Hello and welcome to Nobia's Q1 report 2022. Throughout the call, all participants will be in the listen-only mode, and afterwards, there will be a Q&A session. Today, I'm pleased to present Tobias Norrby, Head of IR. Please go ahead with your meeting.
Thank you. Good morning, everyone, and thank you for calling into this presentation of Nobia's Q1 2022 results. We will do it the usual way today, starting with an overview by our President, Mr. Jon Sintorn, before our CFO, Mr. Kristoffer Ljungfelt, will fill in with all of the financial details. With that, I hand the word over to you, Jon.
Thank you, Tobias, and good morning, everybody. Thank you for calling in. Starting this presentation, for the Q1 of 2022, we start as usual with a slide presenting the highlights for the Q1 of this year. What we've had is a continued organic growth across our markets, on the back of price, a better mix, a higher average order value, and good market demand. In most of our market, we have also gained market share. That's a real positive, for this quarter. However, further material supply disturbances and not least huge escalating raw material prices, we have also experienced, predominantly obviously related to the very tragic war in Ukraine.
It has been huge direct material cost, north of SEK 200 million, and Kristoffer will share some more of that, but also additional costs related to securing availability and just get our operations running and be able to deliver this demand. Our response have been further price increases, which have been very significant. As you can see that also in the organic growth number, price is a component, obviously, of that. This, all in all, ends up in a group operating profit of SEK 182 million compared to SEK 196 million last year, and a margin of 4.8% versus 5.8% as of last year. In the Nordic region, we had an 8% organic growth, again, based on price mix and a higher average order value and the market share gains.
If we look at the U.K. region, we're going from a loss last year to a break-even result this quarter, and we have an 8% organic growth. I'd like to highlight a strong winter sales campaign and a campaign that we were able to sell more of our mass premium products and less of the lower end, and also increasing our average order value by that. That was some good news last quarter. As we have talked about in previous calls, we are on a transformation journey with the U.K. business. I'll get back to the U.K. in a little moment, but we will continue on that plan now with a cost reduction and cost structure program.
On our big initiatives in our Tomorrow Together strategy and Tomorrow Together plan, things such as the new factory are progressing really well. We're moving from obviously, we were doing a lot already last year, but we are escalating and further moving from a lot of planning into actually doing and implementing in that, according to that plan, which is progressing really well. We do have a strong, a good order intake and a solid, strong order book.
As we communicated, not so long ago, our U.K. businesses, the Commodore and CIE, we have now separated from our Region U.K. and put into what we formerly called Region Central Europe, now called Portfolio Business Units, enabled to gain better focus both for the Commodore and CIE businesses who have their opportunities and challenges, as well as emphasizing the focus on our Magnet business in the Region U.K. Those were some highlights for this Q1 . Let's first then get into more of the details with regards to the Region U.K. transformation.
As you may remember from previous calls, we've talked about that we have put a new management team in place. Building on their knowledge and insights, and what we know since before, we put a new plan into place, which we call the U.K. transformation or Magnet transformation plan, which in short is to put further focus on the Magnet brand and in parallel having the OEM sales to Wickes, where we separated the Benchmarx or divested or went out of the Benchmarx business previously and have a better solid profitability in this channel. Our focus on Magnet continues. Building a kitchen specialist, focusing on that, on the Magnet business a bit more. As I just mentioned, the Commodore and CIE has been transferred to another unit in order so we can fully focus on Magnet. We want.
What we want to achieve is to leverage on our unique Magnet brand proposition, where we have a focus on retail, but also even further focus on trade as well as project. We want to implement something we call the church tower principle, which is more of empowerment in the local markets, having more sales designers in the local market addressing these three segments, retail, trade and project. As a consequence, we will put more of the money where the strategy is, so we will invest in customer-facing activities even more. Again, building, attracting the best kitchen designers, increase the density of designers, meaning getting more designers, sales and design tools. We also, on the back of our trade, increased trade focus and efforts, we're increasing the availability and service levels for our trade customers, meaning more frequent deliveries, to our stores.
On the back of that, continuing on our plan to get Magnet both growing and increased profitability, we are today launching a cost program. The cost program is, as I said, in line with putting the money where the strategy is. The program is proposed to scale down the U.K. central support functions in order to invest more in the customer-facing organization, and very importantly, also improve the profitability for the Magnet business. This is all in line with Magnet's new revised operating model. This cost program, both cost reduction and having another structure of our cost, will give an annual run rate saving of approximately SEK 150 million. Related to this program, there is a one-time cost of SEK 130 million-SEK 150 million, which will be charged to the income in the Q2 .
Regrettably, around 200 employees will be impacted, and that is obviously subject to customary union negotiations. All in all, this is predominantly referred to the U.K., but we'll have some smaller or other effects elsewhere in the organization as well, predominantly group functions. That's about the cost program. Moving on to the kitchen market development. I've mentioned it already. The Nordic market continued to see favorable developments in consumer as well as project markets, and knock on wood, so far, we haven't seen any immediate impact on the market demand from the war in Ukraine and so on. The U.K. market is growing in value and the trade segment is taking a larger share.
The London super premium project market and social housing remain weak as we have communicated for quite some time now, and in that sense, it's pretty much the same. If you talk about the London super premium market, the geopolitical situation has not improved that situation, at least. Same goes for Austria and the Netherlands, where we have a good underlying demand, but specifically in the Netherlands, we've had challenges in terms of installers and projects being delayed because of shortage of material and so those sorts of things, which by the way, minor or major, but some of those effects we see, absolutely see across our markets. It's a bit more turbulent in trying to reschedule projects and so on.
That's because of lack of installers or availability with our customers' availability of materials and those sorts of things as part of the turbulence in the delivery situation, as of now. That was a bit about the kitchen market development. If we move on to our Tomorrow Together strategy and talk about our priorities there. You remember we have growth acceleration, we have structural efficiency, we have people engagement, and at the heart we have sustainability and design leadership ambitions. Those are themes that we are driving with various initiatives. And one of them we just talked about is the U.K. transformation having a firmer focus on Magnet, getting the Magnet business into profitable growth.
Other ones, if I'm gonna mention two, one is the structural efficiency initiative, which is the big new factory in Jönköping, which is now progressing really well according to plan, both in time and budget. It's really nice to see how we absolutely already last year, but now definitely moving from a lot of planning into actually doing, and you can see concrete things happening. There is now part of the building being raised in Jönköping, and it's about half of it. It's a big one. It is half, and then the first production equipment is being installed in roughly, let's say 20% of the building. There is an area where we can start installing a big saw, which is being done as we speak. That's progressing really well.
Next, I'd like to highlight our design and sustainability leadership ambition that is at the heart of the strategy, and our concept, which we internally call Nordic Nature, has won the Ideal Home Kitchen of the Year Award. So that's really confident. It's the largest home magazine there is in the U.K. We won this award both on terms of that having great design obviously, but it's also very nice to see that this Nordic Nature and sustainability spirit is coming across in a good way. So this is really a nice recognition for our product Nordic Nature. That was a bit of introduction and some highlights from the Q1 , and now I hand over to you, Kristoffer.
Thank you, Jon. Summarizing the quarter organic growth of 6%, mainly driven by growth in average order values. Gross margin improvements of 3%, mainly driven by the price increases in the U.K., where we managed to more than offset the cost inflation. Transport costs, which is a component in our FC&A, or below gross margin, increased considerably on the back of soaring energy costs. Also FC&A increases in Magnet on the back of increased marketing and sales activities as the store network was closed last year. EBIT in total of SEK 182 with a margin of 4.8%. Now let me. If you take next slide, please. Let me shed some light on the material cost here, because it's been a very exceptional quarter for Nobia in terms of direct material hits.
As Jon was alluding to, the year-on-year own cost is approximately SEK 220 million, which is obviously huge in a company of our size. I can just reiterate what Jon also said, that the fast action taken on price increases back in fall 2021 and at year-end has just been absolutely necessary for us. Given further inflation that we have seen, as of late, we have increased price quite considerably also during Q1 this year. Currently, our purchases amount to about SEK 6 billion on a run rate basis, where about 50% is related to components from the wood industry, like the sheet material, you can see here 17%, frontals and cabinets. This is also where we have seen the highest impact coming through for the direct material increases.
As of now, it's too early to tell how these prices will evolve going forward. However, on a positive note, we get indications that availability is improving gradually from the COVID situation. As of now, we don't foresee any immediate shortages of direct material nor of components. Having said that, oak in particular has been very impacted by the war in Ukraine, as Ukraine is one of the world's largest supplier of oak, and we are currently and successfully finding new alternative routes to that supply. In addition, the lead times from some of our suppliers of the bought-in goods, like white goods and things and taps, et cetera, is very long for the moment, but also this is possible to handle. If we take next slide, let me shed some light on the markets.
If we start with the Nordics, it represents 45% of Nobia sales. We have had a good momentum in all of the Nordic countries in the quarter, both in terms of sales and order intake. Norway and Finland grew double digits in the quarter, while both Denmark and Sweden grew single digits. We can clearly see the project market coming back strongly across the Nordics, while retail was somewhat softer in the quarter. Although we still have a good footfall coming into our stores. We have managed to increase average order values across the Nordic market and in all segments, and we will continue to do so. Due to our order book, the price increases here will take up to 3 months before they get full effect into our books and into our PNL.
We also deem the Nordic market to be strong in both retail and, foremost, products for the short term here. It is too early to tell though what the long-term market will look like given the impact from inflation and interest rate hikes that we've seen as of late. The U.K. represents 33%, where Magnet delivered a very strong winter sales with double-digit growth in all segments. Average order values were exceptionally strong, driven by volume growth of more premium kitchens, higher penetration of booking products, and the more general price increases that we also did. Volumes of our low-end Simply Magnet products declined, which is in line with our strategy, which also led to some better mix into our stores.
It's also positive to see that the project business start to grow again in the U.K. after a long and tough situation during the COVID. Magnet Trade now represents 34%, so it's one of our obviously the largest segment in U.K., but also one of our largest segments in entire Nobia now, which requires even more increased focus. For next slide, looking at the Nordic PNL, growth in the quarter was 8%, mainly as a result of the higher average order values. However, extraordinary direct material increases did impact the margins, and our extraordinary price increases we did last year did not compensate for the last material price increases we saw beginning of this year. As a result, the gross margin dropped by 3%.
In addition, the impact from Omicron was actually quite severe in the beginning of the year for our factories. It resulted in very high sick leaves, which had to be compensated by overtime, and we can shift production in basically all our factories in the Nordics. Just to mention again that to cover for the inflationary pressure, all our brands in the Nordics have done extraordinary price increases also in Q1. Below gross margin, we also book our transport costs, and we normally don't comment on it. Given the pressure on energy costs, the transport cost has actually eroded 1% of our margins in the Nordics. Apart from that, the SD&A or the sales and marketing was pretty much in line with last year. Moving over to the PNL for the U.K., organic sales increased 8%.
If we back out the exit of Benchmarx, the U.K. region was up 17% in the quarter. All segments in Magnet and our OEM business was growing, and I was already talking about the average order value, what that consists of. Gross margins were up as we continued to exit unprofitable, low gross margin business. In the U.K., we also successfully managed to compensate for the inflationary pressure. A good growth of gross margin of almost 6% here. Most of you remember that our store network was completely closed for the same period last year. Obviously for this year we have incurred higher sales and marketing cost.
From a cost position, we believe that we are at the right levels for sales and marketing at a percentage of sales, but the proposed cost program will address the non-sales driving costs in the U.K. structure, as Jon was talking about. All in all, break even in the quarter, which is an improvement for last year where stores were closed, but obviously it's far behind our long-term ambitions. Moving over to our portfolio of business units, the very new region that we have, you could say, where we've declined in organic growth in the quarter with 7%, basically driven by soft project markets in both Netherlands, but especially so in Austria, where the market is very, very soft in our super premium end of the market.
Austria continues to perform well in terms of growth, and it's very much similar to the Nordic businesses. Gross margins were up due to the higher average order values, but also country mix contributed to the slight increase here in gross margin. EBIT ended at SEK 20 million with a margin of 4.3%. Over to our financial position, operating profit pretty much again aligned with last year, that's where the working capital position. However, our investment in fixed asset has obviously increased quite a bit, and it's obviously a result of our investment in the factory, and Jon was showing some pictures how it starts to come alive, and then also we will consume cash on it.
As a result, our financial net debt was SEK 700 million in the quarter or end of the quarter with SEK 700 million, which still leaves us with a lot of headroom and a solid balance sheet with a good leverage, according to ourselves. With that, Jon, I hand it over to you again.
Thank you. So very short in summary, for the Q1 , we've had good market conditions and done a good job overall in the market. We have implemented significant price increases to the market, also facing significant headwind on direct material. That was, in short, the Q1 . We're now looking going forward; we're seeing continued good market conditions, at least in the short term. What we can see, the good market conditions continues. But we also see that material price increases is expected to continue, arguably not to the same speed of increases as we saw against the backdrop of the war in Ukraine. With that, we will continue to have significant price increases to the market in order to mitigate this situation.
Our average order value improvements is expected to continue as well, that we will continue to work on our mass premium product ranges, which is in line with our strategy. We will deliver on the cost program that we just talked about, and we will continue to be mindful with cost during this circumstance. That goes overall. We will continue to invest in our Tomorrow Together strategy and make sure that we continue to progress as well as we do on all these major and big initiatives that we have, such as the new factory. That was a bit about Nobia Q1 and a little bit on what's going on, or we can expect going forward. With that, thank you very much, and time for Q&A.
Thank you.
Operator, please open up for questions.
Thanks very much. We will now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel that request, please press the hash key. Once again, that's star and one if you wish to ask a question.
Hi again.
Your first question today comes from the line of Victor Hansen from Nordea. Please go ahead.
I think that's me, Victor Hansen, Nordea. Yes. Can you hear me by the way?
We can.
Yeah. Okay. Yeah, I guess it was my name then. Great. Hi, hi, Jon and Kristoffer.
Hi.
A couple of questions from me. On organic sales growth up 6% for the group, how much of this would you say is price driven?
Almost all of it.
Yeah, makes sense.
It's price and higher order value, meaning better product, so to speak.
Yeah.
Yeah. Price.
Yeah. More premium product also. Yeah.
Yeah.
You mentioned the high orders, Jon. Perhaps you can say anything about how much better they are, year on year. What you think of the price level in your backlog given the ongoing cost inflation. Do you think that they are on a decent level, or should we expect it to lead to negative margin effects, in the near term?
Okay. Let me see if I got your questions right, Victor. One thing which Jon also mentioned here, the average order value is going up, and the possible volume, so to say, is increasing in Magnet primarily on the back of low-end volume, so to say. We expect that to continue, of course. We also have talked before about our ability to quicker increase prices in Magnet because of the somewhat shorter order book. We will see faster effects in U.K. as well. As for the Nordics, it will be a very similar situation to what we had between Q4 last year and Q1 this year because of the lag in the order book, really. The extraordinary price increases done now in Q1 will materialize towards the end of Q2 instead.
There will be a gross margin effect on that, which is quite similar to the Q1 effect. Does that answer the question, Victor?
In short, we were able to compensate the previous increases by the-
Yeah
By this quarter. Now with the additional direct material increases, there will be a similar lag as we had, the last time around, so to speak.
Yeah.
Yeah. That answers the H2 of my questions very well. On the first part of the question, high orders, if you can say anything, how much higher they are year-on-year?
We don't want to comment on how much higher our order book is, if that was the question.
Yeah.
Just to conclude that we have an order book which makes us confident in the short-term market growth.
Understood. I think I heard something in the background. Yeah, okay. Next question. You mentioned replacing central headcount primarily in the U.K. with customer facing, and it would be interesting to know the net headcount reduction.
As we said, this is obviously subject to customer and union negotiations and labor laws and all those sorts of things. We are estimating an approximately 200-
Okay. The net.
For the program.
Yeah. Okay, that's the net effect? 200 people less.
Yes. Yes.
Okay. Yeah. Okay. The gross one for assumption must be way higher than. Okay. Understood.
No, let me put it this way. It's the net and the gross in this case is the same. We will spend money to drive revenue by also in the future adding sales staff and potentially also marketing spend. Again, that is as a ratio of the revenue that we will make as well.
All right. When do you expect this restructuring to start to have an effect on your earnings? When will it reach the full effect, the full run rate?
A little shy of 50%, H2 of this year and the rest H1 of next year.
Okay. Of the total, SEK 150 million of-
Of the total 100.
75.
Yes.
Okay.
A little shy of 50%.
Oh, okay.
Yeah.
Yeah.
Around about that.
Yeah.
Remember, these are proposals we need to be also respect union negotiations and labor law process into this. Yes, little shy of 50%.
Yeah. Understood. Looking at your CapEx, almost SEK 390 million in the quarter, how much is related to the new factory?
The majority of that is the new factory. Basically close to SEK 300 million is the new factory, of that amount.
Okay. I'm approaching the end of my questions here, so bear with me.
No worries.
Yeah. Yeah.
We like talking about Nobia.
Yeah. So do I. But for the Nordics, it would be interesting to hear what your thoughts are on the housing starts going forward since there are some worries here.
We have the same view as the banks. The only thing that we could eventually comment is, again, on this order book for the short term deliveries. It still looks solid. We suggest that the available information out there on housing starts is better than we are to predict the future of that.
Yeah. Makes sense. A final question. So the material energy and transport costs you mentioned, SEK 220 million. Just to clarify here, is this what it's up year-on-year in Q1, or how do you calculate this?
It's the year-over-year cost increase for Q1.
Okay. Got it. That's all for me. Thank you.
Yep.
Thank you. Your next question comes from the line of Rasmus Engberg from Handelsbanken. Please go ahead. Rasmus Engberg from Handelsbanken, your line is open. Please go ahead.
Hi. Rasmus Engberg with Handelsbanken. Can you hear me?
Yes.
Rasmus Engberg with Handelsbanken here. I had two questions remaining. Just, can you remind us roughly what how long your order book is typically? You know, what is the time lag until it materialize, so we can sort of try and figure out if it's different in the Nordics to the U.K., et c?
Yes. It's in the Nordics, it's longer than in the U.K.. In the Nordics, we normally talk about 2 to 6 months of order book. Currently it's been quite long from a historical point of view. In the U.K. we talk more about 1 to 3 months of order book.
Okay.
Very good. Just a question. Easter, is that going to have any impact on the Q2 compared to last year? Is there any sort of difference in scheduling that has a significant impact on the earnings or is it similar?
Now in 2022, we don't see any, there's no major change compared to 2021 in terms of Easter.
Okay. Very good. That's actually all my questions. Thanks.
Thank you.
Thank you.
Thank you. As a reminder, ladies and gentlemen, to ask a question, please press star and one on your telephone. Don't seem to have any further questions. Oh, just one more question coming through from the line of Sofia Sörling from Carnegie. Please go ahead.
Right. Thank you so much, and thank you for the presentation. Sofia here. I have one question on Nordics. Could you please just give some color on why you had or that you were better to successfully compensate for higher inflation costs in the U.K. and the Austria and Netherlands compared to the Nordics? That's my first question.
Yeah.
All right.
I start, and then you can fill in, Jon.
Yeah.
There, there's a couple of effects. First and foremost, like Rasmus was alluding to, the order book in U.K. is shorter. Obviously.
Mm-hmm
We get quicker impact for the price increases.
Mm-hmm.
Secondly, we've successfully managed to move the more premium products in the U.K. compared to the low-end product that we were selling in U.K. prior years as well. That's a positive mix effect, you could say. Thirdly, we have been very successful in selling adjacent products together with the more premium products in the U.K.
Okay.
In a way, also, number four is that in U.K., we also see more sales in the Magnet segment, which is improving our mix in terms of brands. All in all, we're very pleased that we managed in U.K. to increase to those type of levels, but the order book also helped us in that. We should also mention that the extraordinary price increase in Nordic has been also very high and we start to see the increases we made end of last year coming through in the order books strongly now in Q1. It's just a lag that we foresee now for up until the end of Q2, the latest price direct material price increases.
All right. Thank you. Maybe if you can give your view on your expectation on this London super premium project market, the outlook here.
Well, very early in the quarter, we started to be slightly more optimistic about the outlook in the super premium in London.
Mm-hmm
On the back of the war outbreak, etc , are optimistic. Are starting to be optimistic outlook change to be same as before. There is still some business, but it's not at all to the level that we saw some years back since pre-COVID.
All right. Okay. This extraordinary cost of GBP 130 million in the U.K. due to the layoff of people, is the discussion with the union, or the union customary discussions are cost related to these discussions, are they included in this estimated amount of GBP 130 million?
I'm not sure I understood that question really. I mean, we launched
You said.
We launched. Yeah.
Sorry. Yeah. The question is that you said that you had estimated one-time charge of around SEK 130 million in Q2 due to the layoff of people. You also said that it was subject to this union customary discussions. Do you see any risk with additional costs due to the discussions here with the union?
Uh-huh.
Are those included in the SEK 130 million?
First of all, there is the range 130 to 150 to ensure that we can deliver on this program in a good way and in a respectful way.
Yeah.
That's one aspect of it. All in all, this is obviously a proposal that we need to deal with in a good legal fashion, so to speak. Again, that's a customary union negotiations and those sort of activity. The range that we gave and the level of the cost program we absolutely believe is what's going to happen and it's going to cover it.
All right. Okay. I believe that was all my questions. Thank you.
Thank you.
Thank you.
Thank you. As a final reminder, ladies and gentlemen, at star one if you wish to ask a question. We don't have any further questions coming through at this time. I'll now hand back for any closing remarks. Thank you.
Very good. That's it from our side today, and we welcome you all back on the 19th of July for our half year results. Thank you.
Thank you.
Thank you. That does conclude our conference for today. Thank you all for participating, and you may now disconnect.