Nilfisk Holding A/S

CSE:NLFSK

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Tracy Fowler, executive]

Good morning, and welcome to Nilfisk's earnings conference call for the second quarter of 2024. My name is Tracy Fowler, and I'm the Head of Investor Relations here at Nilfisk. To cover Nilfisk Q2 2024 results today, we have our new CEO, Jon Sintorn, and our CFO, Reinhard Mayer, presenting.

For the call today, we will cover the following topics: first, Jon will share his view on why he joined Nilfisk and then give an update on the Q2 2024 numbers. Then Reinhard will give a more detailed run-through of our financial performance in the quarter.

We appreciate that you took the time to listen in on the call this morning. We look forward to taking your questions during the Q&A session at the end of the webcast.

Moving on to slide 2. Before we begin today's presentation, please note that this presentation, including remarks from management, may contain forward-looking statements that should not be relied upon as predictions of actual results. For more details, please read the content on this slide.

Now, I would like to share a brief introduction to our new CEO. We welcomed Jon to Nilfisk on June 17 as CEO and Executive Board member, where Rene stepped down as Interim CEO and remains on the Board as Deputy Chair.

I would like to briefly introduce Jon and some highlights of his career so far. Jon joins us having worked in several large global organizations such as Permobil, Nobia and ABB. bringing with him a proven record of building and growing businesses, most notably the growth journey of Permobil with advanced annual growth.

The Permobil journey was anchored around commercial and product development, acquisitions and adapting the business organization for continued growth. Alongside this, he also has a thorough experience with transformation of businesses and execution, including consolidation of brands, product platforms and supply chain network, managing significant projects at Nobia.

Finally, Jon chooses purpose-driven organizations focused on building a performance culture. Welcome Jon to Nilfisk. And with this, I pass over to you.

[Jon Sintorn, executive]

Thank you, Tracy, and good morning, everyone. I'm very happy to be here, and thank you for joining us on the webcast today. I will share some thoughts on why I joined Nilfisk. So, please go to slide 4.

Most of my years, the vast majority, I have worked with the technical products with the service element, varied commercial models in a global environment, and I really like it. Nilfisk has a strong market position, operating in the market with mega trends, supporting growth each year. It's an iconic brand with strong heritage of being nearly 120 years old means that there is a lot of knowledge about what we do, cleaning solutions.

We have leading premium products and compelling range in our portfolio to cater for our customer needs. This is supported by the service offering, providing a customer-centric approach, stickiness and a recurring revenue stream.

Nilfisk has a strong sustainability agenda, to cater for our customers' increased needs in this area, often through technology-led R&D. In recent years, Nilfisk has generated profitable growth, improved cash flow and reduced debt significantly strengthening the financial resilience.

There is a clear strategic direction in the business plan 2026, and right now, I'm in the midst of learning about our customers, the products, the people, the company. So, let me reiterate, I am very excited to be here and look forward to a great future at Nilfisk.

Moving on to slide 6 for the financial highlights. Nilfisk's second quarter 2024 results continue to be in line with our plans, delivering a robust financial performance. We saw satisfactory progress across many of our financial KPIs, but let's start from the top with the revenue development.

Total revenue came to EUR 278 million, representing a reported growth of 0.8% and an organic growth of 2.4%. Consumer saw strong organic revenue growth, while service and professional saw moderate to limited growth. Specialty declined by minus 2.3% in the quarter.

Looking at the regions, EMEA continued to deliver strong growth in both our professional and Service segment. Americas saw a decline in organic growth over a very strong prior year and APAC was impacted by the weaker economic situation in several markets.

EBITDA before special items increased to EUR 39 million, and the EBITDA margin before special items rose to 14.1%. This was supported by a solid margin improvement compared to prior year. Overall, the second quarter results were in line with our plans.

Moving on to slide 7 and moving on to Reinhard for the financials.

[Reinhard Mayer, executive]

Thank you, Jon. Let's turn to financials on slide 8. In Q2 2024, our revenue increased to EUR 278.4 million from EUR 276.5 million in the prior year period, corresponding to reported growth of 0.7%. Revenue was driven by continued diligent price management and minor volume growth.

Foreign exchange impacted revenue negatively by 1.7%. This was mainly driven by Turkish lira. Revenue from the consumer business was very strong with 18.1% organic growth as customer demand continued to grow. This was mainly supported by the updated high pressure washer range and new product launches, including the vacuum [ lira S1 ].

Service delivered organic growth of 2.6%, following investments into Business Plan 2026 and a strong focus on service agreements and contract attachment rates. The service attachment ratio grew from 22% to 25% in the quarter.

Professional was flattish at 0.7% organic growth driven by private label and floor care, while we saw high pressure waters and Wax negatively impacted by market demand. The Specialty business saw a decline in organic growth of minus 2.3%. This was due to lower demand in APAC and Europe, especially in the industrial sector.

Moving on to slide 9. Looking into the 3 regions, the EMEA region delivered strong organic growth of 6.5% in Q2 2024. The organic growth was led by consumer. The region also saw strong growth in both professional and service with price management remaining a key element. In total, EMEA delivered revenue of EUR 162.8 million.

The Americas region saw a negative organic growth of 1.7% in Q2 2024 over a very strong quarter last year, which had an organic growth of 17.8%. Demand was muted in North America, while price management remained a positive driver. In total, Americas delivered revenue of EUR 96.8 million.

The APAC region delivered negative organic growth of 8.7% in Q2 2024 as market headwinds in China and Pacific led to negative volume growth. This was partially offset by continued price management. In total, APAC delivered revenue of EUR 18.8 million.

Moving to slide 10 and the gross profit and gross margin development. The gross margin reached 42.2% in Q2 2024 compared to 40.4% in Q2 2023. This is the highest gross margin since Q4 2020.

The gross margin benefited from favorable price management and mix effects. Alongside, you realize smaller positive effects from lower freight and capacity utilization.

Let's look at the 3 buckets of moving parts impacting the gross margin. Compared with Q2 2023, pricing and mix effects benefited the gross margin with 1.3%points. In addition, freight and distribution costs positively impacted the gross margin with 0.1% points.

Volume growth positively impacted gross margin alongside tailwinds from raw material cost reduction and improvements in capacity utilization, leading to a positive impact to the gross margin of 0.4 percentage points. Summing up, the gross margin increased year-on-year by a strong 1.8 percentage points.

Moving to slide 11 and some comments on the overhead costs. In Q2 2024, overhead costs increased by EUR 5.5 million compared to Q2 2023, coming to EUR 94.2 million. The overhead cost ratio increased in the quarter to 33.8% from 32.1% in prior year.

Let's have a deeper look into the evolution of our major spend categories. Sales and distribution costs increased by EUR 2.5 million from Q2 2023, driven by merit increases and increased spending on marketing activities.

Administration costs increased by EUR 1 million from Q2 2023, impacted by BP 26 activities and offset by structural efficiency measures executed in 2023. R&D spend increased by EUR 1.9 million in Q2 2024 to EUR 9.8 million, representing 3.5% of sales.

We continued to invest into refreshing our product pipeline in Floorcare. Other income and expenses decreased by EUR 2 million versus last year, mainly by the one-off income received from the sale of our dormant site in Italy in Q2 2023.

Moving to the EBITDA margin development on slide 12. EBITDA before special items increased by EUR 1.2 million in Q2 2024 compared to prior year and came to EUR 39.2 million. This corresponds to an EBITDA margin before special items of 14.1% compared to 13.7% in Q2 2023. The top-line growth and gross margin improvements benefited the EBITDA margin, offsetting the increased overhead costs.

Moving on to cash flow, working capital, et cetera, on slide 13. Free cash flow amounted to an inflow of EUR 8.4 million and decreased by EUR 31.7 million compared to the prior year period.

The key driver of this development was the increase in working capital from year-end 2023, mainly from higher inventory to support new product releases and due to higher accounts receivable. CapEx ratio in the quarter was 4.1%.

We continue to invest in our product innovation, digitalization and capacity expansion. As a result, cash flow from operating activities for Q2 2024 was a net inflow of EUR 19.7 million compared to a net inflow of EUR 43.6 million in Q2 2023.

Total net interest-bearing debt declined by EUR 28.2 million compared to Q2 2023 and came to EUR 263.3 million. The gearing is on the same level as year-end 2023 at 1.9x, reduced from the 2.2x in the same period last year.

Next page, please. This concluded the financial sections. Let's move on to slide 15, the outlook for 2024. We confirmed the fully year outlook as communicated in the annual report 2023. We continue to expect organic revenue growth in the range of 3% to 6%.

The range for EBITDA margin before special items is expected to be 13% to 15%. We also expect the CapEx ratio to be around 4% and special items in the range from low to mid-single-digit million Euro.

And with this, we conclude our presentation, and we are now ready and able to take any questions you may have. Operator, please?

[Operator]

[Operator Instructions ] The first question is from Casper Blom with Danske Bank.

[Casper Blom, analyst]

Starting with organic growth in the service business, which came in at 2.6% here in the quarter, and Reinhard, as I recall it, after Q1, you talked about a negative Easter impact in the service business. And I would have expected a little bit of a rebound there. Where did that rebound go?

[Reinhard Mayer, executive]

You are absolutely right. We had, so to say, about a percent of flip over from this holiday topic from Q1 into Q2. If you deduct that, the underlying growth is obviously in Q2 to alone 1.6%. But it's a percent which, this was affecting the Q2 result.

[Casper Blom, analyst]

And what's your view on 1.6% underlying organic growth in service?

[Reinhard Mayer, executive]

Well, the effect is in the following. We have, at the moment, seen a clear growth in the segment. And this will actually continue with good demand. And if you look into the service attachment ratio, which really begins to now come forward strongly from 22% to 25% in the quarter, you will see basically more service growth in the next quarter.

On the other side, you should remember, in prior year quarter, we had a rather strong service growth for the quarter. So, it's a base compare, and it's also so to say compare in the month.

[Casper Blom, analyst]

Then my second question goes to pricing. In the slide where you show the overhead costs, you also show again that merit and in wage inflation, I suppose, is having a negative impact. And we can also see that the overhead cost ratio is increasing year-over-year.

Would that not imply that maybe you have not been increasing prices enough to keep up with higher costs? And is there anything, of course, I would guess, a normal consideration about volumes, but anything else holding you back in terms of lifting prices a bit more?

[Reinhard Mayer, executive]

Well, first of all, I mean, with the price increases, you can see we take a positive effect in our gross profit margin. So, that lifts overall up.

On the other side, what also drives overhead costs forward is an effect of investing into the business. As such, Q2 was certainly impacted by significant marketing and product launch activities. That comes on top of the merit increases.

Beyond that, we are investing into building a stronger service force, stronger R&D force, and stronger marketing and stronger product management force. Those effects take also part in the overhead cost growth. So, it's not only a merit increase topic, but the merit increase, as such is, as we have it today, covered through price increases. And that is my answer to your question.

[Casper Blom, analyst]

Then my last to the U.S. market. There's been a lot of talk over the last couple of years about a backlog in the U.S. and the ability to deliver especially on the larger machines, what the customers wanted. Can you give an update on that situation and whether or not you're expecting any change to that here in the second half of '24?

[Reinhard Mayer, executive]

I'm not quite clear whether I understood your question. I mean, we have, in a way, in the United States, a situation that we have different dynamics in the market.

We also call it a muted demand, specifically in the area of public and school sector. That is depending on budgets. On the other side, we are going to benefit in the Americas as well from product innovation coming into the market at the second half of this year.

And that, we have always described that our product innovation will actually support growth for the second half of the year as the product shown at Interclean will predominantly come into the market for invoicing and shipping as of Q4.

[Casper Blom, analyst]

Apologies if the question wasn't clear, If I can then ask in another way, are there still product segments where you are seeing an elevated order book or backlog whatever you want to call it, in the U.S?

[Reinhard Mayer, executive]

Yes, we see still an elevated order backlog on the large industrial and that we continue to reduce, but we have not reduced it yet to the normalized level of pre-COVID situations.

[Casper Blom, analyst]

And do you still expect that, that will be normalized by the end of this year?

[Reinhard Mayer, executive]

That's current expectation.

[Operator]

[Operator Instructions] Your next question is from Claus Almer with Nordea.

[Claus Almer, analyst]

So, the first to go to you, Jon. I know it's still early days and you're still in the learning process, but have you made any new initial thoughts about improvement changes that could bring extra value to the shareholders?

[Jon Sintorn, executive]

As I said, I'm really excited to be here, and I think this is a great company, and I see lots of opportunities and also areas that we should address. But as you just said, I mean, it's still a bit early day to share very publicly those kinds of things, and I need to reflect a bit more on that.

[Claus Almer, analyst]

Do you think that Q3 will be the time where you will, let's say, open up for the toolbox? Or when should we hear more about your strategic thinking?

[Jon Sintorn, executive]

As you said and I said, I'm in the midst of learning customers, products, people and the company and so on and understand where we are and understand how to go forward. And, in due time, which is not a super long time, but still in due time, we will get back to that.

[Claus Almer, analyst]

Then a question regarding U.S., you were kind of flattish year-over-year, you're up against quite tough comparison. Can you give some more flavor to what is actually happening in the U.S. market?

[Reinhard Mayer, executive]

Maybe I take that question with some more background, let's say, history. I mean, yes, first of all, it is a market that was extremely strong compared to the 17.8% that we had last year quarter, but it's also a market where we see some currently muted demand, specifically in the public and school sector, which is typically in this very season, a driver of, let's say, demand. There, we saw muted demand during the second quarter.

On the other side, we see a very good demand in the specialty business, specifically on IVS, that's lifting up. But we also see that there is a somewhat market headwind from the high-pressure washer side. And that is not only on our side as the industry. And that is what I can reflect to your question.

[Claus Almer, analyst]

So, the specialty was good, but levels down on group level at least and gross margin was down. So, you created growth by discounting your products? Or is it mix? Or how to think about that?

[Reinhard Mayer, executive]

We had a very good growth in IVS in the Americas region, but we had decline in EMEA and APAC. And as EMEA is by far larger share in that IVS business, the overall impact brought today, the performance in the IVS business, specialty business down. But as such, you asked for Americas, IVS is one of the business segments really driving healthy forward.

[Claus Almer, analyst]

Then just to my understanding, one of the slides showed this evolution on your gross margin and it seemed like labor was one of your contributions for a positive gross margin development, but I would have thought there was inflation in your labor cost. You've more people and your merits, you have cost inflation. How can that be positive for your gross margin?

[Reinhard Mayer, executive]

Well, on one side, I mean, this is a bucket which, let's say, sums up volume, labor and raw materials. The labor, of course, is a negative driver, volume but also raw material, let's say, improvements are the positive drivers. And it's the sum of all those. But the merits --

[Claus Almer, analyst]

And then just my final one, service area, your attachment rate goes up, and I think these service agreements must have a very high gross margin impact. Still, the gross margin within service went down. So, is that due to mix or how to think about that?

[Reinhard Mayer, executive]

Well, first of all, I mean, the service contract has a more longer-term perspective. So, that's strong that these rates go up.

The second piece is we have, let's say, an investment piece to that, which is in workforce because we are supporting the, let's say, the growth in this segment with workforce, which needs to be trained up, not yet as effective and productive as the existing workforce. And that is actually the main driver in our FTE growth in, let's say, the first half of the year. So, structurally, we are investing into business plan 2026, and productivity is not yet there, but get there.

So, this is why the gross profit margin in the service business is slightly down to prior year because the effect of more labor, not yet at the same productivity and rental contracts, not yet, so to say, fully in force, basically deliver a slightly lower gross profit margin and those are the effects. But overall, fully according to plan, and I'm very happy on the growth we see there now with concrete, focused actions.

[Operator]

We have a follow-up question from Casper Blom with Danske Bank.

[Casper Blom, analyst]

Reinhard, I was just thinking if maybe you could give us a little update on what to expect on the cash flow for the full year? Obviously, you had a lot of working capital tailwind last year towards the year-end, and I think it's maybe normalized a bit more here by now. How do you see that panning out the remaining 6 months of the year?

[Reinhard Mayer, executive]

Well, I know it's a little bit of an idea, I mean the building of gross, which we assume for the second half is in one way coming through the buildup of inventory. That has happened and it's certainly continuing slightly, but maybe not at the same pace as in the first half of the year.

Secondly, we have been building more capacity into our factories to further reduce our order backlog. Those investments are more or less finished, whilst we still continue to invest into digitalization and new product innovation. So, that will come.

But we will expect to get some better cash flow in the second half than what we have seen in the first half. We do not specifically guide on cash flow. So, I will not say any specific number here.

[Casper Blom, analyst]

But then maybe you could just remind us how far down you want to see debt before considering potential return of cash to shareholders?

[Reinhard Mayer, executive]

Well, I will not give you a specific number, but in our, let's say, annual report and in our capital allocation policy, we stipulate, once we are sustainable within the guidance range of 1.5 to 2, we will then start, so to say, paying out capital to our shareholders, in whichever way and form.

We are on a good trajectory there. And I will, so to say, not give you now a specific number, but we should expect that we will further improve our leverage towards end of the year.

[Operator]

The next question is from Kristian Tornøe with SEB.

[Kristian Tornøe Johansen, analyst]

Just one question on your guidance. So, you stick to this 3% to 6% organic growth guidance with 3% organic growth in the first half, getting to the upper end, means that you need to make at least 9% organic growth in the second half of the year. Can you just elaborate on that scenario? And then what could potentially drive such a big improvement to growth?

[Reinhard Mayer, executive]

Alongside, we need to remind ourselves that Q3 and Q4 last year had a negative growth. But that's a different base effect to the first half of 2023, which we now, so to say, have concluded with the compare now in the Q2 '24.

But more important is actually the other effect, the effect of new products coming into, let's say, invoicing and revenue as of Q4. And the products you have seen at Interclean we have displayed them, and they will actually drive additional volume and revenue.

And those are, of course, the key drivers for coming towards the higher end of the range. Besides, growth continues in our service business, and I think we have given now the evidence that service attachment ratio, especially in Europe, is going to drive further service growth.

[Kristian Tornøe Johansen, analyst]

And then maybe just an update on your visibility on the demand for your new products, how much do you have as of now in terms of how much they will sell?

[Reinhard Mayer, executive]

We have very good demand, but as we are not, let's say, giving all the number values out, I cannot specify those now. But we see very strong demand in our new product.

[Operator]

[Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to the management for any closing remarks.

[Jon Sintorn, executive]

Yes. And then thank you all for participating in today's call. We look forward to meeting with some of you over the coming weeks. And if you have any follow-up questions after today's call, please do not hesitate to reach out to Tracy.

We will be back with the third quarter report on November 15, 2024. And with that, have a great day today.