Earnings Call: Q4 2020

Feb 4, 2021

Thank you, and welcome, everyone, calling into this presentation where we will give you some more details on our Q4 numbers that we already pre announced some 3 weeks ago. We will do it the usual way. We will start with an overview by our President and CEO, Mr. Jurgen Zinthorn. And then our CFO, Mr. Christophe Jurgenfeld, we'll dig into all of the financial details. And with that, I hand the word over to you. Jurgen? Thank you, Tobias. Good morning, everybody. I hope you're all healthy and safe in these strange times. And let me start before going into the highlights of the Q4, let me start by thanking everybody for the 2020 and all the hard work and All the difficulties and challenges and opportunities that we encountered in 2020. So thanks To customers, to employees, shareholders and all the other stakeholders for being there and doing all the work that we've done in the course of 2020. And On that note, it was very nice to see the strong end to the year with higher earnings, and those earnings were driven by the double digit organic growth in the Nordics and Central Europe, where however, the UK market still is in recovery. But again, it was nice to see the strong end of the year for our company. It was for the Q4, a 5% organic growth, reaching revenues of $3,450,000,000 for the group And the EBIT of SEK 295,000,000 compared to the SEK 214,000,000 of last year. Interest on a solid gross margin, which remained on par with last year and considering the circumstances, quite okay, gross margin, I must say. Through the year and continued for the Q4, we have had and had a good cash generation. And from the financial position that we're at now, we will have a dividend proposal of SEK 2 per share. So that was some high level financial numbers. Let's get into a little bit more on some activities and decisions that we've made in the course of the Q4. We had a formal decision on to build a new Nordic factory, which will be a highly automated one in Johan Crupping To Be Ready 2024. We've had good discussions with the unions come up with a plan for a transition program for employees and other things related to that. We are looking forward to implement and move along with. We're also obviously, continuing with the preparatory prep work and the preparations for the machinery and the building and all those things. We have now a solid project team in place taking care of that. So all in all, that progress is moving well along with our plans. And obviously, this decision make it easier to move along even further. There are still some formal permits, etcetera, pending. But all in all, our the progress is going along well along with our original plan. Obviously, a very exciting project, which We really look forward to conclude and create this opportunity for us to deliver even stronger lead times and quality products and all of that. Big milestone for us as a company. On the back of that or related to that, I should say, we also concluded and new long term financing and the long term financing was secured with the banks Nordea and Handelsbanken. Quite some work, but came to a really good conclusion, which strengthened us and puts a good headroom for us to maneuver now with the things that are coming with the new factory. And it's a revolving facility of total of SEK 6 sorry, of SEK 5,000,000,000. Another important step for us is that we put some new sustainability targets in place. The last couple of few years, we've laid more than that, but let's say that we've laid the ground, put our house in order, put the baseline in place, lots of good activities, such as having 100 percent renewal electricity in all our production units, that's one example. Those sorts of things, we've worked a lot. And now moving forward with even more offensive, if I may use that word, sustainability strategy and targets, we as the first step of that, we have as the 1st kitchen supplier, a climate target approved science based targets by approved by the science based target initiative, which is also obviously relating our targets to the Paris agreement. Hugely exciting and will continue to be an even more important pillar in our strategy, in our activities moving forward. New organization. We have talked about or we have conveyed on these calls slightly before, But I think I would like to take this opportunity that the organization announced in June, in effect from 1st September, is working. Even though difficult working circumstances where people, for the most part, on top level of working remotely and routines and all sorts of things where travel is very difficult unlimited access to being in office together, etcetera. But with that said, I think it's worked out really well. And moreover, the model that we've chosen, where we have the strong commercial regions taking strategic and tactical responsibilities for our business, region West and region North, fact or supported by a strong supply chain organization. It's coming into place. We have now not all, but for the most part on the top 2, 3 levels people in place. And the key message is Basically, that we have built a capability that we'll be able to deliver and run And drive the projects associated with our plan tomorrow together. So I'm very encouraged, By the way, how the organizational changes has come into play, and now people are starting to act more in that structure and working More together as things. Obviously, we have more to do, but it's a really good start for this organization. So those were some highlights from the Q4 in terms of, let's call it, activities and decisions. A few words on the market situation is and I think you will You will probably hear this being said multiple times in the course of this call, but that it is a good underlying demand. However, hampered by partially closed retail store network. And that relates obviously, for the most part, to the U. K, Denmark, Austria In Oslo, or I should say, even greater Oslo areas and parts of Norway. We have effect in obviously, in other countries as well. But the bigger impact or the more hampering impacts are related to those markets with more severe lockdowns, which moves us into the next slide, the Kitchen market trends for the Q4. The Nordic market is deemed to be higher than with previous year. Market growth in all countries but Finland. And this stay at home and home renovation, home improvement trend, we are there is a positive impact on us from that trend. U. K. Market is still in recovery, Again, emphasizing the underlying consumer demand remains good. However, there is a severe impact from the 2nd wave of lockdowns or restrictions. It is difficult for our customers to reach when the store network is closed, its retail network is closed. It's difficult for the customers to make the final steps. Even though we have really good digital journeys for our customers now. The final steps to come to conclusion and really make the purchase with a restricted store network makes very difficult. So again, emphasizing underlying demand is good, but it is challenging to come to closures for deals for the customers this quarter. Demand in Central Europe increased Due to some pent up demand following the first lockdowns and then also the stay at home trends, I must say Central Europe has done a really good Had a really good performance in the Q4, and it continues to be a good market situation for them. Again, specifically, Austria having more severe lockdowns, but also Netherlands being affected by it. Same message there. There is an underlying demand, and we find ways to reach customers. It's been difficult, but the performance is Schizophrenia. So there were some highlights on some financials, some activities and the overarching market trends. And with that, some further details on the financials. And Christopher, please. Thank you, Joon. So first of all, the high level financials that Joon has been presenting already. Organic growth of 5%, mainly driven by Nordics and Central Europe, whilst the UK was negative. Gross margin on par with last year, 37.7%. Again, Nordic and Central Europe, good operating performance, but U. K. Was declining somewhat, and I would shed some light on that. And then an EBIT of SEK 295,000,000 or 8.6 percent EBIT margin. Yes, some comments then on each market and segment. If we start with Denmark, on Page basics. Yes. There we go. Thank you. In Denmark, 29 Essentos sales. The strong market trend continues. And on top of that, we're gaining market share on the back of successful product launches and also the successful conversion of owned stores to franchise. And we have now also managed to convert some of our competitors' franchises into HTH, which we believe it's a talking of strength of the HTH and the business model. Unfortunately, and I will repeat capital to ask what Johan has been saying, the retail the Danish retail store network had to be temporarily closed in January on the back of the restrictions. And we're now only using the digital sales channel for retail sales, which will have some negative effects on the winter sales, but probably result in high demand for the spring campaign. In Sweden, then 11% of our sales. Our consumer campaign was considerably stronger than expected, and it's clearly so that the Marvelous style and the color palettes are trending right now. However, it is increasingly difficult to find capacity for the painted products. And we are working intensively in the supply chain to build more capacity and strengthen up that part of the business. Product sales in Sweden was flat in the period, which is more or less in line with our own expectations ahead of the quarter. Finland, 7% of sales was the only Nordic market with declining sales in the quarter on the back of the softer project market, although the retail sales was growing. And fortunately, we were allowed to keep all retail stores open, as we were in Sweden, by the way. We are not really concerned about the volume drop in Finland. We are instead working internally to get margins up to an acceptable level. And we have for a bit too long worked with some of our margins on this market compared to the other Nordic markets, and we will carry out changes to drive profitability before growth in Finland. Then Norway, 6%. It was very good to see the Norwegian sales coming back in the quarter after a very soft market throughout 2020. Double digit growth driven by strong project sales, but also fairly good retail campaign. And again then on the negative note, in Norway, we had to close all the retail stores in Greater Oslo with the same impact than previously alluded to. Netherlands in Austria, 6% and 4%, respectively. Very solid performance, strong growth on the back of pent up demand and also solid operating performance by our teams over there. And collectively now it represents 10% of our group sales. And I will give you some more light on that performance later on. U. K. Then on the right hand side here, we saw the demand coming back Q4, basically in all segments, except for the social housing and property development in London. And as we have said before, the Q4 is not strong season for retail. So the growth we had in this segment did not really significantly impact the profitability in the quarter. However, the quarter is very important for our trade business where we continue to grow and perform well. And we will, as we have said before, tool more resources into trade and make further changes to this proposition and products that go into this segment and are quite confident that we will continue to grow in these segments. Product sales in U. K. As we have said, continues to be very challenging and especially so in social housing. This segment represents about 1 fourth of our sales in U. K, where we actually are declining over 30% in the quarter. And of course, it's challenging. And we don't foresee that this market, the social housing market will come back anytime soon, slightly more optimistic about the pilot developers over in these things. I think we next slide, please. So a summary of the Nordic. Growth in total then 11%, performance driven by the strong retail sales in all countries. Gross margin improvements on the back also of the retail sales where we have higher average order value. Productivity was somewhat lower in the period, mainly driven by the effect of this capacity constraints in the painted products, but also driven by temporarily supply chain issues from our sub suppliers given the current situation. Currency headwind of SEK 10,000,000. But despite this, we come in at an EBIT of SEK 282,000,000 with a margin of 60%, which we considered to be a very solid result in the quarter. Summary of the U. K. Financials. Organic sales decline of 4%, and as I was saying then, mainly on the back of product sales. Gross margin erosion of 2 percentage points roughly, mainly driven by the factories that some half of the capacity running only in our manufacturing for the project market then burdened the gross margin quite heavily. EBIT of SEK 21,000,000. And as you can see, we've made a short notice here on the Brexit transition. It's running relatively smooth. And the only effect we can see so far is some increased cost for administration for the imports. But otherwise, the supply chain has been operating in operating normally, which is very good. We also have showed you this slide a couple of times before, which gives you the monthly development of sales in the U. K. And as you can see from September to November when the store network is open, we can pretty much fend off the heavy sales decline in project sales. However, and by the end of November, where we're forced to close some of the retail networks. And roughly for a few weeks, quickly bird of the top line the following month as we have 4 to 6 weeks lead time. And in this case, December was slightly softer than what we saw in October November. So even if we're optimistic about the underlying demand and the trend for home renovations. We are, of course, concerned about the when our retail stores go into full lockdown. Land Central Europe, fantastic growth driven by pent up demand, but also, as I said before, really solid performance as well to deliver to the demand and a strong operating leverage on the back of that, increased the gross margin. And again, very pleased about the SEK 62,000,000 EBIT result with 16.4% margin, so in line with Nordics even. Coming back to the cash flow, as you've mentioned, we have had strong cash flow throughout the year and generating on a year to date basis. Year to date basis, slightly north of SEK 1,400,000,000 well, last year or 2019, sorry, we did just short of SEK 1,000,000,000. I would say that we have had very good cash control in all our business units, keeping both cost and investments quite low throughout the year. However, we have also been helped by postponed tax and VAT payments of roughly SEK 300,000,000, which we then have been able to move from the year 2020 into 2021. And we will see some negative effects cash flow coming in from that up until summer of roughly the same amount then. As you can see from the slide here, we have had healthy cash flow also in Q4, basically the same type of trend. And this has led us to be a very solid company in terms of financials and continue to be a solid company in terms of financials. By the year end, we're debt free. And if you exclude the leasing and personal liabilities that we have, and we're actually in a net cash decision right now, which is very good. And it also enables the board to proposed dividend of DKK 2 per share. So Eun, back to you. Yes. To wrap this call up with a brief summary. As you heard, there have been a strong 4th quarter driven by organic growth in Nordic and Central. And the U. K. Market is now back to pre pandemic levels, predominantly driven by the project businesses And now the lockdowns, as Christophe was alluding to. The cash generation, however, is really good and at an all time low debt level. Our new factory investment is progressing according to plan. And on the back of that, we have a new long term funding secured. And as just said, SEK2 per share is the proposal. 1 of the first sentences early on in this call and finishing off this call with this statement is that we do have good underlying demand. Nordic expecting a slight growth. However, there is uncertainty in the retail segment due store closures as we see in Denmark and Norway in the Nordics predominantly. The UK The important U. K. Winter campaign, highly impacted by the temporary retail store closures, and the project business is still lagging. The lockdown effects in the U. K. Make it challenging to reach black numbers during the Q1 this year. But we do see a strong demand, the underlying demand. So we're looking forward to a good spring campaign. Results. Thank you, everybody, and we are ready for Q and A. Yes, let's open up for questions please, operator. Thank you. Our first question comes from the line of Adela Dhanian from Handelsbanken. Please go ahead. Thank you very much. Hi, thank you for taking my questions. My first question relates to the UK and your outlook on when the project market will Presumed to pre pandemic levels. I've followed some comments that have been published by the U. K. Government, and it seems like they're really Interested in getting this sector to continue to operate during the lockdown. And I believe you've also previously stated that you're Expecting to resume back to normal in the first half of twenty twenty one. So could you please give us an update on what you're expecting here and if that Your earlier outlook has changed at all given the current situation? Sure. No, we still have this expectation of the market to be fully recovered by the first half of this year. We're quite late into the project as well. Don't forget that. So we're one of the lab products that comes into the homes. However, it's mainly private developers that we consider to be fully back. When it comes to social housing, we believe it will take another 6 months before that has recuperated and back to pre pandemic levels, so to say. Social housing will take longer. And the reason for that is that it's difficult To get workers into the actual buildings, correct? Precisely. But then again, the U. K. Government have been quite quick with the vaccinations. So if we can see that continue and the vaccination schemes carry on in the same level, then hopefully, we're able to get into the social housing apartments quicker than our estimates are right now. Okay, great. And then on the stores being closed in some of your markets, you mentioned earlier that it's typical to get to the final steps When customers are placing orders using your digital channels. So how are you maneuvering this situation? And then also, what are you thinking about Physical store network going forward. Let's say, if there's a shift in customer behavior longer term of going from offline to online. Okay. Now we obviously try to encourage the customers to make that decision. We're sending samples, for example, for them to touch and feel And get that experience as well. And step by step, people are getting more accustomed to make a fully digital journey as well. But this type of purchase, I think that will take a longer time before it will be completely digital for all the customers. We're also trying to Find a tradesman or something that can help out also for the retail customer, so to speak. So that's what we're trying to do. Yes. The long term people's behavior will change. That's what we believe as well. And as a consequence, we are Enforcing and continue to make investments in the digital experience for people to do that the way things are going. Exact effect on our store network, which I heard your question was. It's too early to tell in more detail, But it will have some kind of effect going forward in a couple of years multiple years perspective. Okay. So we should expect To see some more investments being made in the digital space to enhance the experience for your customers, correct? Yes. All right. And then finally, could you give us an update on the competitive landscape and also potential M and A. You really have been able to manage good cash control That you've said earlier. So what's your outlook and expectations in that space? For M and A? For M and A, yes, and then also on the competitive landscape. Well, 1st and foremost, and I think that goes for everybody, We've been our minds being on managing the situation in the course of 2020. And I think everybody has been, Let's call it busy doing that and it's been difficult with It's our mind has been full of that, if I put it that way. There are some interesting targets in terms of M and A, But I'm not expecting to make one deal after the other in the next couple of We have big projects to do, such as the big new factory for example. Concerning the competitive landscape, we don't want to comment on the competition as such. Again, we as we were alluding to in the beginning, we have strong underlying retail markets. And we work with the same assumptions on the store networks as our competitors do. So that's what we have to say about the competition at this stage. All right. Great. Thank you, guys. Thank you. Thank you. Our next question comes from the line of Cedric Moritz from Pareto Securities. Please go ahead. Thank you, operator, and good morning, everyone. First of all, I was hoping you could perhaps help us Size up the temporary cost avoidance that you managed to get through in 2020? And then also how much of that could be expected to come back this year? Well, first of all, we have the furlough schemes that we've been a part of. And mainly that goes for U. K. When we entirely close the store network. That's, of course, something that will not come back unless we put cyclone on furlough for whatever reason. Then there's been a lot of cost out activities throughout the year. And it's or I wouldn't want to put a number on it. Of course, when we see growth to the extent that we have in the Nordics and Central Europe, there will be some cost coming back into the company. Okay. Fair enough. And then I was hoping also you could tell us something about both the current pricing environment that you're seeing across your major markets as well as what you expect to be able to realize here in 2021. Yes. Well, again, on the retail side, we can see that the average order values go up somewhat due to a bit more complex products. And as we have said many times before, there's a huge pressure on retail prices in the U. K, a little bit less so trend in terms of average order values currently. Okay. And how does that size up against any potential So there are no headwinds that you might be facing with the material prices perhaps inflating somewhat and other headwinds that you might be seeing related to currencies perhaps. Yes. So we have moved during the year 2020, we moved from tailwind in direct material to some headwind in that. And it's driven by higher prices in sheet material than the steel prices that we use for our hinges in the products. So we can see prices go up somewhat. And it's important that we carry on these price increases out to the end consumers as well. That's the way it has to be. And do you think you could offset those headwinds using price? Sorry, can you say that question offset? Okay. Thank you very much. Thank you. Our next question comes from the line of Julius Rupelli From SEB. Please go ahead. Hi, guys. Good morning and thanks for taking my question. Maybe the first question relating to the supply chain challenges you mentioned in the call. Anything you can elaborate here? And which parts of the Slide 10 are most affected at the moment? And how do you see this or what do you expect from 2021 In regards of this. What we expect from what was the last From the supply chain development. So we've for the most part, our supply chain, if you talk about the Nordics, are running quite well Really well even, where we have the challenge is the high demand for painted product, Which has we run into capacity constraints. That's the short answer. We will make some short term investments in that to fend off the constraints, but it will continue to hamper us for a while until that investment has been put in place. We run well. It's more uncertainties whether lockdowns will have an impact or not. What is the actual operations, Ospart is working on. And there are some categories in our supplier base that are more difficult than others. And we don't really want to go into which parts that are in this call. Okay. Fair enough. Thanks. Then maybe a question on the factory investment that you have been highlighting here during the past quarters. Any time line for the investments, the SEK 2,000,000,000 and SEK 1,500,000,000 you mentioned also in the Also in the report, Nelp. So there's few other things or more other things, we're more than happy to share at the aftermarket's day. Give you more flavors to some of these topics. All right. Sure. Thanks. That's all for me. Thank you. Our next question comes from the line of Victor Hansen from Nordea. Please go ahead. Thank you, operator, and thank you for taking my question. I hope you can hear me, right? Yes. We can. Yes. Wonderful, wonderful. I am wondering whether you could break down the organic growth in the Nordics by price and volume as you point to in the report, please. I don't want to break down it in price and volume. I'm sorry. Okay. Yes. Okay. Fair enough. Regarding costs in the UK? What I can say, so you don't get me wrong either, is that it's both volume and price growth in the quarter. So It's not one or the other. We are growing both volume and price. Yes. Okay. Regarding cost savings in the UK, you've mentioned earlier in previous reports And that you are revamping the manufacturing footprint. I'm wondering if you could provide some flavor on the current run rate in the UK of the cost savings Yes. We the main thing we have done throughout second half of the year is to consolidate the Rixson Way range on the K20 platform so that we can manufacture for social housing in also in our big factory in Darlington. And it's been a good moment to make those changes now. And we have drastically reduced also the range complexity by doing it. I would have given you figures if I knew when social housing was coming back. So since we are a bit worried about the whole social housing market. We're not sure how quickly we can get these effects back in terms of cost savings. So I'm very happy to come back to that a bit later in the year when we have seen the market stabilize. Yes. Okay. And regarding social housing then, is it reasonable to expect quite severe pent up demand within this in the UK in a similar manner as we have seen in Central Europe and all the positive effects there. And do you have the capacity to deliver on this once it returns? Actually, the way we read it is that there's a demand for the last 5 years in social housing. So there's a lot to be done in the social housing segment in U. K. It's maybe I shouldn't be the one to judge it, but it's not been it's been quite slow from the U. K. Government to start these refurbishing programs. And we still think that it's a huge market. However, still lagging them and again, a big pent up demand. Okay. Thank you very much. That's all for me. Thank you. Our next Question comes from the line of Adela Dhanian from Handelsbanken. Please go ahead. Hi. Yes. I just have a follow-up question on the social Housing market question. Social housing is still less than 5% of total sales in the UK, correct? Yes, depending on when you look at it, yes. Otherwise, I would say 10%. Of U. K. Sales, right? Yes, of U. K. Sales. Yes. Thank you. Okay. Thank you very much. There are no further questions at this I'll pass back to the speakers for closing comments. Well, thank you. Thank you very much, everyone, for calling in. And we will, in due course, send out some invitation to an upcoming Capital Markets Day that we will arrange for later this spring. And it will, of course, be in a digital format. Otherwise, next report will be on April 28 for the Q1 numbers. So that's it from our side. Thank you and have a nice day.