is to start the transfer of Marbodal kitchens from Tidaholm into Jönköping, which will gradually happen in 2025, with start in January as planned.

And also here on the page, you can see -- and I reiterate some of the huge benefits we will have from it, where we can customize kitchen at large scale. We have the absolute latest automation and digitalization technology in the factory. We will step change performance and efficiency, flexibility and use our scale and improve lead times and improve quality design. And also that we are very proud of, have a strong sustainability footprint on our products across the Nordics.

I also want to give you a short recap, if we go to next slide, please. Short recap on our manufacturing footprint in the Nordics and how this investment will play a role in that. So today, we have 5 factories operating in the Nordics. The Finnish Nastola and the Norwegian Eggedal has a capacity of about 500,000 cabinets to 300,000 cabinets a year, respectively, per factory. And they both serve the local markets where they are. And currently, we have a workforce that has been slightly reduced in those factories to about 100 to 150 FTEs depending on the site. Tidaholm and Ølgod, being our larger entities, have a max capacity north of 1 million cabinets and currently about 350 to 400 operators per site. And in Jönköping, we are now currently running 200,000 cabinets per year through the factory, with a target to reach north of 2 million cabinets over time.

And in full ramp-up, the idea is that we have transitioned the Marbodal volume and transition the Danish volume for the Swedish and Norway market. And that will lead us to the margin enhancement that you see here to the left of about 3.5 percentage points, whereof 2.5% comes from the manufacturing and another 1% from transport and logistics. And on top of that, we expect further sourcing and product harmonization benefits over time.

So just finally, on Jönköping in the next slide, please. So again, the finalization of the new factory is progressing well. We have industrialized already panel manufacturing, flatpack cabinets and certain types of frontals. Now we are in the industrialization mode of further frontals and full kitchen assembly. The remaining CapEx is about SEK 650 million. And we also have about SEK 300 million from the sale and leaseback transaction to get back, so to say. And again, full ramp-up during 2025 when the manufacturing is transferred from Tidaholm.

We also wanted to shed a little bit of light on the U.K. transformation. So if you move to the next slide, please. This slide, you've seen before, and it's fair to say that it's been a challenge to drive this transformation in an underlying difficult market, but we start to see green shoots in many areas. And in order to migrate to this asset-light operating model that we have talked about, we have concluded both on Phase 1 and almost all of Phase 2. And that has entailed some major changes to the business. We have, amongst other, exited unprofitable social housing business, we have downsized the staff in general and flattened the organization. We have consolidated [ our production ] from 5 to 2 sites, and that means a total manual reduction of over 1,000 FTEs by now. We have also stepped out of about 15% of our store network on those stores that were unprofitable, and that equals actually 20% of the square feet store space.

We're also happy to have gotten some new successful partnerships, which some are still in trial models, but early days looks very promising. And we are also successfully targeting the slightly more affluent customer group with higher average order values, which is the main contributor to our improved sales in this year for the consumer segment.

And as we continue to invest towards this asset-light operating model, we will see stronger average order values to a more affluent customer base, and we will start to see improved profitability coming through from our U.K. business as well.

Now over to you, Henrik, to run through the regional results in more detail.

[Henrik Skogsfors, executive]

Thank you for that, Kristoffer. Let's start with the Nordic region. The organic sales declined by 11%, showing slight sequential improvement over the second quarter. Despite a significant drop in the business-to-business volumes and a decrease in organic growth, Nordics reported a higher EBIT than the same quarter last year. The average order values were bolstered by a favorable mix between -- mix shift between the business-to-business to business-to-consumer, which supported the top line. However, the overall volume decrease negatively impacted the sales performance in all countries in the Nordics region.

Gross margin improved by 3.6 percentage points, reaching 36.6%, a satisfactory outcome considering the substantial volume decline we had in the quarter. This uplift is attributed, as Kristoffer alluded to before, to better productivity in the Nordic supply chain, the favorable mix across the segments, countries and the products, with consumer sales performing better than the project segment. The improvement was partially offset by unfavorable currency effects.

Despite the uplift in gross margin, gross profit declined due to the lower business-to-business model. Targeted cost reduction initiatives implemented both previously, but also during the quarter, along with a strict no spend policy in Nobia, helped control SG&A expenses, which lifted EBIT above the level of the third quarter in 2023. EBIT increased from SEK 92 million to SEK 104 million in the quarter, with an EBIT margin improvement from 6.2% to 8.1%. Strong performance in Denmark was the key contributor to this improvement.

During the quarter, we reported SEK 43 million as items affecting comparability. These costs relate to the transition to the new factory in Jönköping and the implementation of an additional cost measures in August. The Q3 program will start to generate savings now in fourth quarter and will reach full run rate savings of approximately SEK 40 million by the end of the third quarter in 2025.

So please -- next slide, please, U.K. U.K. reflected similar underlying trends as those in the Nordic region, with growth in business-to-consumer and a decline in business-to-business. Organic sales in the U.K. were, however, flat in the quarter compared to minus 17% in the same quarter last year. Following growth during the winter sales campaign, the retail segment achieved double-digit growth, which was offset by a double-digit decline in both the project and the trade segment in U.K.

The gross margin declined by 1.7 percentage points to 38% flat. Positive segment mix, as previously mentioned, was offset by underabsorption in the supply chain. SG&A expenses decreased by approximately SEK 22 million in the quarter, primarily due to the impact of our cost reduction programs. However, costs remain elevated in relation to the current sales volume, which led to further cost-cutting measures in August. Part of our strategy to reduce fixed cost involves shifting to a more asset-light model in the U.K., with fewer owned stores and more franchises and partnerships. This approach aims to lower our fixed cost base and reduce vulnerability to significant volume fluctuation.

EBIT for the quarter came in slightly below third quarter last year. As outlined in the quarterly report, we recorded SEK 9 million as items affecting comparability for the quarter. These costs are related to additional headcount reductions within the administrative areas of the U.K. business. The cost reduction is projected to start generate savings also now in the fourth quarter and reach run rate savings of around SEK 20 million by mid-2025.

Let's go over to the next slide, please, the financial position. Cash flow from operating activities was minus SEK 20 million for the quarter, representing a decline of nearly SEK 200 million year-over-year. This decline is primarily attributed to items affecting comparability this year of SEK 56 million, along with the previous year's positive impact from the divestment of the Dewsbury [indiscernible] U.K.

The movement in working capital from the end of second quarter is consistent with the movement observed last year. Accounts receivable decreased on back of lower sales in Region North, and accounts payable decrease on back of cost savings and reduced purchasing, lowering the accounts payable balance.

Inventory affected cash flow positively. The total inventory level has decreased by approximately just north of SEK 200 million compared to previous year. As Kristoffer mentioned earlier in the call, we are intensifying our efforts to enhance operational excellence with our new operational structure in place, including continuing to reduce our inventory balances. We have a large focus on working capital in the group.

The operating cash flow, including investments, amounted to SEK 154 million compared to negative SEK 305 million last year. Of these investments in the quarter, primarily related to the new factory for the Jönköping, was SEK 138 million, which is a decline from last year's SEK 484 million. As Kristoffer mentioned and showed you earlier, we are in the final stages now to complete the factory in Jönköping.

Net debt, excluding leasing and pension obligations, decreased year-over-year by SEK 719 million to SEK 2.320 billion, which is driven by divestments that we did of our business in Austria and the Netherlands in February, the sale leaseback of the property in Jönköping and the rights issue executed in April. Net debt increased by SEK 386 million since the end of the second quarter. The quarter increase is primarily related to investments in Jönköping and the working capital swings that we usually have in the third quarter.

The completion date for the factory is approaching, and we still have approximately around SEK 700 million in ongoing outflows. However, it's important to note that we also have an outstanding receivable balance of about SEK 300 million from the buyer of the property, and we are now in the final stages of fulfilling the terms of this agreement. So a major part of the amount that is hold back by the buyer can be released.

That was all on the financial position. So over to you again, Kristoffer.

[Kristoffer Ljungfelt, executive]

Thank you, Henrik. And just to summarize on our priorities going forward. Again, we are going to obviously advance on our strategic agenda, with a very important ramp-up of the Jönköping factory expected for 2025, starting now in January. We're also working intensively with the [ turnaround of the U.K. ] operations, including a review of further activities to advance to the asset-light model as soon as possible. And also, we have a strong focus to deliver on our cost-out program in order also to strengthen profitability and strengthen our balance sheet, and we will continue to do so until we see a stabilized market recovery.

But also, we are increasing our efforts to leverage the daily operations in the new decentralized organization. We will capture growth in consumer sales where we see the customers returning gradually to our store networks. We will increase our average order values through capitalizing on our strong brand and using the product introductions we have done over the last couple of years now to drive consumer value.

We are working on productivity-enhancing activities. Our supply chain have made some great achievements as of late and even so in the low-volume environment that we're currently operating in. We will have very disciplined cost control, as Henrik was mentioning, and this will be as important as ever. And as you also heard from Henrik, we are intensifying our target on working capital and enhancing strict working capital governance, especially to preserve cash flow and, again, to strengthen our balance sheet.

Thank you very much for listening in. Now over to you, Tobias.

[Tobias Norrby, executive]

And over to questions from the audience, please.

[Operator]

[Operator Instructions] There are no questions at this time. I would like to turn the conference back to Tobias Norrby for closing remarks.

[Tobias Norrby, executive]

All right. Well, if we don't have any questions from the audience, then we say thank you from our side, and welcome back on the 4th of February for our full year results presentation. Thank you, everyone.

[Kristoffer Ljungfelt, executive]

Thank you.

[Operator]

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