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

Good morning, and welcome to Nilfisk's Earnings Conference Call for the third quarter of 2022. My name is Elisabeth Klintholm, and I'm the Head of Investor Relations and Group Communication here at Nilfisk. Before we begin today's presentation, please note that this presentation, including remarks from management, may contain forward-looking statements that should not be relied upon as predictions of actual results. For more details, please read the content on this slide. To cover Nilfisk's Q3 2022 results today, we have our CEO, Torsten Turling; and our CFO, Reinhard Mayer, presenting. The agenda for today is as follows: Torsten will start off with some high-level commentary on our Q3 performance as well as a short update on the progress we are making with implementing and realizing Business Plan 2026. Following this, Reinhard will give a more detailed run-through of our financial performance in the quarter before handing back to Torsten, who will finish us off with giving some comments in connection with our revised outlook for 2022. We appreciate that you take the time to listen in on the call this morning, and we'll keep today's presentation short and look forward to taking your questions during the Q&A session at the end of the webcast. And with that, welcome to you, Torsten. We are ready to hear your comments to the accounts.

Thank you, Elisabeth, and good morning to all of you. Thank you very much for joining the earnings webcast call today. We will be sharing our business highlights and comment on results for the third quarter of 2022. We will also go into some of the underlying dynamics in the quarter. So let's get started with our revenue development in Q3. In the third quarter, we managed to continue the positive revenue developments from the first 2 quarters of 2022. This was achieved despite the current global economic slowdown and increasing headwinds. Sales reached EUR 263 million, up by EUR 23.8 million over the same quarter the prior year. This translated into reported growth of 9.9% in the quarter and an organic revenue growth of 5.4% in the quarter. Nilfisk Branded Professional business was the growth engine with increased sales in all regions compared to the third quarter of 2021. Organic growth in the Professional segment stood at 10.8%, with the Americas and APAC regions growing by a double-digit percentage, whereas Europe Professional business grew organically by 6.4% in the quarter. Meanwhile, revenue from our Consumer and Private Label business declined notably in Q3, in line with respective end markets. Supply chain constraints continued in the quarter. The lack of critical components like PCB boards still constrained sales growth in the quarter. Our ongoing work to mitigating the effects of supply chain shortages continued. As you know, a tornado destroyed our U.S. distribution center in March this year. We resumed operation and a new facility in record time. However, in Q3, we continued to suffer from parts availability, impacting our availability to supply. Furthermore, our dedicated pricing efforts continued successfully in the quarter and contributed to the revenue growth. In Q3, order intake once again exceeded invoiced revenue. With the continued solid demand for our professional cleaning equipment, the order book at the end of Q3 was marginally higher than end of Q2. On that note, let's move to Slide 6 for comments on our margins and earnings. Overall, in the quarter, margin was temporarily challenged by parts availability issues and lower capacity utilization. Continued parts availability issues from our U.S. distribution center impacted our ability to drive service business revenue and also cause some under-absorption in our manufacturing facilities. We consider those issues temporary; however, they had a significant impact on our margins in the quarter. Pricing largely mitigated raw material cost inflation and continued high freight rates. Furthermore, in the quarter, we continued to invest behind our key strategic initiatives. Overhead cost ratio increased with those strategic investments in growth platforms, our digital infrastructure and our supply chain robustness. Overall, with this margin implications in the quarter, we achieved EUR 20.2 million EBITDA, and the quarter EBITDA margin of 11.1%. With this, I'd like to turn to Page 7 with some commentary on our execution progress in the last quarter on our Business Plan 2026. As we started with the announcement of the business plan and the long-term strategy to sustain long-term profitable growth, we continued strategy deployment throughout the organization. We continued touring our global operations site and shared with our employees the core content of the strategy and business plan. We also embarked on teaching a methodology, which is called Nilfisk Operating System, which is a proven methodology to secure successful execution. So a very positive reception by our people on the key elements of the strategy, and we started to go into implementation full steam. One of the first results is in line with our ambition to drive our sustainability commitments towards new levels. As part of our renewed value proposition, we have targeted to set new benchmarks in our industry when it comes to sustainability. As part of the results that we have achieved with this is a Gold rating by EcoVadis that we have been awarded just a few weeks ago. EcoVadis is one of the most renowned institutions for sustainability ratings. With the Gold rating that we have achieved now, we are among the 5% most highly-rated companies in the world when it comes to sustainability efforts. So this is along our path to continue driving the boundaries of sustainability in our industry. So finally, on strategic priorities, where we have defined a short subset of initiatives that shall help us to drive long-term sustainable growth. In particular, I'd like to mention one of those strategic priorities, which did lead to great results in the third quarter. So our ambition to grow in large scale markets, and in particular in the U.S. market, did lead to remarkable results. In the third quarter, revenue did grow in the U.S. market by 14.5%. This let us grow in the U.S. market despite the tornado incident year-to-date by 11.4%. We continue to see upside opportunity for us in the U.S. market continuing gaining market share. With those updates, I'll pass it on to Reinhard for more details on our financial performance.

Thank you, Torsten. Let's look at the financials of Q3. I would like to start with our operating segments. Our branded Professional business delivered revenue at EUR 237.2 million in the quarter, up 10.8% organically from last year. This performance was driven by a very strong growth in the Americas, which reported revenue of EUR 103 million, and delivered organic growth of 15.9% in the quarter. In Europe, revenue in Q3 amounted to EUR 110.6 million and organic growth of 6.4%. The Consumer business delivered revenue at EUR 12.7 million in the quarter and declined 29.6% organically compared to Q3 2021. Last year, we saw strong momentum from COVID-19 related home improvements benefiting this segment. This year, we faced a completely different sentiment in the consumer market, significantly lower consumer confidence driven by the high inflation and economic slowdown is affecting our consumer business in line with the respective markets. Private label and other business reached revenue of EUR 13.1 million, down 22.2% organically versus Q3 last year. We see the demand from key customers slowing down in 2022, which, in essence, follows the same reasoning as for our consumer business. In total, we grew revenue in Q3, 5.4% organically and reached net sales of EUR 263 million across all segments. Moving to Slide 10 and our regions. Our overall revenue growth of 9.9% in the quarter was due to strong growth in the Americas and APAC region. In Americas, revenue grew with a healthy 14.7% organically. U.S. experienced the largest improvement, while Canada and LatAm grew notably compared to Q3 2021. The appreciation of the U.S. dollar had a positive effect on reported growth. However, supply chain constraints within Americas continued to limit revenue growth in the region. Europe delivered revenue of EUR 132.4 million, a decline of 1% compared to Q3 2021. Professional floor care equipment and the aftermarket business grew in Europe in Q3 '22, while demand slowed across high-pressure washers and vacuum cleaner product segments. Europe South continued to outperform in Europe, driven by strong sales in France, Belgium and Turkey. Europe North and Europe Central faced challenges as demand was negatively impacted by the economic slowdown, though offset in part by solid execution on the price increases earlier this year. In APAC, we saw a growth of 12.8%, leading to revenue of EUR 26.1 million. This was driven by a rebound from China during Q3 as lockdowns eased. Pacific and Southeast Asia markets experienced also strong growth in Q3 2022. One can say our pricing actions supported revenue growth across all markets. Moving to Slide 11 and the income statement. Our reported net sales of EUR 263 million led to reported growth of 9.9%. The foreign exchange rates had a favorable impact of 5.4%, mainly influenced by the U.S. dollar movement. The gross margin came in at 39.1%, 160 basis points lower than prior year. Following are the main influencing factors. First, lower capacity utilization stemming from lower revenue in the Private Label and Consumer business, as well as reduced volumes in vacuum cleaner and high-pressure washer product lines in the quarter. Parts availability issues, as mentioned by Torsten, in the U.S. distribution center is leading to constraints in the U.S. service business and the fulfillment of certain customer orders in U.S. Impact from increasing material costs and continued high freight rates was, to a large extent, offset by our continued pricing actions. Even though we compare developments to Q3 last year, we note that the gross margin improved during the third quarter and is up versus Q2 level this year. EBITDA before special items came to EUR 29.2 million. This is EUR 5.3 million lower than in Q3 '21. EBITDA before special items was affected negatively from gross margin pressures, only partly offset by positive impact from revenue and pricing. The EBITDA margin before special items came to 11.1%, a decline of 330 basis points compared to prior year. The decline was driven by lower gross margin and higher overhead costs. In the quarter, we recorded special items in the amount of EUR 3 million compared to EUR 0.5 million in Q3 '21. Special items were mainly legal and advisory costs incurred regarding strategic projects such as Business Plan 2026 as well as the ongoing liquidation of Nilfisk Russia. Turning now to the balance sheet and cash flow on Slide 12. Let's start with inventories. In the quarter, we continued to actively manage our inventory levels to match business activity. In addition, the quarter was affected by valuation effects following the price increases on raw materials as well as foreign exchange rate movements in U.S. dollar. As a result, inventory value rose by EUR 46.2 million compared to Q3 last year, and we ended the quarter at EUR 248.2 million. Working capital grew by EUR 90.7 million. This was a result of the higher inventories as described, lower trade payables, and an increase in other receivables in connection with insurance claims for our U.S. distribution center in Springdale. Consequently, last 12 months working capital ratio was up by 490 basis points compared to last year. CapEx increased in the quarter, EUR 1.5 million, primarily from investments in R&D, including sustainable products and investments into IT systems. Total R&D spend rose by EUR 1.6 million and came to 3% of revenue versus 2.6% in Q3 last year. The free cash flow in the quarter amounted to an inflow of EUR 17.7 million, up EUR 3.1 million compared to Q3 2021. Cash flow was positively affected by changes in working capital and higher financial income. Net interest-bearing debt at the end of the quarter stood at EUR 365.1 million, an increase of EUR 19 million compared to Q3 '21. Higher net interest-bearing debt in combination with a decline in last 12 months EBITDA led to an increase, 0.3x in gearing to 2.7x. With this, I close my presentation, and back to you, Torsten.

Thank you very much, Reinhard. Let's turn now to our outlook for the full year 2022 on the next slide. Our full year 2022 outlook was revised on October 26 with company announcement #15 of 2022. Based on the first 9 months of 2022 and the current visibility, we now expect organic revenue growth in the range of 4.5% to 6.5%, compared to our previous expectations of revenue growth between 4% to 7%. We expect the EBITDA margin before special items to land around 13% for the full year of 2022. Previously, we expected an EBITDA margin between 13.5% and 15.5%. We mentioned earlier that the gross margin improvement slightly during Q3, and consequently, we expect the margin to improve going into the last quarter of 2022. We also know that the customer demand for professional cleaning equipment remains good. We still hold an all-time high order book at the end of the third quarter. We have been able to mitigate an increasing part of the inflationary pressures with pricing actions in Q2 and more so in Q3. And finally, we are progressing well with implementation of our Business Plan 2026. This plan is focusing on long-term sustainable growth and focus on customer value creation. Key drivers like growth in the large-scale U.S. market, developing service-as-a-business as well as leading with sustainable products will continue to contribute to this growth alongside with optimizing our leadership position in Europe and enhancing the robustness of our supply chain. In addition, we are building our execution engine with the Nilfisk Operating System and creating an execution culture where we see both opportunities and challenges and act accordingly, which is progressing. This concludes our presentation, and we now open the call for your questions.

[Operator Instructions] The first question is from Claus Almer from Nordea.

I have a few questions. The first goes to the gross margin, which declined year-over-year. And according to the report, you are explaining this trend by lower utilization rate, but revenue growth organically is up by 11% for the branded products and 5% on group level. So can you try to put a little more color to this lower utilization rate? That would be the first question.

Yes. Thank you, Claus, for the question. This utilization topic is coming from different sources, not all across. Reinhard mentioned that in relation to the decline in our consumer and private label business, there is some impact on the vacuum cleaner and high-pressure washer category. So this has implications on capacity utilization in that category. Professional equipment overall is growing, primarily driven by the floor care and the service business. Here, of course, we continue to have a very, very good capacity utilization. Then we have capacity utilization issues in our U.S. manufacturing plant due to availability of supply. So also here, our sales growth has been constrained, could have been better. But given the fact we couldn't complete some of the semifinished products due to missing parts, we also see an under-absorption of our fixed cost structure in the U.S. manufacturing plants. So those are the 2 key contributing factors, Claus. So the under-absorption in our U.S. manufacturing plant and the high-pressure washers and vacuum cleaner volume driven absorption coming primarily from the Private Label business decline.

But on average for the group, you're selling more volume, so that must be good for your utilization in general. And also, I guess, the mix should also be positive for the gross margin? Or am I missing something here?

Claus, maybe to add here. I mean the gross margin and when you look at the proportion of sales growth, you recognize also that Americas is growing stronger than Europe. And in Americas, we do have somewhat lower overall gross margins than in Europe. That's why there is a mix effect there. And the second driver is as well that we are having, so the pricing actions started end of Q2. They are leading into pricing improvements during the quarter, as we have highlighted, but the price inflation effect were already strong in the second quarter and basically were fully available to us in the third quarter. So there's also a little bit of a delay effect. Those are the other 2 drivers to the margin, let's say, somewhat mooted versus last year. But as we said, up versus the second quarter, and that is really a good momentum.

Okay. And then my second question goes to this lawsuit that has been filed. One of them is from your insurer. So what is actually going? A bit more color to that?

Well, Basically, as it's a lawsuit, we are not making statements here in public. But you are right that we are, let's say, discussing the values and the compensation of those values. More once we have clarity around sort of the position.

Okay. And then there was EUR 12 million received from insurance in the quarter. How did that impact your P&L in the quarter? Or how does that have an accounting impact?

No P&L impact. Only impacts on, let's say, the balance sheet. And we had highlighted it in a way that there was other receivables, movements on one side, that's our claims. And then, of course, there's cash flow coming in to actually compensate for some of the cash out, which we had earlier in Q2, but also in Q3 for the rebuild of this distribution center. So it is, let's say, a mix of different things, no impact to the P&L.

The next question is from Casper Blom from Danske Bank.

A couple of questions from my side also. Torsten, you mentioned that you still see good demand in the Professional segment. But how worried are you that the current weakness within Consumer and Private Label will eventually also spread to the Professional segment, if we could start there, please.

Yes. No, thank you, Casper, for sure, a very valid point. And as reported, we have seen impacted revenue in the Consumer and Private Label business. And although we report an all-time high order book at the end of the quarter, we see signs of a muted demand in some of the countries in Europe. So this is clearly on the horizon. We still see more supply chain constrained sales growth in the Americas with a super high order book. But in Europe, particularly in the categories that we mentioned before, vacuum cleaners, high-pressure washers, we saw demand in Europe cooling down in the Professional segment. So to some degree, you see, in particular, in those categories, already some cross implications, whereas Floorcare and the service business continue to drive the growth in volume terms, but also in value terms topped up with the pricing activities.

And when you have discussions with your larger customers, I suppose you already now have discussions for next year for the larger ones, the key accounts. Are there any signs there that their demand may cool up a bit next year compared to '22?

So we see slightly different dynamics. When we talk, to your question, Casper, with our large key accounts, most of them are still bullish also for next year. Where we see a little bit more hesitation is in the discussions with our dealers, in particular, with the smaller-sized dealers. So they are more prudent in their outlook for the following year, and consequently keep the inventory levels rather on the lower level. So a bit of different dynamics, direct key account business, those discussions, still we see a good level of demand stack for following year. We see, on the dealership channel, a bit of a more prudent behavior.

Okay. And if one was to sort of maybe draw a scenario where demand actually cools over the Professional segment next year. Can you give any kind of guidance to where volume is right now compared to, for example, 2019 as a pre-COVID level. I mean, can you talk about, if 2019 was index 100, then where are volumes right now, just so we can better understand where it could potentially fall to.

Well, Casper, thank you for that question. But that's, of course, going into what I would call an outlook 2023 question. And as you know us well, we typically would basically provide an outlook alongside Q4 and the annual report. But basically, we will provide an outlook once we have finished our budget discussions with the markets, but also with the organization and have basically a better grip around the market momentum. When we have that, whenever that is, we then will give a better outlook around the volume impacts. And other than that, we cannot really give a different perspective as of today.

I'm actually not looking for any outlook for '23, but just sort of if you could provide where volumes are today versus 2019.

Yes. But we don't disclose, let's say, single product volume movement. I think we have disclosed clear the organic drivers. And when you look at the professional segment, clearly, we have overall for the year, volume growth over and above '19. And when you look to the Private Label and Consumer segment, then you see where we are significantly declining alongside with the respective markets in Europe predominantly.

Fair enough. Then just my final question. You mentioned that you are investing in supply chain robustness. Can you maybe comment a little bit deeper on what it actually is you're doing? Maybe some examples on how to secure that robustness going forward?

Yes. Casper, I'll give you a few examples. The most severe bottleneck that we have in a given plant is in our manufacturing facility in the U.S. So when it comes to sourcing categories with electronics, we are impacted across. But here, of course, forward by diversifying supplier base, that's what we're doing. But when it comes to investments, particularly in our U.S. manufacturing facility, we just, in the third quarter, have completed an additional assembly line. And so we put machinery up to equip additional assembly line. We also have engineered -- it's not yet implemented in the third quarter, but to give you an example, we have engineered and brought on the way a project that will help us for some particularly critical constraining components to forward integrate manufacturing into this U.S. facility. So those are investments in machinery, in new lines that will help us to ease a bit the constraints of supply, in particular, in our U.S. facility. We continue to have an all-time high order book in the group overall, but the biggest proportion of that order book and the biggest opportunity for further growth we have in the U.S., and that's why we're investing in particular there in the capacity expansion.

[Operator Instructions] The next question is from Kristian Tornøe Johansen from SEB.

A couple of questions for me as well. Just on the split between volumes and pricing. So the 10.8% organic growth you report for the professional segment, how much of that comes from pricing?

Well, we will not be disclosing exactly the pricing increase, but it's a bigger share than the volume growth. And let's leave it there.

Okay. But obviously, there is still positive volume growth?

Correct.

And then in connection with Q2 results, you talked about the EUR 10 million to EUR 12 million revenue in the U.S., which you expect to be there from Q2 to second half of this year, can you, in any way, update us on that and potentially also say how much was then realized of that in Q3?

Yes. I mean, the EUR 10 million to EUR 12 million, which we had informed you about, let's say, for the Q2 result. Basically, we could say that the lion's share of that revenue has been captured in Q3 and it's, let's say, difficult to actually nail this number down to a precise value because there's a lot of moving parts. As we have said, we have long lead times anyhow, and in this context, the exact shift is something which I would not like to actually disclose. I cannot disclose it here. But the lion's share of the EUR 10 million to EUR 12 million is captured in the third quarter. And there are some minor rollovers in the fourth quarter. And one of the reasons why we have also been growing our order book in the end of Q3.

Understood. Then to these supply chain constraints, and I think you gave an example of the lack of PCB boards, so just curious with what we're seeing within sort of consumer demand. So obviously, demand for consumer products in general is likely going down. Is there any, I mean, potential spillover to your supply chain, can you give us any thoughts around that?

I mean, what we can acknowledge is that the supply chain constraints have started to become better. So some of the components that were constrained earlier in the year or last year have started to become more available. We still have, however, in the electronics, the most severe supply chain limitations. We do hope indeed that this will get better over the next couple of quarters in line with the overall normalization of the global economy. That's our expectation. However, we have not seen this in the third quarter and have not seen this yet. So we are confident we'll see an improvement also in the electronics over the course of next year. But the actuals that we see yet in our business is still constrained in this particular category. It's probably the most constrained category that we have across all the categories. Other categories, as mentioned, have already improved.

Understood. Quite clear. And then just my last question on special items, you booked EUR 3 million related to Russia and your business plan. So how much more special item costs do you expect for these 2 elements, i.e., Russia and your Business Plan.

Well, we are not guiding on, let's say, the special items. I mean, like the Nilfisk Russia, we take them as they come, and it's, let's say, very difficult to predict activity, and the legal and advisory costs for the special projects we named in connection to Business Plan 2026 are predominantly finished. But that's for this part. Whatever is out there, where we would see, let's say, a need for it, there's no guidance at this moment in time, nor do we have any concrete plans. So I cannot give you a more precise answer than this. So if we would have a plan, we would tell you that and would guide on this, but that is not the case.

Understood. Well, I didn't exactly expect a specific number. It was more to understand the situation in Russia, for instance, how far long are you there? And obviously, if there's still more to be done, I mean does that mean that potentially more special items could come?

I'm expecting that Nilfisk Russia activity is being actually legally winded down by the end of the year. But that's the last plan.

This concludes our Q&A session, and I hand back to CEO, Torsten Turling.

Thank you very much, operator. Thank you very much, everyone, who joined the call. Let me conclude. We have seen a very strong growth in the third quarter with continuation of growth in the first 2 quarters. I think we are well underway with executing on key initiatives. We talked about over and above growth in the U.S. market. We talked about pricing, which we really execute tightly in line with our prior outlined plans. We also continue to make progress on our service-as-a-business growth opportunity. This will be in the light of somewhat softening economy in the future, certainly one of the key elements which will support our ambition towards long-term sustainable growth. So I'd like to conclude the presentation. Thank you very much for attending, and your questions, and we're looking forward to see you soon. Thank you very much.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you very much for joining, and have a pleasant day.