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Edited Transcript of NOBI.ST earnings conference call or presentation 28-Apr-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Nobia AB Earnings Call

Stockholm Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Nobia AB earnings conference call or presentation Friday, April 28, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lena Schattauer

Nobia AB - Head of Communication & IR

* Morten Falkenberg

Nobia AB - President, CEO

* Kristoffer Ljungfelt

Nobia AB - CFO

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Conference Call Participants

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* Mattias Holmberg

DNB Markets - Analyst

* Howard Seymour

Numis Securities Ltd. - Analyst

* Johan Dahl

SEB Enskilda Inc. - Analyst

* Marcela Kozak

Handelsbanken Capital Markets - Analyst

* Cinda Sorbey

Arctic Securities AS - Analyst

* Sazsac Zovinovich

Modea - Analyst

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Presentation

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Lena Schattauer, Nobia AB - Head of Communication & IR [1]

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Good afternoon. We published our Q1 report and you are all very welcome to this conference call about the first-quarter results.

Our CEO, Morten Falkenberg, and CFO Kristoffer Ljungfelt will hold the presentation, and after that we will open up for questions. After this short introduction, I hand over to you, Morten.

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Morten Falkenberg, Nobia AB - President, CEO [2]

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Thanks, Lena.

If we look at the first-quarter highlights, the net sale is up by 7% and organic growth is 10% up. If you adjust for Easter, we are actually closer to 6%, which is also strong. If we look at EBIT, strong improvement as well, and also EBIT margin as such. Kristoffer will take you through in more details the makeup of the EBIT part and also looking at elements like [rupto] and operational leverage.

It's important when you think about the UK, and that is the way we think about it, is really to look at the UK channel diversification matrix. It's a fine word, but it really covers four quadrants that are more or less the same size, one-quarter of each of the market, one being contracts, one being trade, one being B2B, and one being retail. That is the way we look at the business also in this presentation when Kristoffer takes you through it.

For the Q1, contracts, which is Rixonway, it's CIE, Commodore, was extremely strong. B2B, excluding the facing out of our business in Bunnings, the Homebase -- previous Homebase is strong, strong B2B if you take the effect of Bunnings out, so TP is doing very well; trade is holding up well, too. Where we see a slight negative tendency is in retail, where the retail business is down by 3% in Q1.

So, in essence, it's really three like-sized -- four like-sized entities, contracts, B2B, retail, and trade, and we see that as a good diversification vehicle also going forward.

This is also the first quarter where we have reached our 10% EBIT growth and where we are investing for growth. For us to get to our internal ambition, which we have mentioned externally also to get to SEK20 billion in 2020, we need to have organic growth and acquired growth, and that's why in this quarter we have invested quite a bit in HTH growth, in omnichannel, in digital as well, so that is important to look at and have in mind when you look at the numbers going forward.

The kitchen market trends, UK market is estimated to be down based on macroeconomic uncertainties, and you have a June election coming up and there's clearly strong competition in the marketplace. That has been so for the past many, many years; we live with that and we prosper. I mentioned in our last report that Magnet, excluding currency, is at 10% EBIT.

The Nordic market is booming right now, and when we look at the newbuilds and also the project business, as we are privy to the pipeline going forward, it looks very, very strong. So we have a strong Nordic market. Central Europe, which is now less than 5% of our total business, is still a little weak, but the market as such is -- our business is slightly weak, but the market is slightly up, but no big drama.

When we look at our net sales and operating margin, we are a 12 months rolling at 10.3% and really steady going forward. If we look at the financial targets, just reiterating that we want to grow faster than 5% going forward, both organic and acquired. And clearly, the organic part needs to be 5% in order for us to get to the numbers we want to in 2020. Profitability will be steadily increasing, but above 10%, and we have talked about our finance, our net debt to equity, and also the dividend that we paid out in the quarter as well, close to 60% -- actually, 56%.

So all in all, before I hand over to Kristoffer, I'll have a look at our new house, which has a few extra rooms. The omnichannel, which is a clear, clear area of investment, we introduced our first omnichannel in Norway just a week ago and it looks great, and we will be introducing in the UK and in the Danish business and the Swedish very, very soon.

Value from [that money offer], clearly an area where we see our organic growth coming from. It's the HTH growth. It's the Simply Magnet, and this is where many of our consumers live and we need to be much stronger there.

And then, where we have still much to do is product management and also supply chain. Still, they hold back, and efficiency, clearly a lot to do.

We spend a lot of time on finding the right acquisitions. It's an interesting test to have as we now have a good balance sheet and also money to buy the right acquisitions, so that is clearly top of our agenda, along with growing profitable as well.

So with this brief introduction, I'd like to hand over to Kristoffer, who will take you through the different regions.

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Kristoffer Ljungfelt, Nobia AB - CFO [3]

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Thank you, Morten.

So starting with the Nordics, and as you can see, we have had a strong organic growth in Q1 of 16% and there are two main drivers to this. First of all, we have had the Easter effect, which we believe corresponds to roughly 6% of the growth. Secondly, we continue to have very good momentum in the project business and that's basically across all our Nordic countries, and we are pleased to see that we have really no capacity constraint to supply to this higher demand.

In addition, in the quarter the consumer market has been growing somewhat in all Nordic countries but Finland, and Sweden sticks out on the positive side as the effect from the tech subsidies is over.

Morten mentioned previously that we launched HTH Go in Denmark end of Q1 in order to grow shares in the B2C. And early indicators said that the launch has been positively received by the market, but it's still too early to see any effect in Q1, and that will be in Q2.

All in all, we have completed our third consecutive quarter where the organic growth rate has been above 9% in the Nordics, adjusting for Easter. And we believe we have gained some market share somewhat on a pan-Nordic basis.

The Nordic gross margin was slightly up in the period, as you can see, mainly driven by higher order values and favorable material prices. However, the SG&A was also up in the quarter as we have invested, like Morten was talking about. We have invested in growing the B2C -- in the B2C market and mainly through the HTH Go, but also in other Nordic markets, and we have spent roughly SEK30 million growing in this segment in the quarter.

In addition to that, we have completed most of the -- or fixed most of the K21 world bracket problems that we had. We believe that costs from this will be marginal going forward.

The sales drop-through to EBIT is, as you can see, somewhat lower in the quarter. This is, however, in line with our expectations as we grow in the B2B, where we have lower gross margins. And in addition, we have invested this roughly SEK30 million in the growing the B2C business. But all in all, we're pleased with the development and the margin improvement of roughly 1%.

So turning to UK, you can see the organic growth rate amounted to 6% in the quarter, and the main contributor to the growth was the large increase in project deliveries through our latest acquisitions. In addition, we do have an Easter effect in the UK; however, it's much smaller than in the Nordics.

Our Magnet trade business, like Morten was saying, was marginally stronger in the quarter, while the Magnet retail was declining by 3%. And we do believe that the retail market in the UK is still challenging, both in terms of the uncertainty of the Brexit, but also from a pricing perspective. Our sales in B2B was -- that is the sales to Travis Perkins and Homebase -- was affected by the exit in the Homebase account, while on the other hand Travis Perkins continues to take some shares in that segment.

If we look at the gross margin then, and as we alluded to in the Q4, the negative currency effect of the pound will diminish gradually now throughout 2017. Despite this, in Q1 we had a currency loss of SEK25 million, which affected the gross margin roughly 2% in the UK and almost up 2% on the group level.

The impact, however, it's a bit less severe than what we had in Q4, and we probably face some more currency headwind for the next quarter, but then it will taper off after the summer.

In addition, the gross margin was burdened by the segment mix we have had, and as I said before, the project sales was very strong in the UK in the quarter, and we believe the effect of having the higher project sales affected the gross margin by as much as 2% in total.

So all in all, given the current market uncertainty, we are still pleased with the UK results and especially pleased with the performance from our latest acquisitions. And that also shows that we have a good channel diversification in the UK, as Morten mentioned previously.

Okay, turning the page to central Europe, and, as you know, we have divested Poggenpohl end of January, so it's only Austria remaining in this region. And the Austrian growth rate fell to minus 2% in the quarter, despite the fact that Easter should have helped us somewhat. And we have had some issues with the replacement of the product line installed in Q4 -- sorry, production line installed in Q4 last year, which has impacted deliveries and caused some capacity problems. We are, of course, working hard to rectify the issues. But on the positive side here was the gross margin that was still helped by some favorable pricing in the Austrian market.

So turning to the financial position and given the quarterly sales growth, we have had what we believe is a strong working capital performance where it actually was declining in spite of the growth rates. And as you can see from the net borrowings a bit further down on the page here, we had cash of roughly SEK440 million by the end of March and this is before the SEK500 million dividend that was paid out in April, just to make that clear. Before the dividend payout, we had a net debt of 11%, and if I adjust for the dividend, we are at 29%, so we're still far better than our financial target.

So over to you, Morten.

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Morten Falkenberg, Nobia AB - President, CEO [4]

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Thank you. Before questions, just, again, we are focusing on continuing on the strategy to growth in both organic and acquired terms and really focusing on profitable growth going forward.

As I say, there is an old saying that it takes money to make money, and you will see us hopefully investing in a prudent way going forward to ensure that we become a bigger company and also in relative terms, but also in margin terms, a very, very strong company going forward. And that is part of -- which Kristoffer mentioned -- part of the investments that we are putting in, especially in the economy segment as well, but also in new stores and in omnichannel as well.

So with those words, I would like to hand over to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Mattias Holmberg, DNB.

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Mattias Holmberg, DNB Markets - Analyst [2]

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Hi, good afternoon. So to begin with, I would just like to get some more clarity on the UK operations, and you report very strong sales growth, which I understand is related to the project channel. I should say that the consumer and B2B is weak and demand is falling, and just sort of to get my head around it, if we look at consensus now, it's expected a 1% organic decline for the full year of 2017. And just to get an understanding of the underlying market, how would you assess Q1 to have been if we sort of exclude this one-off project sales, which it sounds like when I read the report? Thank you.

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Morten Falkenberg, Nobia AB - President, CEO [3]

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I think I'd like to start with reiterating what I said in the beginning, that we basically have four different businesses or channels, and starting with your contract business, you're right. It was stronger, but still the underlying business in contracts has also a very strong pipeline going forward, and so this is stronger than it normally would be, but we can see into a foreseeable future that it really looks very strong.

Trade, I mentioned, also was up 1% in the quarter, and if we tried to take the exiting of Bunnings and Homebase out of the equation, a very, very strong B2B. Where we are slightly down in the quarter is minus 3% in Q1 for retail, which, again, represents roughly 25% of the total business.

So all in all, I think we are holding up well in the UK, but anybody who reads the papers and watch television will know that it is an uncertain period we are getting into, but we are ready to do the right things both in terms of cost and price and also scaling up on the efficiencies. So I would say so far, so good.

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Mattias Holmberg, DNB Markets - Analyst [4]

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Very clear. And just to follow up a bit on what you talked about in the last quarter about your acquisition strategy, I recall you saying that you wanted to add about SEK4 billion on the topline by 2020 in order to reach the SEK20 billion sales target by then. If I recall correctly, you mentioned something like five to 10 companies on your shortlist. I was just wondering if you have anything to comment on that or give an update on how you look at it and what the situation is like now.

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Morten Falkenberg, Nobia AB - President, CEO [5]

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Along with moving the organic gross, the acquired gross is top of my agenda and Kristoffer's agenda. I'm spending a lot of time together with the acquisition team to do that, so we still have the list, which we are moving on, and acquisition will still during this time period be a key contributor to getting to our target as well. So, yes, it will be very, very important, and without being flippant, I'd like to say that you will be the first to know when we make an acquisition.

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Mattias Holmberg, DNB Markets - Analyst [6]

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Great. That's all for my side. Thank you very much.

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Operator [7]

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Howard Seymour, Numis.

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Howard Seymour, Numis Securities Ltd. - Analyst [8]

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Thank you very much. Hello, gentlemen. It's on the UK again, if I may, and really it reflects the strategy you just alluded to, pricing. I just wonder in the context of obviously the exchange rates, et cetera, what pricing policies you've taken across the four areas, whether you put prices up in those areas by the same factor, because obviously you do allude to sort of the retail market particularly being price competitive. So, just any comments on that would be appreciated. Thank you.

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Morten Falkenberg, Nobia AB - President, CEO [9]

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Without getting into minute detail on our pricing strategy and tactics, it's clear that the long-term agreements we have in those in B2B and also the contracts, there you have set prices. Where we can manage pricing is in our own 220 stores, where 70% of those have a trade element and also, of course, the retail. So it is really optimizing our pricing in the trades and also in retail, and even though it's a very competitive business, if you have great products and if you come out with new interesting products, pricing will still in that part of the business be a very important factor.

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Howard Seymour, Numis Securities Ltd. - Analyst [10]

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Okay. Thank you. Could I also ask you -- you've alluded before to potential store openings in the UK market. You mentioned obviously a period of uncertainty, et cetera. Any real changes in the context of your views there?

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Morten Falkenberg, Nobia AB - President, CEO [11]

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Nothing whatsoever. We are in it for the long term, and still our goal is to get 10 to 15 stores on the ground this year and we're doing that and we'll be doing that for the foreseeable future.

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Howard Seymour, Numis Securities Ltd. - Analyst [12]

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That's great. Thank you very much.

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Operator [13]

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Johan Dahl, SEB.

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Johan Dahl, SEB Enskilda Inc. - Analyst [14]

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Yes, hello there. I was wondering if you could provide some details on the timing of planned investments into sort of driving the retail offering, improving that. Clearly, it's had a fairly significant impact in the first quarter. Just to help us understand how that's going to impact the entire year and the coming quarters.

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Kristoffer Ljungfelt, Nobia AB - CFO [15]

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In terms of investment in the B2C market in the Nordics, I think the launch that we have done now in Denmark is a trial to see how we will do in that segment, and of course we invested quite a bit in it, but it is mainly an investment that will be in Q1 and then we will alter the marketing money that we usually have between the different segments. So, of course, we have never had such a big launch as this one and it's a one-time effect in that regards.

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Johan Dahl, SEB Enskilda Inc. - Analyst [16]

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If you look on a group total, how much more money are you putting into sort of the branding and product development to drive your sort of low-end offering?

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Kristoffer Ljungfelt, Nobia AB - CFO [17]

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We don't have any details on that now. We will be prudent with the cost, like Morten was saying, and we have invested now quite heavily into the HTH Go, and we will be prudent going forward and make sure that we have return on what we invest in.

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Johan Dahl, SEB Enskilda Inc. - Analyst [18]

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Okay. Just a question also on the UK. You provided some details about losing a B2B client and some headwinds in the consumer retail markets. Could you just update us on the pipeline on the project business? I appreciate it was strong in the first quarter, but how does this sort of pipeline look for the full year there?

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Kristoffer Ljungfelt, Nobia AB - CFO [19]

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I think you mentioned, first of all, the Bunnings and Homebase, and there our relationship is ending during this year and it's public knowledge as well and it's a minor business. It has been, and it's currently getting smaller and smaller by the day and has historically not been a very profitable business, either. But if you look at the retail business as such, there we -- sorry, the contract business -- there, the Commodore CIE pipeline looks very, very strong for the full year, but also into next year.

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Johan Dahl, SEB Enskilda Inc. - Analyst [20]

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Okay. Thanks.

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Kristoffer Ljungfelt, Nobia AB - CFO [21]

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But still, I just need to add to that that we have had high deliveries now in Q1, exceptionally high, because also the Battersea Power Station project.

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Operator [22]

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Marcela Kozak, Handelsbanken.

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Marcela Kozak, Handelsbanken Capital Markets - Analyst [23]

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Thank you. Good afternoon. A couple of questions from me as well. Coming back to the UK retail business, did you know this worsening throughout the first quarter? Was it a lot worse at the end of the quarter compared to the beginning of the year?

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Kristoffer Ljungfelt, Nobia AB - CFO [24]

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I think it has been testing for quite a while because of the uncertainty in general in the marketplace, so it hasn't worsened as such.

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Marcela Kozak, Handelsbanken Capital Markets - Analyst [25]

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And would you expect it to maybe get even weaker for the remaining part of the year?

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Kristoffer Ljungfelt, Nobia AB - CFO [26]

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Who knows? It depends what is happening. You have, as we mentioned, an election in June. It's really -- it's about consumer sentiment and I cannot judge that. The only thing I can promise you, if you give us a little credit for the history we have had over the past seven years, is that we will react to anything that is coming at us in terms of changes and we can do that relatively fast, especially in the retail side where it's our own stores.

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Marcela Kozak, Handelsbanken Capital Markets - Analyst [27]

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Thank you. Then a question on the UK project sales, are you expecting any deliveries in -- any significant deliveries in the second quarter?

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Morten Falkenberg, Nobia AB - President, CEO [28]

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Of course we are. Just reiterating what Kristoffer and I said is that we had an extraordinary strong Q1 in the project and we are looking forward in a couple of quarters and actually the full year and into next year, a strong pipeline is coming through, so, yes, but Q1 was extraordinarily high.

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Marcela Kozak, Handelsbanken Capital Markets - Analyst [29]

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So you are not expecting another extraordinary quarter, second quarter?

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Morten Falkenberg, Nobia AB - President, CEO [30]

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Not as such. A strong quarter, but not as extraordinary as the Q1.

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Marcela Kozak, Handelsbanken Capital Markets - Analyst [31]

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As the Q1, thank you. That's clear. And then maybe some more on the UK prices, how are your competitors behaving maybe within the trade channel? Are they increasing prices or coming with discounts?

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Morten Falkenberg, Nobia AB - President, CEO [32]

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I think if you look at the UK market and if you go back five years' time, it's probably the most competitive market in Europe and it has been so, so it is top competition, but still we have been able to weather that and also manage the price in a good way, so we will continue to do that.

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Marcela Kozak, Handelsbanken Capital Markets - Analyst [33]

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Thank you. And a final question, would you give us a little bit more information regarding the recall of the K21 suspension system? How big a charge have you taken in the first quarter? What did you expect for the coming quarters?

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Morten Falkenberg, Nobia AB - President, CEO [34]

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As I said, we have incurred some cost in Q1, but we don't expect any large amount to be occurred in the coming quarters.

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Marcela Kozak, Handelsbanken Capital Markets - Analyst [35]

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And this means less than SEK5 million in Q1, or even less?

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Morten Falkenberg, Nobia AB - President, CEO [36]

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It's a little bit more than SEK5 million in the quarter.

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Marcela Kozak, Handelsbanken Capital Markets - Analyst [37]

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Thank you. This is all for me. Thanks.

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Operator [38]

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[Cinda Sorbey], Arctic Securities AS.

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Cinda Sorbey, Arctic Securities AS - Analyst [39]

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Thank you and good afternoon. Can you elaborate on your market shares? It appears when you look at the figures and look at your comments that overall market shares have risen, but is that primarily as an effect of what subsegments you are, let's say, they're [in] exposure there or is it general market-share gain? If you can please comment on that.

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Kristoffer Ljungfelt, Nobia AB - CFO [40]

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As you know, we have a strong market share in the B2B business in the Nordics, and I believe when it's good times like this one, we tend to have a lot of customers that enjoy our product and the service offering, so we believe that it's mainly within the B2B that we grow shares.

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Cinda Sorbey, Arctic Securities AS - Analyst [41]

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Okay, and what about retail channel, both in the UK, but also in the Nordics?

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Morten Falkenberg, Nobia AB - President, CEO [42]

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I think that the B2C has been more stable market shares for us and, like we discussed before, that's why we're doing a drive now to launch into the value end segment, and we will see what will happen now in Denmark after the launch of HTH Go, but we have great hopes for that, of course.

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Cinda Sorbey, Arctic Securities AS - Analyst [43]

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Okay, fine. And then moving on to raw materials, you had some tailwind now. How do you see that development going forward?

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Morten Falkenberg, Nobia AB - President, CEO [44]

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We had a little bit of tailwind in the Nordics. We don't know -- it's a lot of turbulence in that market and so forth. It doesn't look like the sheet materials and the woodchip materials are worsening, but again we don't know. We have seen from the steel prices that's coming up and that's a small part of the inputs we have into our products, but still it has [been] effective course.

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Kristoffer Ljungfelt, Nobia AB - CFO [45]

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And adding to that, we have -- the contracts we have with the suppliers over a period of time as well.

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Cinda Sorbey, Arctic Securities AS - Analyst [46]

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Thanks. Finally, can you elaborate later on the process of adjusting your sourcing in the UK due to the, let's say, currency situation? Have you managed to increase local content in the UK operations?

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Morten Falkenberg, Nobia AB - President, CEO [47]

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Yes, we have managed to increase somewhat the content.

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Cinda Sorbey, Arctic Securities AS - Analyst [48]

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Do you see any further potential going forward?

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Morten Falkenberg, Nobia AB - President, CEO [49]

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I think it will be more and more difficult. When we did this in the start, we had some obvious opportunities there. Along with looking to the group suppliers, it becomes more difficult because we have the same contracts with the suppliers between both Nordic and UK market.

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Cinda Sorbey, Arctic Securities AS - Analyst [50]

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Okay. Excellent. Thank you. That's all for me.

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Operator [51]

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(Operator Instructions). Johan Dahl, SEB.

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Johan Dahl, SEB Enskilda Inc. - Analyst [52]

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Thanks. Can you please help us just understand what this -- you're increasing your investment in the retail channel in the UK and the Nordics. What do you expect to gain from that? Could you help us quantify that? Arguably, you are putting a lot of money into a group of customers that isn't being much there demand at the moment. The whole group's demand has been driven by projects [as essentially] quite a good growth, so just to put those investments into perspective what you expect to gain from it? Is that possible at all?

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Morten Falkenberg, Nobia AB - President, CEO [53]

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As you know, it's really hard to put any numbers on it, but just to clarify it, when we invest in growth in the UK, of course we have omnichannel and so forth, but that's the main part of the stores in the UK, which is different from the Nordics where we see that we have an opportunity to go into the lower-end segment. And, of course, I would wish that I had the right amount from what we gave, Johan, but it's early days. It seems to be well received by the Danish market, so we have good hopes for it.

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Kristoffer Ljungfelt, Nobia AB - CFO [54]

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I think I can add to that -- (technical difficulty) we want to do the same in the Nordics.

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Operator [55]

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[Sazsac Zovinovich], [Modea].

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Sazsac Zovinovich, Modea - Analyst [56]

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Thank you very much. Just a few questions from me. Maybe I missed it earlier in the presentation, but can you give us your guidance on SG&A going forward? Because you mentioned you took SEK30 million for HTH Go over SG&A earlier in the presentation. Is it something we should expect for the other quarters as well?

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Morten Falkenberg, Nobia AB - President, CEO [57]

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No. As I mentioned before, this was because of the launch of a completely new product and a new concept, so it's more of a one-off character. We will invest a little bit more in growing in this segment, of course, but we will also try to use the market and we have already today and to use it wisely into the other segments.

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Sazsac Zovinovich, Modea - Analyst [58]

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Okay. Thank you very much. And just the last one, if you can comment on the partnership with [expert] and how that has progressed for Q1?

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Morten Falkenberg, Nobia AB - President, CEO [59]

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We see that we have a fairly good progression mainly in Norway, where we launched it first. We have grown into Finland where the volumes are coming through quite nicely. We have some stores that we have opened in Denmark, but also there it's a bit too early to see any effects from it. But all in all, I think we have a solid concept and also expert are willing to grow in this channel. We're positive.

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Operator [60]

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And there are currently no further questions registered. Speakers, please go ahead.

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Lena Schattauer, Nobia AB - Head of Communication & IR [61]

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Okay, by that we conclude this conference call. Thank you, everybody, for participating and welcome back next time. Our Q2 report is due the 21 of July.