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

Good day, and thank you for standing by. Welcome to the Nobia Q4 Report 2023 Webcast and 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 first speaker today, Tobias Norrby, Head of Investor Relations. Please go ahead.

Thank you, and good morning, everyone, and welcome to this call presenting Nobia's fourth quarter results for 2023 and the rights issue announcement from this morning. Presentation today will be conducted by our President and CEO, Mr. Jon Sintorn; and our Chief Financial Officer, Mr. Henrik Skogsfors. And with that, I leave the word over to you, Jon.

Thank you, Tobias, and good morning, everyone, and thank you for joining the call today. I will start with commenting on the quarter before turning over to this morning's announcement on the rights issue. We delivered a positive operating profit in the fourth quarter, adjusted for the items affecting comparability. Given the continued tough market situation, driven by poor macro fundamentals with a significant organic sales decline as well as currency headwind, negatively impacting group some, we regard this as a good achievement. The organic growth in the quarter came in at minus 22% for the group. The business-to-business project segment accounted for the majority of the decline. However, net sales were also lower for the consumer sales. Again, the market situation is tough, which is clearly reflected in our top line. There are nonetheless several positive developments to note. Firstly, our cost reduction program continues to deliver. In the quarter, the positive impact from the program was SEK 90 million. On top of that, we are also maintaining a tight cost control overall, which results in additional savings. Year-to-date, the program has delivered cost savings of SEK 280 million. At the full effect by mid-2024, the restructuring program will deliver annualized cost reductions of up to SEK 350 million. Furthermore, the cost of our input material is starting to decrease slightly, and our price increases continue to have an effect. As a result, the gross margin for the group increased. In fact, gross margin was higher in all of our 3 regions. And for the full year, we have a flat gross margin despite the very challenging market and volume situation. Group operating profit for the quarter was SEK 3 million positive compared to SEK 25 million last year, adjusted for items affecting comparability. As I said, we have several positives helping us. But when sales declined 22%, the volume impact is extreme and difficult to completely offset. Our main strategic initiatives, setting up the factory on Jönköping remains on track. It has been an intense year for the factory with extensive machinery installations and testings and so on. This year will be intense as well. There are some machinery installations remaining, but 2024 is more about commissioning and testing and IT and connecting processes and flows and so on to ensure that we have the full capability for kitchen manufacturing -- full kitchen order manufacturing and order consolidation for complete orders by the end of the year. To repeat, there is a production happening already. We are producing kitchen components for assembly in the Tidaholm facility as well as starting the first flat-pack kitchen deliveries. And in January, we entered into a sale and leaseback agreement of the factory building. We now become the long-term tenants in the building with a 20-plus -- a 20-year extension lease contract. A few words on the U.K. transformation program. We're making good progress. Cost savings and restructuring measures are showing positive effects with a more attractive product mix and increased average order value and a clear gross margin improvement. We will continue to drive further improvements, for example, by adding asset-light distribution models. This is a capital-efficient way to increase our sales distribution reach, which also makes us more agile in the front end and less volume sensitive. We have recently reached an agreement for a shop-in-shop concept in partnership with Selco, a leading U.K. builders merchant, where we now have received the very first kitchen orders. And also, we are delivering a very good winter sales here with strong consumer order intake during this traditional market-wide campaign. So moving on to the next slide, the kitchen market development. As you know, the market has declined significantly during 2023 due to the macroeconomic development. No major shift in the market compared with the last quarter. And in general, we believe that we will see some market stabilization in 2024 and a start of recovery in 2025, led by the Consumer segment. The Consumer segment sales initially experienced a sharper decline than the Project segment. Demand from Project customers has declined due to fewer housing construction starts and a gradual diminishing of housing projects under completion. So the project segment held up better due to the longer lead time between order and delivery. The decline in order intake as the year has passed started to flatten out; however, the intake is still slightly declining. If we look at the Nordic market, in general, there is the same trend in all our markets, but looking at the Nordic market, the Consumer market decline is flattening out than Project market on the back of housing starts, and the lag is the continued decline and as the housing completions are taking off. And then looking at the U.K., Retail and Trade market is declining due to cautious consumer sentiment; however, starting to see a little bit of the same as in the Nordics, stabilization, but then Project market also in decline. And then Austria and the Netherlands softer markets in both countries. The overall trend in all our markets are quite similar. Then, next slide, please. Over to the news from this morning. With a strategically important investment in the Jönköping factory, our investment levels are fairly high. Together with a very weak market, it has resulted in a strained financial position. In order to resolve this situation and enable the completion of the investment, we are taking a number of actions to strengthen the balance sheet. However, I would like to note that the company is managing the underlying business in this market situation. Disregarding the Jönköping factory, our leverage would be well within our financial targets. The Board of Directors at this morning resolved on a fully guaranteed rights issue of new shares of approximately [ SEK 1.25 billion ] with preferential rights for existing shareholders. We also announced that we have reached an agreement with our lenders regarding an amendment and extension of our revolving credit facilities. The purpose of the rights issue is to adjust the capital structure, finance remaining investments in the Jönköping factory and strengthen the balance sheet in order to secure long-term financing that allows efficient operational and financial flexibility. The main owners are fully committed and are supporting the strategy, realizing the full potential in the Nordics with harmonized products and processes and a highly efficient factory with superior product and production capabilities. The rights issue resolution follows up our other decisions taken. We have during January and February announced that we have signed, and now, also closed the sale and leaseback of the Jönköping factory building and divestments of noncore assets. We have a firm focus on our businesses in the Nordics and the U.K. As a consequence, we have divested Bribus in the Netherlands and ewe in Austria. Both transactions are expected to close before the end of March. Please note that all of this is after taking after the close of the year, so no impact from the actions are recognized in the financial statements for 2023. We can now continue to execute on the strategy and finalize the important Jönköping factory that will render superior product and manufacturing capabilities. By leveraging the full potential of our Nordic operation and drive transformation in our U.K. businesses, we are committed to delivering value to shareholders and customers. I would like to take this opportunity to convey gratitude and really thank the entire organization and stakeholders that have managed the business in the very tough -- these very tough times. At the same time, as we have successfully managed big strategic projects and several transactions, a big thank you, all. And with that, over to you, Henrik, for some further details on the numbers.

Thank you, Jon. Then let's jump into the Nordic region to start with. A very solid improvement of 1.6 percentage points to 33.3% for the gross margin in the quarter, a strong performance considering the large volume decline. We have improvement on back of price realizations. We have reduced costs as well as favorable product mix where Consumer sales holds up better compared to the Professional segment. The improvement in gross margin was partially mitigated by adverse currency effects. The organic sales experienced a decline of 25%. As mentioned, price realization was good across the board and continued to support top line. This was counterbalanced by a notable decrease in volume, which affected the sales performance in all countries and in all segments. The project in the trade sector observed the most significant sales decline followed by a slightly smaller drop in the [indiscernible]. Reduction of selling and administrative costs benefited the result in the quarter where the impact from the restructuring and cost program, which was communicated in January last year, resulted in savings of approximately SEK 20 million in the quarter. As outlined in the quarterly report, we accounted for SEK 78 million as items affecting comparability in the quarter. These costs are primarily associated with the move of Jönköping factory to asset held for sales in the fourth quarter, as well as the transition for Tidaholm and headcount reduction in Finland. I am pleased to note that we are successfully managing the situation, delivering a positive EBIT despite a very challenging market situation. Please move to next slide. Thank you. We noticed very good progress in the gross margin, which increased by 5 percentage points on back of the progress in our U.K. transformation strategy with higher average order values on back of high share of sales in the Premium segment. As communicated last year, the company is strategically withdrawing from the lower margin portions of the Product segment, which is one of the components of the gross margin uplift. Organic sales declined by 21%. The U.K. kitchen market, much like the Nordics, exhibited softness during the quarter, partly then related to the withdrawal from the low-margin portion of the Project segment. Economic headwinds particularly affected Consumer sales in retail, leading to reduced volumes. The savings resulted from the restructuring and cost program communicated last year that -- as I mentioned for the Nordics, it positively impacted the quarter by around SEK 60 million, slightly surpassing our expectations and driving the reduction in selling and admin costs in the quarter. Despite that, sales are declining 21% on an organic basis, the U.K. are improving the profit by SEK 47 million compared to last year with strong support from the gross margin as well as saving activities. Next slide, please, Portfolio business units. Portfolio business units delivered a flat EBIT compared to last year despite an organic sales decline of 13%. Sales declined primarily on back of volume and mix, offset in part by realized price increases. Also, as Jon mentioned earlier, gross margin increased for Portfolio business units by 1.7 percentage points on back of price increases, favorable development of input material prices in combination with stringent cost management. The Netherlands, the largest entity in the Portfolio business units, they managed to offset the market slowdown with price increases together with an improvement of input material prices. The Austrian market remains challenging where price increases and favorable development of input material prices was more than offset by a reduction in volume. Going forward and following the divestment of Bribus and ewe, our Commodore & CIE business will be from now on included in U.K., and Superfront will be included in the Nordics in the follow-ups to come. Next slide, please, the financial position. Cash flow from operating activities declined by SEK 85 million in the quarter year-over-year on back of reduced working capital liabilities. The lower positive effect from working capital was mainly driven by the termination of a supply chain financing program being a timing impact between the quarters. The impact in the quarter was approximately negative SEK 200 million. Excluding the effect from the supply chain financing program termination, cash flow from operating activities was positive. We expect that first quarter of 2024 will be impacted by approximately the same amount before the program is phased out. The operating cash flow, including investments amounted to negative SEK 188 million, where our investments in the quarter, primarily related to the construction of the Jönköping factory amounted to SEK 508 million. The net debt, excluding leasing and pension debt, increased by SEK 425 million in the quarter to SEK 3.464 billion. The increase in net debt was expected as we are continuing to build a factory. The increase in net debt in combination with the decline in the EBITDA, resulted in a leverage of 7.6x. We have in previous investor calls, communicated that we are fully committed to reduce debt and explore various debt reduction options. As announced, we executed the sale and leaseback transaction of the property in Jonkoping. Last Monday, we announced the divestment of our operations in the Netherlands and [indiscernible] released information on the divestment of the Austrian business. On top of this debt reducing activities, we communicated a fully guaranteed rights issue in addition to an amendment and extension of the credit facilities this morning, as you heard Jon talked about a little bit earlier. The new agreement is adopted to reflect Nobia's current situation. All these net debt reducing activities will strengthen the balance sheet and allow for operational and financial flexibility. That was all for me. So over to you again, Jon, please. Okay. Sorry. Okay, I was missing with 1 more slide. This is a summary of the rights issue that we announced this morning. A fully guaranteed rights issue that is estimated to get gross proceeds of SEK 1.250 billion. We have a guaranteed undertakings covering 100% of the issue from the largest shareholders of Nobia. As Jon mentioned earlier, we would use the proceeds to finance the remaining investments for the Jönköping factory and also, as I have mentioned, to strengthen the balance sheet and allowing for operational and financial flexibility. The net debt development that you can see to the right on the graph is the 7.6x, as we have at third and fourth quarter. The net debt reduction activities that I mentioned on the previous slide will take us down in net debt, and by that, reduce our leverage situation. Even so -- the fact is that in the short term, the leverage is expected to increase due to the remaining outflows that we will have during 2024 before the factory is completed, as Jon mentioned earlier, by the end of the year.

And then priorities going forward. Obviously, in this market circumstance and where we're at right now, continue to drive sales is important and a focus area across the organization. And we will continue to drive cost efficiency beyond the cost program that we talked about earlier in this call, and I've been talking about before as well. And we will realize the full potential of the Nordic region, and that includes completion of the new factory in Jönköping, significant important task going forward, of course, and then continue with the U.K. transformation as we also expressed improving our proposition, improving our gross margin and looking for further asset-light new sales distribution points, et cetera. And then last on this slide, but not least, we have the rights issue, obviously, an important task to do and complete in the best of way, which is a focus for us in the organization. So with that, thank you very much for listening to this presentation, and we move over to the Q&A session.

[Operator Instructions] And your first question comes from the line of Rasmus Engberg from Handelsbanken.

Yes, can you hear me?

Yes.

Very good. I was just wondering about the disposals that you announced after the end of the quarter in the Netherlands and Austria. Can you give us an indication what the EBITDA was from those units?

I can give you a flavor of the EBIT. But as we said earlier, it will be reflected in the first quarter of 2024 because the only impact that we had in the third -- fourth quarter, Rasmus, was the level of an asset, the Jönköping asset to asset held for sale. The rest will be reflected together with the pro forma in the first quarter of 2024. But as an indication, approximately on a sales-wise, around SEK 1.7 billion of the sales 2023, the full year, are associated with sales from ewe and Bribus.

SEK 1.7 billion.

SEK 1.7 billion in sales -- yes, sales fully, and around SEK 150 million in EBIT.

Yes. And EBITDA, is that sort of proportional to the rest of the company, more or less?

Yes.

Right. And the other question is on the sale leaseback. Have you done your calculation on how much lease debt we should put in the balance sheet roughly?

Yes, approximately SEK 1 billion.

SEK 1 billion. Okay. Very good. And then finally, on the -- you gave an indication in the material where you say that EBITDA should be positively impacted by 3.5 percentage points in 2026, assuming the volume that we had in 2023. How does it look to get there? Is it all in 2026? Or is it gradually or is it even negative initially? Or what can you say about the ramp-up of the factory?

So I'm not sure I understood your question fully correctly, but in terms of ramp-up, we have communicated before that the Tidaholm, by the end of the year, the capabilities will be ready. So early '25 in the first quarter, the Tidaholm will be transferred into the Jönköping facility. And then we need to find stability and so on to make sure that that's all fine. So the second half of '25 is the HTH Sweden, Norway and Finland volumes that are to be transferred into the Jönköping factory. And those are the plans that we have conveyed since before. So that's a gradual ramp-up.

And then the benefit in terms of savings, are they mostly going to be then in 2026 and late 2025, maybe?

Yes. That's correct.

All right. And just a final question while I'm on the line. You have some remaining units in Portfolio business units that you are now moving in back into the U.K. business. I mean I assume those are loss-making. Is there a plan to sort of exit those or restructure them separately? Or what is the -- what is your thought on those businesses?

They are being restructured, as we conveyed before closing of one factory. So we have less fixed cost for that business, being the Commodore business. And we are -- have gradually and now even more so sold the Magnet product from that. So it's a very capable project team that we have in that entity. And we're selling more and more of the Magnet project. So that type of transition or transformation is ongoing as we speak.

Yes. So they are more integrated rather than sort of the rest up to...

Correct.

Very good.

So it's completely in line with focus on the Magnet business in the U.K. as we have commented.

[Operator Instructions] And your next question comes from the line of Hanna Lindbo from DNB.

Hi, good morning, everyone. And my first question is, well, I would like some clarification on the SEK 1 billion left of investment in the Jönköping factory. Is this including everything like your CapEx? Because I know that the buyer of the factory was supposed to pay for the building.

No, no, that's our -- it's our -- it's for the machinery because we sold the building, not the machinery.

Okay, because I thought it was supposed to be a bit lower than that, but yes, that's fine. And then also I had a question like what happens to -- you have a quite a large factory in Denmark. And now after these investments, and you're supposed to move production to the Jönköping factory, are you planning on closing this one or selling it?

Your question was whether we plan to close the Danish factory?

The factory in Denmark. Yes.

No. Those are not according to our plans.

Okay. But what are you planning on producing there going further?

Well, the Danish market, to start with, HTH has a very strong market position in Denmark. So significant volumes going for the Danish market in the Ølgod factory. One should remember that the overall, when -- it is a bit of a [indiscernible]. So when the market is very -- on the peak, so to speak, contrary to today, which is very low, but when it's on the peak, we've had the capacity constraints in our manufacturing footprint. So this is one way of resolving that so we can follow, so to speak, or take advantage of a better market circumstance as well.

All right. But you're not planning on like moving because my view was that you're going to move the HTH production to the Jönköping one, but maybe that's a bit further down the line.

So what we have said is that the Tidaholm volumes, Marbodal, will be transferred on Jönköping, and then, volumes out of transport efficiency and so on from Norway and Sweden and Finland to different transport in [indiscernible] that we believe that we have a good setup for our manufacturing at this point. But we also have said that we are catering for -- in very peak times, we have capacity to grow, and a better resilience in the downturn. But that's a decision for later. But the Danish factory is to be -- to stay, to remain.

All right. Great. Just last question here, a bit -- maybe if we could get some more flavor on these divestments you announced this last week. Was this a move to like trying to avoid a rights issue? Or was -- is this something you have thought about longer?

We spent some time recognizing that we -- when we saw where the market was going, realizing it would be a softer market, and then, that was timed with in that sense, unfortunate timing with when we have the biggest outflows in terms of the investment in Jönköping. We looked at what actions can we take and should we take. So we were working in a comprehensive approach, looking at how do we strengthen our financial position. And if we think, first of all, the sale and leaseback, the divestments of noncore assets, getting credit facility agreements in place and now also the rights issue. It's a total package in order to secure our long-term financing to complete the strategy that we have embarked on. So that's the main approach in order to safeguard in this softer and more difficult and challenging markets are concerned. If we look at the divestments as such, so in terms of timing, yes, there is a connection. But in terms of strategy, we have and shall have a lot of opportunities going forward with focusing on the full potential in the Nordic business on the back of strong market positions, good brands, very strong brands and now facilitating a good, let's call it, supporting system with harmonized products, harmonized processes and a very good and capable factory. That's a key priority. And then doing the transformation on the back of a strong, good brand, focusing the business as well around Magnet and do that business model an asset-light like distribution much like in the Nordics. Those are the main strategic initiatives and focus that we have for the business. And with that, the Dutch and the Austrian operations, well, first of all, it doesn't really fit into that situation or that program as we are right now. So in that sense, strategically also it makes sense. And by the way, for them to further develop, they also would need capital for capacity and market -- business development and those sorts of things. And for us, that -- here and now, our focus is elsewhere, on the Nordics and the U.K., so it's twofold.

Yes. That's very clear. That was everything from me.

Thank you.

There are currently no further questions. I will hand the call back.

Okay. Well, then with that we conclude, and we welcome you all back for the first quarter results that are going to be published on the 14th of May. So thank you very much, everyone, for calling today.

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