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

Good morning, and welcome to Nilfisk conference call for the third quarter of 2025. My name is Nynne Jespersen Lee, I'm Head of Investor Relations and Group Communications. And with me today are Jon Sintorn, CEO and Carl Bandhold, CFO. Before passing the word over to Jon, I would like you 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, everyone. So let's immediately turn to our third quarter key highlights. A key milestone this quarter was positive organic growth in all 3 regions. Elevated tariffs from China to the U.S. and softer demand impacted our gross margin through pricing adjustments, supply chain flexibility and operational efficiency measures, we mitigated much of the impact and maintained a solid margin foundation. We continue to execute structural cost reductions, lowering overhead and administrative costs while maintaining momentum in product development, R&D. These changes are already visible in our cost base. In October, we finalized the divestment of our U.S. high-pressure washer business. This step enables us to further concentrate it on our core activities and strategic priorities. We also completed a comprehensive review of our product portfolio to reduce complexity. This included phasing out, selected development projects and inventory items. As part of this transformation, we announced the consolidation of our production from Brooklyn Park into Querétaro. This moves improves efficiency, reduces inventory cost and strengthen the competitiveness of our big industrial machines line. These strategic actions have resulted in significant special items for the quarter, of which most were noncash items, reflecting the execution of decisions that improve our competitiveness and profitability. As we continue to sharpen our focus and strengthen the company for long-term profitable growth, we are making deliberate choices about where to invest and where to step back. Now let's move to some of the key numbers for the third quarter. In the third quarter, we reported revenue of EUR 238.7 million, corresponding to an organic growth of 2.1%. EBITDA before special items came to EUR 30.1 million, a decrease of EUR 0.8 million compared to last year, corresponding to an EBITDA margin before special items of 12.6%, which is slightly down from the 12.8% prior year. The professional business saw organic growth of 3.5%. The service business saw strong organic growth of 5%, driven by strong service performance in EMEA and Americas. The Specialty business saw negative growth of 7.7%, and the consumer business saw a negative organic growth of 13% as a result of continued decline in market demand for specifically high-pressure washers, but also some for vacuum cleaners across most European markets, if we compare it to last year, third quarter. By region, we continue to grow in EMEA and APAC and Americas returned to growth. Turning now to a market outlook per region. We continued to see growth in the EMEA region for the 7th consecutive quarter. Organic growth in the core professional business in EMEA, meaning excluding consumer and private label was 2.8%. This was driven by strong service business growth and solid performance in Professional. M2H is an important part of our EMEA go-to-market strategy to serve contract cleaners, and we are reclassifying its status as our now primary associated company. Americas saw organic growth of 4.3%. And if we take out the recently divested U.S. high-pressure washer business, organic growth was 9.1%. However, is with a fairly low, compare to the same quarter of last year since it was a bit weak due to the SAP Go-Live by the end of that quarter last year. In APAC, we continue to make good progress and delivered another quarter of organic growth and this time of 7.9%. This was driven by professional and specialty business with the large orders across various markets. China's economy continues to face some challenges. In contrast, the rest of Asia and particularly the Pacific region shows good momentum and steady demand. In the first quarter, we presented our strategic road map for 2025, where we highlighted 3 areas of focus for this year, and those were improving our competitive position in North America, enhancing our operating model through decentralization and executing on structural efficiency improvements. And in the third quarter, we have made material progress across all 3 strategic priorities. North America, delivered positive organic growth in the quarter and made significant progress on improving our competitive position. We restructured our operations footprint by initiating the last step of the consolidating of Brooklyn Park production into Querétaro. At the same time, we reinforced our strong commercial presence in the U.S. Looking ahead to the fourth quarter, we will continue to increase sales and commercial density, drive sales of new products and maintain a strong focus on product and parts delivery performance. As for our operating model, we are starting to see positive effects from the increased accountability that has been placed with the regions as part of enhancing the operating model. One example is that we are starting to see effects in terms of lower backlog and better inventory management. In the fourth quarter, we will tailor value propositions even more effectively across customer verticals, continue reshaping our cost structure and adapt financial performance management to ensure an even sharper focus and accountability. As part of executing structural efficiency improvements, we realized targeted cost savings from previously announced restructuring programs in the third quarter. We also addressed working capital and finalized the divestment of the U.S. high-pressure washer business in October, allowing us to concentrate on core activities and strategic priorities. Coming into the fourth quarter, our focus remains on delivering additional cost savings and continuing to improve working capital discipline. In the third quarter, we announced the last step in the consolidating of our manufacturing operations in Brooklyn Park into Querétaro. This will significantly improve our cost competitiveness and operational efficiency. Currently, we are only producing 4 products in our Brooklyn Park site. And those are big industrial machines. The CS7500, the SC8000 scrubber and the SW8000 sweeper will move to Querétaro and the 7765 sweeper-scrubber combi machine will be pruned. This consolidation will deliver approximately EUR 8 million in annual savings, creating a leaner cost base and freeing up resources for growth. So with that, overview, I will now hand over to Carl, who will give you a financial update.

Thank you, Jon. And I will look forward to taking us through the financials of this exciting quarter where we made a lot of good progress on reshaping the company and achieved some milestones and good financial performance. Not least, organic growth across the business, reduction in capacity costs, positive cash flow. And then we will also talk a little bit more about our quite significant special items resulting from these changes. So let's start with the P&L. EBITDA for the quarter, as Jon mentioned, came in at EUR 30.1 million for 12.6% EBITDA margin, very close to 12.8% where we were in Q3 last year. What we see here, of course, is that gross margins have come down a little bit, primarily driven by tariffs, but also under absorption in our factories due to slightly lower volumes. I am very glad though that we were able to offset most of this with a reduction in our operating costs. Also important to highlight is, as Jon mentioned, M2H is a partner of ours, serving the contract in the segment in France. It's a partnership we have for more than 2 decades, which has been extremely successful in serving this customer segment. We own 49% of the company. And when we are working now in our new decentralized structure and developing go-to-market strategies for the 3 regions separately, we see that this is a key component of the way we want to go to market in EMEA at least. And therefore, we are recognizing that this is a core part of our company, and we include M2H's profit contribution in our operating profits. And as you can see in the box here, the Profit contribution from M2H last year was close to [ EUR 5 million, ] revenue close to EUR 90 million and the profit of -- close to 18%. So a highly profitable business. And over the time, when we have worked together, M2H has also built a very strong balance sheet with over EUR 40 million in cash, which is not included in our balance sheet in our financials. So a little nugget in the Nilfisk portfolio. And talking about the EMEA go-to-market strategy, let's look a little bit on growth. So the third quarter of 2025 was another quarter of growth in the EMEA region. So across all our businesses in EMEA, we grew 0.1%, but as Jon also mentioned, when you look at the core professional business, i.e., excluding Consumer and Private label, we grew close to 3% again. So another solid quarter there. On the consumer business, this is a business where 2024 was a super strong year for the market as a whole and for Nilfisk. And compared to that, we are coming down, where we see the market coming down specifically in the high-pressure washers, but also slightly in Max. But we see that we maintain or even improve our market shares across markets in Europe. For instance, we can say that in September, in Denmark, we had a 45% market share in Max. I'm also very, very glad to see that Thomas and the team in APAC delivered a third consecutive quarter of organic growth. So we see really solid performance there despite some volatility in some of those markets. And as we have talked about before, a few really nice projects where we are installing autonomous machines in airports and other locations across the region. And then going to Americas, where we have been a little bit more challenged recently, a nice quarter with organic growth, again, realizing that the comps from last year was not so high as we have SAP Go-Live in September. But still a nice performance and fun to see that we grew in the market. That said, I think it's important to note that the market in Americas, particularly has been quite volatile throughout this year, with a lot of uncertainty for our customers as well as for us with tariffs as well as a 42-day government shutdown. So we can see quite a lot of volatility between months in how our customers have behaved. Looking ahead, we expect this to come down a little bit now that the government is open again and the tariffs have stabilized. Talking about tariffs, let's move on to gross margin. So we had a fair gross margin of 41.2% in the third quarter, where price increases and mix offset tariffs and under absorption in the factories. Looking ahead, now tariffs have stabilized. Of course, going forward, we expect them to be at a higher level than what they were before March of this year, but more in line with what they were now in Q3. Also to note, as Jon mentioned, we have taken quite significant steps during 2025 to improve our production footprint. So we concluded the consolidation of our 2 factories in Hungary in the end of Q2. And now we are executing the consolidation of our 2 production sites in North America, into Querétaro during Q4 and Q1 of next year. And as Jon highlighted, the second will contribute by about EUR 8 million in cost savings and the two together a little bit over EUR 10 million on an annual basis in reduced production overhead. Talking about overhead then, let's look at other parts of our overhead. We did manage to achieve quite a significant reduction in overhead in the quarter compared to the third quarter last year of about EUR 3.5 million. This was primarily driven by head count reductions in support functions or admin costs, somewhat offset by slightly higher total costs for product development and slightly lower capitalization ratio of our total R&D expenses, which is a result of product portfolio and project portfolio review that Jon mentioned earlier, which means that we are refocusing our R&D project portfolio. And in the changeover, we see that capitalization is a little bit lower, but we expect this to come back going forward. And elaborating a little bit here, the move in the U.S. also means that we are moving some of our R&D resources to locations where we have been more productive in R&D projects. And when we look at the R&D portfolio going forward, we will focus more on facelifts and cost downs rather than big moonshot projects. So we expect this to change going forward and to continue to improve our competitiveness. Yes. So we saw positive cost reductions in the quarter. If we look at the trend on overhead costs, we talked earlier in the year about reducing our overhead cost by 6% to 8% by the end of the year, and we are making very good progress on achieving this. So if you compare to Q3 last year, we are down a few percentage points if you compare it to Q1 of this year, the third quarter reported number was down by 12%. Some of this, about 3 percentage points is FX, but even adjusting for that quite a significant improvement on cost sequentially. So we feel confident that we will be able to reach our goal of reducing overhead by 6% to 8% before year-end. And at the same time, you can also see that we are making good progress on reshaping our resource allocation where we are using fewer of our resources on administrative tasks and more on sales and product development, which will improve our competitiveness and hopefully return us to consistent growth going forward. Another positive development in the third quarter is on cash flow, where we had close to EUR 17 million in positive operating cash flow, and slightly more than EUR 10 million in free cash flow in the quarter. So while I'm glad to note a positive development in the third quarter, of course, we still have not had strong cash flow year-to-date as we have built up quite high inventory levels, and we have invested significantly in our restructuring programs. But we do still see quite a significant opportunity to reduce inventory and strengthen cash flow in the coming quarters. But reducing inventory is an integral part of how we manage our supply chain and releasing that inventory will require us to change how we operate significantly, which we are making progress on, but it's a lot of hard work. So talking about changes in how we operate. We made a number of changes in the quarter that we have touched on. We also made a number of decisions. And all of this has resulted in some significant impact on our accounting, especially -- especially in so-called special items. So with looking at this from the perspective of what are the changes we have made, which I think is the important takeaway here, and how is that changing the business. So firstly, as Jon mentioned, we were able to close the deal on divesting our U.S. high-pressure washer at the end of October. As we have mentioned before, this is in a business that is not part really of the core of what Nilfisk offers our customers, it is not sold to the same customers, it is not using the same technology that we use in any of our other high-pressure washer businesses. Following the tornado that hit the facility last year, and this is also a business that have had a negative profit contribution by about EUR 1.5 million on a full year basis. Also, obviously, an impaired business, so we were not able to get that much value when we sold it, but at least it was cash flow positive, but it meant an impairment of about EUR 11 million that we took in the third quarter. Also, as touched on before, we are consolidating our North American footprint by moving the last production from Brooklyn Park to Querétaro Mexico. The objective here clearly is to reduce our production overhead, improve efficiency in the factory and improve our long-term competitiveness. This resulted in special items of EUR 6.4 million, out of which just EUR 1.4 million was cash. This is primarily related to write-downs on fixed assets in the factory, but also impairment or nonprofitable contracts, i.e., the lease on the facility in Brooklyn Park. On that same direction, we also have reviewed our product and project portfolio to make sure that we focus our efforts on the products that we see as core to our assortment going forward. This will enable us to focus our product development, on keep maintaining and updating the key products, which is something that we have under invested in, in the last few years. So consolidating the product portfolio will enable us to keep our portfolio current. And it will also enable us to work on component commonality across our product platforms to reduce our costs. This product portfolio pruning will result in some quite significant impairments, EUR 23.3 million, which is mostly intangible asset resulting from capitalized R&D expenses in the past relating to these products, but also some inventory of products that we don't expect to sell. Those were really the bigger items. We also have some other things and special items. We have used some consultants in conjunction with working through these restructuring programs and our updated business plan and strategy that we expect to elaborate on in our annual report, and we have some updates on a couple of legal cases that we have communicated before. So that was quite a lot, but a lot of special items, I think, were worth to discuss. If we then start to look ahead and our outlook for the rest of 2025. We are narrowing our guidance on growth. So we're going from expecting an organic growth of 1% to 3% to guiding that we expect growth to be around 1%. And as we get closer to the year, we can see that getting to 2% or 3% organic growth does not seem very likely, which is why we set it to around 1%. On EBITDA margin, before special items, we maintain our guidance of 13% to 14%, which is supported by the progress on reducing our costs and expected stability on tariffs and such things. Supporting this outlook are a number of important assumptions. Firstly, continued stable market conditions in EMEA, also that APAC region maintains moderate growth for another quarter. And as I touched on briefly before, that the uncertainty for our customers in the U.S. is reduced now that the government is open again and the tariffs have stabilized. So those are our expectations for the rest of the year and the assumptions behind that. Thanks, everyone, and I return the question or the mic to Jon.

Thank you, Carl. And with that, our presentations have been concluded, and we hand over to the operator for Q&A and questions.

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

A couple of questions from my side. On your guidance assumptions. Just to clarify, the 1% organic growth you are guiding, is that including or excluding the high-pressure washer business?

It is excluding high-pressure washers in the U.S.

It is excluding, okay. So what is the organic growth rate for the group in the first 9 months, excluding. So I think I assume these minus 0.2% you're reporting, that's including the U.S. high-pressure washer business, correct?

Yes, that is correct, Kristian.

Okay. And do you have that number excluding?

Not on top of mind, I'm afraid.

Obviously, the reason for asking is to try to calculate what you are sort of implicitly guiding for Q4 because if I just take the -- the minus 0.2%, I get to an implicit guidance of 4.4% -- sorry, 4.7%. But obviously, that's wrong. If the 1% is excluding because then the minus 0.2% is not the right number to use, so, yes. If you have that number afterwards, that would be useful. Then the other question I had was just on your margin guidance of 13% to 14%. Obviously, you get a tailwind of 0.5 percentage point from the M2H reallocation. But still 13.2% for the first 9 months and keeping the other end, the 14%. Just curious what scenario you see which could take the full year margin to 14%?

No. As you say, we are above 13% and generally, Q4 is a strong quarter for us. So I think there is an opportunity that we will have quite a high margin in Q4. So that is within the realm of possibility. We have also seen -- our gross margin improved sequentially over the last couple of months. So I think we still see that we will sort of be within that range.

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

A question on divisional level. Your professional business looks as it's a bit getting particularly hit by tariffs here in this quarter. Can you give any kind of guidance as to whether you expect that to recover in Q4? That's the first one, please.

We will see a gradual recovery in the course of fourth quarter and then moving into the first quarter, on the back of operational activities that we have done to mitigate, but also on the back of some price increasing that we have initiated early this quarter.

Okay. Will you see full benefit of that price increases here in the quarter if you've initiated in the quarter, I guess, not so expectedly some carry on into '26 also then?

That's correct. And obviously, we monitor this very closely with effects in the markets, obviously, the stickiness of the pricing but also how the volumes develop. But it was initiated early this quarter. So it will not have the full effect until early next year.

Understood. Then on the service business, the EBITDA margin here is -- looks as if it's up compared to Q2 and Q1. Has there been anything sort of unusual going on there?

No, I think there is some variability in the margin there, depending a little bit on the mix between service labor and parts sales, basically. So that, I think, explains that there is some fluctuation quarter-to-quarter in service profitability.

Okay. And then just a final question. Will you be providing adjusted divisional EBITDA numbers given the change of accounting on associates?

Excellent question. I haven't thought about that. Let's -- we need to think about how we do that.

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

Also a few questions from my side. So the first one is the special items and the cleanup you've done on the balance sheet. Should we expect more cleanup in the coming quarters? Or was that it? That would be the first one.

I don't expect anything like this in the coming quarters, no. We have done a good review of both our business plan and our balance sheet. And I think we have taken the big items now.

So we see big items. So if you -- if more adjustments were to be made, in what area would that be? .

I don't expect any more adjustments, but I expect that we will continue to have some special items related to severance payment for additional cost reductions.

Right. Then the M2H reclassification, what is the ownership of that asset?

So Nilfisk owns 49% of the company and the remaining 51% is owned by the founder. .

And how are you then able to include it in our EBITDA?

It's -- we classify it as an operating or as a primary subsidiary.

But isn't that -- I'm no accounting expert, but isn't that you need to have split control of the company to put into your operational performance?

Well, you need -- we need control of the company to be able to include the whole P&L in our P&L. But we're only including the operating profit as part of our operating profit and that we can do for associates.

Okay. All right. And then just coming back to the U.S., excluding the whole tariff things, but the shutdown of the government should maybe postpone some orders or revenue from Q3 to Q4. Have you seen any -- or do you expect any impact from that or it's more gradual going also into 2026?

Well, coming from a fairly strong October, we have seen that the order intake in November has been weak, weaker than anticipated. So on the back of uncertainty. So we anticipate that the reopening of the government and tariff stabilization, we anticipate that it will somewhat improve the market activity level. So yes, we have seen effects. .

Okay. And so you say strong October, weak in November. If you sum those up, is that then in line with expectations? Or is it above or below internal expectations?

I guess, so far, in average-ish, in line with expectations. But as we stated, we anticipate that market activity levels pick up somewhat on the back of the reopening of the government.

Ladies and gentlemen, that will be the last question. I would now like to turn the conference back over to Jon Sintorn for any closing remarks.

So thank you all for participating in today's call and for your continued interest and caring about Nilfisk. We will return with our full year 2025 report in February and look forward to speaking to many of you over the coming weeks. Thank you very much, and goodbye for now.