Good day, thank you for standing by. Welcome to the Nobia Q1 Report 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star-one-one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. 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.
Very good. Welcome, everyone, and thank you for calling into this Nobia Q1 2023 Results Presentation. I have with me today, of course, our CEO, Mr. Jon Sintorn, and our acting CFO, Mr. Henrik Skogsfors. We will start with Mr. Jon Sintorn, starting with an overview of the quarter before Henrik digs into some of the financial details. With that, I hand the word over to you, Jon.
Thank you, Tobias. Good morning, everyone, and thank you for joining the call today. For the first quarter, on a high level, we see market demand further soften with the macro fundamentals hampering consumer as well as the project segment. The organic growth in the quarter came in at -6%, predominantly driven by the consumer segment decline across the markets. On a positive note, our price increases are compensating for the inflationary pressure we have been battling for some time now. On the other hand, with the sales volume decline and mix shift, has burdened the gross margin. Hence, EBIT came in at SEK 81 million for the quarter versus SEK 182 million prior year, and that is excluding the Items Affecting Comparability.
As communicated earlier this year, we have launched a significant cost program, which is up and running and being executed on according to plan. On a cash flow basis, there was an improvement, most notably in the working capital, which also was positively impacted by timing effects. As we have commented in previous quarters, we do have a situation where the economic downturn and macro coincides with the temporarily elevated investment levels that we have due to the construction of our new factory in Jönköping. This has resulted in an increased leverage. As we said at the Capital Markets Update in March, the factory building in Jönköping is close already, and we are actively exploring sale and leaseback.
On that, we have made a lot of progress in our strategic agenda, with this investment in the new factory being obviously the most important. Progress there is according to plan with a busy schedule for equipment installation, and we have already started to utilizing some of the machinery for kitchen component manufacturing to support our Nordic supply chain. Moving on to the next slide. Talking about the cost reduction program. The cost program will generate an annual run rate cost saving of SEK 300 million by mid-2024. The effect for this year, the run rate effect for this year is SEK 220 million for the end of 2023. The biggest components are the restructuring of the U.K. operations as well as rightsizing certain Nordic and Central Group functions.
Talking about the U.K. part of it, we are exiting and have been exiting in the course of the quarter unprofitable parts of the U.K. projects business. We are taking out low margin products to pursue a strategy to go for more of the mass premium and higher average order value. We are moving over to a more variable cost model in the very premium project business. As a consequence, we close Dewsbury and Grays, which are two of our U.K. manufacturing sites, and consolidate more into our plant in Darlington. We're also flattening and simplifying the U.K. overhead structure, continuing in our plan to empower the sales organization and have less of central administration and central costs.
The total cost of the program is SEK 450 million recorded as Items Affecting Comparability, and that was taken in the fourth quarter of 2022 and this quarter, first quarter of 2023. All the activities identified in this program have been executed upon according to plan, and we see a little effect in the first quarter, but the following consecutive quarters, we will see the material effects gradually materialize. That was on the cost program. Next slide, please. Markets. I think it's fair to say that compared with one or two quarters ago, it's fair to say that there has been further softening of demand given the more challenging and uncertain macro circumstances with inflation and increased interest rates, et cetera.
Across all markets, there is clearly a softer consumer demand, consumer and retail demand. In terms of projects, we have longer order books, so in general, there is still many projects that are on its way to completion and hence there is business associated with that. Filling up the pipeline with new started projects is more challenging today during this quarter and what we see looking forward in the short term. In terms of the trade segment, in general, it's holding up a bit better as a segment. I think that is the fair statement across the Nordic market, the U.K. market, and our business unit portfolio markets as well.
Moving on to the next slide, we talk about direct material, and as you know, it's been significant increase of direct material inflation and other types of inflation in the last six, eight quarters. What we see now is the pressure continues. Sequentially from what we see as a peak, early the fourth quarter of 2022, we see a slight decrease from that level. On a year-on-year basis in the first quarter, we're still up in direct material pricing or cost. Again, we see a sequential decrease and expect that trend to continue. The total own cost for material, energy, and transport was approximately SEK 150 million in the quarter.
I should add, this is an area, driving sales in this market circumstance that we are even more activities, so to speak, and addressing cost base and addressing direct material cost are the three main themes currently, is having a significant impact on profitability. Moving over to the next slide, the Tomorrow Together strategy that we addressed at the Capital Markets Update in March. I don't know exactly how many of you at this call right now that was there, but I really appreciated that day. It was great to see you there, and we were very proud and very happy to also showcase this building, which is a token of the strategic transformation that we are undergoing for this company.
Hopefully, we could convey and come across and see how this materially is very significantly will improve our ability to serve customers in a very good way going forward with great products, availability, lead times, quality, and all of that. What we addressed, the three main themes we did address as the update was obviously the progress on the Nordic factory construction, and what benefits that means for us and our customers and partners, both operationally, product-wise, and financially. We talked about the transformation plan for the region U.K. and how we plan to execute important changes to create a stronger, sustainable operating model in the U.K., such as driving value instead of volume, simplify with one brand, one product assortment, and one pricing structure, et cetera, cost efficiency, and empowerment with more decentralized decision-making.
Then thirdly, the balance sheet-related topics, giving the current temporarily, but still high investment levels and increased leverage. At the update day in Jönköping, we also made a visit to the factory building site, of course, to tour this, we believe, very impressive plant. Give people almost a preview of the first installations of our new manufacturing technology that is on its way. We also visited a refurbished HTH brand franchisee store, close to the factory, to give a flavor of how nice and good products we have and, an indication of our strong market positions that we do have with, in this case, HTH brand. All in all, very nice to see you there. It was a good day. One of the highlights of the quarter, actually.
With that, over to you, Henrik.
Thank you, Jon. Let's go into Nordic region for the first quarter. Organic growth in the quarter came in at - 7%. The volumes declined on the back of the negative development in the consumer segment in all countries, while the project segment held up well, especially in Finland. Our price realization was good across the board and continued to support the top line. As mentioned in the fourth quarter call, we had some supply chain capacity and output constraints, especially related to the Swedish factory in Tidaholm. The situation stabilized and improved in the first quarter. The impact in the quarter amounted to around SEK 15 million. By country in the quarter, the sales increased in Sweden and in Finland, whilst they were declining in Norway and Denmark. The gross margin declined by 4 percentage points to 32.1%.
The primary reason behind the drop in gross margin is related to the decline in volume, especially in the retail segment. As Jon said earlier, we see some small signs of improvement in the direct material versus the fourth quarter. We have continued headwinds in the year-on-year comparison from direct material, transport costs, as well as impact from higher energy bills. In summary, EBIT of SEK 105 million compared to SEK 213 million last year. Please note that this is excluding the quarter's Items Affecting Comparability of - SEK 90 million that was communicated in January. Next slide, please. Region U.K. Organic growth in U.K. was - 5%. In line with our transformation strategy as presented on the capital markets update in March, we go for the higher average order value segment, which contributed positively to our top line in the quarter.
However, we're not able to mitigate the volume decline. The gross margin came in at 43.4, 0.2 lower than same quarter last year. Solid price impact mitigated effect from higher year-on-year direct material costs. Despite the margin being close to flat, the absolute gross profit declined in the quarter on back of lower sales volume. We had some savings from the cost out activities, which is the main driver behind the lower selling and administration costs in the first quarter in region U.K.. In summary, U.K. delivered an EBIT of SEK 5 million compared to zero last year. All numbers are excluding Items Affecting Comparability that I mentioned just a while ago. First quarter Items Affecting Comparability amounted to SEK 170 million related to the restructuring program announced in January. Over to slide nine, please.
Portfolio business units came in flat on back of solid sales increase in the Netherlands on back of delayed effect of price increases. The positive contribution from the Netherlands was hampered by a challenging consumer market in Austria. The project market is obviously still a challenge in London and declined in the quarter. As communicated in January, we are closing the factory in Grays that is serving Commodore, and we move over to a more flexible cost model. We are moving in the right direction, and we see, despite a challenging market situation, early positive indications in form of upticks in the order intake. EBIT for the region was SEK 12 million compared to SEK 20 million last year. Price increases were not able to offset the volume decline and the increases year-on-year from direct material.
The primary reason behind the decline in profit in portfolio business unit is the project business in London. In the quarter, SEK 36 million was classified as Items Affecting Comparability in the region because it's related to the closure of the Grays factory serving Commodore. Next slide, please, financial position. On cash flow, positive effect in the first quarter from lower inventory in addition to improved accounts receivables, the latter back of the lower sales. Account payable movement is driven by timing effect. The change in working capital in the quarter more than offset lower cash flow due to the decreased profit, resulting in a cash flow from operating activities of SEK 318 million. Cash flow from investing activities primarily related to the construction of the factory in Jönköping amounted to negative SEK 353 million.
Our net debt, excluding leasing and pension debt, increased by SEK 227 million in the quarter to SEK 2.066 billion. The increase in net debt is according to plan as we are continuing to build the factory in Jönköping. The increase in net debt in combination with a decline in EBITDA resulted in an increase of leverage from 2.36 in December to 3.11 for the first quarter, which was in line with our expectations. The fact that the economic downturn coincides with our planned high investment level has resulted in an increase in leverage. As communicated at the Capital Markets Update, we explore different leverage reduction options such as sale leaseback of assets. We also said in March that we, together with our real estate advisor, have created an investment memorandum.
The memorandum has been presented to a range of different investors, and we are now evaluating the outcome of those meetings. That's all from me. Back to you, Jon.
The priorities we have going forward is to drive sales activities in, let's call it, more challenging market circumstance. There is plenty of activities and initiatives to drive sales. We will drive towards higher over average order values rather than volume. That's an important initiative. Actively, very actively working on direct material price reductions as demand softens suppliers and direct material pricing or cost needs to come down. That's an important activity as well. Execution of the cost program and some more across the group. The cost program predominantly related to the U.K. and the repositioning of our business model and position in the U.K. continues.
Of course, the Jönköping factory and everything associated to that, ensuring that we keep being on plan and on track, and then further exploring and taking the next steps in the sale and leaseback process. Those are the priorities for us, going forward.
Very good. Can we open up for questions, please?
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile a Q&A roster. We will now take the first question. It comes from the line of Hanna Lindbo from DNB. Please go ahead. Your line is open.
Yeah, hi. Thanks for, thanks for having me. My first question is on the Nordic margin, it seems to have been impacted by a number of factors. I mean, my question is just how should we view this margin going forward?
Which margin?
The Nordic one.
Yes. As mentioned, Hannah, thanks for the call. Sorry. As mentioned, the reason why we are declining in the Nordics is due to, first of all, the volume decline, but also that we have the mix shift, that we are, the decline in retail consumer is higher than the decline, sorry, than in professional segment. That is negative for Nobia, that mix shift, so to say. The consumer market is.
Thanks.
Sorry?
Mm-hmm. No, no, continue.
As you know that the consumers are having it quite tough now. We see that as we mentioned, we see the retail going down in all our markets where we have retail customers. It's expected that there will still be a challenge on the margin with regards to this mix.
Okay. The project market seems to start softening a bit now as well. Is this according to your expectation, like in timing, or do you expect it to come later on?
I'm not sure I understand the question.
I mean, the project market, I think we all could agree that we expected it to decline sometime in the future.
Yeah.
It starts to happen now, if I understand you correctly, and is this according to your expectations?
For the first quarter, as said, there's still a lot of projects going to completion, so to speak. On the back of that, we have project sales. However, within the project sales, a slightly different mix. A little bit lower end, so to speak, or slightly lower priced kitchens going through there. For this quarter, there's still on the order book and so on for housing completion.
Sorry, just to add a comment to what Jon is saying now, Hanna, is that the professional segment actually increased a tad in during the first quarter.
Yeah. I was thinking more about, you know new housing.
Yeah, no. What we will see going forward unless housing starts, start to, well, stabilize, if I put it that way, or get to a decent level, we will see effects later this year and so on. It's according to expectations in that sense for the first quarter, and we haven't had any material effect of the most recent.
All right. yeah. Thank you. I know you don't comment on your covenants, but I know you mentioned earlier it seemed like you've been pretty confident in your financial position. Has that changed in some way?
We are confident in our financial position, and we are actually pursuing activities to make sure that we have a leverage where we need to have it. The sale and leaseback is obviously one of those.
When you talk about options, that you explore different options from leverage reductions, is it more options than sale and leasebacks, or?
No. Well, it's the sale and leaseback, which is obviously the big thing that we're doing. We have other types of investments and stuff that we scrutinize and look at.
As we mentioned on the Capital Markets Update, yes, the big one, of course, when it comes to sale and leaseback is obviously Jönköping. We are also investigating other sale and leaseback options. We have other plans.
Mm
We are investigating to do that. On top of that one, we also mentioned the Capital Markets Update that due to the fact that we are now closing our factory, for example, in Dewsbury, that property will be sold, et cetera. We have some mitigating activities that we are executing on.
You should see it in the lineup . The sale and leaseback activity for the Jönköping factory is the prime one, the bigger one, and then we have some others on a smaller level.
All right. Great. Thanks. That was all for me.
Thank you.
Yeah. Thank you.
Thank you. We will now take the next question. It comes from the line of Sofia Sörling from Carnegie. Please go ahead, your line is open.
Right. Thank you, and thank you for your presentation. This is Sofia from Carnegie. I have a couple of questions here. I just want to start with the IAC items that you recognized during the quarter. If you could please give some more details on what this SEK 90 million in extraordinary costs recognizing the Nordics, covers. You mentioned the structuring measures, but could you be more explicit what this type of cost is?
Yes. Shall we start with that part of the question?
Yes. We can start with that one.
Yes. Yes, SEK 90 million. Yes. It's restructuring and cost reduction, I would say, because restructuring is mainly related to U.K. I think that that's also what we said in our press release on January 20th. The restructuring is primarily related to U.K. closing of the two factories. We have cost, you know, cost out activities for other parts. In the Nordic region, the majority of that is headcount reduction. There is also cost related to the transfer of the factory from Tidaholm to Jönköping. Because that's the SEK 90 million that we have in region Nordic.
All right. Sorry, the transition costs then from Tidaholm, wouldn't that be expected as a type of cost like that will continue during 2023?
Yes. Correct.
You don't expect any other Items Affecting Comparability during 2023 or?
We said already back when we informed the market about that we were going to build this factory, that we probably will have around SEK 130 million as extraordinary costs, so to say, during the course of 2023 and 2024 when the transfer is actually taking place.
Yeah.
Now we have taken some part of that is taken in the first quarter, as just mentioned, and then there will be this kind of cost also during the remaining quarters. If they will be classed as Items Affecting Comparability or not, I don't have the answer right now.
Then a follow-up question on question about annual savings. Let's see, of the SEK 300 million that you expect in annual savings from the second cost-saving program, could you please give us some more color on when do you expect this annual savings in terms of proportion when this will start to recognize in the financials? You mentioned like a major part in Q2. Also if you can give us, you mentioned that most of it's related to the U.K. region, but could you also give more of a high-level split, how much will be related to the Nordic, and if also the portfolio business units for already in 2023?
Yes. I'll give you a quick one. U.K., 50% of the saving, Nordic 45%, 5% portfolio business unit. That's the split. On the first part of the question, there, it is, we already had some positive effect already during the first quarter. Remember that we did some, we did a Q4 program also.
Yes.
That is starting to give effect already during the first quarter. What we announced now, the SEK 298 million that we took in the first quarter, that's gonna have effect starting in Q2 and Q3 and Q4. Then it's...
Tapering off.
Tapering off, exactly. After Q3, I would like to say.
All right. Also a follow-up question, if we relate to the transformation journey in the U.K.. I noticed that the gross margin is high in the U.K. during the quarter. It's still around about 43%. You removed this SEK 170 million in Items Affecting Comparability. Adjusted EBIT is still very low. Haven't you seen any, shouldn't be a better move from the cost from the first annual saving or cost reduction program? Or how do you think about that?
Two things. First of all, we see the gross margin is also related to the shift that we move away from low, lower margin products.
Yeah.
At some volume, of course. Moving from volume to value. We have been able to increase pricing, and higher average base price and have higher average order value. That's one effect that you see. The bigger cost savings from this program will not materialize yet because it was executed upon, so to speak, in the first quarter, but it will roll out. The program you relate to, some of that you see, but some of it was also investment in the market we did at the time, as we also communicated. We have more sales designers and those sorts of things. There's a shift on where we put our cost more front than the sales-oriented, less central administration related. That was the first step in that journey.
All right. Thank you. Yeah, I have three more questions. Just first of all, the investment in the Jönköping factory. You mentioned the building was already, the building is ready, but of the total remaining spend, how much is related then to the lease, the asset that you're expecting to sell, and how much is related to just tangible assets that you such as machinery and stuff? I think you mentioned that t he remaining part was SEK 500 million for land and building per Q4, and then SEK 1.5 billion left in tangible assets.
First of all, just to set. The factory building is close to ready. We have an administration building at not a huge cost that we will complete in the course of next year. That's one. The asset related is now is related to the building.
Around 85%.
Yeah.
I would say on the spend that we have set up for the building is spent. [audio distortion] , what's left, is the primary thing that is left is the administration building for the work and workers, etc. That's gonna be built in attachment to the site.
Okay.
The main part is that.
Was that a clear answer to your question?
Yes. Then I have some questions on when the factory so we see a decline in market and if volumes now decline and capacity utilization will be very low in the new factory. How do you expect to protect profitability in the Nordics? Perhaps also during the CMD you presented with EBITDA bridge contribution, potential volume growth. There was an ambition EBITDA that you presented. As we understood it, the volume growth would then be around 50% to the Nordic, the current state in the Nordic. Where do you see the 50% in volumes come from? Yeah, my two question.
Could you repeat that question, please? We're not sure.
Yeah. Just to start with, the first question is about volume. Is to see a volume decline, and given your new factory, which you estimate will have on two shifts, 300,000 kitchens that you could produce, we estimate that utilization will be quite low initially. If you could give us some color on how you will protect profitability in the Nordics given the low utilization rates. T hat first.
I'm not sure I understood completely, but I'll try my best to give two answers. One, in the current setup that we have today, we are continuously working with the volume related adaptation adjustments. If volume go down, we go down, so to speak, and adapt to that in terms of our capacity and all of that. That is what we're doing continuously in our current footprint. Those type of activities we have been conducting in the course of the quarter, and I expect or not expect, we will continue to do those type of activities and adjustments based on the S&OP plan that we have. In terms of the capacity for the new factory. It's designed for 2 shifts. If everything go...
If the market would suddenly surge and would triple or so on, we obviously have a lot of capacity to capture that growth. If the market is really, really compressed, the capacity, as we have conveyed a few times, is that we can fit all of the Nordic volume into that factory. Theoretically, so to speak, we can consolidate all the factories that we have into that factory.
All right. Okay. That's clear then. Thank you.
Okay. Thank you.
Thank you. As a reminder, it's star one one to ask a question. We will now take the next question. It comes from the line of Rasmus Engberg from SHB. Please go ahead. Your line is open.
Yes. Hi, guys. Can you hear me?
Yeah.
Yes. Very good. I was wondering about this working capital release. Where does it come from? Perhaps more importantly, what do you think about working capital for the full year? That's the first question.
Okay. You mean, for the first quarter, is that what you're talking about, Rasmus?
Yes, yes.
Yes. As I said, we have inventory reduction versus last year, and that's partly explained by, as I mentioned in a bit further as the Capital Markets Update that we have focused on to reducing inventory. On top of that one in the year-over-year comparison, we also had a very, very high with the same order intake last year that drove inventory up. This year it was lower than last year, we had a positive effect on that one. It's twofold. High order intake last year impacting the balances last year. In addition to that, we are focusing to get inventory down now when we have a softer market.
Mm-hmm.
On the accounts receivable, as I mentioned, it's primarily related to that we have lower sales. That means that we tie up less accounts receivable, and that's the contribution. On top of that one we have timing effect on accounts payable.
For the full year, what do you think?
Yeah. It's difficult considering the market circumstances and what's going on now. It will be quite tricky. Timing effect like we have, for example, for the accounts payable that might, you know, timing is that sometimes you need to pay your payables, right?
Right.
There's timing effect both last year and next year. It's a really, really tricky question to answer. Our focus will continue to be to closely monitor working capital. The inventory reduction should continue. We are tight, we are close and tight to our customer and their payment behavior, making sure we get paid on time. Of course, we always negotiate with our suppliers to get the best terms. We are doing what we can do on our side, try to contribute as good as possible working capital.
Is there any effect from lower input prices in the inventory or is that yet to come?
That has not yet been seen, no.
Okay.
As you mentioned, we have a big focus to go out and have serious discussions with our suppliers when it comes to raw material.
We see sequential decreases.
Yes. you don't really see that effect in.
Not here, not here, yeah.
Right. then you had a comment about the Nordic business, where you talked about a SEK 15 million effect, from I think you referred to inefficiencies or alternatively, is that what you meant?
Yes, correct. I think we mentioned that also during the fourth quarter call, we mentioned it.
Yes.
That's what I'm referring to. That's correct, Rasmus.
Are we sort of, you know, SEK 15 million isn't necessarily that much, but are we sort of? Is that mostly behind us now or is there still a legacy effect also in Q2 from inefficiencies you think?
It's improving. We have done a really good work during the first quarter and it's really coming down. We expect it to improve.
We are per today in a significantly better situation than we were or a quarter ago, supposedly. Very much better. There's still.
There will be still some money but it's, we are in a positive trend right now.
Absolutely.
Very good. That's all for me. Thank you.
Thank you, Rasmus.
Thank you. There are no further questions at this time. I would like to hand back over to Tobias Norrby for closing remarks.
Very good. Thank you very much. Hopefully we talk next time on the 20th of July when we report our second quarter numbers. Thank you for calling.
This concludes today's conference call. Thank you for participating. You may now disconnect.