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

Hello, and welcome to the Nilfisk A/S Q1 results. [Operator Instructions] Speakers, please begin your meeting.

Good morning, and welcome to Nilfisk's earnings conference call for the first quarter of 2021. My name is Antonio. 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, should not be relied upon as a 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. We will start by going through the key takeaways for the quarter as well as an update of the business in general. This will be followed by going through the financial performance of Nilfisk, followed by our perspective and adjusted outlook for the financial year 2021. As always, your ambient, let's go to Slide 5 for the key takeaways for the quarter. With the year 2020 now behind us, many things have changed, but we are proud to say that Nilfisk has successfully navigated a challenging environment, and now we have a stronger and more efficient platform for growth. And I want to thank all of our employees for their efforts in this journey. Also, the overall economy has increasingly adjusted to the reality imposed by the COVID-19 pandemic, and we are in a much different situation. Thanks to the disciplined cost control measures and the positive impact of a lower structural cost base after the execution of the restructuring program in 2020, we delivered a significant improvement of EBITDA margin before special items in spite of the negative impacts of freight, and raw material costs. Also, we maintained our focus on working capital in this revenue growth environment. As we communicated earlier this month, the strong trading conditions that we are experiencing, together with the improved visibility of the second quarter, led us to adjust our guidance upwards for 2021 still considering in our guidance the uncertainty related to COVID-19 pandemic and the ongoing supply chain constraints. And finally, as we have communicated, Torsten Turling and Reinhard Mayer are joining the company as new CEO and CFO, and I'm confident that they will further strengthen our leadership team. Let's move to Slide 6 for more details on the business during the first quarter. It has been a key focus for us to keep the business fully operational and to serve our customers throughout markets in spite of the pandemic and supply chain constraints. In the first quarter, we have been able to continue production and distribution with little or no interruptions while demand continued to improve, and the backlog increased further. Demand has been recovering across key geographies. And as I said, overall economy has increasingly adjusted to the new reality. Particularly, the industrial and commercial segments have recovered well. While other segments such as the hospitality segment, remained impacted due to the restrictions of the pandemic. Especially in certain Asian markets, the hospitality segment is a large contributor to our revenue. I would like to highlight that we saw strong performance in the southern part of Europe and also continued growth in the U.S. as we improve our approach to the market. In the consumer segment, we experienced a better-than-expected high season and also high demand from key customers in Private label. Finally, I want to congratulate our design and consumer teams after the successful launch of the award winning, high-pressure washer, consumer product, the Core 140 that you've seen on the slide, which highlights our efforts to drive sales through innovation. And with this, I will start the financial review of the first quarter. First, the income statement. Overall, it was a positive quarter as we demonstrated our ability to address the demand that we saw coming back in the marketplace, while increasing our profitability. The strong performance of the business resulted in organic growth of 11.9% and a reported growth of 8.3%, negatively impacted by 3.5 percentage points of FX effects, which are mainly related to the drop in the U.S. dollar. Our gross margin declined 1.2 percentage points, with a positive impact from increased capacity utilization, being more than offset by the negative impact from higher freight rates and raw material prices and the negative mix effect from higher revenue in the consumer and Private label segments. The EBITDA margin before special items increased by 4.3 percentage points, supported by improved overhead cost ratio as a result of higher revenues and continued cost management. Activity related costs, such as travel and marketing were kept at a low level, while we benefited from lower structural cost base after the successful execution of the restructuring program in 2020. Finally, special items amounted to EUR 0.2 million, mainly related to the remaining cost of the restructuring program carried out in 2020. With this, let's move on to a short review of our reporting segments, starting with Europe. And now we are on Slide 9. First, I would like to mention that as we disclosed last year, the parameter of these segments was changed in 2020, and we are consequently changing the name from EMEA to Europe. This is only a name change and has no impact in the comparison figures. Now positive performance in Europe with an organic growth of 5.5% driven by recovery in demand across key markets, highlighting the good development of the industrial and commercial segments as the pandemic restrictions became less relevant in certain geographies. In the southern region, we experienced a strong performance after the negative impact in Q1 2020, with France leading the recovery. In northern part of Europe, the United Kingdom and the Nordics, recovery is still negatively impacted by the pandemic related restrictions. The central region was also impacted by the pandemic. However, the good performance of the industrial demand in Germany highlights the fact that customers are adapting to the new reality. And finally, the gross margin experience, the positive impact of increased capacity utilization, which was more than offset by the negative impact from higher freight and raw material prices. And the EBITDA margin before special items was impacted by gross margin and also helped by disciplined cost control measures and the positive impact of a lower structural cost base. Now moving on to Americas, and this is Slide 10. We are pleased to see a continued positive development in the U.S., our biggest market, but also a good recovery overall in the region with a total organic growth of 11.2%. We maintained a focus on the execution of our strategy in the U.S., which has led to the expansion of our indirect sales channels and an improved approach to strategic accounts, while we see a good recovery in the industrial segment. Also, we have seen a positive recovery in Canada and in Latin American countries with Mexico, however, still impacted by the development of the pandemic in the first quarter. Increased capacity utilization and lower rebates contribute positively to the gross margin expansion, with improving EBITDA margin before special items, helped also by disciplined cost control measures and the positive impact of a lower structural cost base. Turning to Slide 11, where we have the numbers for APAC. In APAC, the markets are facing very different situations with several areas still heavily impacted by the pandemic and other countries showing good recovery. The Pacific region, that is Australia and New Zealand, experienced solid growth, given the limited exposure to COVID-19 pandemic and the positive economic performance. The high-growth levels in China has to be seen in comparison with a strong decline in Q1 2020, but China is still below the pre-pandemic levels due to the slow demand recovery. Finally, Southeast Asia countries were still impacted due to the exposure in the hospitality industry, such as hotels, restaurants and casinos, which have been very negatively impacted by the pandemic. Also here, increased capacity utilization and lower freight impact contributed positively to the gross margin expansion, with improving EBITDA margin before special items, helped by disciplined cost control measures and the positive impact of a lower structural cost base. Now for our Consumer and Private Label segments, let's move on to Slide 12. So starting with Consumer, with an organic growth of 34%, we, once again, in Q1, saw a strong performance of this business with a better-than-expected high season, driven by new consumer trends related to the pandemic, but also stronger focus on sales execution and new product launches. The gross margin was impacted by increased freight and raw material costs. For the private label business, the strong performance in the first quarter was driven by demand from key customers and resulted in an organic growth of 28.7%. Also here, gross margins were impacted by increased trade and raw material costs. I will now turn on to the balance sheet and the cash flow, and this is Slide 13. Since the escalation of the pandemic in the spring of 2020, we have focused quite intensively on proactive cash management. We have worked actively -- hang on one second. We have worked actively to manage our inventory levels to match expected demand, and we have further emphasized our focus on credit collection. The reduction on working capital ratio of 3.4 percentage points compared to last year was driven by higher revenues and a reduction in working capital of EUR 20.2 million due to continued efforts on working capital management. Compared to the end of Q4, working capital increased by EUR 21 million due to increased trade receivables related to increased business activity and a normalization of inventories. This effect we expect to be present throughout the year. A prioritization of projects and lower activity in R&D led to reduced CapEx by EUR 2.1 million. The free cash flow increase was driven by mainly higher operating cash flow with a higher operating profit being partially offset by higher working capital investments in the quarter, a low level of special items and also a lower CapEx level. Accordingly, net interest-bearing debt was down EUR 46.9 million compared to last year, again, due to the strong cash flow generation and down EUR 4.8 million compared to the end of Q4. So higher EBITDA and the reduction of net interest-bearing debt led to a financial gearing to 3.4x compared to 3.9x reported in Q1 2020. And now we move on to Slide 15, perspectives for 2021. In this slide, we want to show our current view on the perspectives on 2021 regarding the main items included in our outlook. First, organic growth. As you have seen in the first quarter, we have experienced a strong recovery in demand following the decline of organic growth in 2020, and we do expect this recovery to continue. On the EBITDA margin before special items, as mentioned in the presentation, the positive impact of increased revenues, driven by organic growth and the low levels of activity related costs, are expected to be present in the first half of the year, also the negative impact related to increase in freight and raw material prices. For the second half, however, the revenue increase should be less meaningful, while we expect the normalization in the current low levels of activity related costs as the pandemic restrictions are lifted. Also, the negative impact of freight and raw material prices we expect to continue. Finally, we move to the outlook section, and this is Slide 16. First, some context on the outlook for 2021. As we recently announced, and as a consequence of current strong trading conditions in our key markets and improved visibility for Q2, including a strong order book, which, in particular, in the industrial segment can be a result of pent-up demand, we have adjusted the outlook for the full year 2021. The organic growth for the total business is expected now in the range of 8% to 12%, and the EBITDA margin before special items in the range of 13% to 15%. Again, the range provided reflects the better-than-expected performance of the business, but also a continued uncertainty related to the development of the COVID-19 pandemic and supply chain constraints, including pressure on freight and raw material prices. And with this, we conclude our presentation, and we are now ready to take your question's.

[Operator Instructions] Our first question comes from the line of Claus Almer from Nordea.

I just want to ask a few questions. First of all, you mentioned several times this cost inflation and higher freight costs. And I guess, you're not the only one in the world seeing these trends. How do you see the ability to raise prices? Normally, the industry only raise price once a year but given the situation throughout this year, maybe a second price increase may be needed. Do you think you will do that? And do you see there's room for raise in prices? That will be the first question. I'll do them one by one.

Hi, Claus, thank you. It's kind of a tough question because it has to do with our customer relationships. There are certain cost triggers in certain countries where we can automatically raise the price for things, like freight. But the freight on our own -- so components, et cetera, et cetera, it's harder to raise. So it really depends on what the industry does altogether. We have no current initiatives to raise prices above what we normally do.

Okay. So for 2021, the price increase has already been announced, so to speak?

Absolutely.

Normally you do it in the beginning of the year?

Yes.

Okay. Then the second question goes to Q2, and I know you're not providing guidance for -- per quarter. But maybe you could add some color to how Q2 has started, should we think about the momentum that the growth in Q2 this year will more or less offset what the decline was last year.

Yes. I mean, I don't want to be that specific, but the reason we came out early and increased our guidance for the year was, first and foremost, the strong growth we saw in Q1, but also that we have had an increasing order book. So with that, more visibility into the second quarter. So I think and hope that kind of answers your question. And then also keep in mind that the -- last year, we saw a significant decline in Q2. And of course, if you just look at organic growth rates, they should be pretty dramatic here in Q2.

Exactly. So -- and that's probably leading to my third and last question. So given your updated guidance of organic growth, only the upper end of the range more or less compensate or offset the decline last year. To all the momentum we are seeing at the moment, shouldn't it be possible for Nilfisk to return at least to the level you saw better than the level we saw in 2019 or is there still some headwinds? And therefore, you can only go back to, so to speak, the level we saw in 2019?

I think what we are saying now is what we are comfortable with. And also, as we included in our guidance, we have uncertainties when it comes to the COVID-19 restrictions. We've seen the Northern and Southern Hemisphere are kind of bounce off depending on the climate situation in this countries. We have vaccines coming in, which, of course, seems to improve the situation. But frankly, we still don't know. And then we have the dramatic increase in freight pricing. And then I think I would say the most important thing for us right now is trying to get enough components to deliver on our backlog, but also on our expectations for the second half. And I think this is happening across all industries because we see some of our suppliers that also supply to other industries are significantly constrained in their ability to deliver on our forecast. So we'll see what happens.

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

The first one is related to Americas, more directed to the new improvement that you're seeing in the strategic accounts, can you try to elaborate a little bit on exactly what is driving this? And maybe also if the direct sales share, is that increasing compared to how it was the last 2 years?

Yes -- I mean, thanks for the question. It's a very good question. As you may recall, the -- our offering in the U.S. has predominantly been through our big network of distributors and local partners. We have historically not been very strong with big Penn national accounts in the U.S. and a couple of years ago, we started an initiative to basically have a better service organization to cater for these big accounts. This does not mean that we go directly to all of these accounts, but we try to serve them also through our strong network. So it's kind of a win-win for our distribution strategy, but also for the customers that we can serve them nationally. And what we are seeing in the U.S. numbers, as you also alluded to, is that we are seeing more success on winning some of these big accounts.

Okay. And then maybe a question on the nice little perspective that you incurred in the slide pack. You say that you expect normalization of activity related costs primarily related to COVID, I assume. And then in terms of the freight and raw material prices, can you try to explain what assumptions you made there? Is it that H2 will be less negative than H1?

We basically model that H2 will continue with the level that we see in H1. We have no reason to believe otherwise right now. And we talk about other activity ready costs in Q1, we saw still very little travel and fairly little marketing activities. And as markets are opening up, we will see a more normalization of these types of costs. And then, frankly, also when you look at our total business, and you can probably see that when you look at our CapEx level as a good indication of this, we have underinvested for a while, at least when we look at the current activity level. But this was simply something we had to do last year. We did not know how long this pandemic would last. So we will look for us to step up our investments across the board in our business.

Okay. And then maybe a little bit nitty-gritty question relating to the freight raw material prices, you saw this morning that the freight rates continues to go up. And then Q2 effect compared to Q1 effects. Have you made any assumptions there? Or do you just made like an estimate of how much H1 will be?

It really depends on the trade lanes we are looking at. So it's fair to assume that the big increase we saw in Q1 is also what we approximately model for Q2.

And we have another question from the line of Kristian Johansen from Danske Bank.

First question is regarding demand. You also highlighted that the recovery has been stronger than you expected. So maybe just if you can help me understand why that is. So obviously, 2020 proved that your business was fairly sensitive to these COVID-19 restrictions. And obviously, Q1 this year has still been impacted to a large extent by restriction, but obviously, it seems like there's been a sentiment teams among your customers. Can you elaborate a bit on exactly what has driven this?

Yes. That is a very good question, and we struggle a little bit ourselves to exactly dissect this because there can be pent-up demand. I mean our business, as you also see, historically, our customers typically react early cycle with reductions in demand. It is because cleaning machine is -- it is an investment for most customers, and they can postpone that for several quarters and then eventually, they need to replace it. And a lot of our products have a product life cycle of, say, 6 to 8 years. This is why you see these early adjustments. But typically also, as economies recover, we see the other effect, and that is what we are seeing right now. It is simply -- some of the effect we see now is post -- has been the postponement of replacement of machines, et cetera. So that is one effect. Then we have another effect, which is all the initiatives we have taken over the past 3 or 4 years in terms of better geographical coverage of our customers, a better service level. We have the whole investment in autonomous machines. And then we have, as mentioned before, what we call the G50 or key account approach where we want to have better offerings to our key customers, not only machines but also a service offering, also sharing data with them when relevant. So we see our strategic accounts or key account demand actually increasing. We also see traditional customers' demand also increasing. And -- but sometimes we serve markets directly, sometimes we serve indirectly. So it's difficult sometimes to pinpoint exactly what is the effect of pent-up demand and what is the effect of the initiatives we are taking. So we believe it's a combination of both.

That makes sense. Then on the U.S. You say in your presentation that you have had a focus on executing on your strategy. When we spoke a few weeks ago, you said one of the things you hope with the new management team coming in is, obviously, to, I guess, execute with a higher success rate in the U.S. So just trying to understand what your thought here is? Are you going to keep the current strategy and just have, I mean different resources executed? Or will you allow the new management team to sort of assess the current strategy and find out whether you need to do changes? How should we view that?

I mean, first of all, strategy is something that is set between the management team and the Board. So of course, there can be a discussion on strategy, and we always try to refine the strategy. I don't see -- and this is based on the discussions we already had with the new team. I don't see major changes in our strategy, but of course, there can be tweaks. When it comes to the U.S., it does take a while when you cover a market like that for the things you do to actually have an effect. And I think our team over there has diligently worked with, first and foremost, improving our market coverage. So do we have the distributors that are successful that want to grow, are we giving them enough support? The distributors that where we are maybe only a small portion of that business, do they get too much attention that could -- do they get that attention they deserve? So this whole distribution structure has been important for us to kind of improve and we've done that over the past years. And also, as I mentioned before, and the other question here, the way we serve big customers. When we go direct, that it can potentially create a channel conflict, so finding the right balance between when we go direct what is sort of the appropriate compensation to the local distributors as well. That has also taken a way to figure that out. But I think right now, we are seeing things come together in terms of us being able to actually win bigger accounts. So that strategy is working and that we will continue. Then, I mean we are comparatively small compared to our big U.S. competitor in the U.S. and as we can see in Europe -- and as we can also see from their experience in the U.S., the better density you have in your sales, but in particular, also your sales and service organization combined, the better you can simply serve your customers. So the U.S. is also a market where we will probably up the investments in market coverage, not only going -- not only with our indirect channel, but also with our direct channel in the situations where the indirect channel cannot really fulfill the service requirements that we have. So I think this is more of the same, but we will also continue more of the same. And as the U.S. grow, we can also invest more in the U.S.

So a bigger sales force. Is that what you're indicating?

Sales force, but in particular, I would say, the service network, either our own service technicians also -- they are also umbrella service providers that you can lay us with in the U.S. So we have white spots in the U.S. and we have to find a better way to cover these white spots. And that is through a combination of indirect access, sometimes direct access, and then a better service umbrella or service organization.

Understood. And then just on the consumer business. Obviously, it's been quite an impressive turnaround in the last couple of quarters. Any strategic considerations around this business? Obviously, you try to exit, but you're unable to, I guess, the current results would serve as a better foundation for a new strategic review. But what are your thoughts on your ownership of that business as of now?

Yes. I mean, as you know, we are predominantly a professional cleaning business. And then we have consumer, which used to be 10% of our revenues, but now it has become a bigger portion we -- you're absolutely right. We tried to exit the business, but we were not successful. And then we basically said, well, let's -- then at least create a business where we can have a stronger impact in the market where we are. So we exited our consumer presence in certain markets, so enabling us to focus more on the markets that are closer to us. And this, combined with the demand pattern changes we've seen associated with COVID-19 has actually implied that the consumer business is doing quite well. So the consumer business is, again, close to our heart.

So no plans to try new anytime soon?

No.

Very clear. Great. And then my last question, you talked about the risk of component shortages, maybe if you can elaborate a bit on how significant this risk is? And to what extent you have reflected that in your guidance?

Yes. I mean, it is very much reflected in our guidance. And we -- I mean what we and what we and others are trying to do. Conventionally, we have maybe looked at a couple of quarters ahead when we secure key components for our factories. And now we are looking further ahead because with the demand pattern increasing we are seeing at the moment, we need to try to secure components for -- in some cases, we are looking more than a year ahead, actually, 1 year, 1.5 years. And here, we have difficulties getting -- historically, you get commitment from your suppliers, this is what you want. Then we will get that to you. And if you don't -- if you actually don't take what you have promised us to take, there can sometimes be a penalty associated with that. What we see right now is that the -- that our suppliers -- all of our supplies customers are asking for security of component deliveries, 3, 4, 5 quarters ahead. And this implies that our suppliers cannot give guarantees that they can supply to us simply because they also, as we did, they cut capacity during COVID-19, and now they have increased capacity. And now they also see increased demand so we are -- the reason we say we are uncertain. It is not because we cannot deliver at the moment, but we are uncertain when we look 3, it depends on the component of cost. But 3, 4, 5 quarters ahead, we cannot get the guarantees that we can normally get. And this creates uncertainty.

Okay. So there's actually a risk into 2022 on this element as well?

But again, '22 is far away, and we typically resolve it by then. But it is -- I mean, you probably see the same in all your calls with companies at the moment that we are all talking about these shortages.

And we have a follow-up question from the line of Claus Almer from Nordea.

Just want to go back to the comment you mentioned about the U.S., it sounded like you're holding back investments in the U.S. at least as I understood you reply that once U.S. grows bigger for you, then you can also do more investments. Is that correct?

No. I think you should -- I just didn't want to leave the impression that we are pouring money into the U.S. If you look at the coverage we have in the U.S. compared to our competitors, we are significantly smaller. And this is not a gap you just closed in a quarter or 2. So my own -- my comment was basically just to say that we are investing in the U.S., but we are doing it in a prudent manner.

And as there are no further questions, I'll hand it back for any closing remarks.

And we'll see you in the next quarter.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.