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

Good morning, and welcome to Nilfisk's Conference Call for the Second Quarter of 2025. My name is Nynne Jespersen Lee, Head of Group Communications. And with me today are Jon Sintorn, CEO; and Carl Bandhold, CFO. Before passing the word over to Jon, I would like to turn your attention to Slide 2 regarding forward-looking statements. 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 that, I would like to pass the word over to Jon.

Thank you, Nynne, and good morning to everyone who joining us on the call. Before we dive into the second quarter results, let me take this opportunity to briefly reintroduce Nilfisk for you. Nilfisk was founded in 1906 and has grown into one of the world's leading providers of professional cleaning equipment and services. Today, our solutions are sold in over 100 countries through more than 40 sales companies. We have a broad range of industry -- industries from manufacturing to health care to retail and hospitality with a portfolio that spans from advanced industrial vacuum solutions to high-pressure washers and floor care equipment. We have a full range of floor care, vacuum cleaners and high-pressure washers contributing to our ability to meet evolving customer needs. Looking at our regional footprint based on full year '24 figures, EMEA continues to be our largest market, accounting for 60% of revenue, followed by the Americas at 33% and APAC at 7%. We operate across 4 business verticals: contract cleaners and institutions, including education, offices, retail, health care and hospitality; industry such as manufacturing, warehousing, food and beverage and pharma. And for these segments, cleaning, support, safety and compliance. Agriculture, construction and automotive sectors that need robust equipment for demanding environments and consumer households using our vacuum cleaners and pressure washers for everyday cleaning tasks. With that context, let's turn to our second quarter key highlights. A key milestone this quarter was the completion of our production consolidation in Hungary, which strengthened our supply chain resilience and supporting gross margin. As we said we would, we reallocated resources from back-office functions to frontline commercial positions. To protect margins and free up resources for future growth, we launched a cost reduction program in the second quarter. The program is designed to align our cost base more closely with our business volumes and address the rise in overhead costs we saw since Q3 '24. We had another new product introduced. We launched the SW3000, a mid-size sweeper designed for contract cleaners, retail, education and light industry. The product improves maintenance and efficiency and is made of 25% recycled plastic. This product addresses a more premium niche to complement existing products in this category. Another important milestone we reached this quarter was that our net 0 emissions targets were officially validated by the science-based targets initiative, confirming the strength of our climate road map. We are now committed to achieving net 0 across our entire value chain by 2040. U.S. tariffs have continued to influence how we operate. In the second quarter, we were also hit by a one-off incident where we had an extraordinary short-lived tariff level come into effect. Even with these temporary headwinds, we kept a healthy gross margin, which shows the strength and flexibility of our operations. On the back of recent U.S. tariffs agreements, we expect higher tariff level, which we will, with a little lag, mitigate with price increases and supply chain resourcing. Now let's move to some of the key numbers for the second quarter. We reported revenue of EUR 269 million, corresponding to a negative organic growth of 1.1%. And we had an EBITDA before special items of EUR 36.4 million, corresponding to an EBITDA margin bsi of 13.5%, down from 14.1% last year, due to lower revenue combined with increased investments in sales organization and product development. The Specialty business delivered very strong organic growth of 10.8%, supported by solid sales momentum in the U.S. and robust demand for new products. The consumer business saw a decline of 5.1% due to muted demand in predominantly the high-pressure washer category as well as vacuum cleaners. The service business grew slightly by 0.3%, driven by strong field service growth in EMEA. The Professional business saw a negative organic growth of 2.4%. By region, we continue to grow in EMEA and APAC. Americas sequentially improved compared to the previous quarter, but is still showing negative organic growth year-on-year. Turning now to an update per region. We continue to see growth in the EMEA region, which was driven by moderate growth in the service business, strong growth in the specialty business and slight growth within the professional business. The growth in EMEA was negatively impacted by a decline in the consumer business. Although the more fluctuating consumer market softened due to weaker demand for high-pressure washers, we gained market share in Germany and France. Excluding consumer, growth in EMEA was 1.8%. Americas improved sequentially, but is still showing negative organic growth. This was driven by a high backlog in the same quarter last year, a soft demand and lower production capacity in the hurricane-affected U.S. high-pressure washer business, which is held for sale. Excluding the high-pressure washer business, growth in America was showing sequential improvement. In APAC, we continue to make good progress and delivered another quarter of growth driven by a sharpened commercial focus and improved execution under since 1.5 years new leadership. This quarter's performance was supported by major contract wins, particularly in India, South Korea and Australia. Speaking of the wins of India, we would like to highlight an example. We -- in Nilfisk delivered 24 autonomous scrubbers to Ahmedabad Airport. That is our largest robotic deployment in APAC. In just 60 days, the fleet cleaned over stunning 5 million square meters, boosting efficiency and sustainability in a high-traffic water-stressed environment. This has really sparked a significant regional interest, positioning us strongly for future smart cleaning initiatives in India. I will now then hand over to Carl, which will give you more of a financial update.

Thank you, Jon, and good morning, everyone. I look forward to taking you through our financials for Q2 as well as our outlook for the rest of the year. So let's start with the P&L. As Jon just mentioned, we had an EBITDA bsi of 13.5%, in line with our targets for the year. Gross margin was a solid 42.2%, slightly down from Q1, driven primarily by tariffs, but I'll get back to that. Also, we can see OpEx starting to decrease slightly, which enabled us, as mentioned, to reach our target level on EBITDA. But let's go through the P&L a little bit more line by line. So let's start with the first, revenue. Overall, negative organic growth of 1.1%. Breaking things down a little bit, I guess, on the positive note, we are continuing to grow in EMEA, in APAC as well as in Latin America. And if you look at our businesses, as Jon mentioned, the specialty business is really doing well, while the consumer business is a little bit more challenged. Looking at the details perhaps a bit more by region then. So overall, organic growth of 0.7% in EMEA, including consumer, taking consumer out, a positive growth of 1.8%. And year-to-date, so first 6 months, a very healthy organic growth of 4.2%. Turning to APAC. As Jon mentioned, we have made the leadership changes there over the last 18 months. And in the last few quarters, we're really starting to see results. So another quarter of organic growth. Q2 this year, 2.7% compared to negative organic growth of 8.7% last year. And for the first 6 months, very much in the same direction, 2.8% organic growth. So we are at a different momentum in APAC than we were a year ago, clearly. Turning then to our more challenging parts, Americas. As I just mentioned, we have a very nice business in Latin America that continues to grow, while the U.S. is challenging for us. As Jon mentioned, probably the biggest challenge there is the U.S. high-pressure washer business, which is suffering from limited production capacity following the hurricane as we have discussed in before. Looking at the rest of the business then, excluding U.S. high-pressure washer, growth in the second quarter was a negative 1.4%, which is significantly better than a negative 7.7% in the first quarter. So clear sequential improvement, which we are very happy about. So that was growth and revenue. Let's continue down in the P&L and go to gross margin. So as I just mentioned, solid gross margin of 42%, very much in line with where we were a year ago. slightly down from Q1, where we were above 43%. And the key drivers here, if we compare to last year is -- we had materially higher tariffs in the quarter. A little over half of that though was kind of onetime things that we don't expect to see going forward. Even so, we were able to offset both higher tariffs and some under-absorption in our production facilities with the price increases we implemented at the beginning of the year more broadly and more specifically for Chinese goods coming into the U.S. in April. Moving on to operating expenses. At the beginning of the year, we talked about reshaping our cost structure, reducing cost in back-office functions, and increasing sales and service density. We have done this also in the second quarter. But as we discussed after the first quarter, we also have an ambition now to reduce our cost base on a run rate basis, and we started the cost program in the second quarter to address this. We have made significant progress, and we implemented a reduction in force in May. We cannot really see a lot of the impact of that in Q2, but we expect to see that in the coming quarters. And we will continue to take cost reduction measures to achieve our targets here. Moving on then to the balance sheet and cash flow. I guess here is an area where we can see some of the effects of the cost reduction program as we had special items of close to EUR 8 million in the quarter. And we had negative cash flow again. And when I look at it, I think in terms of cash conversion, so where we're able to convert our EBITDA profit into cash flow. And the things that stand out here to me is an increase of EUR 21.6 million in working capital in the quarter as well as the special items of just under EUR 8 million in the quarter. We also had a capital expenditure of about EUR 7.5 million, but that's more in line with plan and actually quite a significant reduction over last year. So that was the results for the second quarter. So let's move on to the outlook for the rest of the year. So at the beginning of the year, our expectation was to grow between 1% and 3% organically and have an EBITDA margin of 13.4%. We reiterate this guidance. And the key assumptions here is that we have stable market conditions in EMEA, so we can continue to perform well there. We expect to have a neutral development in the U.S. compared to last year. And we expect the APAC region to continue on its current pace. Furthermore, those are the things kind of supporting the growth outlook. Looking at profitability then, we expect to be able to offset the current level of tariffs with pricing and supply chain initiatives, as Jon mentioned. Furthermore, we have taken action to reduce our cost base. We've already executed on a significant part of that in Q2, and we expect to see results of that in the second half of the year. So based on that, as I mentioned, we reiterate our guidance. Then looking at our priorities for the year and progress on that. So also at the beginning of the year, we talked about 3 main focus areas. Improvement in our competitive position in North America, enhancement of our operating model as well as executing structural efficiency improvements. So I will talk about structural efficiency improvements and then let Jon discuss the other 2. So in the first half of the year, we were able to consolidate our production facilities in Hungary, reducing our operations overhead significantly. In addition, as I just mentioned, we have made workforce reduction to reduce our operating expenses. And we are in the process of divesting our U.S. high-pressure washer business. And during the second quarter, we also closed a couple of sales entities in APAC to achieve higher profitability there. Looking into the second half of the year, I look forward to realizing our cost savings targets based on our cost savings initiatives that will continue throughout the year. We are also very much looking forward to finalizing the divestment of the U.S. high-pressure washer business. And with the 2 consecutive quarters of negative cash flow, we are looking at addressing working capital to return -- to change the trend here. With that, I hand over to Jon. Thank you.

Thank you, Carl. Then moving on in the strategic road map for 2025, looking at enhancing the operating model. As has mentioned already, we are reshaping our cost structure with the ambition to relatively see more of our resource going into the commercial activities and products and services and less into back office administrative. We have started really to implement the new decentralized operating model and one key activity in this is obviously to reorganize to reflect this new operating model where they have the commercial regions being close to the customers and driving our P&L. Going forward, we will continue to even more tailor our value proposition more effectively across customer verticals that we really take a customer need approach or customer demand approach to our propositions. We will continue to reshape our cost structure and also adapt the financial performance management to align the reporting to the more -- the decentralized operating model for even better and even more effective decision-making. Looking at improving the competitive position in North America, we have reduced backlog and improved delivery performance. We have delayered the commercial organization, and we have continued to work on increasing sales activities and starting to address sales density in this region. And going forward for as a priority for the second half is obviously to continue to increase sales density to drive sales of the new products and to -- continue to improve product and parts delivery performance to enable us to be doing even better in this region. And with that, thank you very much, everybody, for listening, and we move over to the Q&A.

[Operator Instructions] The first question comes from the line of Kristian Tornøe, SEB.

A couple of questions. So first one goes to your organic growth guidance of 1% to 3%, which obviously requires a substantially better second half than your first half. So to the assumptions, you say neutral development in the U.S. versus 2024. I'm just curious on the assumption and the technical treatment of the high-pressure washer business. So assume you sell the high-pressure washer business during the second half of the year, do you then restate previous quarters? So if I calculate right, the high-pressure washer business diluted organic growth for the group in the first half by more than 1 percentage point. Would you then exclude that, or would you only exclude it on a sort of a forward-going basis?

Thanks for the question. Regarding the treatment of the U.S. high-pressure washer business, I expect that we would take it out for the comparison if we are able to divest it during the year, yes.

Okay. So for the first half, if you exclude the high-pressure washer business, your organic growth, as I calculated, would be 0%. So that's essentially what we should look at when benchmarking against your 1% to 3% guidance?

Yes, I think that will be appropriate.

It sounds like you assume to -- yes.

Okay. So you do expect to close the sale of the high-pressure washer. I mean, can you maybe elaborate on that process? Do you have concrete dialogue with buyers at this point?

Yes. We have a concrete dialogue with buyers. These processes are always uncertain, but we have significant interest. So -- we hope and expect to close this. But we don't -- obviously, we don't know now, but we hope to close this before year-end, yes.

Okay. That makes sense. And then just staying on the U.S. because regardless of that transaction, it still requires an improvement in the U.S. You have sort of had some tailwind from backlog conversion acceleration, which I guess you will not necessarily have to the same extent in the second half of the year. What makes you confident in the underlying improvement? And what have you seen in the third quarter so far?

Thank you for the question. No, as you mentioned, then the backlog effect obviously decreases for the -- significantly the second half compared to the first half. So in some -- due to some reasons, we have improved comps, easier comps, so to speak, for the second half than the first half, backlog being one driver. We also have introduced some new products, which we expect will have a better effect as we communicated before, more effect in the second half than it had in the first half. And then we are working on commercial activities, and we will increase density, and those other things are -- and improve our overall performance -- delivery and performance as we have worked on that will have an effect.

Okay. But can you see this improvement in your July figures?

Well, this is a call about the second quarter. But as we said, we are seeing not a gigantic by any means, but we are seeing a sequential improvement.

Okay. Fair enough. Then my other question goes to the net working capital because as you point out, it's a pretty steep increase and a significant drag on cash flow. So what can you do to actually reduce this? And where do you expect net working capital to be at year-end?

Yes. Yes, as I mentioned, we were also disappointed with the cash flow development and net working capital increase in the quarter. What can we do? I think some of the things that increased in the quarter were kind of more natural course of business. So we invoiced quite a lot in the -- towards the end of the quarter in Americas, for instance, which meant that receivables went up that will naturally come down. So that was kind of more temporary effect. In addition, we are starting initiatives to reduce working capital more structurally.

And where do you expect it to be year-end? I mean...

Yes. So I think, let's say, the first focus is to get back to kind of more of a normal level. I think we were at kind of a normal level ending last year. So I think we should be able to get back to that within the next few quarters.

Okay. So Q4 this year should end roughly where you ended Q4 last year. That's the ambition.

Within a few quarters, I said. A few can be 2, 3, 4. But yes, that's kind of what we're shooting for.

Okay. Fair enough. Great.

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

Our first question goes to tariffs and basically to your Slide #13. And thanks for splitting out the impact from tariffs, the 1.9 percentage points. As I understood, you said that the temporarily high tariffs had an impact of a little more than half. So should we sort of on the back of that, expect that tariffs have a little less than 1% impact in Q3, and then in Q4 that you can make it go away due to your mitigating initiatives. Is that the way to think about tariffs for the next couple of quarters?

Yes, so let me be distinct there. So what we have on the slide is the incremental cost of tariffs, so tariffs paid, not the net effect. So that reflects the cost paid. And as I mentioned, yes, a little bit more than half of that were onetime things. So in terms of cost, I think you're right in the assumption. We are also offsetting this with prices. So the net impact is -- we had a net impact in the quarter specifically to that because we made a price increase in April, and that has not completely offset because it takes some time to kind of roll into effect when you make a price increase. So yes, I think we will expect to see about 1% -- slightly lower than 1% impact on the cost side, but that we will be able to offset that with pricing and with supply chain. Yes.

So already in Q3, the net impact would be neutral basically?

No, it will probably take a little bit longer to get the neutral, so more towards the end of the year.

Okay. Okay. That's fair enough. You've previously also talked about moving production to Mexico in an effort to also sort of protect yourself against other -- yes, or other initiatives in the future. Could you give an update on that move?

Yes, absolutely. So briefly, we have done a lot of preparations and gone through how would it work and we've done pilots and all of that. So we are prepared to go ahead if necessary. But at current tariff rates, the business case is not -- doesn't suggest that we move on it. But we are ready to do it if necessary.

Okay. So you just have to plan in that draw, if need be, so to say?

Yes. Net one-off incident that we had, if you take that out of the equation, as of now, it's still better to go with current flows as we have. But we are very ready to move if things would change.

Okay. That is very clear. And then a final question, maybe most of all to Carl. Now you've had a few months more in -- within Nilfisk, and I suppose you've had a better chance to go through numbers and books and so forth. Are you comfortable with your balance sheet as it is today in terms of what items you have? Are there anything on the balance sheet where you see a need for adjustments or impairments or things in the future? Or are you sort of comfortable with what you have inherited now that you sort of have had a chance to go through it in more detail?

Thank you. Very interesting question. So I mean, there are some things on the balance sheet that you're all aware of. So we have the Springdale case where we expect a decision by the courts next year that could have a potentially negative effect. We also, of course, have the divestment of the U.S. high-pressure washer business. We don't know where that will end up, but there's a risk there, of course. I guess the other thing is we are -- we are working on an updated strategy and business plan for the company. And one of the parts there is kind of reviewing our products and project portfolio within R&D. So I mean, that is an area where we made a lot of CapEx in the past. We have a lot of intangibles and inventory. So if that results in changes in our product portfolio that could trigger some additional write-down needs. So I guess -- I guess those are the kind of big things that I see. But that's not anything we have concluded on.

Fair enough. Do you know sort of when you expect to have your new business plan and product planning ready so that you can sort of decide to say, okay, this is the Nilfisk that we want to continue working with.

I think we expect to finalize that during this year.

Okay. So that sounds like something we will hear more about in connection with full years.

I think that could be appropriate. Yes.

[Operator Instructions] The next question comes from the line of Claus Almer, Nordea.

Yes. Also a few questions from my side. So the first goes to the U.S. market and the tariffs, not the impact on the P&L, but more on the competitive landscape. So normally, in the U.S., you have been facing some Chinese brands. How are they acting given the tariffs that have now been imposed to their prices? That will be the first one.

So the question was, how are the Chinese brands acting...

Compared.

Compared?

Yes.

Well, that's a broad question. All in all, we see -- I mean, globally, it's fair enough to see that we've seen -- we are seeing more Chinese brand pop up in the various markets. I think also on the back of -- it's been more uncertain and more costly to drive it into the United States. We did see price increases from several or I can't say everyone, but a lot of participants in the market in the U.S. did impose price increases during the second quarter. It has been a wait-and-see mode with regards to that since then. But I guess it's not unrealistic to believe that people, including the Chinese brands, will move on price and sourcing and what have you in order to mitigate and manage the situation, which is at least a bit clearer now with the recent agreements.

Okay. And then the second question is probably to you, Carl, but actually maybe to both of you. But 1 or 2 quarters into the cost saving program, have you made any new observations or got new ideas to further optimize the cost structure?

Very good question. So I think the themes remain very much the same. We see opportunities to run our supporting functions more effectively. And part of that is just maybe stopping doing some activities that we don't really have to do. We're also looking at kind of the location of our people and our costs to see if we can have a higher share of those functions in low-cost locations. I think an area where -- that we have started to work on in APAC specifically is kind of the -- what does the cost setup look like for being present in the market. So of course, we want to be present in as many markets as possible to serve our customers globally. And there are different kind of ways, everything from having an agent to a distributor to a sales company or local warehousing and local production. And I think we have sales companies in a lot of countries with quite a high-cost structure. So we're kind of reviewing how can we be in many places and serve our customers more cost effectively.

Okay. And then just a final question regarding this production consolidation in Hungary. Should we expect this to unlock some cost savings? Is it more about improving the delivery times and security and so on? If there are some cost savings, when we will see that in the numbers?

There is a gross margin improvement to be had through the consolidation. Clearly, -- and what was the next question you said? You said cost and.

Is there any -- do you also see an improved delivery certainty, or it is mostly about cost?

We will see an increased -- a positive effect on the gross margin. We will also be more efficient in serving now with the regions driving the P&Ls and also the supply chain or distribution responsibility for the distribution activities. So it's an easier collaboration through there. And also, we have had a temporary inventory increase effect because of the actual move into this factory. So we will see some inventory reduction as an effect as well.

You didn't mention that when we talked about the net working capital increase in the quarter. But I guess that's also part of this EUR 34 million increase.

Yes, some safety stock in lack of a better word, during -- for this transition was also part of it.

And that will -- end of Q3, then that will be gone, so to speak?

We will consume it as volumes go, whether that's Q3 or Q4, I don't know.

That was the last question. I would now like to turn the conference back over to the CEO for the final remarks.

Okay. Thank you all for participating in today's call and for your continued interest in Nilfisk. We have a lot of exciting things going on. And we will return with our third quarter report in November and look forward to speaking to many of you over the coming weeks. Thank you very much. Bye.