Nobia AB (publ) (NOBI) Earnings Call Transcript & Summary

Hello, and welcome to the Nobia Q4 report 2020. [Operator Instructions] Today, I'm pleased to present Tobias Norrby, Head of IR. Please go ahead with your meeting.

Thank you, and welcome, everyone calling into this presentation where we will give you some more details on our Q4 numbers that we already preannounced some 3 weeks ago. We will do it the usual way. We will start with an overview by our President and CEO, Mr. Jon Sintorn; and then our CFO, Mr. Kristoffer Ljungfelt will dig into all of the financial details. And with that, I hand the word over to you. Jon?

Thank you, Tobias. Good morning, everybody. I hope you're all healthy and safe in these strange times. And let me start -- before going into the highlights of the fourth quarter, let me start by thanking everybody for the 2020 and all their hard work and all the difficulties and challenges and opportunities that we encountered in 2020. So thanks to customers, to employees, shareholders and all the other stakeholders for being there and doing all the work that was done in the course of 2020. And on that note, it was very nice to see the strong end to the year with high earnings. And those earnings were driven by the double-digit organic growth in the Nordics and Central Europe, where, however, the U.K. market still is in recovery. Well, again, it was nice to see the strong end of the year for our company. It was, for the fourth quarter, a 5% organic growth, reaching revenues of SEK 3.450 billion for the group and the EBIT of SEK 295 million compared to the SEK 214 million of last year. It rests on a solid gross margin, which remained on par with last year. And considering the circumstances, quite okay gross margin, I would say. Through the year and continued for the fourth quarter, we have had and have a good cash generation. And from the financial position that we have now, we will have a dividend proposal of SEK 2 per share. So that was some high-level financial numbers. Let's get into a little bit more on some activities and decisions that we've made in the course of the fourth quarter. We had the formal decision to build a new Nordic factory, which will be a highly automated one in Jönköping to be ready 2024. And we've had good discussions with the unions, come up with a plan for a transition program for employees and other things related to that, that we are looking forward to implement and move along with. We're also obviously continuing with the preparatory -- prep work and the preparations for the machinery and the building and all those things. We have now a solid project team in place taking care of that. So all in all, that progress is moving well along with our plans. And obviously, this decision makes it easier to move along even further. There are still some formal permits, et cetera, pending. But all in all, our -- the progress is going along -- well along with our original plan. Obviously, a very exciting project, which we really look forward to conclude and create this opportunity for us to deliver even stronger lead times and quality products and all of that. A big milestone for us as a company. On the back of that or related to that, I should say, we also concluded a new long-term financing and the long-term financing was secured with the banks Nordea and Handelsbanken. Quite some work but came to a really good conclusion, which strengthen us and puts a good headroom for us to maneuver now with the things that are coming with the new factory. And it's a revolving facility of total of 6 -- sorry, of SEK 5 billion. Another important step for us is that we put some new sustainability targets in place. The last couple of few years, we've laid more than that, but let's say that we've laid the ground and put our house in order with the baseline in place, lots of good activities such as having 100% renewal electricity in all our production units as one example. Those sorts of things, we've worked a lot and now moving forward with even more offensive, if I may use that word, sustainability strategy and targets. We -- as a first step of that, we have as the first kitchen supplier, a climate target approved -- science-based target by -- approved by the Science Based Targets initiative, which is also obviously relating our targets to the Paris Agreement. Hugely exciting and will continue to be an even more important pillar in our strategy, in our activities moving forward. New organization. We have talked about -- or we have conveyed in these calls slightly before, but I think I would like to take this opportunity that the organization announced in June, in effect from 1st of September, is working even though difficult working circumstances where people, for the most part, on top level are working remotely and through Teams and all sorts of things where travel is very difficult and limited access to being in office together, et cetera. But with that said, I think it's worked out really well. And moreover, the model that we've chosen where we have the strong commercial regions taking strategic and tactical responsibilities for our business, region West and region North, backed or supported by a strong supply chain organization, it's coming into place. We have now not all, but for the most part, on the top 2, 3 levels, people in place. The key message is basically that we have built capability that we'll be able to deliver and run and drive the projects and -- associated with our planned model together. So I'm very encouraged by the way how the organizational changes has come into play. And now people are starting to act more in that structure and working more together as teams. Obviously, we have more to do, but it's a really good start for this organization. So those were some highlights from the fourth quarter in terms of, let's call it, activities and decisions. A few words on the market situation is -- and I think you will probably hear this being said multiple times in the course of this call, but it is a good underlying demand, however, hampered by partially closed retail store network, and that relates obviously, for the most part, to the U.K., Denmark, Austria and Oslo or, I should say, even Greater Oslo area and parts of Norway. We have effect in obviously in other countries as well, but the bigger impact or the more hampering impacts are related to those markets with more severe lockdowns. Which moves us into the next slide, the kitchen market trends for the fourth quarter. The Nordic market is deemed to be higher than with previous year. Market growth in all countries but Finland. And this stay-at-home and the home-renovation, the home-improvement trend, we are -- there is positive impact on us from that trend. U.K. market is still in recovery. Again, emphasizing the underlying consumer demand remains good. However, there is a severe impact from the second wave of lockdowns or restrictions. It is difficult for our customers to reach -- when the store network is closed, it's -- retail network is closed, it's difficult for the customers to make the final steps. Even though we have really good digital journeys for our customers now, the final steps to come to conclusion and really make the purchase with a restricted store network makes it very difficult. So again, emphasizing and -- underlying demand is good but it is challenging to come to closures for deals for the customers this quarter. Demand in Central Europe increased due to some pent-up demand following the first lockdowns and then also the stay-at-home trends. And I must say, Central Europe has done a really good -- had a really good performance in the fourth quarter, and it continues to be a good market situation for them. Again, specifically, Austria, having more severe lockdowns but also Netherlands being affected by it. The same message there. There is an underlying demand, and we find ways to reach customers. It's been difficult but the performance is good there. So there were some highlights on some financials, some activities and the overarching market trends. And with that, some further details on the financials, and Kristoffer, please.

Thank you, Jon. So first of all, the high-level financials that Jon has been presenting already, organic growth of 5%, mainly driven by Nordics and Central Europe, whilst the U.K. was negative. Gross margin on par with last year, 37.7%. Again, Nordic and Central Europe, good operating performance, but the U.K. was declining somewhat, and I will shed some light on that. And then an EBIT of SEK 295 million or 8.6% EBIT margin. Just some comments then on each market and segment. We start with Denmark on Page 6, yes. There we go. Thank you. In Denmark, 29% of sales, the strong market trend continues. And on top of that, we're gaining market share on the back of successful product launches and also the successful conversion of own stores to franchise. And we have now also managed to convert some of our competitors' franchisees into HTH, which we believe is a token of strength of the HTH and the business model. Unfortunately, and I will repeat a couple of times what Jon has been saying, the retail -- the Danish retail store network had to be temporarily closed in January on the back of the restrictions. And we're now only using the digital sales channel for retail sales, which will have some negative effects on the winter sales but probably result in higher demand for the spring campaign. In Sweden then, 11% of our sales. Our consumer campaign was considerably stronger than expected, and it's clearly from the Marbodal style and the color pallets are trending right now. However, it is increasingly difficult to find capacity for the painted products, and we are working intensively in the supply chain to build more capacity and strengthen up that part of the business. Project sales in Sweden was flat in the period, which is more or less in line with our own expectations ahead of the quarter. Finland, 7% of sales, was the only Nordic market with declining sales in the quarter on the back of the softer project market, although the retail sales was growing. And fortunately, we were allowed to keep all retail stores open, as we were in Sweden, by the way. We are not really concerned about the volume drop in Finland. We are instead working intensively to get margins up to an acceptable level. And we have, for a bit too long, worked with subpar margins on this market compared to the other Nordic markets, and we will carry out changes to drive profitability before growth in Finland. Then Norway, 6%. It was very good to see the Norwegian sales coming back in the quarter after a very soft market throughout 2020. Double-digit growth driven by strong project sales but also a fairly good retail campaign. And again, then on the negative note, in Norway, we had to close great -- all the retail stores in Greater Oslo with the same impact than previously alluded to. Netherlands and Austria, 6% and 4%, respectively, very solid performance, strong growth on the back of pent-up demand and also solid operating performance by our teams over there. And collectively now, it represents 10% of our group sales. And I will give you some more light on that performance later on. U.K. then on the right-hand side here. We saw the demand coming back during fall, basically in all segments except for the social housing and property development in London. And as we have said before, the Q4 is not a strong season for retail. So the growth we had in this segment did not really significantly impact the profitability in the quarter. However, the quarter is very important for our trade business, where we continue to grow and perform well. And we will, as we have said before, tool more resources into trade and make further changes to this proposition and the products that go into this segment and are quite confident that we will continue to grow in this segment. For the sales in U.K., as we have said, continues to be very challenging and especially so in social housing. This segment represents about 1/4 of our sales in the U.K., where we actually are declining over 30% in the quarter. And of course, it's challenging, and we don't foresee that this market -- the social housing market will come back anytime soon. Slightly more optimistic about the private developers over in the U.K. I think we -- next slide, please. The summary of the Nordic. Growth in total then, 11%, foremost driven by the strong retail sales in all countries. Gross margin improvement on the back also of the retail sales, where we have a higher average order value. Productivity was somewhat lower in the period, mainly driven by the effect of this capacity constraint in painted products but also driven by temporarily supply chain issues from our subsuppliers given the corona situation. Currency headwind of SEK 10 million. But despite this, we come in at an EBIT of SEK 282 million with a margin of 16%, which we consider to be a very solid result in the quarter. Summary of the U.K. financials. Organic sales decline of 4%. And as I was saying then, mainly on the back of project sales. Gross margin erosion of 2 percentage points roughly, mainly driven by the factories, the sub -- half of the capacity running only in our manufacturing for the project market that burdened the gross margin quite heavily. EBIT of SEK 21 million. And as you can see, we've made a short notice here on the Brexit transition, it's running relatively smooth. And the only effect we can see so far is some increased cost for administration for the imports. But otherwise, the supply chain has been operated -- been operating normally, which is very good. We also have showed you this slide a couple of times before, which gives you the monthly development of sales in the U.K. And as you can see, from September to November, when the store network is open, we can pretty much send off the heavy sales decline in project sales. However, by the end of November, where we're forced to close some of the retail networks and roughly for a few weeks, it quickly burdened the top line the following months as we have 4 to 6 weeks' lead time. And in this case, December was slightly softer than what we saw in October, November. So even if we're optimistic about the underlying demand and the trend for home renovations, we are, of course, concerned about the -- when our retail stores go into full lockdown. Then Central Europe. Fantastic growth driven by pent-up demand but also, as I said before, a really solid performance as well to deliver to the demand and a strong operating leverage on the back of that, increased the gross margin and again, we're pleased about the SEK 62 million EBIT result with 16.4% margin, so in line with Nordics even. Coming back to the cash flow. As Jon mentioned, we have had a strong cash flow throughout the year, generating on a year-to-date basis slightly north of SEK 1.4 billion, whilst last year or 2019, sorry, we did just short of SEK 1 billion. I would say that we have had very good cash control in all our business units, keeping both costs and investments quite low throughout the year. However, we have also been helped by the postponed tax and VAT payments of roughly SEK 300 million, which we then have been able to move from the year 2020, into 2021. And we will see some negative effects in cash flow coming in from that until summer, roughly the same amount then. As you can see from the slide here, we have had healthy cash flow also in Q4, basically the same type of trend. And this has led us to be a very solid company in terms of financials and continue to be a solid company in terms of financials. By the year-end, we're debt-free. And if you exclude the leasing and pension liabilities that we have, and we are actually in a net cash position right now, which is very good, and it also enables the Board to propose the dividend of SEK 2 per share. So Jon, back to you.

Yes, to wrap this call up with a brief summary. As you've heard, there have been a strong fourth quarter driven by organic growth in Nordic and Central. And the U.K. market is not back to prepandemic levels, predominantly driven by the project businesses and now the lockdowns, as Kristoffer was alluding to. The cash generation, however, is really good and at an all-time low debt level. Our new factory investment is progressing according to plan. And on the back of that, we have a new long-term funding secured. And as just said, SEK 2 per share is the proposal. One of the first sentences early on in this call and then finishing off this call with this statement is that we do have a good underlying demand, Nordic expecting a slight growth. However, there is uncertainty in the retail segment due to the store closures, as we see in Denmark and Norway in the Nordics predominantly. The U.K. -- the important U.K. winter campaign, highly impacted by the temporary retail store closures, and the project business is still lagging. The lockdown effect in the U.K. made it challenging to reach black numbers during the first quarter of this year. But we do see a strong demand, the underlying demand so we're looking forward to a good spring campaign. With those words, thank you, everybody, and we are ready for Q&A.

Yes. Let's open up for questions please, operator.

[Operator Instructions] Our first question comes from the line of Adela Dashian from Handelsbanken.

My first question relates to the U.K. and your outlook on when the project market will resume to prepandemic levels. I followed some comments that have been published by the U.K. government, and it seems like they're really interested in getting this sector to continue to operate during the lockdown. And I believe you've also previously stated that you expect things to resume back to normal in the first half of 2021. So could you please give us an update on what you're expecting here and if that -- your earlier outlook has changed at all given the current situation?

Sure. No, we still have this expectation of the market to be fully recovered by the first half of this year. We're quite late into the project as well, don't forget that. So we're one of the last products that are -- comes into the homes. However, it's mainly private developers that we consider to be fully back. When it comes to social housing, we believe it will take another 6 months before that has recuperated and back to prepandemic level, so to say. The social housing will take longer.

And the reason for that is that it's difficult to get workers into the actual buildings, correct?

Precisely. But then again, the U.K. government has been quite quick with the vaccinations. So if we can see that continue and the vaccination schemes carry on in the same level, then hopefully, we're able to get into the social housing apartments quicker than our estimates are right now.

Okay. Great. And then on the stores being closed in some of your markets, you mentioned earlier that it's difficult to get to the final steps when customers are placing orders using your digital channels. So how are you maneuvering this situation? And then also, what are you thinking about the physical store network going forward, let's say, if there's a shift in customer behavior longer-term of going from off-line to online?

Okay. No, we obviously try to encourage the customers to make that decision. We're sending samples, for example, for them to touch and feel and get that experience as well. And step-by-step, people are getting more accustomed to make a fully digital journey as well. But this type of purchase, I think that will take a longer time before it will be completely digital for all the customers. We're also trying to find a tradesman or something that can help out also for the retail customers, so to speak. So that's what we're trying to do. Yes, the long-term people's behavior will change. That's what we believe as well. And as a consequence, we are enforcing and continue to make investments in the digital experience for people because that's the way things are going. The exact effect on our store network, which I heard your question was, it's too early to tell in more detail, but it will have some kind of impact going forward in the next couple of years, multiple years' perspective.

Okay. So we should expect to see some more investments being made in the digital space to enhance experience for your customers, correct?

Yes.

All right. And then finally, could you give us an update on the competitive landscape and also potential M&A? You really have been able to manage good cash control that you've said earlier still. So what's your outlook and expectations in that space?

For M&A?

For M&A, yes. And then also on the competitive landscape.

Well, first and foremost, and I think that goes for everybody, we've been -- our minds' being on managing the situation in the course of 2020. And I think everybody has been, let's call it, busy doing that, and it's been difficult with a -- not difficult. It's -- our mind has been full of that, if I put it that way. There are some interesting targets in terms of M&A, but I'm not expecting to make one deal after the other the next couple of years. We have big projects to do such as the big -- new factory, for example.

And concerning the competitive landscape, we don't want to comment on the competition as such. Again, we -- as we were alluding to in the beginning, we have strong underlying retail markets, and we work with the same assumptions on the store networks as our competitors do. So that's what we have to say about competition at this stage.

Our next question comes from the line of Fredrik Moregard from Pareto Securities.

First of all, I was hoping you could perhaps help us size up the temporary cost avoidance that you managed to get through in 2020. And also, how much of that could be expected to come back this year?

Yes. Well, first of all, we have the furlough schemes that we've been part of and mainly that goes for U.K. when we entirely close the store network. That's, of course, something that will not come back unless we put people on furlough for whatever reason. Then there's been a lot of cost-out activities throughout the year. And it's -- or I wouldn't want to put a number on it. Of course, when we see growth to the extent that we have in the Nordics and Central Europe, there will be some cost coming back into the company.

Okay. Fair enough. And then I was hoping also you could tell us something about both the current pricing environment that you're seeing across your major markets as well as what you expect to be able to realize here in 2021.

Yes. Well, again, on the retail side, we can see that the average order values go up somewhat due to a bit more complex product and, as we have said many times before, there's a huge pressure on retail prices in the U.K., a little bit less so in the Nordics, and we expect that to continue. But again, on a positive note, a slightly better trend in terms of average order values currently.

Okay. And how does that size up against any potential external headwinds that you might be facing with the material prices perhaps inflating somewhat and the other headwinds that you might be seeing related to currencies, perhaps?

Yes. So we have moved -- during the year 2020, we moved from tailwind in direct material to some headwind in that. And it's driven by higher prices in sheet material and the steel prices that we use for our hinges in the product. So we can see prices go up somewhat. And it's important that we carry on these price increases out to the end consumers as well. That's the way it has to be.

And do you think you could offset those headwinds using price?

Sorry, can you say that -- the question?

If we can offset.

We can offset, yes.

Do you think you would be able to offset this?

That's our intention, yes.

On par.