Nilfisk Holding A/S (NF1.F) Earnings Call Transcript & Summary

Welcome to the Nilfisk A/S Annual Results Call. [Operator Instructions]. I'll now hand the floor to our speakers. Please begin your meeting.

Good morning, and welcome to Nilfisk's earnings conference call for the fourth quarter and full year 2020. My name is Antonio Tapia, and I am Head of Investor Relations here at Nilfisk. To present Nilfisk's results for the full year 2020, we have the CEO, Hans Henrik Lund; and CFO, Prisca Havranek. Before we begin, I would like to remind you that this presentation, including remarks from management, may contain forward-looking statements that, for a number of reasons, shall not be rely upon as prediction of actual results. I therefore encourage you to read the content of this slide in connection with the presentation. Now looking at Slide 4. The agenda of today's presentation is as follows: Hans Henrik Lund will start by going through the key takeaways full year 2020 as well as an update on their business in general. This will be followed by Prisca Havranek going through the financial performance of Nilfisk in the fourth quarter and the full year of 2020, followed by an outlook for the financial year 2021. As always, you are invited to ask questions during the Q&A session at the end of this presentation. And with this, I will hand over to you, Hans Henrik.

Thank you, Antonio. Good morning, everyone, and thank you for taking part on our call this morning. I hope you're all safe and well. And this morning, we've released the annual results. And we have, of course, been looking forward to sharing the presentation with you. Let's go to Slide 5 for the key takeaways for the year 2020 for Nilfisk, please. 2020 was a year nobody could have foreseen, for sure. The COVID-19 pandemic changed the world dramatically starting in Q2. And of course, we also -- we were deeply affected at Nilfisk by this very extraordinary situation. But when looking at the 2020 full year result, what I first and foremost would like to highlight is the fact that we delivered a stable EBITDA margin items of 12.1%. It has indeed been a challenging environment for us, heavily impacted by COVID-19. But with the actions taken, such as disciplined cost control measures and a successful execution of our restructuring program, we did deliver a margin in line with last year despite the lower revenue that we experienced. In the first half of the year, we experienced a steep decline in customer demand across all markets basically. Restrictions and lockdowns in response to COVID-19 forced many of our customers to scale down, save costs or even temporarily close the operations. And obviously, that did impact demand and our revenue. There were very large variations in this decline between customer segments and markets. Among the most impacted markets were China, as we saw early on and then followed by the Southern part of Europe. We also saw the hospitality sector, industries like hotels and restaurants being very much affected and more affected than other areas like retail and manufacturing. And this has had an impact on our business in many Asian markets, in particular, where the hospitality segment is a large contributor to our sales. However, as the first wave of the pandemic started to ease, we did see a gradual and steady recovery in our demand pattern starting in the end of the second quarter and continuing all the way towards year-end. We completed the fourth quarter with a total organic growth of minus 2.1%, following the recovery trend that was initiated earlier in the third quarter and highlighting the Americas segment that actually got back to positive growth in the fourth quarter with a 2.1% score. So all in all, we are, of course, pleased to see that we have a continued quarter-by-quarter improvement during the second half of 2020. Despite the significant pickup, demand did not reach the level from before the pandemic, obviously, for the year as a whole, we realized the total revenue of EUR 832.9 million, and this corresponds to an organic growth of minus 11.5%. Let's move on to Slide 6, please, for a little more detail on how we responded to the pandemic. Over the course of 2020 and during the pandemic, it has been a key focus for us to keep the business fully operational and serve our customers throughout all markets. We've been able to continue production and distribution with limited or absolutely no interruptions also during the peak of the crisis. We implemented precautionary measures to ensure that our sales force and obviously, service technicians could continue supporting our customers. And this has been particularly important for customers that are part of the so-called critical infrastructure, health care, manufacturing, part of retail, food manufacturing, medical supplies. As a supplier to these customers, we were granted status as an essential business in countries like the U.S. and the U.K., and this has allowed us to continue our operations also in markets where all nonessential businesses had to shut down temporarily. Through our offering, we also responded rapidly to the pandemic and to the increased focus on cleaning and thereby new demands. We did bring out selected new solutions to market, tailored to specific cleaning challenges our customers were facing during the pandemic. We reintroduced a range of steam cleaners in selected markets. We launched a portable disinfectant sprayer solution in the U.S., and last but certainly not least, we introduced an innovative UV-light solution that can disinfect and remove bacteria and virus. And this solution is applied to our autonomous scrubber, SC50, and the only 1 in the market. So we're proud of that one. And then we had to completely rethink how we interact with customers, meeting them online and performing virtual product demos. And our customers have responded positively to all of these virtual sales visits. And we're confident that these new ways of working and collaborating, we will take with us after the pandemic as well. Internally, we reacted swiftly to the new situation and changes in demand. We focused on proactive cash management, obviously, as well as CapEx reduction and prioritization. And at the same time, we executed a restructuring plan, as you heard, with the aim of lowering our structural cost base. This included a reduction in the workforce by approximately 250 full-time employees across functions and regions. While navigating through this quite unusual situation, we did stay focused on our strategy. Key initiatives within Nilfisk's next progress according to plan, and the next slide, Slide 7, we'll give you a little more flavor of the highlights of this. Within our autonomous solutions, we've seen solid progress in the sales of the Liberty SC50. Sales have been expanded to multiple customer segments and cleaning applications within industries like airports, retail, health care. And across segments, we've seen a growing interest in Autonomous Solutions brought on partly by the pandemic. Because of the COVID-19, cleaning has become more essential for many businesses and institutions, and many of them have turned to autonomous cleaning technology to meet these new demands. In parallel, we kept investing and launched an additional autonomous scrubber the Liberty SC50. It's our largest machine and our first machine built on the software developed by our technology partner, Brain Corp. Because it's larger and relevant for bigger indoor spaces like warehousing and logistic centers, it complements our existing autonomous scrubber SC50 really well. We continued the execution of the growth plan for the U.S. business, focusing on leveraging the full portfolio, serving our distribution partners better and strengthening our approach to strategic accounts. Despite the COVID-19, pandemic, we've seen progress in these 3 areas during 2020. And obviously, we ended with a positive growth in Q4. In terms of our digital efforts, I'm very happy to see the development during the year. We continued to expand our global e-commerce solution, which has been implemented in 16 European markets by year-end. Together with other initiatives we spoke about like virtual product launch events and sales meetings, as well as the migration to scalable and more efficient web platforms, we have further supported our digital infrastructure and customer experience. Finally, I would like to mention the development of our supply chain. During 2020, we went live with our new European distribution centers operated by our supply chain partner, which is leading to a faster and more efficient delivery to our customers. So trying to sum up 2020 as a very special year. We've stayed focused on the strategy during a year that challenged us in the marketplace. We've navigated through these challenges with a determined focus on serving our customers and providing them with the solutions and services they needed, and also new products catering for new demands. And we have taken action on the new situation and mitigated the impact through strict, cost management and restructuring program that altogether has made us able to maintain margins despite the downfall in revenue. This leaves us confident about the commercial execution for '21. And before I hand over to Prisca, let's just have a quick look from a moment, moving on to Slide 18. First and foremost, our overall focus for '21 will be on the recovery in the marketplace. And this is backed, of course, by innovation as a continued key driver for the industry, including bringing digital solutions to market and working with sustainability across our business and our offerings. On this backdrop, '21 will be characterized by dedication to regaining sales volume as markets are recovering as we expect them to do from the impact of COVID-19. The pandemic is still around us, and there is no doubt that we, at this point in time, see continued uncertainty for market conditions in '21. Over the last couple of months, we've seen many countries enter into new lockdowns, and introduce more restrictions. However, we do believe that the rollout out of the vaccines across markets ultimately will lead to a more normalized market condition during second half of the year. And we are determined to meet and address any peak in demand and any need that may arise in the comeback of the market. And that brings me to commercial execution. Nilfisk next will continue to set the overall direction of our priorities where we navigate the continuous dynamic market conditions. And with the progress made in terms of simplifying structures and processes and set up over the last years, including the actions we've taken over the course of 2020, the foundation for commercial execution is solid. With this, I would now like to hand over to you, Prisca, for a financial review of fourth quarter and the full year 2020.

Thank you, Hans Henrik. Let me start off with the income statement for the fourth quarter of 2020. Overall, it was a good quarter, showing strong margins and where we demonstrated our ability to address the demand that we saw coming back in the marketplace. As Hans Henrik just mentioned, in Q4, we saw a continuation of the positive recovery trend in many markets as we have seen in Q3. As I will detail in a bit more in a moment, several of our markets reported positive growth in the fourth quarter. And together with the continued strong performance of our consumer business, this resulted in organic growth in Q4 of minus 2.1%. Total reported revenue in Q4 came to EUR 220.2 million, which is a drop of EUR 13.6 million. Roughly EUR 1 million of this or 0.3% comes from the exit of the consumer business in the Pacific region in Q4 last year. And around EUR 8 million or 3.4% comes from FX effects, of which the drop in the U.S. dollar accounts for around half. As a result, the reported growth in Q4 was minus 5.8%. I'm happy to report that despite the lower revenue, our gross profit was in line with last year at EUR 93.3 million, and the gross margin was up 230 basis points. It's worth noting, though, that the comps are low in Q4 last year in connection with the transition of the Pacific Consumer business, we carried out large onetime sales at low margins, which diluted the gross margin of both the consumer business, but also the total Nilfisk business. So if we compare to Q3 2020 instead, we still see an increase in gross margin by 130 bps mainly as a result of improved capacity utilization, owing to higher activity level. Now looking at overhead costs, we are pleased to see a reduction of EUR 5.4 million compared to Q4 last year. Half of this reduction was driven by lower travel expenses and other related costs, like activity related costs and such as marketing and consultants, and the remaining half of the reduction was lower personnel costs. As a consequence of the slightly improved overhead cost ratio, together with the gross margin improvement, we delivered in Q4 an EBITDA margin before special items that was 320 bps higher than last year, coming in at 14%. Special items amounted to EUR 0.8 million, where the majority was related to our new distribution centers, again, which Hans Henrik just mentioned. So to summarize, as a result of lower overhead costs, special items, our reported EBIT for Q4 increased by EUR 7.1 million compared to last year and amounted to EUR 11.3 million. The EBIT margin improved by 3.3 percentage points to 5.1%. So looking back at 2020, Q4 was a positive quarter and a positive ending of a year with 4 very different quarters. And on that note, let's move on to the income statement for the full year 2020 on Slide 11. Overall, I will say that 2020 has been a turbulent ride, in terms of fluctuations, we've seen the market demand and revenue but we've been able to keep our margins up, thanks to strong focus on cost, CapEx and cash. Our full year revenue amounted to EUR 832.9 million, equal to a reported growth of minus 13.8%. We had a negative FX effect of 1.5 percentage points. Here, a significant part comes from the lower U.S. dollar. The underlying organic growth came to minus 11.5%, slightly better than what we had expected in our latest guidance update in November last year, which you remember was minus 12% to minus 14%. As I just mentioned, the organic growth for the full year is a combination of 4 very different quarters in terms of underlying market demand. So to recap, in Q1, we saw the first indications in March of what became a significant drop in demand continuing, obviously, into Q2, where we experienced our worst quarter in terms of revenue growth. Then in Q3 and Q4, however, we saw continued quarterly improvement across most of the markets. That development, in combination with a very strong performance throughout the year in our consumer, as already mentioned, led to a slightly better revenue than we expected when we interstate guidance -- full year guidance in October. So looking at our profitability in Q2 and Q3, our gross margin suffered a bit from the low capacity utilization. In Q4, though, the positive pickup in demand led to high activity, which led us to scale up our production. As a result, during both Q3 and Q4, we've seen gradual improvement in our capacity utilization, which is reflected in the gross margin coming in at 41.6% overall for the full year and at 42.4% in Q4. For comparison, our gross margin in 2019 was 42.1%. Now looking at overhead costs, we managed to reduce this by EUR 43.7 million compared to '19. During Q2 and Q3, we received grants from government support programs of around EUR 7 million. So the underlying reduction was around EUR 37 million. Roughly half of this reduction is driven by activity related costs, such as travel, marketing or freight costs. The remaining part of the reduction is driven by lower personnel costs, where our restructuring initiative in Q2 and Q3 has been the key driver. In general, we have realized savings across all functions and across all key markets at Nilfisk. In R&D, while we have maintained our strong innovation focus, we have prioritized our key projects, and thus, we're able to reduce the R&D ratio from 3.7% in '19 to 2.8% in '20. In terms of sales and admin costs, story is more or less the same. Our activity related costs were lower than in '19, and we've also reduced personnel costs due to the restructuring that I mentioned. Now moving on and looking at earnings. We see that the drop in revenue led to a lower gross profit for the year. However, it was partly offset by the lower costs and our EBITDA special items end at EUR 17.2 million lower than last year. But at the same time, the EBITDA margin before special items was at the same level as last year at 12.1%. So given the exceptional circumstances that we were operating in, I think we can say that this is a solid performance for a difficult year like 2020, and we came in slightly higher than we anticipated in our latest guidance in November 2020. Special items came in at EUR 10.8 million for the year. 2/3 of this relates to restructuring, as mentioned, carried out in Q3 and -- Q2 and Q3, which was triggered by the pandemic and the remaining part relates largely to the consolidation of the European distribution centers. All in all, for 2020, we report an EBIT of EUR 22 million and an EBIT margin of 2.7%, equal to '19. And with that, let's move on to a short review of our reporting segments, starting with EMEA on Slide 12. Like most markets in the world, EMEA was hit by the pandemic and demand sharply dropped in March. The EMEA South region was more severely impacted as markets like Italy, France and Spain, struggled with the effects of the pandemics such as lockdowns and restrictions, which affected the business activity. But we are pleased to see that during Q3 and Q4, South region recovered quite strongly. And the region ended with negative single-digit growth in Q4. In EMEA Central and EMEA North, they were generally less impacted because of a strong correlation with the lockdowns in the country restrictions, which, to a certain extent, will lighter in this parts of Europe. But both Central and North showed good recovery trends during the second half of the year as the restrictions were lifted and demand picked up. So all in all, revenue for EMEA for the full year came to EUR 396.6 million, corresponding to organic growth of minus 11.6%, with the South region coming in slightly below this and the North region slightly above. Looking at the gross margin for the full year, we saw a decrease of 1.3 percentage points to 46.2%, which is mainly an effect of lower capacity utilization, higher freight cost in the second half of the year, while pricing had a positive impact on the margin. We were able to offset a large part of the drop in gross profit through cost reductions in the second half of the year. But at the end of the day, we did see a drop of EBITDA margin of 2.5 percentage points in EMEA for the full year due to the reduced top line of this year. Now moving on to Americas on Slide 13. Overall, we are happy to report positive development in the U.S., which is our biggest market. Similar to EMEA, sales in Americas were hit hard by the drop in demand in Q1 and in particular in Q2. However, we did see solid recovery in the second half of the year, most outspoken in the U.S., where I'm happy to report that we ended the year with positive organic growth in Q4. You do need to bear in mind, though, that revenue in Q4 '19 was relatively -- was negatively impacted by a slowdown in the industrial segment. So the comps for that quarter are supporting us here. On the other hand, Canada showed a very slow recovery trend. And in Latin American markets, we've seen a mixed picture with some markets recovering well in the second half, while others were actually at quite low demand levels throughout the pandemic. All in all, revenue for the Americas came in at EUR 247.6 million and organic growth is minus 12.4%. Looking at the gross margin, we improved it in Q4 compared to Q3 as a result of better capacity utilization. When comparing to last year, though, we see the impact of low capacity utilization we've had during a large part of the year. Higher freight costs also had a negative impact, whereas pricing has a positive impact. Overall, the full year gross margin was 40.6%, which is 1.6 percentage points lower than in '19. The good news is that our cost management efforts throughout the year, in combination with lower personnel costs had a positive effect on the earnings in both Q3 and Q4, which more than offset the drop in gross profit. So this is improving EBITDA margin in Q3 and Q4. For the full year, the EBITDA margin ended on par with the year before at 18.7%. Turning to Slide 14, where we have the numbers for APAC. This region is a bit of a mixed bag, with several markets heavily impacted by the pandemic and other markets actually showing good recovery. But overall, our APAC segment has experienced the most severe drop in the demand. And in general, we've seen slower recoveries compared to many other markets. A large part of this is the reason for the slow recovery in APAC is the fact that we have a large presence in the hospitality segment, such as hotels, restaurants, casinos, and these industries have been very negatively impacted by the pandemic. But we also do see contract clearance and institutions that are having low demand levels. As we mentioned in October in our Q3 announcement, we are not entirely satisfied with our performance in China, even though we have seen a quarter-on-quarter improvement in the second half of the year. I am pleased, however, to see that the Pacific region has been performing both in Q3 and Q4 quite well. As you know, you have been -- we've been struggling with these markets for some quarters. So it is good to see positive indications from this region. Total revenue for APAC for 2020 amounted to EUR 65.8 million, corresponding to organic growth of minus 28%. Gross profit for the full year dropped by EUR 10.4 million, but the gross margin improved slightly to 38.8%. It should be mentioned here that in '19, the gross margin in APAC was negatively impacted by inventory write-downs in Australia in the second half. Costs were slightly lower in '19 as compared to '19 as a result of lower activity related costs, but that was not enough to compensate for the drop in gross profit. So as a result, the EBITDA margin for the full year dropped by 8 percentage points to 5.3%. Now for our consumer and private label segments, let's move on to Slide 15. Starting with consumer, where we once again in Q4, saw strong performance from this business. Our revenue for the full year was EUR 76 million, corresponding to organic growth of 15.7%. Obviously, a strong contrast to all of our other segments. We are very pleased with this performance because it's not only a reset of high market demand in home improvements as a side effect of the pandemic, but indeed also due to a strong effort from our consumer team. It's great to see that the team picked up on opportunities in the market, not just with our existing customers, but also adding new customers during the year. As you know, we've outsourced the manufacturing of our consumer products through a third-party. And we now see the positive effect of this move. Thanks to this and also to an improved product mix. Gross margin for the full year improved. The biggest impact, however, comes from the fact that the consumer business made large onetime sales at low margins in connection with the exit from the Pacific. And this obviously has diluted the gross margin in Q4 '19, but also affect the full year gross margin for the year '19. But overall, to sum up, the year 2020 was a solid year for the consumer business, and we're obviously happy to see this development. For the private label business, total revenue of 2020 was EUR 46.9 million, which is EUR 6 million lower than the year before. This is mainly a result of the gradual phaseout of selected accounts during that year. Organic growth was minus 11.3%. Gross margin improved to 5.4 percentage points due to better product mix. Turning now to the balance sheet and to the cash flow on Slide 16. So since the escalation of the pandemic in spring 2020, we focus quite intensively on proactive cash management. We've worked actively to manage our inventory levels to match the expected demand and we have further emphasized our focus on credit collection. At the end of 2020, inventory levels were down by EUR 23.4 million compared to '19. A large part of this reduction is a natural outcome of the lower levels of activity and reduction in our business compared to the same time last year. And in addition, some of the reduction is driven by FX effects. On our trade receivables, we have maintained our collection efforts, and we've maintained the same level as of end Q3, despite higher activity in Q4. Comparing to end '19, we've reduced trade receivables by EUR 20.8 million. Looking at the underlying KPIs, we've seen a drop on the level of overdues and also in the days outstanding as a result of our continued focus on collection of cash. Trade -- trade payables, sorry, were reduced by EUR 12 million compared to last year, but were up by EUR 12.9 million compared to Q3 end. Overall, if you compare to Q3 end, net working capital was reduced by EUR 13 million, and this was largely due to higher trade payables. All in all, we have delivered good progress on our working capital management and I am happy to see the working capital ratio dropped by 180 bps. Please bear in mind, however, that we will see a reversion of this as a consequence of our anticipated top line growth in the year of 2021. As we've emphasized throughout the year, we have prioritized our CapEx to protect our cash flow. Compared to '19, CapEx for '20 was EUR 26 million lower as a result of lower IT investments, lower R&D activity and to a certain degree, also lower investments in tangible assets, such as tools and equipment. Looking at free cash flow, starting with Q4, we generated free cash flow of EUR 35.4 million, which is double of what we had generated in Q4 '19. Half of the improvement was driven by a better operating result of special items, but cash from working capital reduction and lower CapEx also has contributed. If we look at the full year, free cash flow improved by EUR 38.2 million compared to the year before and amounted to EUR 73.5 million. This was mainly driven by lower CapEx and working capital reduction, as I've explained before, but obviously, a better operating result after special items and lower tax payments has also contributed to this cash flow improvement. As you know, over the course of 2020, we've had a strong focus on reducing our net interest near bearing debt, and we've reduced it further in Q4 compared to Q3. We remain fully focused on managing our debt levels going forward. EBIT at the end of 2020 came in at 800 -- sorry, EUR 383.2 million. This was EUR 30.9 million lower at the end of '19, and it's EUR 19.1 million lower than at the end of Q3. The level corresponds to financial gearing of 3.8x. Our headroom at the end of 2020 amounted to EUR 232 million. So we leave 2020 in a fairly good shape from a balance sheet point of view. And this brings me to the final topic, our outlook for '21. Please move to Slide 18. First, I'll give you some context on the outlook for '21. As you know, we've come from a situation where we have seen demand improve quarter-over-quarter in the second half of 2020. However, moving into '21, there has been an increase in lockdowns and restrictions across markets as a result of the continued outbreak of COVID-19. With the roll-out of vaccines across the markets we expect a more normalized environment during the second half of the year, but we see, however, continued uncertainty for market conditions in the whole year. We expect the total business in 2021 to generate organic growth of 5% to 10% compared to 2020 -- in '21, sorry, as I said that we expect the total business in '21 to generate organic growth of 5% to 10% compared to 2020 based on market demand trends that we are experiencing and the overall expected economic recovery. Structural costs in '21 are expected at a lower level compared to the year before, on the other hand, we expect activity related costs, such as marketing, freight and travel, to increase compared to the relatively low levels reported in Q3 and Q4. So with our continued focus on cost discipline and revenue growth as described above, we expect EBITDA margin before special items to stay in the range of 12.5% to 14.5%. And finally, on other modeling assumptions, we expect a negative FX impact of around 2%, special items of around EUR 5 million and a CapEx rate of around 3%. This concludes our presentation. And now we are ready to take your questions. Operator, will you please take over?

[Operator Instructions] Our first question comes from the line of Kristian Johansen of Danske Bank.

So a couple of questions from me. First 1 is on the balance between sales prices and cost inflation. So first of all, can you elaborate on what level of sales prices you are pushing through into 2021? And also on the cost inflation you are seeing -- as we are seeing more material prices and freight prices and so on as such.

Yes. Thank you for your question, Kristian. So you're right, we do see certain cost inflations as we go into the year. I think I will mention raw materials. But I will particularly mention freight costs, cargo. Sea cargo, at the moment, the rates are sometimes 300%, 400% of what we used to see. We don't expect that to full year, but it will definitely be a headwind in -- for sure, the first half of the year. As for sales prices, we don't really see any new developments. It's basically a continuation of the developments, which was quite positive, which we've seen in the year 2020.

So do you expect to be able to compensate your cost inflation through sales prices? Or will let those 2 elements pros sort of a dilution of your gross margin?

Yes. That's -- at this point of time, quite difficult to predict for us. I can see a scenario where we see both ways. It will very much depend on the freight rates that we see throughout the year and obviously, also on market conditions from a pricing point of view. So at this point of time, I won't be able to give you more specifics on that.

Fair enough. Maybe just a follow-up. So in case that, say, freight cost doesn't normalize, are you able to sort of push through extraordinary price increases? I mean what will your metrics be in the scenario where sort of the cost inflation sort of stays on or accelerates?

Kristian, I'll give you a historical perspective. So this industry has been very disciplined and good at saying there is a yearly price increase. We've done exactly the same. I have not, in my time, seen many try to do extraordinary ones in the middle of the year. I'm not saying we won't consider that, but I'm just giving you historical data that I haven't seen it happen to any significant extent before.

Okay. That's quite clear. Then my second question is on overhead costs. So what you say, it seems like you've had sort of tailwind of EUR 25 million from COVID-19-related measures, meaning there. I think you said EUR 7 million in grants, and half of the remaining reduction must be EUR 18 million in lower travel cost, marketing and so on. So one, is that figure roughly right, the EUR 25 million? And what are you assuming that to rebound to? I mean, is that entire EUR 25 million is going to come back in 2021?

So first of all, you're right, the normal is -- we have to normalize the overhead cost level in '20 for the grants that we have seen. Obviously, they won't come back. Then you're also right, we will see -- and that, of course, I think in marketing costs, we definitely will see a bounce back because that's a leading indicator, and some of it is also reflected in Q4 already. For the travel cost, we will likely also see a bounce back, and we expect that more, I would say, towards the second to fourth quarter. And overall, that, of course, will then be somewhat mitigated by the restructuring program, which we haven't seen the full year effect yet in 2020, as you know, but we'll still the full year effect in '21.

Understood. And then my last question. You and I are guiding for EUR 5 million in special item costs. I mean, you have previously indicated there should not be any special items cost once we get to 2021. So can you just elaborate what these EUR 5 million relates to?

I'm very happy to do that. So honestly speaking, it's an estimate at this point. We do see effect of some of the programs that will continue into '21, but this is very minor. But as it's early in the year, we don't have complete visibility on some of the more longer-term projects that we are working on, whether they will have an impact in '21. So you have to see this as an estimate, a rough estimate at this point of time. Obviously, once we have better visibility, we will be able to say more on this. But there's no -- maybe just to reiterate, there's no major initiatives that you don't know of that we are working at the moment on.

Our next question comes from the line of Casper Blom of ABG Sundal Collier.

My first question is actually a little bit of a follow-up to Kristian's questions regarding cost inflation and freight costs. Basically, just trying to figure out the -- you must have seen much higher freight cost also in Q4. So is the freight costs you see in Q4, is that also sort of a good proxy for the starting point for '21? That's the first question.

Yes. I'm afraid we will see -- our current -- what we see in the market right now would lead me to believe that will actually be a step-up for the Q4 costs. But of course, you have to always tick, there will always be a volume-related component. There will always be a floor-related component. But overall, what we are seeing right now would mean a step-up from Q4 in freight costs.

Excellent. Okay. That's clear. Then on the working capital side, Prisca, you said we should expect a reversal in '21. Is it basically a full reversal of the working capital improvement you see -- saw in 2020 that would sort of just flip over? Or is it more so in between?

So I think we have to separate 2 things. We -- I think we have made good efforts on managing working capital in the sense of days. The turns are going in the right directions, both for DSOs, DIOs. However, of course, we have had a tailwind in '20 from the reduction in business where we were released working capital. Now your question as to how material that will be compared to '20 and '21, of course, it depends very much on the top line growth, and also of the phasing of the top line growth. So at this point in time, what I know is that there will be a reversal. But giving you specifics as to how big that impact is, it's difficult to say at this point as it's very different, whether you take a 5% or a 10% growth rate on the top line.

Okay. Fair enough. Then on the CapEx, you guide for the 3% CapEx of revenue. Could you elaborate a little bit on the split of that between R&D and long sort of tangible CapEx? I noted in your annual report that the R&D spend was down to around EUR 23 million from EUR 36 million in 2019. Should we expect that to sort of come back to where it was in '19?

Yes. As a rough guidance, I would say, on the CapEx ratio, R&D will be roughly half. So CapEx R&D, I would expect roughly half of the 3% CapEx ratio. And then the rest will be other things like tools and equipment, IT and so on.

Okay. Then final question from my side is just on the guidance for 2021. If you could talk a little bit more to what would get you to the high end of the EBITDA margin guidance, I suppose it's relying on growth also being in the high end?

Yes. I mean, it's a very good question, obviously. And of course, I can see various scenarios. And with the range we have tried to cater to a lot of the different developments that we can think of, both in overhead gross margin but also in revenue. And you would -- of course, it would make it quite much easier if we're at the top end range of organic growth also to closer to the top end of the margin range. But as I mentioned before, on the gross margin, there's a couple of uncertainties at this point that would, of course, also drive a different outcome. So it will depend on both gross margin development and revenue.

Okay. Just 1 follow-up. Is there a scenario where you land in the low end of the revenue growth guidance and in the high end of the margin guidance?

No, I will never say never, but what you can tell you is we will focus, as we have done in 2020 on the things we can control. Now I'm afraid I can't really control freight rates at this point, to a large extent, but we can control overhead costs. And we will continue to strike a careful balance between investing in innovation but also containing our costs and looking for mitigation action. So if that case would happen, of course, we do have some mitigation actions that we could pull on the cost side.

Our next question comes from the line of Claus Almer of Nordea.

Yes. I would also like to go back to the whole cost inflation for 2021. I'm a bit confused. So if you only look at the more COVID-19 linked cost in 2020, which will hopefully not repeat it in this year, should we understand that due to that, that the overhead costs will increase by these EUR 20 million to EUR 25 million? Was that a confirmation? Or how should we think about it? That will be the first question.

So I think what we can say is, obviously, we have some one-off effects, and maybe that's the COVID costs you were mentioning somewhere in the range of EUR 7 million on EBITDA level, that will basically not come back. We've seen that pronounced in Q2 and then to a certain extent in Q3. That's government grants in indirect or direct form. So that basically would then be a normalized cost level. And then what you will see is the effect of our restructuring project that we have mentioned, which we have indicated, we've seen about half of the full year effect in '20. So we'll see in the second half in '21, which will lower costs. We are really managing inflation in a very strict way. So we are really trying as best as we can to reduce inflationary pressure on our personnel costs. And then the remainder will be, as I've mentioned, a mix between marketing, travel and bond rate. That will then -- what you call maybe be the rebound of the COVID costs. Overall, I would expect the normalized cost level to increase because of that as a net. But to what extent we will see during the year, and we do have a certain flexibility, of course, of things that we can do internally. And then the coverage restrictions will also have an impact on some of the variable costs.

Sorry, I'm still confused. So can we just leave out the restructuring program. So only the positive impact from, let's call it, COVID-19 for 2020. So normalizing, marketing, normalizing, traveling, no grant and so on. What will be the increase in the cost level due to that? That's the question, if possible.

I won't be able to specify in terms of percentage of millions. But what I can tell you is that we will see net on that an increase of cost.

Okay. Obviously, that would have been very helpful to make our estimates for 2021. Then a question regarding the R&D cost. In 2020, it seems like -- or it seems like you did capitalize less of the R&D cost than we have seen in the past. That could indicate that you are really cutting down the more long-term R&D spend. Maybe you could put some more color to the R&D strategy? That will be my second question.

Claus, so R&D strategy, unchanged. We believe firmly in innovation, as we've always done. No change. We are -- if I go through 2020 with you, we have kept investing in autonomy. We have launched an even better SC50. We've kept improving that product. We've added UV lighting. We've launched SC60, the new product. We've launched a number of midrange products. We have launched a couple of HPW products. We've launched a complete new range of core products for consumer, and I'm probably forgetting a few while we talk. So there is no change, Claus. We are becoming more effective, though. It's a reality that we invested a lot of money in our own platform on an autonomy for SC50 that was what you saw in '18 and '19. We've always known that, that was a sort of upfront investment we needed to do, and we also knew that it would come back. And I think I've communicated that earlier. The other thing that we've done in '20 is that we are now having the China site for R&D being our biggest site. We've scaled up out there during the year. And of course, that does influence the cost structure as well. So we're becoming more effective. The strategy hasn't changed, and we are actually quite content with what we've launched in 2020.

Okay. And then, Hans Henrik you had this slide with robotics, but we haven't seen any numbers. So you used to have a more aggressive ambition. So where are we? How many machines have been selling? Are you still as ambitious for the outlook? That will be very helpful to some color.

Of course, Claus. And guess what, I was the first 1 in the industry being aggressive in September '17, when I said that it could be up to 10% of our revenue within 5 to 7 years. And if I look at what has happened since, I'm actually way more content with that statement that I ought to be when I said it in '17. So nothing has changed Claus on the aggressiveness. I'm not willing to give you numbers because for -- obviously, for competitive reasons. You can hear that we are quite content and happy with what happened in '20 and we've met our internal plan in what we wanted to do with the existing product, SC50. So we are as bullish on that application and segment as we have been since '17.

But will you, going forward, tell us whether or not you will meet your 5- to 7-year target?

We have no intention of communicating anything that can give us a competitive disadvantage. So we were not going to talk about specific volumes, Claus.

Okay. Then just my final question, which goes to one-off costs. I actually have 2 questions more, sorry. But one-off cost, I think you -- in the past, has said no more restructuring program, no more one-off costs. And now '21 will be another one-off cost year. So when -- will '21 be the last year with one-off costs?

Can I rephrase that a little bit, Claus, because my perspective, and it might not completely be aligned with yours, but my perspective has been we've had major restructuring programs over the 3 years I've been here because we needed to set ourselves up differently. I would look at that EUR 5 million as prudent from our side, saying, if something comes up, we would like to be able to execute it if it gives us a benefit. Look at it that way, Claus. This is -- there is no sort of firm program behind the EUR 5 million. This is for us to say, we don't want to be limited if something comes up that makes sense.

Okay. So it would not be employee-related. It will be more investment to...

We do not know, Claus. We have it because we want to be prudent. I don't want to be in a situation if I get a good idea in June, and then I've told you it will be 0, and then you will come back and tell me, you were lying to me. So I'm not going to do that.

That I will never say.

I know, but we're basically putting it in there. We don't have a dedicated program behind it at the moment, but we think it's prudent to say that we might get ideas through the year, and then it would be good to have told you already that it might be up to EUR 5 million.

Right. Okay. And then just a final question. I know you're probably not going to give a quarterly guidance, but maybe you could share some details on how this second, third wave of COVID-19 have impacted Q1?

You know that we will not and cannot talk to current trading. So all you have to look at, Claus, is the trend you saw in Q2, minus 29%. You saw minus 7% in Q3, and then you saw minus 2% in Q4. Look at the recovery trend. And then we are adding to it that we're not through the woods yet. There are still uncertainties out there given the people talk about wave 3 and blah, blah, blah, blah, blah. So look at the trend and then add the speak on top that we're not out of the wood work yet.

But could you see Q1 '21 be like the same as Q1 last year? There was also lockdowns. I know it's a slightly different pattern, but still.

It was a very different quarter last year, to be honest, I don't think you can compare because literally, January and February were corona free. I know we had an impact in China. But the overall majority of our business was not impacted in January and February.

Our next question comes from the line of Mikael Petersen of SEB.

The first 1 goes regarding the guidance of the growth for 2021. You speak about normalization in the second half as being 1 of the assumptions. What kind of assumptions do you have for the first half of the year? That will be my first question.

I think I want to go with where I just left it, Mikael, we're still seeing uncertainty in first half. We are not looking at a situation where we expect to get back to '19 levels. We expect some recovery, but definitely not to that level. Because you can ask me how many products are you selling for airports or for hotels at the moment? Not many, trust me. So we're not seeing a full recovery.

Okay. And then I have a second question on the APAC market. It seems that China is dragging down the division, but the other part of APAC is doing quite all right with Australia, for instance, but also in comparison with the tenants, which also reported here recently, we saw like more or less like the opposite picture that China was doing very well, but the opposite or the other parts of APAC was doing not so good. So can you try to talk a little bit about the competitive situation in APAC and how you see that develop through 2020?

I think you did it excellent, Mikael. You just said that we have a little bit of an opposite situation, where we are happy with Australia and New Zealand and tenant is not. Tenant is happy about China. I'm not and that is the competitive situation in that space. We are working, obviously, on 2 fronts, right? We have a structural situation in Thailand, Malaysia and Vietnam, where the hospitality is an issue. And obviously, we're hoping that for many good reasons that we can all start traveling to those regions again, and that will help. And then, of course, China, we're doing a little bit more fundamental work, making sure do we have the right indirect setup? Do we have the right push on strategic accounts and so on and so forth. And we've now brought China into direct reports to our Head of Sales globally. So we are having focused on saying, how can we do that better.

Our next question comes from the line of Kristian Johansen of Danske Bank.

Just 2 follow-ups here. So first one, trying to address the topic of current trading in a slightly different way. So I mean if we look at how your customers have reacted during the current lockdown here in Q1, is there any differences to how they reacted during the lockdown in Q2?

Yes, there is Kristian, because, quite honestly, everybody was scrambling in Q2 last year because it was so new that nobody really knew what to do. Where I believe that where we are now, where we were in Q4, people are having -- they're finding their ways in how to do things in a safe way and in a different way. So I wouldn't compare the 2 at all. But segment-wise, Kristian, there are just segments that, as I've highlighted, where, obviously, they're not buying cleaning equipment at the moment. So it's just a fact when you have industries like restaurant, hotels, airports and stuff, that is so much under pressure that by including equipment is not first in their priorities.

Understood. And then the second follow-up here on cost inflation. Can you quantify how much raw material costs and transportation costs are as a proportion of sales?

As a percentage of sales, what I can tell you is on our COGS, roughly a 85% are variable, and a large part of that is transportation and raw materials.

Okay. And the split between transportation and raw materials, is that roughly the same? Or that you have?

The overwhelming part, obviously, is raw materials is components of the 85%.

And we have a follow-up from Casper Blom of ABG Sundal Collier.

Just 1 follow-up here. I think you recall that before they started having south, you had a medium-term target. And I think that after IFRS 16, and the target was like 15.7% to 17.7% EBITDA margin. Please correct me if I'm wrong. And as I also recall it, you sort of walked away from having any timing to that target. Now where things are starting to be back on track at least progressing in the right direction, when would you sort of see that old target again in relevant?

The target has always -- thank you for asking, Casper. And let me confirm that you remember right, 15.7%, given the new IFRS 16. The target has always been relevant. I've said it numerous times that I believe in that potential. And honestly, given my learnings from the past, I'm not going to give you a time. I will -- at this -- I confirm that I firmly believe in the potential. And then we will guide you every year and take it from there. I'm not in the business of reinstating midterm guidance or anything like that, just coming out of a 2020 COVID year. I'm pleased to see the uptick in our guidance from the 12.5% to 14.5%. I can't tell you anything more, apart from the fact that I still firmly believe in the potential.

So you also still fairly believe in the high end of that target, which was 17.7%?

Let's get into the interval before we have that conversation, Casper, let's see.

And we have 1 further question in the few at this time. That's from the line of Mikael Petersen of SEB.

I have a follow-up question regarding the distribution center that you now have changed in Europe. Can you try to quantify the financial impact of this?

Yes. But can I start in a different place from that, Mikael? First of all, it's a strategic decision, right? We don't believe we are the world's best at running a warehouse and distribution. So we've chosen to have a 3PL check, which means we've closed down our own centers. It gives us a better -- and we're positioned better down in Belgium than we used to be being here in Copenhagen. So obviously, it has an impact on our freight costs in a positive way because we're more centrally placed. But I really don't want to quantify it as such. But you should see it as, yes, there is a benefit financially, but also importantly, the customer experience will be better given that we're more centrally placed.

Okay. And then maybe a slightly similar follow-up. The savings in the operations that you moved out of Denmark. Are you able to quantify that in any way?

So you mean from taking our Danish center to Belgium?

But you also moved other parts of the organization. For example, R&D you moved out.

That is all -- I mean, those are 2 separate questions, right? What is pertaining to the restructuring program that is included in what we've seen in second half 2020 and the full year effect that we see the second part in '21. So I think that is pertaining to your question to the R&D savings and the shifts that we're doing that we have been doing. On the distribution center, we have definitely incorporated the impacts into our calculations for the guidance range for '21. So this is included.

And as there are no further questions on the line at this time, I'll hand back to our speakers for the closing comments.

Thank you, operator, and thank you all for spending an hour with lots of great questions and a pleasant dialogue. So we look forward to speaking to you soon again. Thank you, and have a good day.