Nilfisk Holding A/S

CSE:NLFSK

Earnings Call Transcript 2023-Q1

[Elisabeth Klintholm, executive]

Good morning, and welcome to Nilfisk's earnings conference call for the first quarter of 2023. My name is Elisabeth Klintholm, and I'm the Head of Investor Relations and Group Communication here at Nilfisk. To cover Nilfisk's Q1 '23 results today, we have our CEO, Torsten Turling; and our CFO, Reinhard Mayer, presenting.

For this call, we'll cover 4 topics. First, Torsten will give an update on the numbers and key drivers for the quarter, followed by a business plan 2026 update on the efficiency measures that we are implementing. We will also share some deeper insights into the service business. Then Reinhard will introduce our new financial reporting structure that was presented last quarter and has taken effect from this quarter. And after this, Reinhard will give a detailed run-through of our financial performance for Q1 2023. And lastly, he will comment on our outlook for 2023. 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 look forward to taking your questions during the Q&A session at the end of the webcast.

I'm moving 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, I refer to this slide and to the disclaimer in our Q1 '23 report. And with this, over to you, Torsten.

[Torsten Turling, executive]

Thank you, Elizabeth, and good morning to all of you. Thank you very much for joining us on our earnings webcast today.

I'm looking forward to commenting on the highlights of our Q1 results and the related business drivers. If you turn to Slide 4 of the presentation for the highlight. In terms of revenue, total revenue came to EUR 256.4 million in the first quarter 2023. This represents an organic growth of minus 2% in the first quarter compared to plus 9.3% in the first quarter of last year. In Q1, we experienced the continuation of the sharp decline of our consumer and private label business by 25.4% and 37.2%, respectively, in comparison to last year's strong Q1 revenues in those segments.

On the other hand, our branded professional business continued to grow. In particular, the Service and Specialty segment achieved good organic growth of 6.5% and 6.9%, respectively. Revenue in Q1 this year has been constrained by a supply bottleneck in our Americas operations. Q1 volume output landed below Q1 2022. The volume output was impacted by the SAP Go-Live at our production site in Mexico as well as continued supply shortages for critical parts, particularly impacting our Americas plants. The lower production volume from our Americas plants not only impacted sales in the Americas region, but also in our EMEA region.

On the other hand, order book remained healthy and strong, in particular, in the Americas region, and we remain high on a similar high level like in Q1 2022. When it comes to margin, diligent pricing actions continued to positively impact profitability. On the other hand, margins were still negatively impacted by the ongoing recovery of our U.S. distribution center and the related lower sales of parts. Overall, gross margin came to 40.2% in Q1, continuing our margin recovery over the last five quarters. The slightly lower revenue in combination with higher overhead costs, led to an increase in the overhead cost ratio to 35.1% in Q1 2023 compared to 31.5% in Q1 2022. As a result, EBITDA margin before special items came to 11.0% in Q1 this year compared to 14.2% last year.

The overhead cost ratio is expected to decline over the course of the year 2023 as business plan 2026 cost efficiency measures begin to take effect. Free cash flow improved significantly in the quarter by EUR 35.8 million and came to EUR 13.1 million in Q1 2023. Investments into our Business Plan '26 continued in Q1 2023. Overall, those Q1 results were in line with our plans, and we confirm our outlook for the full year 2023.

Moving to Slide 5 for an update on business plan 2026 and in particular, on the structural savings actions embedded in that plan. As mentioned before, the overhead cost ratio is expected to decline during the year 2023. This is based on our business plan '26 cost efficiency measures that have been initiated and will begin to generate savings going forward. The aim is to enable strong long-term performance while achieving structural efficiency improvements. Let me take you briefly through three examples of those structural improvement measures. As part of our revised operating model, we have started to put regions in place and move to an operating model from global functions to a regional setting. We started doing this in the second half of 2022 in the Americas region. We continued to do this in the first quarter of 2023.

In the EMEA region, and we'll complete this transition in the second half of this year by setting up a region for the APAC geography. The rationale of setting up those regions is to create customer proximity, stimulate growth and get to a more efficient execution. At the same time, it allows structural savings. As an example, by the creation of the Europe region, it allowed us to delayer the three subregions that we had in Europe. That delayering took place early in the second quarter this year and will drive savings and better execution for the remainder of the year.

A second building block that we had implemented in Q1, which is this functional integration of our customer value creation processes when it comes to innovation, product management, and service and customer care. So those integration will lead to a more end-to-end responsibility for our process, better customer value proposition, but also more efficiency in our process and shorter time to market. One particular example out of the structural efficiency coming along with that measure is the integration of our service and customer care back-office function. And a third example how we drive as part of Business Plan '26, fundamental structural efficiency improvement is the process and entity optimization.

We did an in-depth process mapping in the second half of 2022 and got to clear findings of improvement potential by standardizing our processes, reducing complexity and increasing the share of automation. You see on the page a snapshot of the findings of the mapping where a good proportion of our process still run manually, partially even despite existence of systems, which leads to higher structural costs. with a more standardization and more digitalization of our processes, we'll be able to substantially reduce our structural cost.

Overall, with those key measures and further ones, we aim achieving savings of EUR 10 million to EUR 12 million for the remainder of 2023. The full year effect of those savings going forward is targeted to be around EUR 15 million to EUR 18 million going forward. In connection with the structural efficiency measures, special items for this year are expected to be around EUR 10 million to EUR 12 million. This level includes the special items that we saw already in the first quarter of EUR 2.2 million.

Moving to Slide 6 for a deeper look at our service business. As we presented in prior calls and in the context of our business plan 2026, developing service as a business is one of the most fundamental growth platforms that we have embarked on. And those activities and the focus is yielding results. Of course, it started with investing into our leadership team, investing into new technology, investing into new processes, but those investments are now yielding results.

You can see that in 2022, we continued our growth journey towards our ambition in 2026. So we started last year -- we started the journey with 27% service revenue on the total revenue, and our ambition is to move to 35%. In the first quarter, on the path towards that longer-term ambition, we achieved 30% revenue proportion. And we are confident this will continue to grow as service in the first quarter has delivered and contributed over proportional revenue growth. One of the key levers to drive revenue growth and enhance the value proposition to our customers is to increase the contract attachment rate.

Now the starting point of that contract attachment rate was very low. I mean, compared to other industries and even within our industries, we certainly have not been leading in this particular metric. But we have clearly set course on driving this metric up -- and with this revenue growth, but also margin improvement in the service business. So what we have achieved after 8% in the full year last year and the third -- in the first quarter this year, 11% contract attachment rate for our direct new equipment business. So this is expected to continue to increase up to 40% by 2026.

As we started this segment reporting, we have seen that this part of our business is among the most profitable areas of the business. 26.6% EBITDA margin in our service business. So we have all good reasons to focus on growing that part of the business. And our long-term ambition as part of Business Plan 2026 is to improve further this already high profitability. In the first quarter 2023, you see we had a slight reduction compared to the full year 2022, which is due to the fact that the field service part of the service has grown faster, faster than the parts part.

There's more margin in the parts part and the field service part has grown faster, but there's a bit lower margin in the field service. Within the field service, however, we have been able to improve margins, and we'll expect to continue to see margin improvement in our field service and also growth in our parts business. So overall, we feel very confident that after the investments we have done to set up the service business in a completely new dimension, we are on a good path now to yield results in the remainder of the year and towards our Business Plan '26 ambitions. With those highlights, I'll pass it over to Reinhard for more details on the financials.

[Reinhard Mayer, executive]

Thank you, Torsten. And as announced at our Capital Markets Day in April 22, and again, last quarter, we have been implementing a new segment reporting that supports business plan 2026 and is aligned with our growth platforms. This is a natural step in providing transparency on our financial progress of our strategy. Let's have a short recap of what we are changing with the new segment reporting on Slide 8. The new segments follow the business categories in Business Plan 2026 and is aligned to our organizational design. We provide revenue, gross profit and EBITDA before special items for each business segment. .

We have introduced four new business segments: Professional Business covering all professional machines, floor care, vacuum cleaners, high-pressure washers and also it includes private label segment. Service Business contains a comprehensive range of service solutions throughout the life cycle of our professional cleaning equipment. It also includes parts, accessories and consumables for the professional business and industrial vacuum solutions, in short IVS. It doesn't include service for food and consumer segments.

Specialty business is covering IVS and Nilfisk food product segments. The last business segment is our Consumer business, which covers consumer machines as well as service and PAC related to consumer products. Finally, headquarter covers overhead costs related to typical headquarter activities such as group management, group reporting, investor relations, corporate communications, et cetera. With the new segment reporting introduced once again, we move on to the financials on Slide 10. Our revenue of EUR 256.4 million was EUR 7.8 million lower than in Q1 2022. This corresponds to revenue growth of minus 3%. Adjusting for the exit from Russia and foreign exchange headwinds, organic revenue growth was minus 2%. Overall, the quarter was impacted by the consequences of economic slowdown, particularly in Europe and to a lesser extent, in North America. Two areas, consumer and private label, saw a combined revenue decline of EUR 13.4 million.

A few words on the dynamics. The Consumer business declined in line with the market development and was also affected by a general reduction of inventory levels in the DIY distribution channel. Revenue decline was EUR 7.1 million compared to Q1 2022. In Q1 last year, revenue rose in the first 2 months, but came to a standstill in March, as the war in Ukraine led to consumer confidence plummeting. Overall, the Consumer business experienced negative organic growth of 25.4% in Q1 2023. Similar dynamics affected the private label part of our professional business, which declined with EUR 6.3 million corresponding to negative organic growth of 39.5%.

The branded part of Professional business grew with EUR 0.8 million corresponding to an organic growth of 1.7%. Supply bottlenecks in our Americas plant combined with the SAP implementation in Mexico, did move the growth of our professional business in Americas and EMEA. Revenue from Wax and Floorcare grew moderately. In total, revenue for professional business declined by EUR 5.5 million, corresponding to organic decline of 2.7%. The Service business grew revenue by EUR 4 million, corresponding to 6.5% organic growth compared to Q1 2022. Revenue from our Specialty business increased by EUR 0.8 million corresponding to organic revenue growth of 6.9%. Across the markets, continued pricing actions benefited revenue.

Meanwhile, volumes generally declined. We note that we finished Q1 2023 with an order book at the same level as in Q1 '22, of which a significant part is related to the U.S. market. Moving on to Slide 11 for commentary on revenue by region. Looking at the three regions, the economic slowdown in Europe becomes more visible. In EMEA, growth was sustained in some markets, including Turkey, Hungary, Poland, Czech Republic and Romania and supported by strong pricing execution and demand. In some of the larger European markets like Germany, France and Spain, revenue declined, primarily driven by lower sales of consumer and private label products. In total, EMEA delivered a revenue of EUR 148.8 million corresponding to negative organic growth of 4.4%. To ease the transition into our new reporting structure, this quarter, we also share organic growth for the old branded professional business.

In EMEA, the branded professional business delivered 5.4% organic growth. In America, revenue came in total to EUR 88.8 million in the quarter. In LatAm, demand remained solid and revenue grew. In U.S. and Canada, demand was softer and in combination with the supply chain constraints and the SAP implementation in Mexico, revenue declined in the quarter. Overall, organic growth for Americas came to 0%, and same applies for the branded professional business in that region.

APAC delivered revenue of EUR 18.9 million, supported by strong growth in China after COVID-19 lockdown was lifted. Growth in APAC was also driven by Thailand and New Zealand. The branded professional business in APAC delivered 10.8% organic growth.

Turning to Page 12, where we look at the gross margin development. Gross margin for Q1 '23 reached 40.2%, the highest in the last five quarters. The gross margin benefited from pricing actions and product mix. In addition, improved freight costs for overseas shipments supported the margin expansion. While we have seen quarter-on-quarter increase in raw material costs and also lower capacity utilization at our manufacturing sites. The disruption of our U.S. DC end of March last year is still impacting our gross profit margin negatively as our ability to deliver parts and perform service was impaired for a period after the incident.

To offset the effects of material price and inflation increases and higher labor costs, we have been rolling out beginning of the year another price increase, tailored to mitigate inflation and the labor cost increases. Consequently, we continue to see an increase in the gross margin which reached the highest level, as I said before. This quarter, we have broken down the moving parts within gross profit margin into three buckets. Compared to Q1 2022, pricing and mix effects benefited the gross margin with 3 percentage points. In addition, tailwinds from lower freight and distribution costs benefited the gross margin with 2.7 percentage points. However, headwinds from lower volume and price increases on raw materials impacted the gross margin negatively with 5.5 percentage points. This means we have now reached a point where our actions have caught up to the severe headwinds from inflation we have faced over the last year.

Moving to Slide 13 and some comments on overhead cost ratio. In Q1 2023, overhead costs came to EUR 89.9 million, an increase of EUR 6.8 million compared to Q1 2022. This corresponded to an increase in the overhead cost ratio to 35.1%. Let's have a deeper look into the evolution of our major spend categories. Sales and Distribution costs rose EUR 5.5 million from Q1 '22, driven by cost inflation, including merit, higher freight cost for last mile delivery to our customers and continued investments in the BP26. In addition, the rebuild of our U.S. distribution center contributed also to cost increase in the quarter. Administration costs rose EUR 2.2 million from Q1 2022, driven by cost inflation and investments in new ways of working, including digitalization.

R&D spend increased by EUR 0.9 million from Q1 2022 and stood at 3.1% of revenue in Q1 2023, an increase from 2.6% in prior year quarter. The increase was driven by investments in modular platforms and software development. In total, R&D expenses increased by EUR 0.3 million. To provide a more detailed overview of the dynamics, we provide a split in overhead increases into three categories. Around half of the increase stems from increased merit, which is the annual inflation and salary adjustments. And then as well the general inflationary pressure, which we are faced with in some functional costs. Around the quarter stems from investments into business plan 2026 as such, the service business and innovation. The rest stems from higher cost towards last-mile freight and distribution.

Moving on to Slide 14. EBITDA before special items amounted to EUR 28.1 million in Q1 2023 compared to EUR 37.6 million in Q1 '22. The EBITDA margin before special items came to 11% compared to 14.2% in the same quarter last year. Pricing actions benefited the EBITDA margin more than offsetting the increase we have seen in raw materials and freight costs. However, the volume decline and the increase in overhead costs described before, lowered the EBITDA margin to 11%. With the planned structural efficiency improvements, which Torsten just explained, we will see our overhead costs coming down towards Q3 and Q4.

Moving on to the positive development in cash flow in Q1 on Slide 15. Free cash flow improved significantly in the quarter and amounted to an inflow of EUR 13.1 million. This was an increase of EUR 35.8 million compared to Q1 2022. Let's look at the most important factors. The lower operating profit and the higher financial expenses was more than offset by cash inflow from changes in working capital. The inflow of EUR 47.5 million compared to last year was positively impacted also by the non-recourse factoring program that we initiated in autumn 2022. Factoring reached EUR 22.7 million at the end of Q1 '23. Cash flow from working capital was also positively affected by lower inventory levels. Cash flow from operating activities for Q1 improved by EUR 38.7 million with a net inflow of EUR 20.4 million compared to an outflow of EUR 18.3 million in Q1 2022. Cash flow from investing activities for Q1 increased by EUR 2.9 million compared to an outflow of EUR 4.4 million in Q1 2022. This was mainly driven by strategic R&D investments. The CapEx increment accounted for EUR 1.4 million.

Summing up. In a challenging environment, we managed to achieve a strong free cash flow of EUR 13.1 million in the quarter. Total net interest-bearing debt declined, respectively, by EUR 54.5 million compared to end of Q1 2022 and came to EUR 317.9 million. The gearing reduced to 2.4x compared to 2.6x in the same period last year.

Next page, please. With this, we conclude the financial section. And now let's move to Slide 18 for the outlook for 2023. On the back of our Q1 2023 results, we confirm our outlook for the full year 2023. Looking into 2023, we expect that the current macroeconomic environment and the uncertainty which comes with that will continue, leading to some volume decline, particularly in the European market. As a result, we continue to expect organic revenue growth to be in the range of minus 2% to plus 2%. This is supported by the full year effect of our pricing actions and a substantial order book from 2022. Negative organic growth for the full year of 2023 would require current trading conditions to worsen as we see it now. The range for the EBITDA margin before special items is expected to be between 12% and 14%.

And with this, we conclude our presentation. We are now ready to take any questions you may have. Operator, over to you.

[Operator]

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

[Claus Almer, analyst]

A few questions from my side. The first question -- I'll do them one by one. The first question goes to the backlog, which we have been discussing also in the past. You're saying you have a flattish backlog. This combined with supply chain issues and also a higher ASP. I would assume actually that we should expect a growth in your backlog, but it is flattish, i.e., a negative volume development. Maybe you can share some more color to this trend? That would be the first question.

[Torsten Turling, executive]

Okay, thank you for the question. Let me try to answer. We have an exceptionally high order book. So it's much higher than what the company has seen in prior years. So this has not changed. So this is a good and a bad thing. So it's a good thing because we still have the cushion, it's a bad thing because we have not translated more of it into actual revenue.

A significant proportion of that order backlog is related to our business in Americas, and it's primarily linked to our supply constraint in our Americas plants as we have commented on before. When it comes to new order intake and given the fact that we have the supply constraints, which leads also to a longer than usual lead times, we need to manage the order book. We cannot just continue to inflate the order book and let our customers then wait for longer. So it's important that we get the order -- we get the volume output up, get the order book trending down, and this allows us to be more aggressive taking new in. So for now, we are intentionally holding a good balance, we would be completely filled with our capacity. So as much we can produce, we can ship and sell in the Americas region. Well, we cannot take on more because it would just further extend lead times to our customers. So we intentionally keep that balance. But to confirm, we are on this, we continue to be in a very high level of the order book, which is a good thing to be, but we aim obviously to translate more of it into actual revenue growth.

[Claus Almer, analyst]

Okay. And given your key competitor, Tennant who showed a significant growth in Q1, stating that their supply issues are easing. Does that mean you are losing projects in your backlog? Are you losing deals out there?

[Torsten Turling, executive]

So our mix of business is obviously different compared to competitors' mix of business. We are -- we continue to be supply constrained with critical items. That continues to be the case. We had the SAP implementation in the first quarter in Mexico is a temporary impact that we had lower volume production volume in this plant, which is now resuming steadily back to normal in the coming months and quarters. So we fill our capacity to the max.

And if there is more demand, then we try to deal with this, and we currently have more demand than our capacity, we try to deal with this the best we can, but we have limits. Otherwise, we accumulate demand and continue to increase lead times. So in that case, where we are not, where we intentionally decide not to take on an order it -- the customer either waits for longer or places the other elsewhere. But we -- the fundamental thing for us is that we're using our capacity to the maximum and continues to focus on increasing the capacity. And the SAP Go-Live that we had in Mexico will help us to get more out in medium and long term, but for the first quarter, it impacted the volume output.

[Claus Almer, analyst]

Okay. But do you see cancellations in your backlog as you may be able to get these machines from a competitor?

[Torsten Turling, executive]

We don't see a wave of cancellation in our backlog. We are more managing kind of the new orders. How much do we want to take in or how much do we need to just pass on, given our capacity limitation, at least for now. And I think this is a fair feedback also to our customers, taking in more orders on an already super high order backlog and let them wait for too long is not a fair answer. So we try to deal with the situation in all transparency with the customer base. And we keep our capacity filled. This is our key metric that we look at.

[Claus Almer, analyst]

Okay. Now we've been talking about this backlog for quite a while. It's still very difficult to figure out the absolute level of this. So maybe try to understand this slightly better. If backlog was going to normalize or your supply chain is a rollout, et cetera, et cetera, is normalizing your delivery ability. How much would that add to the revenue this year?

[Torsten Turling, executive]

I would -- I mean I don't want to give you a precise number, but I think you would see comparable growth than what you have seen from other players in the industry just by just flushing back the backlog in real revenue growth, which we have there as others, but capacity is constrained. We're working on this and it's taking a while, but we're making progress. So we are confident and things will get better over the course of the year. But just purely mechanically, you will see kind of flushing through this super high backlog level, you would see similar growth levels that you saw elsewhere.

[Claus Almer, analyst]

So you mean 5% to 10% on a full year -- if you calculate it from my full year revenue perspective, you're talking 5% to 10% boost to your revenue?

[Torsten Turling, executive]

Yes -- we don't give a particular percentage. I tried to help you with some information nuggets, but I cannot confirm any particular percentage.

[Claus Almer, analyst]

Okay. Then my final question. That's about your guidance, which you are reiterating, if you look at your EBITDA margin guidance, in what scenario do you see you ending in the upper end of the range?

[Torsten Turling, executive]

Reinhard, do you want to have a go at this?

[Reinhard Mayer, executive]

Well, on one side, I think what scenario, we are not describing precisely the elements to that, but we have been given the scenarios, and that's a trend of what we see from raw material effects supporting us or the freight cost effect supporting us. And then, let's say, volume picking up again. And you have seen that, I mean, we have now a negative quarter. So volume will increase over the quarters of the next three to come. and that will support a margin uptake. So I'm not precisely stipulating out now which element is going to help us to end the higher end of the range. But there are three elements, it's volume, it's the pricing and the efficiency effects, which we have now also laid out.

[Claus Almer, analyst]

Sorry, just to be sure, so are you saying that we should expect positive volumes in the next three quarters? Was that what you said?

[Reinhard Mayer, executive]

I said we will see increased volumes to what the volumes have been so far in Q1.

[Claus Almer, analyst]

Increase or less negative or how increase normally that's a positive.

[Reinhard Mayer, executive]

It's an increase of the Q1 volumes. It might still have in some of the product categories, negative product volumes. But overall, an increase of volumes towards what we have seen in Q1.

[Operator]

The next question is from Kristian Tornoe Johansen. I am sorry. The next question is from Casper Blom from Danske Bank.

[Casper Blom, analyst]

A couple of questions from my side also. Just like Claus, I'll take them one by one. I would like to start in the U.S. as I heard you describe the situation over there, you are facing continued bottleneck problems from the supply chain, and you are still facing challenges from the distribution center that was hit by the tornado last year. Are there any other problems in the U.S. in terms of supplying products to your customers rather than these two?

[Torsten Turling, executive]

Yes. I mean, those two, you referred to. The third one we mentioned in this call this morning, Casper, is the SAP implementation we had in Mexico. So that's a project we were working on for 12 months, the SAP went live in February. And then that accentuated -- or that lowered volume output for the Mexican plant. So this is related to the Go-Live. It's normalizing now. It always takes a couple of months after a Go-Live whereas the two other mentions -- the two other topics you mentioned have been the same and structural improvement is worked on, right? We're making progress in both areas, but we are talking about fundamental structural improvements, so it takes some time.

[Casper Blom, analyst]

Maybe you can explain why getting the distribution center up and running again is a fundamental structural change?

[Torsten Turling, executive]

Yes. I'll explain, Casper. So when we had a complete wipe out of the distribution center as we know and we've spoken about. So we were with nothing. Just there was nothing left. So then we went back the fastest we could to resume the business. So we rented a new building next door, put up racking, put up a line. It was too small. We rented another building next door, put up a line, put up a racking and the prime consideration was to service our customers again. The prime consideration was not to have the ideal building, the ideal layout and the ideal process. It was all about getting back into business, which was fundamentally achieved.

So now we are in the phase where we need to structurally improve the processes. We have been very quick up and running after a complete destruction. Now we need to see that we tune the system to the new layout that we optimize the process flow to the new layout. So we have now two buildings of one before -- so it's gotten more complicated. And those -- the businesses up and running very fast, but now the fine-tuning takes some more time. It's process improvement, it's system adjustments.

And while this is happening, we have a lot of extra effort. So we get extra labor in just as the process are less efficient, the systems are not yet fully supporting it, we needed to recruit more labor just to process everything. And as some of the things are not as predictable in terms of what's the next product also, our freight is more kind of an ad hoc call, right, than a regular rhythm of product outflow. So those as a temporary situation, and I understand it takes a while. But you need to see where we're coming from the last 12 months, which was a kind of completely flattened up field. It's not -- we had a plan and we optimize it. We were -- from scratch, we restarted. So we're happy with this. But probably we underestimated how long we have to carry along with us the process efficiency. This is the more structural part we are solving now.

[Casper Blom, analyst]

Okay. And how much longer do you expect it to take?

[Torsten Turling, executive]

Say again, how much...

[Casper Blom, analyst]

How long do you expect it to take before it's as you would like it to be?

[Torsten Turling, executive]

But this is -- Casper, this is not a one-off, right? We take another 3 months, 6 months and then it's back to normal. It's a gradual process, step by step, continuous improvement. It will take the remainder of the year to gradually get better, better, better, better. So -- but it's not like in this next quarter, you see a step change of costs going down and volume output being better. It's gradual every month, we're improving every month, we are improving. So the journey will be with us throughout the entire year.

[Casper Blom, analyst]

Okay. I'll leave that there then. Then a question regarding pricing. I think I had said or maybe as you saw some source partners, I can't remember that you have now caught up with the inflation pressure that was affecting you throughout last year. And I suppose if you look at the gross margin, that's also the impression. However, if you look at the EBITDA margin development, we still see that there is an inflationary pressure. So is it fair to say that if you look at EBITDA, then you have not caught up with inflation yet?

[Reinhard Mayer, executive]

Yes, that's true. But there's the momentum, and I think that's extremely important to understand. So we have a clear, strong trend on the gross profit margin evolution. And that we expect to continue. And on the other side, we have, so to say, structural improvement and efficiency measures, which we have been working on as part of our Business Plan 2026. And when you recall, within the Business Plan 2026, growth platforms, but also efficiency platforms, there was optimized Europe, there was new ways of working. And we have now been working on substantiating those plans over the course of the last quarter. And we have now an idea what to do.

And now we excel on that. And that will help the overhead cost to come down over the course of this year. So I think it's actually a part of our Business Plan 2026, but we are now executing with accentuated plants. And hence, we have made the announcement, which Torsten gave a detailed overview what we intend to do.

[Torsten Turling, executive]

Maybe Casper, one more addition to this. because you're asking about the EBITDA margin certainly is particularly impacted by the higher overhead cost ratio. And of course, inflation is contributing to those cost measures. But more than this, we were aware that we are first building up a structure like for the Service business, for the higher innovation or for the digitalization of the processes. And then once that's in place, and we put this in place last year, it will drive the benefits. And it will drive the benefits in terms of higher performance, margin and top line over time, but it will also help us to improve our processes. And we presented the three key levers of that program, which is now coming through. So the margin dilution that you saw versus prior year is primarily on the overhead, and as Reinhard just mentioned, we were clear -- we were clear also that there was an initial overhead cost build and then we're normalizing. And this is exactly what will happen in the remainder of the year.

[Casper Blom, analyst]

Okay. Then just my last question is actually regarding this program that you announced today. First of all, I was surprised to see this program a year after you announced the Business Plan 2026. And also that it came with another EUR 10 million, EUR 12 million of special items, as you called them. Regarding the EUR 15 million to EUR 18 million that you are targeting as full year cost savings. First of all, is that to be seen with full year effect from 2024. And secondly, what is the comparable base? Is it comparable to '22 or '21 because I suppose this EUR 15 million, EUR 18 million corresponds to around 150 basis points on your margin?

[Reinhard Mayer, executive]

Well, yes, the full effect will be seen in 2024, the full effect. And the comparable base is actually what I would call the Q1 relevant run rate level. That's the comparable base. And why now, the plan? Well, -- and you had -- I don't know whether it was you or at least in the last quarter call, we had been, let's say, faced with the question is something to be expected regarding special items. And I said, well, we have not finalized any plan. Now we have finalized plans alongside our Business Plan initiatives, and we come forward, very open and transparent. And what we also expect from those efficiency measures in terms of contribution. And I think reminding ourselves back to the Capital Markets Day, where we also said in 2022 and 2023, we will invest in overhead. Hence, we had the increase in overhead. But then we are expecting that some of the efficiency measures to help us together with growth again to bring overhead costs down.

And Q1 was certainly, let's say, a difficult compare. Revenue declined with 3% whilst we had really been seeing the investments into Business Plan '26 and the inflationary increase. So we will see better base compares in the coming quarters, but also clear absolute reductions overhead expense. And that will support our Business Plan 2026 journey and journey towards reaching our financial targets by then.

[Operator]

The next question is from Kristian Tornoe Johansen from SEB.

[Kristian Tornøe Johansen, analyst]

Great. Just getting back to the discussion around the U.S. supply issues. So if I understand you correctly, you are now being forced to say no to new orders to balance your order book. The customers who you then turned down, do they go to your competitors? Are you losing your market share based on this situation?

[Torsten Turling, executive]

So it depends on -- thank you for the question, Kristian. It depends on the situation. Sometimes the customers can wait longer. And sometimes they just can't and they need to see what the options are. The market has been supply constrained for the last couple of quarters. So we were not the only ones in this position. But now as we have the capacity full, we had the exceptional temporary situation with the SAP Go-Live in Mexico, where we were less half of the volume, which is now recovering. So that's one thing. But then we have the U.S. plant with a high backlog and some of the material supply constraints continuing. It might lead to the fact that we have to be honest with the customer and say, lead time is more than what is asked by the customer, and then the customer then has to look for another solution. In fact, that might be the case here and there. We do this assessment, customer by customer, order by order, case by case because we wanted, obviously, honor, loyal long-term customers. But it's also clear that we don't have the full capacity, at least at this moment in time to satisfy all the demand.

[Kristian Tornøe Johansen, analyst]

Understood. And then to this SAP upgrade, are you planning to roll that out in any of your other sites?

[Reinhard Mayer, executive]

Yes, we are working on further SAP rollout as part of our new ways of working and the digitalization of our work processes. You have been seeing from Torsten's assessment, we did a very intense study that we really need to upgrade our overall operating systems. And this SAP implementation plan is one element of that. That we have seen somewhat an interruption is normal in the Go-Live for a long time in an environment, which have not been rolling out ERP systems periodically so often. So this is just a short-term effect. We take our learning from that and apply this learning in the next ones. So can I rule out that such an interruption will not happen anymore? No, I can't. But I just know we are a learning organization. That's also one of the requisites of our new ways of working.

[Kristian Tornøe Johansen, analyst]

That I understand. But can you then share the schedule with us? So when do you plan for the next rollout?

[Reinhard Mayer, executive]

Yes. At the moment, we foresee that in Q1 2024, we will go live with SAP in Americas in the United States in specific.

[Kristian Tornøe Johansen, analyst]

And what about Europe? Is that planned already?

[Reinhard Mayer, executive]

Sorry?

[Torsten Turling, executive]

Europe.

[Reinhard Mayer, executive]

In Europe, we have already in Europe in most of our, let's say, subsidiaries SAP implemented. So we had what I would call a white spot in this regard in all Americas region. And one reason of, let's say, digitizing is actually standardizing our ERP system to one solution, which is therefore mentioned SAP solution. And when we have, let's say, completed the Americas, which means Mexico, as factory and sales, Americas as factories and sales and Canada as sales. We are then capturing around 90% of our global revenue with SAP solution, which was before the start, just 55%.

[Torsten Turling, executive]

Maybe Kristian, to be absolutely clear. We have SAP already in place in Europe. We had in Mexico, an outdated legacy system, which we not got replaced by our standard SAP system, and we do the same in the U.S. So we have an outdated legacy system, non-SAP, and we put our standard system.

We talk about the supply issues of parts, material management and so forth. That is also partially caused by the currently outdated system. So the migration of the system to a standard SAP this year in Mexico and next year in the U.S. will help us to come to much better efficiency and also much more reliable material management.

[Kristian Tornøe Johansen, analyst]

Okay. That's clear. Then just a question on the Service segment here, you talked about field services and parts with the margin difference. Can you hear us with a rough split on revenue today? How much is field service and how much is parts?

[Torsten Turling, executive]

So our Service business is dynamically evolving as part of our strategic initiative. So far, just high level, think about this 1/3, 2/3, with 2/3 parts. But most of the field service is still on adhoc calls. And we migrate this to contract-based service agreements, which allows us to be much more efficient in the execution. So the play of those two key elements of service will evolve further. The parts part will grow, and in the labor-intensive field service will drive significant efficiency. This is -- and we have a new dispatch technology, which makes things more efficient. We have more contract-related work, where you can better plan the service assignment but this is a longer term, a medium-term play.

We are on that journey, as you see in our numbers, but every quarter and then every year will contribute to the journey towards 2026 targets.

[Kristian Tornøe Johansen, analyst]

Okay. And along that line, and it relates to your contract with attachment rate, maybe just to understand, so when you do sell a contract along new equipment, what is then the typical scope and duration of such contracts?

[Torsten Turling, executive]

We have different contract types. Typically, I mean, our preferred solution, which we argue is the highest value-add for the customer is a premium contract that has a 3-year duration. This is typically also a lifetime where the customer looks at the equipment and the fleet before it's replenished or returned or something. So premium contract, full life cycle end-to-end service for 3 years. That's what we're aiming at.

[Kristian Tornøe Johansen, analyst]

And what's the average duration of what you actually [sell rate]?

[Torsten Turling, executive]

I mean, today, as you have seen, our contract attachment rate is very low. So we have the full spectrum from simple maintenance contracts, annual contracts, a bit more premium contracts. So we are coming from a single-digit contract attachment rate. So we don't really have a good reference. Target is 40% contract attachment rate and thereof, the majority in food service a 3-year contract. That's what we're aiming for. So all the new attachment rates aims for -- and aims for that. They're coming from lower attachment, lower scope in the contract and shorter duration. But that's what we are now evolving into -- and this will be fundamental to reach our 40% target and the profitability target that is related to the Service business.

[Operator]

We have a follow-up question from Claus Almer from Nordea.

[Claus Almer, analyst]

Yes. Just a few extra questions. So Reinhard, I think you said that you see a substantial gross margin momentum, that was at least what I heard. -- the gross margin is flattish versus Q4 and also Q1 last year. So what do you mean by this gross margin momentum?

[Reinhard Mayer, executive]

Well, we have seen, so to say, last year, a completely different gross profit margins in the quarter, down to 38 percentage point area. And from that, let's say, the downside, I think the uplift to 40.2% is a substantial improvement. And this is a journey. And from this respect, I'm really happy and proud to say, we have caught up with what I would call the inflation facing us specifically in last year and have also captured then what labor cost increases were. So I'm confident this journey will continue. And I regard that as, let's say, from the lower points last year, a substantial improvement.

[Claus Almer, analyst]

Okay. I just want to be sure what your starting point was for that comment. Then a question regarding your new cost saving initiatives. Is this linked to the volume decline? Or is it in reality based on your strategy laid out at the CMD [indiscernible]?

[Torsten Turling, executive]

Let me talk to this. And we put this -- the page in the presentation to explain where those structural efficiency improvements do come from. One is linked to our new operating model. That new operating model was part of the business plan from the start. So we knew to be able to achieve, one, customer proximity and growth, but also better structural efficiency. We need to migrate to this new operating model.

So we started to do this last year with the Americas. We moved into the Europe region, end of the first quarter this year, and we move into the Asia Pacific region. So this is something that is in the making already the last -- since we started the business plan. And then we have the innovation initiative. So here, the learning was over the course of last year, we push on innovation, but we still had too many interfaces between R&D, product management and then servicing the equipment in the field.

Yes. So that was a learning that came over the course of 2022 that we can gain efficiency and speed to market because it was all about launching the new products now faster by integrating that scope of functionality. So this is something that we became clear about over the course of '22. And then we announced the new leadership under Anupam Bhargava, who started with us in August as a Service business leader who is now the wider scope leader of this integrated activity. So we announced this in January this year. And then this massive process efficiency opportunity. So we spend a good proportion of the second half last year with the help of a consultant to map those processes, and you see the -- we gave you on the page as a very small snapshot of the findings. It's pretty significant. So 87%, 83% of our process are handled manually. And hence, you see also the cost, in example, the finance function, not limited to finance versus benchmark is inflated.

Now we're driving the new process implementation. So it's a direct consequence out of the mapping last year. Now we drive the process improvement. Of course, we -- in the light of the overhead ratio in Q1, we need those things now coming through. So we have focus, we have now a detailed execution plan. What does it mean? Per cost bucket per site and so forth, but those plans were in the making already for the last 12 months.

[Claus Almer, analyst]

Okay. That makes sort of sense. And then just my final question. I think we've been discussing this also in former conference calls. So we are seeing supply chain issues. And I know the rollout of ASP has obviously also been a negative, as you have mentioned several times in this call. But my guess would be supply chain constraints is less today than it was 12 months ago. That would just be my assumption at least. And yet your volume in the U.S. is probably down 5% or 10%. You're still having issues delivering according to demand. So doesn't easing of supply chain helping you on your output capacity or apparently it doesn't. So why doesn't it help?

[Torsten Turling, executive]

Yes. No, it's a super valid question, Claus, obviously. So the supply chain constraints we talked about in '22 has become better. And you see this in our European plants. We have gone back to normal delivery times. So everything we commented on, longer delivery times in the Americas region, we don't have this in Europe. We are back to almost a normal situation, not 100% normal, but very close. And in the -- when you take the Americas, the volume reduction in Q1 is to 80%, 90%, if not more caused by the Mexico issue, the SAP Go-Live. The U.S. plant operates at a slightly higher volume output, but it's still -- this is where we have the core bottleneck capacity. And we produce certain product ranges only in a single plant. Another plant cannot help out because we just produce it in that single plant. And for that plant, we are still constrained, right? And we are working on this. It's gradually coming up. But the real more significant volume decline you saw in the Americas region in the first quarter was mostly caused for Mexico.

[Operator]

This concludes our Q&A session, and I hand back to CEO, Torsten Turling, for final remarks. Please go ahead.

[Torsten Turling, executive]

Thank you, operator, and thanks, everyone, for joining us in this call. Thank you for those questions. We appreciate it. We are available for follow-up questions, obviously, please reach out to Elisabeth, Reinhard and myself anytime. Overall, just to confirm, we see the set of results we're presenting today in line with our company plans.

We understand there was a dynamic and a time dynamic we needed to explain, and we try to answer your questions along those lines. But with this set of results, we confirm our full year outlook, as stated before. With this, we conclude the call. Thank you very much for your attendance. We have the Q2 report on August 18, and I'm sure we'll meet prior to that. So have a great day and looking forward to meeting you soon.