Earnings Call: Q1 2021

Apr 28, 2021

And good afternoon, everyone, and thank you for calling in to this Novia Q1 results presentation. Today, we will start with an overview by our President and CEO, Mr. Jurgen Sinton and then Our CFO, Mr. Christoph Jungfeld, who will dig into all of the financial details. And with that, I hand over to you, Joon. Good afternoon, everybody, and again, welcome to this call. Some highlights from this Q1. Starting off, I must say that this is quite a good quarter. I think this provides a really good start to here. And we are, in that sense, I think, in a good place to continue to propel company for the rest of the year. So we had growth and good results specifically in the Nordics, little from Central Europe. The UK was impacted by the retail lockdowns having Specifically, an impact on the important winter sales the winter sales campaign. And the project The market remain in recovery, rendering a minus 8% growth for this Q1. But as you know, since then, the U. K. Has opened up since 12th of April. All in all, that render is 3% organic growth for the group and an EBIT of SEK 196,000,000 compared to SEK 134,000,000 for last year. Operating cash flow, minus €69,000,000 compared to 2.12,000,000 and the net debt decreased to 2.93,000,000. Apart from doing a lot of business, running our factories, selling nice kitchens and all of that, We also had a Capital Markets Day in the Q1, which we and the management team really enjoyed. We were not only excited Well, we were excited and glad to share with, not least you guys listening into this call, about our plans for Future, we also discussed or highlighted the financial targets. We were talking about the Tomorrow Together strategy with its headlines growth, structural efficiency, people engagement with sustainability and design at heart. If we look at the Kitchen market development last quarter, we see in the Nordics a consumer demand benefiting from the stay at home trend, Higher house prices and better consumer confidence, and the business to business was supported by a high level of newbuild projects except for in Finland. In short, where we are able to operate and be almost open, I would say not so restricted. We are benefiting from the stay at home trend. We are we have products in That really covered that area, that growth area really well. In the UK, the project market is still in recovery, And social housing maintenance are delayed due to the pandemic, but the underlying consumer demand is good, however, negatively impacted from the retail lockdown that was until 2 weeks ago, April Well, we've seen the consumer demand through our digital channels and that we have with customers. But again, stating that the Q1 was impacted by the winter Sales, lockdown during the weeks of sales period in time. And we're looking forward to have more open stores to Following the lockdowns and here again the stay at home trend. Housing demand Netherlands supports new construction and project sales. All in all, Central Europe had a really good growth of 20% And doing well. Specifically, in Austria, we've had a higher demand than we've before, which is good, also showing the management team doing a really good job in Central Europe as well. So that was a little bit about the market. Going into some comments on the Tomorrow Together strategy and the priorities, Looking at growth, we see we can now clearly see inroads in the trade segment in the UK. We are growing there, which is good. And the trade segment has not been as impacted as the retail segment has been in the U. K, and that's also something We can see and track. In terms of revitalized consumer retail, I think It's also clear that the refurbishment that we've done in Denmark, the upgrading of of stores have had a positive impact on our sales. And another positive example is the Jood Nara, Jood Nara Parier campaign that we've had for Marvell, where both the sales campaign and the It's also encouraging to continue in developing products and concepts in this area. Moving to the structural efficiency. We are working on the product platform alignment, which we call K2020 in the having a dimensional platform that will streamline Our product assortment moving well according to plan. And the same goes then for the manufacturing footprint transformation where the big thing there is what internally we call the A2 project, which is the new factory in Jan It moves that project is progressing according to plan. We've reached the phase now for the second and the third quarter of this year. We're going to start purchasing machinery, but Also purchasing or the building. So it's moving Well in that area. In terms of people engagement, we We have put an effort into further create value in the Novia. Let's call it the Novia brand. We're not operating the market at Novia and meeting customers under the name of Novia, but we do it in employee branding and those sorts of But also in terms of pride and have everybody working for the company of Novia, when which will be an asset and important when we are to execute and make progress in all these big Strategic initiatives that we have. We have worked on things like core values and purpose and those sorts of things, which have been very Well received and appreciated. And in terms of ensuring and winning capabilities, we've taken in Some new competencies as well, and now we are filling up. And our management teams, which is reflecting the organization that we put in place for the strategy execution. So all in all, we're now Well positioned and have good people sitting around the table in the various management teams. At the heart, we talked about sustainability design leadership. Already in the previous Paul, we talked about that we have 5 bed targets approved now, which is really great in the dimension of looking into the new factory in We are not only scrutinizing, but we are making sure and are keen to make really good This is in terms of with the sustainability perspective in mind. And then on the design leadership ambition, I think we can really see the first bigger things coming out of that ambition. I was Just mentioning the Urnara Fariel campaign that we've been running in the course of this year. We Now or very recently launched something called Ton etool, which is also well received by consumers. And there will be lots more exciting stuff coming out here, new Like something we call Nordic nature. So coming to a store near you soon and go and have a look at It's going to be very beautiful. I think it's really nice to see how both the sustainability dimension To further work on that one, but also the design and concept dimension is now coming across in the company in a more material And distinct way. Lots of hard work for a long time is starting to sure, it's starting to pay off, but also much more to come. That was a few things to mention with regards to our Tomorrow Together strategy and our priorities. So all in all then, concluding on the group level for the We did have 9% growth in the Nordics, 20% in Central Europe, 8% decline in the UK, rendering And organic net sales increase of 3%, that means that our net sales went rendered up to be SEK 3.37 SEK 3,000,000,000. We had a gross margin of 38%, slight increase and an EBIT of SEK 196,000,000 And an improvement driven by the Nordics and Central Europe and rendering at a 5.8% Margin. We're in a strong financial position, meaning a net cash position, excluding the RS 16. So all in all, also a solid and strong balance sheet. So with that highlight for the Q1, I hand over to Christophe that will take you through more of the Thank you, Joon. Thank you. So first, let's look at the breakdown Sales per market, if we double click on U. K, it represents now 35% of sales. We have retail at 43%, trade at 34% product at 23%. In retail, it has been a weak start of the year with sales decline of about 15% on the back of closed store network, order intake in the very same period was down 20%. So it does prove that it takes a little bit longer to build up the order books again. And we believe that it will take yet another quarter before we're back and exceed the 20 2019 sales levels when it comes to the retail segment. Having said that, trade, which represents onethree of the UK business, is is compensating that to some extent with actually much improved order intake. And with that pattern Continuing, we will see growing order books also for the Q2 of this year. The project market, as Joao was alluding to has been very soft, especially in the social housing market and in the London property development market. And we do not expect any major changes in this segment until the second half of the year. As you remember, we closed all the manufacturing sites in Q2 2020. And for that reason, we will, of course, have a very high growth number when we enter Q2. However, we don't expect as of Q2 to reach the same sales levels as we have had back in 2019 as of yet. Then looking at the Nordics, all in all, representing 54 of the product launches that Jorgen was mentioning. We had single digit growth in retail in Finland and Norway, which we are also quite pleased with, especially given that in Norway, we have had a store close store network that was closed for a period of time in the Oslo and surrounding areas. Again, we believe the concepts have contributed a lot to the growth in Sweden and Denmark. And for that very reason, we also believe that we take market shares now in retail. Of course, the retail market was helped by the strong home refurbishment Product sales was flattish across Sweden and Norway. However, growing in Denmark and contracting in Finland has been the pattern the last couple of quarters. Looking at Central Europe, we had another strong quarter then in Central Europe. Austria especially had a strong year on year growth due to last year's temporary closure of the factory and also a strong underlying market, which is, we believe, quite similar to the Nordic pattern when it comes to the market characteristics as as of now. Also, the Netherlands continued to perform well on the back of the improved private development market, whereas the social housing market in Holland is somewhat soft. And Central Europe together now is 11% of group Then just to give some further highlights on the Nordics. The growth rate came in at 9%, driven then foremost by the retail across the entire region, but also project sales in Denmark. Again, good performance from new product concept, which also helps to in operational leverage and increasing our Margins, as you can see, we have grown margins by a percentage point roughly. Solid performance also in supply chain, although we have some capacity constraints in areas like customized painting. We have talked about that before and that trend continues. In Q2 and Q3, we will do investments in this area in some of our major factories in order to cater for the higher demand and especially then of customized products, which in a way is a good trend for our business. Currency also contributed positively this quarter by SEK 20,000,000, mainly on the back of a stronger Swedish krona again compared to the euro. All in all, an EBIT of SEK 249,000,000 with an EBIT margin of 13.6%, which we consider to be a good operating performance as well. Then if we turn the page to UK, and sorry for repeating a little bit here, but the negative 8% is then a result of the retail network that has been closed throughout the majority of the period, compensating to some extent by trade, but again, a very soft project market. Due to the volume decline, we have lost some gross Margin, we also have the our factory, which manufactured to the social Housing market standing, but completely still, but very little to do, and which is burden our gross margin by roughly a percentage point. In terms of EBIT, negative SEK 47,000,000 with a negative EBIT margin there. The retail lockdown has ended as of April 12. And of course, we will see a completely different pattern now going forward for the U. K. Business. And we should definitely be coming back to black numbers in from Q2 and onwards. Central Europe then, The growth 20% has led also to a good volume performance, of course, and productivity improvements, which have supported a strong gross margin of almost 32%, which It's totally very good for this region and an EBIT of SEK 37,000,000 with 10.8 percent EBIT margin. If we then look at the financial position, Operating cash flow of negative roughly SEK 70,000,000, quite a bit below last year. This is mainly related to timing of accounts payables given the various peculiar situation we were facing in March last year. So we don't see that as anything else. Then the timing There has been some postponed VAT and tax payments, which we have conducted now in Q1. Apart from that, it looks like solid cash flow as well. And you can see from the financial net debt, which means our borrowing net pension and interest bearing assets, which is SEK 300,000,000 And if you back out also the pensions on that, we're actually cash positive, which is great given the good initiatives we have now going forward. So leverage of about 6% only. Then next slide, please. So we added a slide that some of you might remember from our Capital Markets Day, where we tried to shed some light on our direct material purchases. And that's because of the last a lot of communication and questions on On this topic concerning the inflationary pressure on direct interior prices, basically, we have a total direct interior spend in the group of SEK 5,000,000,000 of which sheet material where we have the highest inflationary represents 17%. There is also price impact on the Appliances business, however, the appliances is an instant price going out to the our customers and consumers whilst the sheet material go into our production. But as we have stated before, it's very important that we carry on this on cost that we will see in materials to our consumers via the franchisees and dealer and construction company networks that we So that is what we expect from this. We can, as of yet, not give and the details on the eventual price increases that we will see in sheet material, but we will have to come back on that topic in the Q2 report when we know a little bit more. But it's clearly so that there will be upward pressure on that one. And with those words, I hand over to you again, Joon, on the financial targets. Yes. As we described and Presented at the Capital Markets Day, we did some changes on the financial targets to even better Reflect our way going forward. In terms of growth, average organic growth target to 3% to 5% per year, more emphasizing On the organic growth. Profitability, operating margin to be greater than 10% over the business 2nd, it's unchanged. The capital structure in terms of having leverage instead, defined as net debt over And that shall be below or beneath 2.5 times before we have netted to equity. And then the dividend policy, See that the dividend shall comprise at least 40% or a minimum of 40% of net profit after tax and before we The spread or ratio. So those are the financial targets. Then moving in then to a brief summary here at the end of our presentation for this call before the Q and A. As I started out and I think you could hear also from Christophe outlining The sales and the financial performance, I think this is a solid start to the year. Markets free from The direct corona restrictions following the reopening, so to speak, Open Doors of the U. K. April 12, which is good. But with that said, as everybody understands, Living in the pandemic situation, there is still a high degree of uncertainty. As Christophe just mentioned, there is a direct material inflation and there is a direct material pressure on us. We are working on to mitigate that by having higher average order values. There is a potential direct The availability risk because of the high activity in the furniture industry also that's on the back of the stay at HomeTrend. We have indicators That tells us that the Nordics and Central Europe points towards a continued good underlying demand And also UK market continues its recovery. So with that summary, thank very much for listening, and I hand over to the others. Thank you. And operator, please open up for questions. Thank Our first question comes from the line of Victor Hansen from Nordea. Please go ahead. Your line is open. Thank you, moderator. And hi. My first question, could you please add some flavor on what you are seeing in the UK now in April? Are you able to convert digital bookings into sales? Yes. We are. Okay. So It's been just to add to Jorg's comment there. It's been only 2 weeks into the reopening. It's a little bit too early to say. But to Jens' point, we can convert as we expected. But again, we need some more time to to fully validate the situation over there. Okay. Understood. And thanks for the extra flavor. How has your sales volumes been affected by the lockdowns in Denmark and Norway? Do you expect there to be any pent up demand here perhaps? Some effect, I'm sure, let's call it, on the margin as such and in some segments. But all in all, But all in all, we don't expect it to be a rush to have more kitchens. I think we've had a solid Underlying demand that also have been translated into a solid order book. Yes. Our belief is that the lockdown has been a little bit more strict in Norway. So the Danes have been able to operate not normally, but close to normal. No, that's to your point. No, we don't expect a big rush in new demand because of that. But we have a good Yes, good demand. Okay. Fair enough. And could you please tell us how you managed to mitigate the sales decline to just 8% in the UK, in spite of the heavy lockdowns, which impacted several of your segments. How much did your UK trade segment grow, for instance? We don't want to shed light exactly on the trade segment, but it's clearly so that the efforts that we have done in that segment is bearing fruit, so to say. But it's also a more positive underlying in market, you have to remember also that the Click and Collect setup was possible to run over this period of So it was just the retail stores that were fully closed. You could still use the trade back door. Now we only have trade backdoors in 3 percent to about 75% of our store network. So those were still able to operate, again, on a click and collect basis. Okay. Understood. And a final question, please. Could you shed some light on how much of your organic growth Can be explained by volume and price increases, respectively, please? No, we don't want to go into details on that. But there's both components in it. Okay. Thank you very much. That's all for me. Thank you. Thank you. Our next question comes from the line of Adela Dasha from Handelsbanken. Please go ahead. Your line is open. Thank you. Hello, everyone. I want to firstly just congratulate you on a very solid report despite challenges in the UK, And then on to my questions. Firstly, actually relates to trading in the U. Okay. And at least I'm convinced that there's a lot of pent up demand from the first and second wave and then also Increased demand due to underlying market conditions even in this market. So how do you view the production capacity in the coming quarters? Is it sufficient enough to deliver on the demand and cater to all your customers? To start with, I deem our that we will have capacity to cater for the demand. It's also If we take the doors were open 12 April, but it wasn't that everybody was just dashing, running into the kitchen stores And converting all the digital experiences we've had into concrete orders. What we see is an Increase week by week, increase in footfall and people coming into stores and converting as such. But it's not going to Like 2 weeks from now, we're going to have full factories by no means. So it's going to be gradual increase of deliveries in the course of Q2 and running into the Q3 for the business that we have ongoing in various stages in the sales funnel, That's going to be a gradual more of a gradual ramp up than a fixed peak. So we deem the capacity as we look at Positively, I'm sure we're going to have lots to do, but we don't see that as the biggest risk. It's more what we mentioned, The pressure on direct material and availability rather than the capacity in the factories. Okay. But are you seeing the The underlying market trends in the UK that you are seeing in Central Europe and the Nordic region just with the Consumers that you're having discussions with on the digital side? I think there's 2 trends. One is that we're doing a better job today in trade than we did historically, so to speak, which we Benefit from that. And then we have had good interactions with customers in the digital space since some time, and that's That's going to gradually convert into business in a positive fashion, but not from one day to the next. Massive. And to reiterate what Jorg said, with only having 2 weeks open, it's We love our products and our business, but that's not the first thing that came top of mind for Some of the customers. So we see the gradual increase now coming in. So it's really too early to say. It is too early to say to what magnitude That will continue, yes, get in. I think it's fair to also add to that. I mean, we've been saying all along The underlying or the early indicators are all speaking positively to the to our business I think the stay at home trend positive effect is similar in all the markets that we're where we operate. And then it kind of materializes in a slightly different fashion depending on which country we're talking on. But the underlying macro trend, stay It's pretty much the same. All right. Makes sense. And then on the inflationary Pressures that you're seeing on direct material prices, do you expect there obviously, there probably will be a lag until you're able to pass those costs Over to the end customer. So do you expect to see some negative effects on the margins in the coming quarters due to this? As of now, we don't expect that. We think we will be able to cater for the inflationary costs. Okay. And maybe a follow-up on that. Historically, when These type of things have happened. How fast have you been able to pass the cost over to end customer? I think historically, we've been quite good at it. So there's some lag absolutely in certain areas. But historically, we've been All right. That's all for me. Thank you. Thank you. Our next question comes from the line of Matthias Hauber from BNP. Please go ahead. Your line is open. Hi, thank you. You mentioned briefly making some investments in your factories in the Nordics, I think. Could you elaborate a bit on this and what that mean in terms of cash outflow for the rest of the year? Yes. It won't nudge the CapEx budget, the underlying CapEx budget that we have anyhow, I mean, the big ticket item you will see come in later on in the year is the investment in Johan Shopping. This is rather to put the flavor on the fact that we are investing in some of these capabilities that we need right now, which is painting, which is customized type of products. And again, investing in an area where we believe already that we are quite good compared to the rest of the market. So it won't be a big change in the underlying CapEx structure, so to say. Great. And I heard your comment there that you don't believe Q2 sales in the UK to be able to reach 2019 levels, I think that sounds reasonable. I'm just curious if you feel differently about the second half If that's a possible outcome or if that's still sort of far out of reach? Positive outcome to reach 2019, was that the question for the second half? Yes. For H2, yes. I think that would I don't think I'm too bashful to say that that's probable. Good. That's all for me. Thank you. Thank you. Our next question comes from the line of Frederic Mogar from Pareto Securities. Please go ahead. Your line is open. Thank you, operator. Good morning, everyone. First off, just a follow-up on the previous questions on raw materials. Just briefly, if I understand it correctly that you have been seeing some inflation already in Q1, but that you already now started offsetting that with prices? Is there a net negative impact in the Q1 numbers from cost inflation? We will see We have seen some impact in Q1, but quite little. It will mainly be from now onwards beginning of end of Q1, beginning of Q2 and onwards. Okay. That's helpful. Then just when it comes to the discretionary spend, clearly, you're investing in the new product concepts and so on. But at the same time, I guess, you made some significant reductions when it comes to discretionary spending last year. Could you just tell us something about where you think you're running at? Is this the current cost level in terms of discretionary spending, marketing and so on sort of normalized? Or do you still think you have some catch up to do from the 2020 cuts? Well, it's clearly so that to cater for the growth that we have in the Nordics, we have to take back some of the resources that we had back in 2020 before the corona crisis hit. So that is coming back. But meanwhile, we have also made some cost adjustments in all parts of the group. And on a run rate basis, I think we're net better off as of now. But again, it is a little bit tricky to cater for the growth here as well. So we will need to increase it in certain areas. And for example, the Nordics, Denmark sales in Denmark sales and possibly also in in U. K. Eventually in trade. Okay. And that's related also to marketing and Product development and so on and not just sort of Yes. And if we don't see With all these great initiatives we do in design, sustainability, etcetera, I mean, that is resources that we are or that is initiatives that we're prioritizing, we're not adding. So there are some other things that we'll have to give and that we stop to reallocate to this area. So we don't expect our costs to increase on the back of those on that agenda. Okay. Thank you. It's more the market and sales related in that sense, if there's any cost increases. Yes. And the final question, you mentioned that you're Indicators in the Nordics and Central Europe pointing towards good underlying demand. Just curious if you could elaborate on what those indicators are and how you view them? So again, it's we see the early details in terms of web traffic, Design digital design appointments, footfall where we have had the chance to keep open and other things as well. So I think just to mention those 3. Okay. It sounds probably Clearly, coming back to that again, I mean, our customers are much more active today. They have much more Digital interaction with our customers today than 2 years ago. Yes. Sure. Thank you very much. Thank you. Our next question comes from the line of Andreas Stobbe from Arctic Asset Management. Please go ahead. Your line is open. Yes. Hi, thanks for taking my questions. I think I got answered on the market question. 2 other Thanks. First, were there any full payments in the Q1 of this year? Any what? Furlough. Can you repeat? Furlough, okay. Yes. Very little, Very little in UK in social housing. Okay, good. And then are you being hit By delays in the value chain and more specifically within white goods, as I hear there are a lot of people telling that it's a lot of delays and problems with that? It has in all fairness, the players in the white goods area have had Big demands and have had difficulties in supply. So we have faced challenges as well in this area to get On the white goods that we need. And basically, we are still selling the product and retrofitting Whenever we are able to get the machine with the support of the supplier, I should add. Yes. In agreement with it, yes. Okay. Yes. So it means that you face some additional cost, but that a white good The supplier takes most of that cost? Yes. Yes. Okay. And the situation, is it getting worse or better? In our particular case, we had one supplier that was very difficult That has improved. The other supplier now has worsened a little bit, but we are in a better situation now than we were A month back. Okay. Thank you. Yes. Thank you. Thank you. Our next question comes from the line of Julius Rapley from SEB. Please go ahead. Your line is open. Hi, guys. It's Julius from SEB. Thanks for taking my question. Just one follow-up on the raw material prices. And historically, you've been Quite good in passing on the raw material prices in the retail affair. My question relates The project markets and how dynamic are you with pricing in the project markets when you sell to large construction companies And like to those? Thank you. Yes. And we can't really go into details with the contractual arrangements and so on on that. But it's It's clearly so that retail is easier from this perspective or I should say faster from that perspective. And there could be a little bit of lag when it to the construction companies or larger customers. But again, historically, And they also know it. I mean, they buy these materials themselves in other for housing buildings, etcetera. So they know the underlying pressure as well. So and they committed as well to pass it on to the consumer the end of the day, that's how it goes. All right, perfect. That's all from my side. Thanks. Thank you. We have no more questions from the line. I will hand it back to our speakers. Okay. Well then, that's it from our Thank you, everyone, for calling, and welcome back on the 19th July for the half year numbers. Thank you.