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

Good day, and thank you for standing by. Welcome to the Nobia Year End Report 2022 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.

Thank you, and welcome, everyone, and thank you for connecting to the Nobia Q4 2022 results presentation. We will do it the usual way, starting with our President and CEO, Mr. Jon Sintorn, taking us through the highlights of the quarter, before our Acting CFO, Mr. Henrik Skogsfors, will dig into some of the more important financial details. And with that, I hand over to you, Jon.

Thank you, Tobias. Good morning, everyone, and again, thanks for joining this update. So for this quarter, markets held up fairly well, but retail was softer than last year, whilst the project market compensated as expected. The organic growth in the quarter came in at plus 2%. And we managed to grow U.K. trade in a more challenging market environment. Projects in the Nordics continued to grow in the period, backed by strong order book we had going into the quarter. And in line with our strategy, our average order values continues to trend up in general as we move more sales over to the higher end of the market via new products and concepts. On a negative note, the headwind from raw material continues and is now also impacted by a surge in electricity and overall inflation. Again, I believe we have done a good job in mitigating those increases by price increases and higher average order values, but they were not enough to offset all of the headwinds and the additional supply chain costs. And therefore, we continue, over the year end to increase our market prices. We also experienced a gross margin decline in the Nordics due to the loss of some retail volume, especially in Denmark, but also as a result of the previously announced productivity issues we have had in the Nordic supply chain and more specifically in the plant in Olgod. We have made a lot of progress in our strategic agenda during the last half year with component manufacturing ramping up in our new under construction plant in Jonkoping. 5 new stores being opened in the U.K. with the new store format and some great product introductions. Now also with our latest addition, [indiscernible], which is one of our hero products for the winter sales campaign. We are making good progress and follow plan in our big transformational and strategic initiatives. Due to the large planned investments coming in the following quarters, the Board recommends to not pay a dividend for 2022. Summarizing the financials for the fourth quarter, good revenue at a 2% organic growth, strong underlying or good underlying operating cash flow, but poor margin and EBIT results at SEK 25 million. Therefore, we, in the fourth quarter, initiated a cost program that we recently announced. The cost reduction program will generate an annual run rate cost savings of SEK 300 million by mid-2024, whereof run rate by the end of this year 2023 will be SEK 220 million. And the big components are restructuring of U.K. operations, rightsizing of certain Nordic and Central Group functions as well. We announced that we are exiting unprofitable parts of the U.K. projects business, we are taking out low-margin products to pursue in our strategy to go for the more mass premium and higher average order value segment. We also go for more -- with the Central London premium project segment has been struggling in the market for a long time by now, and hence, moving over to a more variable cost model. As a consequence, we closed 2 of our U.K. manufacturing site and consolidate more in our plants in Darlington. We are also flattening and simplify the U.K. overhead structure, continuing in our plan to empower more in the sales organization and less of central administration and cost. The total cost for the program is SEK 450 million recorded as items affecting comparability for the fourth quarter '22 and the first quarter of '23. Again, it is a significant cost reduction program generating an annual run rate savings of SEK 300 million by mid-2024, SEK 220 million by the end of this year 2023. Looking at the market for the quarter. As already said, we have seen a softer retail market across and also so in the Nordics, whereas a stable project market on the back are being supported by housing completions that continues. In the U.K., the retail market was softer. The trade market in the period on par with last year. And as I mentioned, the London super premium project market remains weak. Similar trends also in Austria and the Netherlands, retail market softer and a more stable project market. So as we mention also the headwind that we see, the inflationary pressure continues. The total on-cost for material, energy and transport in the quarter of roughly SEK 260 million. And as mentioned, we continuously continue to further mitigate that by continuous price increases in our various markets. We also continue to drive immense progress in the bigger transformation and the strategic initiatives. And I'd like to highlight again the progress that we're doing with the new plants. We are following plan and budget, and we are, this quarter, starting -- being able to start component manufacturing that we can use in our Nordic supply chain. I think that's a big step for us that we can start to use these assets as we are progressing that well. We're also doing well in aligning our product platform. It's a big step, of course, to coordinate the various ranges that we have, but we also -- that's making good progress and will, in the future, render good efficiency. In terms of market, we are doing the repositioning as per plan going for the more mass premium segment, discontinuing low-margin products in the U.K. as one example and introducing new concepts and new products addressing that segment more specifically. So all in all, good progress in these initiatives.

Thank you, Jon. So over to Slide, Nordic region Q4. The Nordics now represent 54% of total sales in the group. Organic growth in the quarter came in at negative 1%. Volumes were slightly down on the back of negative development in the Consumer segment in all countries, while the Project segment held up well, especially in Finland. Price realization was good across the board and continue to drive top line. As mentioned in the third quarter call, we had some capacity and output constraints, especially related to the Swedish factory in Tidaholm. The problems continued also during the fourth quarter. However, with improvements in the end of the quarter. By contrary, in the quarter, sales increased in Finland. They were flat in Norway, while Denmark and Sweden declined slightly. The gross margin declined by approximately 6 percentage points to 30.7% -- 30.7%, sorry. This was clearly a disappointment and the main driver behind the decline in operating profit. Continued headwinds from direct material costs and supply chain issues burdened the gross margin. On top of this, we also had higher transport costs and impact from the higher energy bills. We have had an improvement related to the capacity and output constraints into the home compared to the third quarter. We had an adverse impact around SEK 20 million in the quarter. The improvements are continuing, and we are expecting to have a cost around SEK 15 million during the first quarter compared to same period last year. In summary, EBIT of SEK 128 million compared to SEK 250 million last year. Please note that this is excluding the quarter's items affecting comparability of minus SEK 86 million that was communicated in January. So over to the next slide, please, Tobias, region U.K. This region now represents 32% of total sales on a rolling 12-month basis. Organic growth came in strong at 5% in the quarter. Volumes were down, but this was more than offset by our higher average order values. Top line increased for both Magnet brand sales as well as the OEM retail sales. In percentage terms, OEM sales growth was double digit, while Magnet brand was low-single digit. The gross net margin came in at 40.2% versus 43.3% same quarter last year. Despite the margin decline, the absolute gross profit increased in the quarter. Given the heavy inflation in direct materials and basically all cost items, it's a decent gross margin number in U.K. On the positive side, the price impact was good, and we had some savings from -- coming from the cost-out program launched in the second quarter of 2022. We continue to invest in sales driving activities, especially in store and sales designer initiatives ahead of the important winter sales campaign, which together with a high inflationary environment burdened the operating profit. As we mentioned in the third quarter and as Jon just mentioned, we are addressing our cost base to mitigate the effects from inflation and other potential softer market through our recently announced restructuring and cost out program. However, and again, repeating what Jon said earlier in the call, we are now pressing ahead with the U.K. restructuring program we announced in January in addition to the measures implemented last year. In summary, EBIT of minus SEK 72 million compared to a positive SEK 1 million last year. No effects from the items affecting comparability program in region U.K. impacted the fourth quarter of 2022. Please, over to Slide #9, Tobias. Portfolio business units, which represents 14% of group sales. Portfolio business units grew by 6% on an organic basis on the back of higher prices. Volume was more or less flat in Austria and the Netherlands, which is a good development given the business fundamentals. While the volume in the Commodore and CIE continued down due to the very challenging market for the luxury and super premium segment in London, which is the main market for Commodore and CIE. EBIT for the region was SEK 27 million compared to SEK 41 million last year. Operating profit in Austria and the Netherlands combined was flat, offset by the weaker in Commodore and CIE's performance. No effect on the item affecting comparability in region portfolio business units in the fourth quarter of 2022. However, part of the U.K. restructuring program that we have communicated is now being implemented related to the project business in Commodore and CIE and will be visible in portfolio business units' P&L going forward. Next slide, please, financial position. Cash flow from operating activity was slightly lower than corresponding quarter last year. We are very pleased to see that our focus on working capital is paying off, resulting in a very good underlying cash flow, considering the decline in operating profit. Change in working capital had a favorable impact driven by inventory reductions as well as last year being impacted by safety stock on back of COVID-19 as well as some timing effects in account receivables year-over-year. The operating cash flow was negative minus SEK 81 million in the quarter, primarily related to the cash outflows related to the investments in fixed assets as we are progressing with the building of the new Nordic factory in Jonkoping. Total investments in fixed assets were SEK 484 million in the quarter. Looking at the full year operating cash flow, it ended up at minus SEK 746 million, down from plus SEK 670 million in 2021. The negative year-over-year deviation in operating cash flow is explained by a lower operating profit in combination with a SEK 1.7 billion CapEx expenditure, where SEK 1.2 billion was related to Jonkoping. We have a leverage of 2.36 in the quarter. In our covenant and financial target calculations, we exclude the effects from IFRS 16, meaning leasing as well as the pension debt. And by that, over to you, Jon.

Yes. To summarize and going forward, we will continue with price increases and as per our plan, drive towards higher average order values to target that segment. We will execute on the overall cost program. That's the key activity going forward and also the repositioning in the U.K. We will normalize productivity in the Nordic supply chain and keep the momentum in the major strategic initiatives. And you are, of course, very welcome and invited to our Capital Markets Day 22nd of March. So you can see how the new factory in Jonkoping is coming alive, and as I said, it follows plan with slightly early in component manufacturing, and it will be up and ready by the end of 2024. And you are more than welcome to see it by already 22nd of March. There's lots to see. So with that, thank you very much, and we are ready for Q&A.

So please, operator, open up for questions.

[Operator Instructions] We will now take the first question. It comes from the line of Victor Hansen from Nordea.

It's Victor here from Nordea. A few questions. Maybe to start off, Jon, you mentioned in the report a good order backlog levels in the Nordics. And I'm wondering if you could quantify this or at least tell us roughly how long it will last?

We typically don't quantify it, but we still have a good planning horizon, if I look that way.

Okay. So you can't say how many months or something similar?

No, we typically don't say that, but I would like to iterate that we have -- like to underline that we -- as we stand right now, we have a good planning horizon in order to manage the situation with -- if the order book would change materially.

Okay. And then I'm wondering about the price level in your backlog here. Is there still a mismatch in the backlog versus current cost levels or is it improving?

No. Not really. I'm trying to understand the question. Can you repeat the question, please?

Yes, sure, of course. So the pricing level in your backlog compared to where your current cost levels are, is there still a mismatch here, which is impacting your margin negatively? Or is the pricing level improving to reduce the mismatch?

Over some time, that will be reduced. There is a lag on our price increases that we have communicated before. So it takes some time before to roll in into the book. But other measures we're taking in terms of cost of productivity, of course, we should gain a little bit on the previously announced price increases that rolled in, so.

Yes. And then a follow-up, more generally speaking here. Are you seeing any input materials at all coming down in price? Or are they all still increasing?

They are all not increasing. I think we could see potentially some early signs of improvement. But it's early days. I wouldn't say that we really see a trend downwards by any means, but early indications of different momentum. Okay. We'll stay on the look at them. And then I'm wondering here, if you're able to use your entire SEK 5 billion in credit that you have available at your current adjusted EBITDA levels? Or will you go above the covenants before utilizing the full SEK 5 billion amount?

We don't comment on our terms and conditions with our revolving credit balance.

Okay. I had to try. And then -- yes?

But we have enough room in our covenant.

Yes, we have headroom.

Great. So 2 more questions here. First, how much will you say for moving some of the component manufacturing that you have discussed to Jonkoping?

That we gradually -- we will gradually do that over a longer period of time. But on the run rate basis has to stand right now is let's roundabout between SEK 50 million to SEK 75 million on a yearly basis.

That's great. And finally here, what's the year-on-year price effect in your organic sales growth if it's similar in all regions -- some price versus volume?

Can you please repeat the question?

Yes. Sure. So what's the year-on-year price effect in your organic sales growth? So I'm wondering what's the -- how much has price driven your organic sales, yes, year-on-year?

We don't give any specific details on that one. As we have mentioned, we have done price increases as well as we had higher average order values as we can see across all our regions.

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

I know you touched upon it just now, but I was thinking about the covenants because I know in the last conference call, you said that you were still confident in your position with them. You still feel like that?

Yes.

Yes. And on the sale of the factory in Jonkoping, how at the earliest, when can that happen?

We communicated in December in conjunction with going up with this investment that, that was a possibility to do. As of now, we have not a decision on doing that. But if that were to materialize, it's around about 10 to 12 weeks.

Okay. Because I was like -- and also look at your financial position and so would it be -- if you come to that point, would you -- would it be an option to pause investments? Or would you rather raise equity at that point?

We will not raise equity.

Okay. So you feel confident that you will not be in need of raising equity?

Absolutely.