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

Good day, and thank you for standing by. Welcome to the Nobia Q4 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.

Thank you, and good morning, everyone, and thank you for calling into Nobia's Q4 results presentation. Today, of course, the presentation will be conducted by our President and CEO, Mr. Kristoffer Ljungfelt; and our CFO, Mr. Henrik Skogsfors. And with those words, please, Kristoffer, the floor is yours.

Thank you, Tobias. Good morning, everyone. Welcome, and thank you for joining. I would like to start off by saying it was a good quarter for the group. We're especially pleased with the Nordics where we took important steps towards improved profitability despite the continued large volume declines that we see in the project market. In the U.K., the operating income is not yet where we want it to be, but we have taken important steps towards our asset-light model in the quarter by exiting large pool of unprofitable stores and consolidated more businesses under the Magnet brand and also consolidating supply chain during the year. In terms of the overall market, we still experienced a very soft project market. And even if we have some more optimism from builders, we don't see any obvious signs of recovery in the short to midterm. On the other hand, we continue to see gradual improvement in the consumer market, albeit it from a very low base. We definitely see an improved footfall in most markets, and we experienced strong growth in design appointments and are building our [ core bank ] in a good way. Net sales was down organically by 7%, where the Nordics was down 14% and U.K. was flat Volume drop to the project market was the main contributor to the negative growth, while consumer sales grew somewhat in both volume and value. On a positive note, we continued to strengthen our gross margin in the quarter by mixing up to higher average order values and being disciplined with the price volume and mix, all in line with communicated plans. We have also done a good job in reallocating resources to the consumer segment where we are confident we have gained market shares, even if I expect that we can close order even more successfully going forward. Growth in the Consumer segment also supports a better margin profile for us. Adjusted gross margin came in at 38.7%, which is about slightly less than 1 percentage point improvement versus the same period last year. I'm also happy to see good returns from our cost programs initiated earlier in the year, savings of roughly SEK 140 million materialized in the quarter, which is on top of the already delivered SEK 400 million cost savings from '23. We will go back to that a little bit later in the presentation as well. We, however, see that we have an additional SEK 150 million run rate savings to expect from the programs from now up until Q3 2025. Adjusted operating income improved to SEK 48 million on the back of the improvements already mentioned. And operating cash flow improved to SEK 138 million, which Henrik will come back to later in this presentation. In the quarter, we also reached a very important milestone as we delivered our first assembled kitchen to customers from the new Nordic factory in Jönköping. And it was with great delivery performance and great quality, even though the volumes are yet quite low. We are very proud of the team that's worked day and night for so many years now to come to this very important point in time. In the quarter, we also received payment of SEK 190 million from the sale-and-leaseback transaction of the building, which also Henrik will mention. And as I said before, we took important measures towards the asset-light model in the U.K. that we are targeting by closing an additional 14 stores and consolidating our product business, Commodore, which we acquired back in 2015. We are consolidating that brand with our Magnet B2B business, and the cost for this transaction amounted to roughly SEK 600 million, of which SEK 500 million roughly of that was a goodwill impairment, which is nonrecurring, obviously. During the quarter, we also have amended terms and conditions for our long-term financing with our long-term partnering lenders to provide greater flexibility during continued difficult market conditions. Next slide, please. So looking into the markets in more detail and updated the consumer market is gradually recovering in the Nordics. We experienced higher interest in our category of products, higher footfall, higher design appointments and growing volumes. We also see continued recovery of house prices and housing transactions, which we believe will support our market also going forward. However, and important to repeat, the consumer market only represents a small share of our business today with about 20% of total volume. So about 8% of our total [indiscernible] to the project market, which remains very challenging. It's really only in Denmark where we see trade and some smaller construction sites picking up from the low levels that we have had over the course of the last 2 years. And again, there are some more optimism around recovery of the housing starts, but we have, on average, a 12-month lag to the housing start as well. So we don't yet see any recovery in our order books. Then if we look into the U.K. market. Unfortunately, the consumer confidence looked a little bit weaker again in January. We believe it's a consequence of the high interest rates still in the country and a high degree of uncertainty that put a drag on the overall sentiment. However, we remain optimistic that things could start to improve. And we have, amongst other mortgage approvals increasing and is now the highest stock of us than mortgage loans since Q1 of 2023. We also see the house prices in U.K. trending upwards, catering for a slight optimism of a recovery. As for the Nordics, the U.K. project market remained soft, driven by low housing starts compared to historic averages. We are, however, slightly optimistic in the recovery due to the huge pent-up demand in that market and some tangible measures by the government to increase housing starts as of late. So next slide, please. Let me update a bit on our strategic priorities. So again, we are pleased with many of the improvements made over the course of the year and the quarter, but we have a lot left to do on our strategic agenda and to get profitability in line with our financial targets of 10%. Maximizing cost efficiency and reduction of net debt remains a top priority. We had on well in this space, I believe, but we need to materialize another SEK 150 million in the latest program. And as long as we see challenges in the project market, we will need to revisit our fixed cost base on an ongoing basis also going forward. Realizing full Nordic potential. We have a very important spring in front of us as we ramp up manufacturing at Jönköping, roughly 1/4 of Tidaholm colleagues will transfer to the new factory during this quarter, with the majority of the staff then transitioning during Q2, somewhat ahead of the plan. And then last, the transformation in U.K. And again, we're taking important steps towards this asset-light operating model. With the latest program, we have reduced store space by roughly 20% in total over the course of the year from 2 million square feet, we're now down to about 1.5 million square feet in the store network. In the quarter, we also consolidated the brand Commodore as I referred to, but we also made further advancements in the new franchise and build a merchant partnerships, which are still on trial, but we're optimistic about it. So a little bit more detail on the Jönköping, if you go to the next slide, please. So again, we are progressing nicely according to plan in Jönköping, and we have started to transfer the staff from Tidaholm to the new site. And it's very impressive to see what our colleagues accomplished every day, given that it's the most advanced manufacturing unit in the industry. And today, we are staffed for some certain manual processes, but we have tested the automated flows end-to-end and are also utilizing the automated close to end-to-end. So we can gradually upping our game in both dispatch of the sample kitchen and productivity towards fully automated flows then by summer. And to the left here, you can see some of the benefits that we expect from the facility to mention a few higher efficiency, customization capability and sustainability through a lot of eco-labeling. But also, we would be able to have growth over time by utilizing the factory. And let me just finally reconfirm that we are very firm on our commitment to deliver to the savings expected from the factory with 3.5% EBITDA improvement when fully operational, which we also described on the right-hand side here. And if we take the next one, we reached a huge milestone in January, where we had the first shipment of complete kitchen to external customers. Just to shed some light on what we're doing, we also have industrialized the front of manufacturing, and we are both cutting and edging frontals and painting frontals with new technology in the factory, hugely exciting. We are doing a full kitchen assembly automatically and also have developed and order consolidation in the factory now. Again, new technology has been implemented with promising results. And we have also started up our intercompany flows where primarily the Jönköping factory is delivering now component to both Norway and Sweden, elsewhere in Sweden. The remaining investment is about SEK 300 million in CapEx to finalize the whole project. Let's move over to U.K. again. And you have seen this 1 before for you to follow up. And of course, we are not pleased with running with losses in the U.K. But again, we have made considerable changes to the business in 2024, which puts us at a much better place where we now enter 2025. And we have done this in various phases where the majority of the activities has been towards end of 2023 into 2024, where we are changing our operating model to target the mass premium segment with higher average order value with the trusted Magnet brand. We have launched new products in this space, have been well received by customers. We are trialing the partnership models, of which some are very exciting. And we have also, during the year, made the, what we call the second phase of this gradual consolidation, which was close in the manufacturing in Halifax. And we now look at capitalizing on the shift that we have done and consolidate further where we can. So Henrik, over to you to highlight some of the financials in the regions.

Thank you, Kristoffer. Just as a clarification, all amounts I will mention are in Swedish crowns. So for the Nordic region in the fourth quarter, the organic sales declined by 11%, which is the same year-over-year development as in the previous quarter. Despite the lower volumes in the product market, the adjusted EBIT rose to SEK 115 million, driving a margin increase from 2.8% to 8.2%. This represents a strong performance in a challenging market environment. And if, as Kristoffer has mentioned, largely thanks to internal initiatives such as cost-out efforts, supply chain productivity and focus on the consumer part of the market. The average order values benefited from a favorable mix shift between professional and consumer, which supported the top line. However, the overall decline in volume negatively impacted sales performance across all countries in the Nordic region. The gross margin improved by 3.1 percentage points, reaching 36.5%. despite the substantial decline in volume. This increase was driven by improved productivity in the Nordic supply chain and the favorable mix segment I have mentioned, but also between mix between countries and products with consumer sales performing better than the [ project ] segment. Despite the uplift in the gross margin, the actual gross profit declined slightly primarily due to the lower professional volume. However, the savings in selling and admin expenses driven by our cost reduction initiatives on top of our strict no spend policy improved adjusted EBIT from SEK 44 million last year to SEK 115 million this quarter, which is then equivalent, as mentioned before, an EBIT margin increase of 5.4 percentage points to 8.2. Strong performance in Denmark was the key contributor to this improvement with market share gains in consumer sales. Norway and Sweden achieved gradual margin improvement supported by higher average order values productivity gains and reduced SG&A expenses. Meanwhile, the Finnish market remains highly challenging and continue optimizing our cost base here to protect our profitability. In the quarter, we recorded SEK 36 million cost as items affecting comparability, primarily related to the Nordic supply chain, in particular, the transition to the new factory in Jönköping. So please, if we can move over to the next slide, region U.K. The market in U.K. reflect the same underlying trends as where we see growth in the consumer and decline in the Professional segment. The organic sales in the U.K. remained flat for the quarter compared to a 21% decline last year. The Consumer segment achieved double-digit growth, partly then offset by double-digit decline in both the project and the Trade segment. The gross margin was impacted by the underabsorption in the supply chain. However, average order values in the consumer segment are gradually improving driven by pricing and mix up initiatives introduced in the third quarter. The gross margin declined by 1.8 percentage points to 41.2% as the positive segment mix was offset by the under absorption. In currency adjusted terms, the SG&A causes decreased by approximately SEK 35 million. The cost reduction initiatives implemented early during the 2024 are delivering savings according to plan, though inflationary pressures have offset part of these gains. The EBIT for the quarter came in line with the fourth quarter of last year. As part of our strategy to reduce fixed costs, we are shifting to a more asset-light more than less Kristoffer was talking about U.K. with fewer owned stores, fewer factories and increased focus on franchisees and partnerships. This approach aims to lower our fixed cost base and reduce vulnerability to large volume fluctuations. During the fourth quarter, we took further steps to move to a more asset-light operating model and closed an additional 14 underperforming stores. As outlined in the quarterly report, we recorded SEK 109 million of items affecting comparability, which includes the cost of the additional store closures. Additionally, during the autumn, Commodore project sales that operates mainly in the London area was fully integrated into Magnet project organization, triggering a noncash goodwill impairment of SEK 478 million. The goodwill write-down is not reported in the U.K. region in the segment specification. Next slide, please. Financial position. Cash flow from the operating activities was positive SEK 332 million, slightly lower EBITDA compared to last year was mitigated by a favorable change in the working capital. Lower sales in the Nordics resulted in a positive impact on accounts receivable. Accounts payable increased on back of timing effects compared to last year. As previously communicated in our calls, we are intensifying our focus on operational excellence, through the new operational structure. One key component of this is our ongoing initiative to reduce inventory balances. These efforts positively impacted cash flow, primarily driven by U.K. and also Denmark, which offset the planned inventory increase in Jönköping during the ramp-up phase of the new factory. Overall, our inventory levels have decreased by 12% year-over-year. The operating cash flow, including investments, amounted to SEK 138 million compared to a negative SEK 188 million last year. Of this, the investments in the quarter which still mainly are related to machinery for the Jönköping factory totaled SEK 198 million, down from SEK 508 million last year. The net debt, excluding leasing and pension obligations decreased year-over-year by approximately SEK 1.2 billion to SEK 2.2 billion. And driven then by the measures that we took last year, the divestment of our subsidiaries in Austria and in the Netherlands, the sale-and-leaseback transaction and, of course, the rights issue for the next year. Net debt decreased by SEK 99 million compared to the end of the third quarter. The quarterly improvement is primarily attributed to the operating cash flow in addition to outstanding residual payments during the quarter, just short of SEK 200 million from the buyer of the property that Kristoffer mentioned in his section. Approximately SEK 100 million remains outstanding from this transaction, and we anticipate that we will receive the full balance during the course of 2025. Thank you. That was all for me, and over to you, again, Kristoffer. And next slide, please.

Thank you. Yes. Thank you. So a summary of the priorities going forward, and we remain very clear on what we have to do from here. First of all, advance with our strategic agenda, which is the ramp-up of Jönköping factory during spring, and it's highly exciting, and we're in a good place to do so in a good way. We continue with our turnaround plan of the U.K. operations, as you have seen also from this quarter, and that work will continue into 2025, and very importantly, deliver on our cost-out programs. In addition then, we will leverage on our strong brands in the organization and leverage on the new organization, which I think is starting very, very good. So here, it's more about looking at the leverage our operations to capture the growth in consumer sales and continue the good efforts that we have done during Q4 into 2025. With that, it entails an increase in average order values really push further on the mass premium product portfolio. We are also looking into productivity-enhancing activities, where supply chains are started to deliver good returns on the productivity side, but also productivity within administration of that. We will carry on with a very disciplined cost control, hugely important also for the cost-out program. And as Henrik mentioned, we have institutionalized strict working capital [ overloads ] across the whole business. So with that, Tobias.

Operator, we can open up for questions, please.

[Operator Instructions] Your first question comes from the line of Mona Kilsgård from Nordea.

I hope you can hear me well as well, otherwise I'll...

Yes.

So Firstly, with regards to the Nordic region, you commented your transitioning resources to Consumer segment, which seems like a solid move that given the prolonged weakness in the project segment. However, could you elaborate a bit on what this transition actually means in reality and also if you believe it to have an effect on your position in the Project segment once it returns?

Well, you have a couple of things to drive more consumer sales. One is, of course, out in the store network. So we have had designers focusing on product and trade business, which we can then -- they know the kitchen business inside out, and they can support with the consumer sales in a much better way. And that's also the opportunity for us to retain our designers in a good way. Secondly, when it comes to the whole system support, et cetera, we are looking at ways to drive footfall to drive design appointments to have digital toolboxes that helps our designers to sell more but also to get the right customers through the doors. And that I would say is the main things. That doesn't mean that we don't -- I mean, we keep an eye a close eye on what's happening on the project business, obviously, and we still have our project sales teams out and about and basically knocking on doors of the builders.

Yes. That's very clear. And you have previously also commented that lower volumes in the Nordics have led to some price pressure in the market, especially then on the consumer side and mainly Spanish market, if I recall it correctly. Given that, that always basically fighting for the same volumes. Have you seen any improvements here during the quarter? And what would you say is the main reason to why Nobia managed to make -- take market share primarily in Denmark?

Yes. Well, there's been -- I think what I have commented on before is that there are more stronger tactical messages in the market than before, not necessarily that the prices are dropping. One very important strategy from our side is to sell higher average order values and mix up the customers to more premium life products rather than to buy the low-end product. And I think that we've done a really good job in basically all brands to drive that performance. In addition, we also try to capture a higher share of the basket size when we are selling to these customers, and they've done some really good work on that, not the least in Denmark where we've seen a pickup in also the basket sizes. So there are multiple ways to keep both gross margins up and sales up in that channel, even if the tactical messages is a little bit stronger than before.

Okay. So we should not be worried that the prices will drop if I recall that quickly?

I believe we have -- or we have a very strong position with our brands, and we are not going to drop our prices in our brands, but rather mix up to the kind of nicer type of products in our portfolio. So I don't foresee that prices will come off on the consumer side.

Perfect. And then in the U.K., you closed 14 stores during the quarter. And then given the lease agreements on the remaining stores and the remaining stores, could you comment anything about how many of these that you -- that are up foreclosure during the coming year? Or what is the reasonable expectation to have here?

Yes. So given the circumstances and what we could see in the crystal ball from the market, we knew that there was going to be some tough times in the retail segment and especially in the U.K. So we have acted swiftly quite aggressively on the nonperforming stores. I think that we will continue, and we always look at the opportunities to do more and rightsize the business. However, the pace in which we will do that will be slightly lower than what we have seen before. But the -- it's always been reviewed and being an important retailer in the U.K. This is something that is being done all the time, obviously. But I would say that we have done more aggressive store closures and would have been normal in a normal market situation.

That's perfect. I was surprised of the 14 stores. So that's why. And then 1 last question for me then on the cash flow side. You highlight some SEK 300 million in CapEx related to the Jönköping factory remains to be paid during 2025, and that the total outflow that is estimated to around SEK 500 million. Could you provide some color on what these investments relate to or specifically? Is it still primarily machinery? And also timing wise, how you expect these investments to be distributed throughout the year?

I can answer that one. It's correct. It's related to completing the factory where we are talking about machinery. We don't -- we are not the owner of the building anymore because we did the sale-and-leaseback transaction, so everything that Kristoffer mentioned is related to the machinery to finalizing the machinery equipment in the factory. So we have approximately SEK 300 million in 2025 as [ corporate's ] not yet booked. But then we also have the cash flow -- outflow is slightly bigger because some of those corporate booked at the end of the year has not yet been paid. And then on top of that, that I mentioned and Kristoffer showed on his slide, we are expecting to receive the residual payment from the buyer of the property in Jönköping after all terms -- all the obligations that we need to do to receive those money have been done, it will happen during 2025.

[Operator Instructions] Your next question comes from the line of Marcela Klang from Handelsbanken.

Congratulations to Nobia on being today's winner on the Stockholm Stock Exchange. A couple of questions from me as well. Now the complete kitchens are leaving the Jönköping factory, is the most critical part of this project behind you? Or -- and which are the most important milestones throughout the year? You mentioned fully automated flow.

Sorry to interrupt, Marcela, but we lost you for a little while. So could you please repeat the question?

Is the most critical part of the Jönköping factory project behind you, and which are the most important milestones during 2025? You mentioned fully automated flows by summer. Will all production be transferred by year-end 2025?

Marcela, it's nice to have you back. It's difficult to say what's been the most challenging parts of this project because when you stand in front of something, you always believe that, that's the highest risk just in front of you. However, I would say that I'm very comfortable in that the manufacturing will be up and running smoothly by 2025. And that comfort has obviously taken time to get to. But the way the machineries are running now, how the machineries are talking to each other and the setup that we have and have tested, it all makes a lot of sense, and it's very comforting to see that it's working properly. So I mean, no doubt that it will be up and running by 2025. So in that sense, you could say that the major obstacles be surpassed. But on the other hand, we still stand in front of a quite complex transition from the Tidaholm factory to Jönköping factory with all the different parameters that they need to go in motion. So there's still a lot to be done to have this fully operational.

And in terms of volumes, do you expect all production to be transferred by year-end 2025 from Tidaholm to Jönköping?

The majority of the folks definitely will go from Jönköping. There will be some elements of the kitchens that might end up in both Tidaholm but also the other factories around in the network throughout the year. But by far, the majority of the flows.

Sounds good. You also announced amendment to terms for your funding agreement without further details regarding the covenants. But how comfortable are you with your covenants right now?

If I start and then maybe you, Henrik, can fill in. We have worked with the -- with both lenders and owners over the course of the couple of years to weather the storms in market. And I would say that I'm first very pleased about the support that we have got from both lenders and owners but also think that we have come to a good arrangement but that puts us in a good state with higher flexibility. And also this that was announced by December before Christmas is a good step for us, which also gives us much better flexibility. But of course, it's up to us also to deliver on what we promise. And I think that Q4 gives us a kind of a good foundation for continuing our improvement here now. And with that, I think that we also put the business in a better space. I don't know, Henrik, if you want to add something to that?

I think it was a good summary, Kristoffer. And then with regard to the covenant levels, we don't disclose those because it's something between us and the banks. But as we mentioned in the press release, as of December '23, we have extended the terms we had during 2024 as we are looking at the EBITDA rolling 12, and then during 2026, we will go over to more normal debt monitoring covenants like leverage, et cetera.

Further questions. You mentioned cost savings of SEK 150 million left to be delivered. Can you tell us more about which areas you are targeting? Where the cost savings will come from?

Again, I'll start and then Henrik, you can fill in. But we're looking at cost savings across all parts of our business. It will come both from the Nordics, the U.K., both within our sales commercial entities and supply chain. So -- and it's mainly related to the programs that we announced in -- back in Q2 and Q3. Then on top of that, we are, of course, looking at given the very soft project business, but still looking at opportunities to where we can reduce cost to a larger extent. Henrik, do you want to?

No, I think it was good. It's important to say also that we -- some of it is related to what we ordered in 2024. But I also think it's important to say again what I mentioned in my part that we have a strict no stand policy, because of the soft product market that you already talked about Kristoffer.

[Operator Instructions] There seems to be no further questions at this time. I will hand back for closing remarks.

Well, very good. And once again, thank you all for calling in and see you all on the 29th of April when we report the first quarter results. Thank you.

Thank you.

Thank you.

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