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

Good morning, and welcome to Nilfisk's Earnings Conference Call for the First Quarter of 2024. My name is Tracy Fowler, and I'm the new Head of Investor Relations here at Nilfisk, taking over from Elisabeth Klintholm. To cover Nilfisk's Q1 2024 results today, we have our CEO, René Svendsen-Tune; and our CFO, Reinhard Mayer, presenting. For the call today, we will cover the following topics. First, René will give an update on the Q1 2024 numbers and a Business Plan 2026 update, focusing on our new product launched in Q1 as well as the 4 new products presented at Interclean this week. Then Reinhard will give a more detailed run-through of our financial performance in the quarter. We appreciate that you take the time to listen in on the call this morning. The presentation today will take approximately 30 minutes, after which we will look forward to taking your questions during the Q&A session at the end of the webcast. And moving on to Slide 2 for the usual practicalities. 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. And with this, I will pass over -- the word over to you, René.

Thank you, Tracy, and good morning to all of you. And thank you for joining us on our earnings webcast today. I will start out with some high-level comments on our key highlights for Q1 2024 and a short Business Plan 2026 update, with a focus on our strategic priority, which is leading with sustainable products. So let's go to Slide 4. Nilfisk's Q1 2024 results were in line with our plans, and we have started the year off with a robust financial performance. We saw satisfactory progress across most of our financial KPIs, but let's start from the top with the revenue development. Total revenue came to EUR 259 million compared with EUR 256.4 million in Q1 of last year. This represents a reported growth of 1%. Consumer saw very strong organic revenue growth while Professional and Services saw moderate growth and Specialty remained flattish. This resulted in an organic growth of 3% -- 3.7% compared to minus 2% in Q1 of 2023. Looking at the regions. EMEA saw stabilization in demand for our Professional Business supported by strong growth in Consumer. Demand in America saw a momentum change versus the second half of 2023, which led to solid organic growth. And APAC was impacted by lower demand. EBITDA before special items increased to EUR 34.2 million, and the EBITDA margin before special items rose to 13.2%. Overall, the Q results were in line with our plans and expectations. So let's move to Slide 5 for some comments on product launches. As you know, a key strategic priority is to grow our business, leading with sustainable products. In Q1, we launched an upgraded version of the best-selling vacuum VP300 R. The upgrade is built in a case of 30% postconsumer recycled plastic. Using postconsumer recycled plastic has a better environmental impact and contributes to circular economy. Therefore, this product is a good choice for the customer who prioritizes sustainability. This week, Interclean takes place in Amsterdam, and we have presented 4 new products. Of the new products, SC550 and SC25 represents the next generation of products in their respective product category with Floorcare. We're very happy to see the interest there has been in these products following the presentation we made at Interclean. So let's move to Slide 6 for an update on our sustainability efforts. As per our press release dated 17th April 2024, we are pleased to have retained our Gold EcoVadis rating for the second consecutive year. This reiterates our commitment to our ESG targets in Nilfisk. We are already preparing the groundwork towards a 2024 submission where the ambition remains high, and the focus is to improve sustainability across the business. Alongside with this, we have continued our focus on increasing our gender diversity across Nilfisk, and this remains a priority in 2024. So let's move to Slide 7, and I will hand over to Richard (sic) [ Reinhard ] for financials.

Thank you, René, and let's turn on to financials on Slide 8. In Q1 2024, our revenue increased to EUR 259 million from EUR 256.4 million in Q1 2023, corresponding to reported growth of 1%. Revenue was driven by volume growth across all businesses, and continued diligent price management also benefited revenue. Professional and Service delivered organic growth of 2.8% and 2.5%, respectively, while Consumer delivered growth of 17.2%. Specialty business was flattish at around 0.3% growth. The organic growth in Professional was driven by Floorcare and Private Label, while we saw high-pressure washer declining. Service revenue grew organically by 2.5% as Q1 was impacted by timing of Easter and the subsequent reduced available working days. Adjusting for that effect, organic growth would have been around 5% in Service. The Specialty business was flattish, with organic growth at 0.3%. This was due to a strong comparison period in Q1 2023 and lower demand in APAC. Revenue from the Consumer Business was very strong with 17.2% organic growth. Growing Customer demand supported by our new product launched recently are drivers of growth. Moving on to Slide 9. Looking into the 3 regions. The EMEA region delivered strong organic growth of 5.1% in Q1 2024. The organic growth was led by the Consumer, but the region was also seeing solid growth in both Professional and Service, with price management remaining strong. In total, EMEA delivered a revenue of EUR 152.8 million. The Americas region saw solid organic growth of 3.6% in Q1 2024, driven by very strong growth in Lat Am, coupled with volume growth in the U.S. Price impact remained positive but at a lower level compared to the same period last year. In total, Americas delivered a revenue of EUR 89.3 million. The APAC region delivered negative organic growth of 6.5% in Q1 2024 as weaker demand and market headwinds in China and Pacific led to negative volume growth, partially offset by continued price management. In total, APAC delivered a revenue of EUR 16.9 million. Moving to Slide 10 and the gross profit and gross margin development. The gross margin reached 41.8% in Q1 2024 compared to 40.2% in Q1 2023. The gross margin benefited from volume growth and price management. Cost inflation, including on raw materials and labor, had a minor negative impact on the gross margin. Let's look at the 3 buckets of moving parts impacting the gross margin. Compared with Q1 2023, pricing and mix effects benefited the gross margin with 1.8 percentage points. In addition, freight and distribution costs negatively impacted the gross margin with 0.1 percentage points. Volume growth positively impacted gross profit margin but were offset by headwinds from labor and raw material inflation, leading to a slight negative impact to the gross margin of 0.1 percentage points. Summing up, the gross margin increased year-on-year by a strong 1.6 percentage points. Moving to Slide 11 and some comments on the overhead costs. In Q1 2024, overhead costs decreased by EUR 0.5 million compared to Q1 2023, coming to EUR 89.4 million. The overhead cost ratio decreased in the quarter to 34.5% from 35.1% in the prior year. The structural cost improvements executed in 2023 is compensating for the inflationary effects. Let's have a deeper look into the evolution of our major spend categories. Sales and distribution costs increased by EUR 0.5 million from Q1 2023, driven by merit increases. Administration costs remained flat to Q1 2023, impacted by merit increases, offset by the structural efficiency measures executed in 2023. R&D spend increased by EUR 0.9 million in Q1 2024 in connection with intensified product innovation. R&D cost expensed in the P&L came down by EUR 1 million in Q1 2024 due to higher capitalization. Moving to the EBITDA margin development on Slide 12. EBITDA before special items increased by EUR 6.1 million in Q1 2024 compared to first quarter last year and came to EUR 34.2 million. This corresponds to an EBITDA margin before special items of 13.2% compared to 11% in Q1 2023. The top line growth and price management in combination with lower overhead costs benefited the EBITDA margin, offsetting the increased costs from labor inflation, raw materials and from freight. Moving on to cash flow and working capital on Slide 13. Free cash flow decreased by EUR 20.5 million in the quarter compared to Q1 2023 and amounted to an outflow of EUR 7.4 million. The key driver of this development is the increase in working capital from year-end 2023 as we grow inventory to support new product releases and revenue growth for the coming quarters. As a consequence of our commercial and communicated plan to further invest our product innovation and digitalization, CapEx ratio increased in the quarter to 4.9%. As a result, cash flow from operating activities for Q1 decreased by EUR 15.2 million with a net inflow of EUR 5.2 million compared to a net inflow of EUR 20.4 million in Q1 2023. Total net interest-bearing debt declined by EUR 50.6 million compared to end Q1 2023 and came to EUR 267.3 million. The gearing was reduced to 1.9x compared to 2.4x in the same period last year. Next page, please. So this concludes the financial section. Let's move on to Slide 15 and the outlook for 2024. We confirm the full year outlook as communicated in the Annual Report 2023. As expected, we are now starting to see the pickup in demand and output in 2024, leading to volume growth across products and services. As a result, we continue to expect organic growth in the range of 3% to 6%. The range for EBITDA margin before special items is expected to be 13% to 15%. The CapEx ratio is expected to be around 4%, and special items are expected in line and in range from low to mid-single-digit million euros. And with this, we conclude our presentation, and we are now ready to take any questions you may have. Operator, please.

[Operator Instructions] The first question is from the line of Claus Almer with Nordea.

I have a few questions. The first one is about the revenue growth. So on reported numbers, then revenue growth is 1%. Is that actually an issue given inflation? And also, what should we expect -- and I know you don't guide on FX impact for the full year, but maybe you could give a round number of the headwind that might be hitting for the full year. That would be the first one.

Thank you, Claus. Yes, reported growth is 1%; organic, 3.7%. Where is it stemming from? I mean a large effect is actually stemming from the Turkish lira effects, where we have seen strong volume growth but also effects from the currency. And the other effect, which is around 20% of the foreign currency effect, is from the Argentinian peso. That is more a onetime effect. And the business over there is, let's say, not really affected other than the revaluation, which has taken place most recently by the Argentinian government.

But -- so if you only grow your revenue on reported numbers with 1% and we are living in an inflationary world, would that mean you need to do further cost initiatives or the likes? How should we think about 1% versus your business model?

No, I think the reported growth will go in line with organic growth, up throughout the year. It was just in this very specific quarter we had seen strong volume growth in Turkey and then, with the effect of the currency effects, has led to this difference. And the same was the one-timer in Argentina. Other than that, you do see the normal fluctuations for our, let's say, relevant currencies, which are U.S. dollar, let's say, the British pounds and some currencies. And whatever happens there, I have no influence on, and I cannot predict, but it's part of our, so to say, overall ambition that we grow in Europe and in Americas forward. So whatever those currencies then tend to do to our business numbers and reported numbers, we'll need to see. But we have given an organic growth guidance, and that is, for me, the relevant one.

Fair enough. So if Turkish lira can have such a negative impact on the currency impact, did you really see -- you must be in a significant volume saw from Turkey in the Q1. But did that have a meaningful impact on the volume trend in the quarter?

Turkey has a positive volume impact as many other countries do have volume impact, and we grow across. And it is, so to say, not the major thing, but I was giving you an explanation of the currency effects. And those ones are Turkish lira and Argentinian peso, which account for approximately 2/3 of the currency effect. The rest is dollar, pound and other currencies we have in our portfolio.

Fair. I just ask because I don't think we really have been discussing the Turkish market before. So I was just wondering whether there was a new potential popping up. My second question is about headquarter costs. So if you look at your breakup in the segment, then your headquarter cost has doubled over the last couple of years. Is there any specific reason for that? Or it's just about how you're allocating costs to the different segments? And what is the headquarter cost?

Well, the headquarter cost, let's say, increased of around EUR 2.5 million versus Q1 last year. What are drivers behind that? Well, first of all, we have also merit increases in the headquarter, predominantly, so to say, those personnel capacity costs. The second topic is we are intentionally expanding our marketing activities, our digitalization activities, and they are, so to say, hosted within the headquarter activities to support growth, to support our product launches, and you most recently have seen it very visibly as we have now going first time since a couple of years to Interclean and the booth there, and that's part of the cost expansion.

The next question comes from the line of Kristian Tornøe Johansen from SEB.

A couple of questions from me as well. So first one goes to your contract attachment rate. So you're making a new definition of the attachment rate. Can you elaborate? I mean how exactly did you do the old definition? And what is the new definition? So obviously, what have you changed here? It is not completely clear to me.

Kristian, Tracy here. Thank you for your question. So to be very clear, the old contractor attachment rate was based on all the service contracts we have across all our products. And actually, what we've now focused on is the products that are relevant that we can attach a contract to. So we're now focusing on Floorcare products that we can sell a contract with. So that's the change in the calculation.

Okay. And still only defined on direct sales, right?

Yes. Correct.

Okay. Then back at your CMD, you put forward a target of 40% contract attachment rate for 2026. Given this definition change, what is the change to your target then?

That target remains the same. It is an ambitious target to have the full capturing around the globe, so to say, and the 40% is an ambitious target. But we wanted to narrow down with this redefinition to a relevant substance that we can better speak to, to all the stakeholders involved internally and externally.

All right. Understood. Then secondly, just a clarification. Reinhard, in your comments about Americas, you said the price impact was positive but down year-on-year. I'm left a little confused exactly what you mean by that. To me, it's a bit opposite. So can you just repeat exactly the price development in the Americas year-on-year?

Yes. I mean we don't give special guidance on our price, let's say, increases. But we mentioned to you earlier when we gave out the 2024 guidance that we expect lower single-digit price increases taking place in 2024, and that is the effect, whilst we had significantly higher price increases incurred in 2023. And that's the real meaning of that.

So was prices up or down in Americas in Q1 year-on-year?

Prices were up in Q1, but not to the same extent the price increase lifted revenues in Q1 2023.

Okay. I see. And then on R&D, you are capitalizing roughly EUR 2 million more but expensing EUR 1 million less. Can you just elaborate on this difference in R&D spend?

This is René here. So thanks for that question. I guess this mainly is attributed to where in the phases of develop you are. I mean you can say the capitalization rules are strict in a sense, and you will have some fluctuations dependent on new products started and where we are in the process, what is maintenance, R&D and so forth. So there is no change as such other than there's impacts of phasing.

That's quite clear. But maybe just to help me understand what the interpretation then is. So it means that you have more in an early stage. Is that how I can interpret then or...

Yes. The other way around. We have more, so to say, going into the finalization stage. Some effects, we have seen more products coming out, and more products will come out in the next quarters towards end of the year, next year. So we have actually filled the funnel for new products to come, and hence, a higher level of capitalization is taking place.

Okay. That's quite clear. And then just lastly, following up on the currency discussion. So just in order to help us forward on the exposure to Turkey and Argentinian pesos, can you give us the proportion of revenue for these 2 markets in 2023?

The proportion of revenue in what?

So how -- I mean Turkey and Argentina, how big a portion of your group revenue was these 2 markets in 2023?

I mean I don't have the percentages here, but you can look the revenues up in the annual report. And in that context, Argentinian has not moved a big way, though Turkey has seen good volume growth in the first quarter over and above what was, so to say, the portion of Turkish revenue in 2023. But please look up the annual report, and then you get a flavor of what the revenue is in there.

The next question comes from the line of Casper Blom with Danske Bank.

A couple of questions as well from me, and I'll also take them one by one. First up, if you could provide an update to your U.S. order book and the progress on importing more products from China and Mexico, please?

Yes. Update on U.S. order book, we still have an elevated order book in Americas, especially on the large industrial equipment, though we depleted slightly that order book. However, we have been collecting nice orders in different categories of Floorcare over the course of Q1. So our overall order book, not only for Americas, but also in Europe, is, end of Q1, higher than it was end of Q4 last year.

Okay. Is it still your expectation that you will be able to have a normalized order book by the end of the year?

Yes. That is still our expectation. But let's say, we are not holding back orders if they come towards us. And as we have said, we have seen now good momentum in the various regions, and that is a positive sign overall. So hence, we are pretty confident on our growth numbers for the year. And as you know, we don't guide on orders, yes.

No, I suppose as long as it's demand driven, then it's fine. Could you also give a little bit of flavor to the ramp-up of exporting large Floorcare machines from China and Mexico into the U.S.?

Well, we are very much in plan with our, let's say, capacity expansions towards those machines. First machines have been produced in Q2. All the machines and ramp-up for what we see in Q1 came out of Brooklyn Park.

Okay. Then another question regarding organic growth. I noted that the Professional segment was up 2.8% while Service was up 2.5%. And intuitively, I would have expected Service to grow more than Professional -- the Professional segment due to the sort of catch-up potential. And I understand that there is an Easter effect in this. Could you maybe comment somewhat on the general traction that you're seeing in growing the Service business?

Yes. General traction in the Service business is still very good. So all the brands we have launched is yielding results. Though, I mean, as you have stipulated, we have seen a working day effect between 2 to 3 days for the quarter. And when you calculate that, in terms of people and capacity, you talk between 3.5% and up to 5%, let's say, less working capacity. If we take a conservative approach to it and take the lower number of that range, we get, so to say, into an organic growth range of Service of 5% or slightly more. So difficult to calculate precisely, but the days we could not invoice because people were not working are obviously between 2 to 3 days out of an equation of 65 days, which was prior year.

And then finally, just a follow-up on Claus' question regarding headquarter costs. Can you provide any kind of guidance as to what levels to expect going forward? Given that you are also launching products here in the coming quarters, should we expect this roughly EUR 11 million level to remain for the rest of the year?

Well, we have, so to say, not been giving guidance specifically for the business segments or headquarter costs. So overall, we guide on cost and more or less on -- not on cost but on our margins and on our growth. But yes, we should expect, let's say, headquarter costs being higher than prior year for the product-related launch costs. And that will continue because we have more products to come, more trade shows to support and certainly more e-commerce activities to arrive on the market. And those are the key drivers of the cost increases.

Okay. And actually, just one more on the product launches. I can see from your Slide 5 in the presentation today that several of these new launches from Interclean will not be available for sale until September and October. Will that allow for any meaningful revenue contribution from these products in the current financial year?

This is René here. I think you shall see it exactly as presented that this has effect in the second half of the year mainly. I think that is how this normally works. We have a quite significant launch amount coming, I mean, in Q1, and now in Q2. And we have said also that there is more to be expected. So this is a second half revenue phenomenon.

The next question comes from the line of Claus Almer with Nordea.

Yes. I just had a few follow-up questions. Reinhard, you mentioned that we could look at your full year report about the Argentina and Turkey exposure. I just tried briefly to find these details. I couldn't find anything. So I might be wrong. So maybe you can tell me where it is. Otherwise, it would be helpful if you could quantify the exposures to these 2 markets. That will be the first one.

Claus, this is Tracy here. I mean, obviously, we don't give details on our individual countries apart from the top 10 revenue that's in our annual report. And I think that's what Reinhard was referring to. And I guess you can assess from the fact they're in our top 10 countries, the level of exposure that we have to these 2 countries.

That was last -- but given -- as you were mentioning these markets this year, so are they a top 10 market in Q1?

Yes, we wouldn't guide on that, Claus.

Okay. All right. So my second question goes to the R&D cost. Given these 5 product introductions you have made, does that mean amortization will increase in the coming quarters? Or will the first be in September, October when you expect them to be available for sale? That will be the second one.

I mean the amortization will increase as we launch and recognize revenue, and that is towards Q3 and Q4.

Right. Okay. And the September, October date, that's unchanged from what you expected when the year started out, right?

Correct.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to René Svendsen-Tune for closing remarks.

Thank you, and thank you all for participating in today's call. And we are now looking forward to meeting some of you over the coming weeks out there. And if you have any follow-up questions after today, please do not hesitate a second to reach out to Tracy. She will be waiting for your call. And we will be back on 15 August with the second quarter report of 2024. Have a nice day, everyone. Thank you.