U.S. Markets closed

Edited Transcript of NOBI.ST earnings conference call or presentation 4-Feb-20 9:00am GMT

Q4 2019 Nobia AB Earnings Call

Stockholm Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Nobia AB earnings conference call or presentation Tuesday, February 4, 2020 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jon Sintorn

Nobia AB (publ) - President & CEO

* Kristoffer Ljungfelt

Nobia AB (publ) - CFO

* Tobias Norrby

Nobia AB (publ) - Head of IR

================================================================================

Conference Call Participants

================================================================================

* Adela Dashian

Handelsbanken Capital Markets AB, Research Division - Analyst

* Carl Ragnerstam

Nordea Markets, Research Division - Analyst

* Christen David Hjorth

Numis Securities Limited, Research Division - Analyst

* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Mattias Holmberg

DNB Markets, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Tobias Norrby, Nobia AB (publ) - Head of IR [1]

--------------------------------------------------------------------------------

Good morning, everyone, and welcome to this presentation of Nobia's Fourth Quarter 2019 Results. I'm Tobias Norrby, Head of Investor Relations. We will follow the usual format today and start off with a short presentation by our CEO, Mr. Jon Sintorn; and our CFO, Mr. Kristoffer Ljungfelt, and then we will open up for a Q&A session.

With that, I hand the word over to you, Jon.

--------------------------------------------------------------------------------

Jon Sintorn, Nobia AB (publ) - President & CEO [2]

--------------------------------------------------------------------------------

Thank you. Hello, everybody. I am happy to share some highlights for the fourth quarter of '19. So our income and margin was on par with prior year's fourth quarter, and that is during a continued market volatility and good to see that we had margin improvements in the Nordics and organic revenue growth in the U.K. on the back of our trade efforts.

We've taken some significantly important strategic steps and probably the biggest one in a very long time was obviously the fantastic announcement of our SEK 2 billion investment in automation and machinery for a new factory in Sweden. We've also taken some strategic steps in terms of continuing the rollout of our enhanced U.K. trade proposition. And we've done some changes or significant changes in the U.K. supply chain.

Last but not least on this slide is that we are proposing a dividend, staying on the same level as last year, amounting to SEK 4 per share, which corresponds to an 83% payout ratio.

Looking into the Nobia Group's quarter 4 performance. We can see that organic sales declined by 2%, but our EBIT was on par to last year considering the nonrecurring items. We had continued growth in the U.K. despite some difficult market conditions, and that's predominantly before the election that was held in December and again, on the back of our trade -- predominantly on the back of our trade efforts. We had negative growth in the Nordic project sales, predominantly in Finland, but also Norway, where -- but Denmark is continuing to perform well, and that market is performing well.

We have higher reported EBIT on the back of margin improvements in the Nordics, and then, as you know, our quarter was impacted by cost for the investments in our strategic initiatives, such as manufacturing footprint program, which is the great investment in Sweden, but also some investments in the trade efforts that we're doing in the U.K. And last year was impacted by some nonrecurring cost-out activities.

As far as the market trends, slightly down is what we've seen in the U.K. market. Our retail and construction activity was impacted by their political uncertainties and the Brexit that we've spoken about quite a lot in this forum as well, impacting consumer confidence and still fierce competition in terms of price. That was predominantly before the election that we had in December. If anything, slightly more positive sentiment today than during last year even though it's kind of early to draw any strong conclusions.

The Nordic market is slightly down compared to previous year. We have some slight positive momentum in Denmark, but significantly softer in Finland from high levels coming down and then slightly softer markets in Norway. And then Central Europe region is to be on par with previous year.

Looking at our financial targets. Despite some difficult volatile market conditions and on the back of the Bribus performance, we are on par with the growth targets of 5%, whereas we have lower profitability, trying to mitigate somewhat, at least, the uncertainties in the U.K., but it has had an impact on our profitability for last year.

What we do have though is a strong cash flow and a strong balance sheet. That means that we are proposing the dividend as we are proposing on the same level as last year, the 80% payout -- 83% payout ratio.

So with that, Kristoffer, please.

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [3]

--------------------------------------------------------------------------------

Thank you, Jon. Giving some more flavors to the different markets here, we have the breakdown to the left of our sales. And if we start with the Nordics, as Jon was alluding to, it was a somewhat softer market in Q4, more soft than what we had anticipated as well where Finland product sales was down considerably, but we also experienced softer market in Norway, and to some extent also in Sweden. And we believe that the volumes will remain subdued in Finland throughout the year. But as you can see, Finland is the smallest market in the Nordics for us with 7% of the sales. And the market is really coming down from [unsustainable] levels. On the positive side in Finland was that the retail market was still healthy and growing, whilst in Sweden and Norway, it was somewhat softer than what we have seen throughout the year previously then.

Again, Denmark was both strong in terms of market performance, but also our own performance in the market, and representing 20% of our sales is, of course, hugely important for us. We have also, throughout the year, done some substantial investments in the store and franchise network to support this growth also going forward. Important to notice on that point is that we have converted some of our own stores in Denmark to become franchise, which impacts the top line with about 2 percentage points.

Central Europe. Now when we have Bribus for a full year, represents 9% altogether; U.K., representing 42%. And on the right-hand side, you can see the split between the different segments. And again, like Jon has said, we have succeeded a first trade season with our new proposition, which has resulted in double-digit growth in that segment throughout the period. And trade now represents 27% of our U.K. business, and is growing somewhat as a percentage of that business.

Product sales also improved in the quarter. However, not to the extent we expected, mainly due to project delays in London on the back of Brexit uncertainty. However, the order book there still remains strong.

The retail market then in U.K., 45%, where we have both DIY and Magnet sales, has been soft throughout the fall, leading up to the election as the product sales was highly affected by Brexit discussions. However, we believe we have kept our market share in that segment, and we are, during the period, gearing up our resources for the very important winter sales, which started on Boxing Day. A positive note before going over to the next slide is just to say that it's also promising to see that there has been very little or no cannibalization between the retail and the trade segments whilst we have pushed in both channels, which is very promising.

Then the financials for the Nordic region. Organic growth, negative 4%. However, we've had an impact of the franchising. Looking at the profitability, I should say that last year was impacted by SEK 25 million in nonrecurring costs. However, if adjusting for that, we still improved in the quarter. And we did have some positive tailwind from currency in the quarter of SEK 15 million after a very long period of currency headwind. So that was positive. But we were also, as I said before, quite pleased about the Danish performance in the quarter. Gross margin remained unchanged compared to last year, but all in all, an EBIT of SEK 204 million versus SEK 165 million last year.

Moving over to U.K. region. And again, slight growth on the back of the trade proposition while retail was subdued due to the market fluctuations. From a margin perspective, we were also helped this quarter by an improved pound-euro crossing, which impacted profitability by a positive SEK 10 million. But we have faced some difficulties in our manufacturing efficiency over the fall, which is based on the fact that we are doing a lot of restructuring activities in the region, which we will explain a little bit more -- give some more flavor to in the next slide.

If you go back, please? Sorry, just to conclude on the EBIT here as well, is that we -- our SG&A was slightly higher as well in the quarter on the back of the trade proposition and the investment in that segment.

So all in all, we delivered an EBIT of SEK 57 million, which is better than last year, but last year was also affected by the nonrecurring cost of SEK 63 million. So all in all, slightly below last year performance if you back the nonrecurring cost out.

Then now we take the next slide, please, Tobias.

--------------------------------------------------------------------------------

Tobias Norrby, Nobia AB (publ) - Head of IR [4]

--------------------------------------------------------------------------------

So restructuring of the U.K. supply chain during that year, in 2019. In the course of the fall, we had significant -- several activities to increase capacity in order for us to leverage scale and enable future simplification and also the product rationalization like the K20 that we have implemented, creating a potential for what we call mass customization.

One of the major things that we have done is, and in course of doing is, to significantly expand the capacity, volume capacity in the Darlington factory, enabling significantly more component manufacturing, not least, and then as a consequence, moving quite a lot of the components previously manufactured in Dewsbury factory and transform the Dewsbury factory into assembly and distribution unit predominantly for the project market, but also create room and headroom for capacity in terms of the trade efforts that we are doing.

We have closed a stand-alone distribution hub in Leeds, and this project has definitely come some ways, but there is still more work to do. And we see some benefits come through -- is expected by the third quarter of 2020. This will lead to somewhat higher cost this quarter, the first quarter, and we will be explaining more about the higher capacity and the plants at the Capital Markets Day, 19th of March.

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [5]

--------------------------------------------------------------------------------

Then a few notes on Central Europe. We had a negative growth in the period. This was mainly an effect of the market in Netherlands where there was a new environmental regulation put on property developers. And that meant that they were holding back some of the projects they were doing. However, that seemed to be resolved now, and the market is still healthy coming into 2020. And these projects have just been moved into 2020. In Bribus in the quarter, we also had an accounting change, which negatively impacted EBIT by SEK 10 million.

Austria in the period was growing slightly, and it's good to see that we're back to growth after spending quite a long time to get all the toxic mix out of the books where too much low end was being sold. And we also believe that we are on the right track to reach the long-term target for that business unit. However, there's still a bit to go in terms of profitability.

And adjusting for the accounting change, the Q4 result would have been slightly better than last year despite the 5% drop in organic growth, which we then find to be a good result, and it also concludes the first full year for Bribus in the Nobia books, which has been very promising for us.

Okay. Next one, please. Moving over then to financial position. And like Jon was alluding to, we have a strong cash flow. And if you look at the Q4 in 2019, operating cash flow was SEK 348 million. This is, of course, mainly -- well, it's largely an effect of IFRS 16 rules. So if you back that out, it was SEK 211 million against SEK 138 million for last year. So we conclude the year with a good cash flow and very healthy balance sheet, and that is also the reason why we feel we have the capacity to sustain a high yield with a dividend of SEK 4.

Net debt, as we end the year, will be including the leasing IFRS 16 accounting. The net debt will be SEK 3.8 billion. But excluding that, it would be SEK 1.3 billion, which again is a very healthy balance sheet for our current cash flow generated as well. Yes.

--------------------------------------------------------------------------------

Jon Sintorn, Nobia AB (publ) - President & CEO [6]

--------------------------------------------------------------------------------

With that, we can open up for questions from the audience, please?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Adela Dashian of Handelsbanken.

--------------------------------------------------------------------------------

Adela Dashian, Handelsbanken Capital Markets AB, Research Division - Analyst [2]

--------------------------------------------------------------------------------

If you could please give us some more insight in how the trade segment in the U.K. is progressing? I think you mentioned that you experienced double-digit growth within this segment during the quarter. A little more information.

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [3]

--------------------------------------------------------------------------------

Yes. I think at this point is we don't like to give more information regarding that. And to say that we are pleased with the proposition that we have changed quite a bit. And we're also pleased with the double-digit growth. And we absolutely believe we have outperformed the market growth. But again, that's too early to say because we don't have all the market figures from that segment either yet.

--------------------------------------------------------------------------------

Jon Sintorn, Nobia AB (publ) - President & CEO [4]

--------------------------------------------------------------------------------

And as we said at last call, we've taken investments in this segment, and it's good to see the revenue come through and -- however, profitability has not reached the full potential as of yet.

--------------------------------------------------------------------------------

Adela Dashian, Handelsbanken Capital Markets AB, Research Division - Analyst [5]

--------------------------------------------------------------------------------

Okay. Great. And then in terms of the franchising of the Nordic store network, is it fair to assume that, that will continue into 2020? Or do you feel like you've reached your capacity there?

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [6]

--------------------------------------------------------------------------------

We have converted the stores now that we wanted to convert. However, on a year-over-year effect, there will be some impact next year on that.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Our next question comes from the line of Carl Ragnerstam of Nordea.

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [8]

--------------------------------------------------------------------------------

It's Carl here from Nordea. I have a few questions. First of all, can you comment roughly how much costs that is allocated towards the trade segment in the quarter as well as the FX impact for the segment?

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [9]

--------------------------------------------------------------------------------

No, we don't want to go into details on that.

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [10]

--------------------------------------------------------------------------------

So no rough figures at all?

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [11]

--------------------------------------------------------------------------------

I think it's -- again, we don't want to go into the profitability of that segment as of yet more than to say that we are still taking investments to drive the growth in that segment. And we don't see the full benefits as of yet.

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [12]

--------------------------------------------------------------------------------

Okay. And you will continue those investments going into 2020, H1 as well, I guess? Or how should we look at that?

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [13]

--------------------------------------------------------------------------------

Well, we would see more of the growth coming through without further large investments, so to say.

--------------------------------------------------------------------------------

Jon Sintorn, Nobia AB (publ) - President & CEO [14]

--------------------------------------------------------------------------------

There are already some leverage on the investments we've done so far for 2020 for sure.

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [15]

--------------------------------------------------------------------------------

Perfect. And also regarding the U.K. restructuring. I mean, can you give us any idea there on the costs related to that as well as if you can also give some idea about the benefits that you're talking about?

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [16]

--------------------------------------------------------------------------------

As we said, if we start with the benefits, they will come about later after summer, we believe, and it's mainly benefits in terms of capacity improvements in the whole manufacturing chain. But also the fact that we are streamlining some of the factories in a specific process instead of doing the full product -- production value chain, so to say. Sorry, the...

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [17]

--------------------------------------------------------------------------------

Okay. Perfect.

--------------------------------------------------------------------------------

Jon Sintorn, Nobia AB (publ) - President & CEO [18]

--------------------------------------------------------------------------------

Your other question was regarding the cost for that program during the fall. We've been taking some of the costs that you find in the numbers here is related to mainly trade, but also somewhat to the manufacturing changes that we have done throughout the fall. I don't want to give a specific number on that one.

--------------------------------------------------------------------------------

Carl Ragnerstam, Nordea Markets, Research Division - Analyst [19]

--------------------------------------------------------------------------------

Okay. And the final one for me -- or sorry, one more. And I mean, you're still keeping fairly soft guidance for U.K. I mean, have you seen any improvement in the retail segments in January or so when the Brexit situation is resolved?

--------------------------------------------------------------------------------

Jon Sintorn, Nobia AB (publ) - President & CEO [20]

--------------------------------------------------------------------------------

No, I think that is too early to say.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from the line of Kenneth Toll Johansson of Carnegie.

--------------------------------------------------------------------------------

Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [22]

--------------------------------------------------------------------------------

First, this cost you had for strategic initiatives in Q4. Are those costs going away in 2020? Or will those costs be similar as in Q4 every quarter going forward?

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [23]

--------------------------------------------------------------------------------

Yes, we took about SEK 40 million on the strategic initiatives in Q4, and that's a onetime cost. It includes partially this restructuring we were talking about in U.K. It includes the activities we have done for being able to announce the factory in Sweden, but it's also supporting some of the other value creation plan initiatives that we are working with. And we believe there would be some cost coming in into 2020 for the value creation plan and for Capital Markets Day, et cetera, but that's considerably lower than what we have invested in 2019.

--------------------------------------------------------------------------------

Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [24]

--------------------------------------------------------------------------------

Okay. Great. Then also, when we look at this large investment you do for SEK 2 billion in the Swedish plant, what is the timing of that CapEx? And what is the payback you're looking for?

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [25]

--------------------------------------------------------------------------------

Those questions, we will definitely come back to in, I think, after Markets Day. We'll give you much more flavor on that.

--------------------------------------------------------------------------------

Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [26]

--------------------------------------------------------------------------------

Okay. Then finally, if we look at -- I'm thinking a bit about the dividend, the payout ratio and the financial targets and so on. You keep a high payout ratio of some 83% compared to the 40% to 60% target you have. But also, when we look at the financial targets, you have a target to be -- have a debt-to-equity below 100%. And you ended the year at 89%. Now I know that the majority of the increase in net debt comes from IFRS 16. But would you rather change the debt-to-equity target you have due to IFRS 16 accounting change? Or should we view this that you are now going for heavy CapEx program and high dividends, but it might be a bit tough to finance acquisitions going forward?

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [27]

--------------------------------------------------------------------------------

I think you need to look at our financial target on a non-IFRS 16 basis. And when we look at this variable debt-to-equity, we're about 31%. So we're way below our financial targets. And that's why we also believe there was room for a possible dividend of SEK 4. We have also mentioned when we made the announcement on new factory that M&A is absolutely something we still look into. And again, I can only say that we still believe we have strong finances to do both. And then, of course, the headroom has become slightly smaller because of the big investment in the manufacturing. But still, there will be opportunities for M&A also going forward.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Our next question comes from the line of Mattias Holmberg of DNB Markets.

--------------------------------------------------------------------------------

Mattias Holmberg, DNB Markets, Research Division - Analyst [29]

--------------------------------------------------------------------------------

I have a few follow-ups on the U.K. initiatives where you're restructuring the supply chain, and you haven't been eager to share the details on what cost levels we're talking about here, but you said that you expect these to continue for at least a couple of quarters. So I'm just curious, without quantifying it, maybe could you give us an indication of how big these costs are going to be in relation to what they were in the fourth quarter?

--------------------------------------------------------------------------------

Kristoffer Ljungfelt, Nobia AB (publ) - CFO [30]

--------------------------------------------------------------------------------

Not to go into details. And it's more about getting the new setup stabilized, so we would consider it to be somewhat less than what we have spent over the fall. But still, we don't want to give a specific number on it. I mean it's very, very early days that we're within this new setup as well. And so far, so good, but we're still looking into efficiency improvements throughout the spring.

--------------------------------------------------------------------------------

Mattias Holmberg, DNB Markets, Research Division - Analyst [31]

--------------------------------------------------------------------------------

Okay. And also on the U.K. business, the trade segment, in particular, you've talked about for a few quarters now about the elevated costs and due to the investments that you're making for the repositioning, how long do you expect it to take before, say, these elevated costs or investments are so as to be covered by the paybacks or the upside that you're getting from this repositioning?

--------------------------------------------------------------------------------

Jon Sintorn, Nobia AB (publ) - President & CEO [32]

--------------------------------------------------------------------------------

We expect to see, let's call it, improvements in profitability by the end of this year.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from the line of Christen Hjorth of Numis.

--------------------------------------------------------------------------------

Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [34]

--------------------------------------------------------------------------------

Just a couple of questions from me. I mean, first of all, on the sort of U.K. trade retail project spreads. I mean, clearly, investment has gone into the trade side, that's the area that's sort of outperforming, particularly in regards to retail. As you look forward over the longer term, how do you expect revenue to split between those 3 categories in the U.K.?

--------------------------------------------------------------------------------

Jon Sintorn, Nobia AB (publ) - President & CEO [35]

--------------------------------------------------------------------------------

We'll be happy to share more of that information at the Capital Markets Day.

--------------------------------------------------------------------------------

Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [36]

--------------------------------------------------------------------------------

Sure. Okay. Excellent. And then secondly, just on price competition in the U.K., I know you noted that has been fierce. So I was just wondering if there's sort of any change to that post the election. Or is it too early to tell?

--------------------------------------------------------------------------------

Jon Sintorn, Nobia AB (publ) - President & CEO [37]

--------------------------------------------------------------------------------

You -- as you said, it's too early to tell. I mean, it's been the election. It's been a holiday season and/or whatnot. So we don't have any new real data on that as of now.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

And there are no further questions at this time. Please go ahead, speakers.

--------------------------------------------------------------------------------

Tobias Norrby, Nobia AB (publ) - Head of IR [39]

--------------------------------------------------------------------------------

Okay. Then, let's conclude. And first, a short reminder that we will arrange for a Capital Markets Day on the 19th of March here in Stockholm. And more information will be posted on our website soon. So please look out for that. And then on the 4th of May, we report the Q1 results. So thank you, everyone, for calling.

--------------------------------------------------------------------------------

Jon Sintorn, Nobia AB (publ) - President & CEO [40]

--------------------------------------------------------------------------------

Thank you, everybody.