Nilfisk Holding A/S

CSE:NLFSK

Earnings Call Transcript 2021-Q3

[Sara Westphal Emborg]

Good morning, and once again, welcome to Nilfisk Earnings Conference call this time for the third quarter of 2021. My name is Sara Emborg, and I'm Head of External Communications at Nilfisk. Before we begin today's presentation, I will, as always like to remind you that this presentation, including remarks from management, may contain forward-looking statements that should not be relied upon as predictions of actual results. I, therefore, encourage you to read the content of this slide in connection with the presentation. To present Nilfisk's results for the third quarter, we have our CEO, Torsten Turling; and our CFO, Reinhard Mayer. Looking at Slide 4, the agenda of today's presentation is as follows: Torsten will start by going through the key highlights and takeaways for the quarter as well as an update on the business in general. After that, Reinhard Mayer will go through our financial performance in the third quarter of the year, followed by our perspectives and outlook for the financial year 2021. After this, Torsten will give you a brief update on the stages of the strategy review process that we are currently undergoing. As always, you are invited to ask questions during the Q&A session at the end of the presentation. And with this, I will hand over to you, Torsten.

[Torsten Turling, Chief Executive Officer]

Thank you very much, Sara. And apologies again for the technical issues. We're starting over because we want to make sure that our messages are clearly understandable and of course, for the Q&A session later on. So going into Slide 5 of the presentation and the highlights from the quarter. Overall, we are very pleased with our results in the third quarter. Q3 marks the continuation of our strong sales growth performance and improved EBITDA margin over prior year. We saw a record volume in demand throughout the quarter, resulting in an organic revenue growth of 17.9%, achieving revenue above the 2019 level. We experienced the highest growth momentum in the Americas region, with revenues growing but by 20.9% versus Q3 2020. We are growing with large strategic accounts but also with our distributor base. Our overall order intake was higher than the sales growth, and our order book sits at a record high. Supply chain constraints limited even further sales growth in Q3 across all regions. In Q3, we saw our gross profit margin being negatively impacted by higher freight costs and raw material cost inflation. Nevertheless, our EBITDA margin before special items improved in Q3 by 180 basis points to 14.4%, mainly as a result of operational leverage. Based on our current trading performance, the strong order book and the improved supply chain visibility, we are pleased to improve the full year guidance for the third time this year. We will give more details on this later in the presentation. Let's move to Slide 6 of the presentation. In Q3, we took determined action to mitigate the supply chain constraints and the related margin impact at least partially. We have ramped up capacity across our global manufacturing network. This allowed us to substantially increase volume output versus Q3 2020 and 2019. We also worked a lot with our global supplier network. We added suppliers, did some joint sourcing of materials and re-sourced a number of our components. We invested into a higher level of inventory on our materials and components so that we can more easily further step up production in the future. The supply chain challenges, above all the extraordinary high increase of the freight costs, are impacting our margins. To protect our margins, we have implemented an exceptional midyear price increase. We have started to see traction from this price increase coming through over the course of Q3. The supply chain challenges are not unique to Nilfisk. As we look into the last quarter of 2021, we expect a continued inflationary environment and record high freight costs. We continue to focus on supplying to the needs of our customers the best we can. At the same time, we stay vigilant to protect our margins with adequate countermeasures. To sum up, we are very pleased with the achieved sales growth in an overall supply chain constrained environment. Now I will be handing over to our CFO, Reinhard Mayer, who will take us through the financials.

[Reinhard Mayer, Executive VP & CFO]

Thank you, Torsten, and also a warm welcome from my side. Moving to Slide 8, I will start the financial with the income statement. For the third quarter of 2021, Nilfisk reported net sales of EUR 239.2 million, an increase of EUR 36.7 million compared to Q3 last year. This corresponds to a total reported growth of 18.1% with foreign exchange rates having a favorable impact of 0.2%. Net sales grew organically with 17.9% to prior year. As Torsten already mentioned, the growth in the third quarter was a result of strong performance from all regions and segments, fueled by significant demand in the markets. The markets in Americas delivered the greatest impact, followed by APAC and Europe. The branded professional business reported an organic growth of 16.1% in the quarter and reached net sales of EUR 204.4 million. The consumer business grew with 4.8% on the back of a very strong quarter a year ago. Our private label business grew with outstanding 74.8% organically. Looking at the first 9 months of 2021, net sales for the total business came to EUR 734.3 million compared to $612.7 million in the same period in 2020, corresponding to an organic growth of 22.2. Foreign exchange rates had a negative impact of minus 2.3% on total reported growth, mainly driven by the U.S. dollar. Now turning to gross margin. In the quarter, we have reported a gross margin of 14.7% compared to 41.1% in the third quarter a year ago. The decrease was driven by exceptionally high freight rates across several trade lanes and higher raw material costs. The above mentioned headwinds, which are affecting many industries with a global setup with significant cost burden were partially offset by increased capacity utilization in our manufacturing plants. We also saw first effects from the extraordinary price increase communicated end of June, yielding now results. For the first 9 months of 2021, the gross margin was 41.1% compared to 41.4% for the same period a year ago. Again, we saw the positive effect of increased capacity utilization this year was more than offset by the higher freight rates and raw material costs. As a result of our increased business activity in the quarter, our activity-related costs like travel, marketing, distribution began to pick up. Versus prior year, overhead costs grew with EUR 3.9 million but was significantly lower than top line growth in the quarter. So the substantially higher sales in the third quarter improved the overhead cost ratio from 36.3% in Q3 2020 to 32.4% in Q3 '21. This development was also supported by a continued prudent cost management across the company. The EBITDA before special items in the third quarter increased by EUR 9 million and reached EUR 34.5 million in the quarter. The EBITDA margin before special items is at 14.4% in Q3 and is 180 basis points up versus prior year period. For the first 9 months of 2021, EBITDA before special items amounted to EUR 112.8 million compared to EUR 69.6 million for the first 9 months a year ago. This corresponds to an EBITDA margin before special items of 15.4%, which is a year-over-year improvement of 4 percentage points and is driven by a strong revenue growth and lower overhead cost to sales. Finally, I also want to mention special items, which amounted to EUR 0.5 million in the quarter compared to EUR 0.7 million in Q3 2020. The special items mainly relate to business restructuring activities initiated in prior periods. And with this, let's move on to a short review of our reporting segments, starting with Europe on Slide 9. In Europe, revenue in the third quarter was EUR 108.4 million against EUR 96 million in the year before. This increase corresponds to organic growth of 12.5%. We have seen a continued strong order intake across region and our continued focus on strategic accounts was a key driver for this growth. The Nordic countries saw a broad market recovery after lifting the COVID-related lockdowns. In the Central European region, we captured very solid growth in the quarter. In particular, Germany grew above the average with our branded business. Yet we are still slightly behind pre-pandemic levels. In Southern Europe, we continue to see markets like Netherlands, Spain and Turkey delivering very strong new business while France and Italy grew somewhat slower. So all in all, a continued positive development in the business in Europe. Gross margin increased with 150 basis points to 46.7% for the quarter. Main driver is the extraordinary price increase implemented in July and a smaller positive impact from product mix. As the lion's share of products are shipped from our European factories, we see a reduced negative impact through increased freight costs. EBITDA margin for the region grew subsequently to a very healthy level of 27.5%. Now moving on to Americas on Slide 10. We are very happy to see a continued positive and very strong development in the U.S., our biggest single market. In Americas, as a region, net sales in the third quarter amounted to EUR 77 million against EUR 64 million in 2020, corresponding to organic growth of 20.9%. The growth continued to be driven by strong demand and order intake in the U.S. as a result of our increased focus on larger strategic accounts. In Canada, we saw a very strong performance in the third quarter as we continued to develop and grow our dealer business. And also our Latin American markets delivered a very strong performance as we saw sales of our mid-range equipment outperformed in the quarter. Gross margin came in with 39.1% and decreased with 150 basis points over 2020. Subsequently, EBITDA margin decreased to 19.4% for the period. Main driver of the decline in margin is a significantly higher freight cost and increases in raw material prices. The higher share of large volume accounts is also slightly impacting the gross margin for the region. Now turning to Slide 11, where we have the numbers for APAC. In APAC, revenue in the third quarter amounted to EUR 19 million compared to EUR 15.8 million in 2020. This corresponds to organic growth of 18.1%. China and the Southeast Asian countries delivered strong organic growth over the period year. But activity remained below pre-pandemic levels particularly due to our high exposure to the hospitality segment and the continued impact of COVID-19 restrictions across some of these markets. We also saw some challenge in the Pacific region, covering Australia and New Zealand, driven by delays in shipments due to the current container shortages. The gross margin increased by a very healthy 280 basis points in the third quarter, driven by customer mix and the impact from the extraordinary price increase implemented in July. EBITDA margin increased even further to 9.5% for the period, which is a year-over-year improvement of 5.1 percentage points. Let's move on to Slide 12 for our consumer and private label segments. We are pleased to see that our consumer business is continuing its very positive development with an organic growth of 4.8%, reaching net sales of EUR 18 million. This is achieved on the back of a very strong quarter a year ago, which posted then 34% growth. Our private label business delivered revenue of EUR 16.8 million in the third quarter, corresponding to organic growth of 74.8% due to continued high demand from our key customers in this segment. Turning to the balance sheet and the cash flow on Slide 13. In the third quarter, we have continued our focus on the cash flow improvements, but also have actively managed our inventory levels to match and fulfill increased demand. As a result of substantially higher business activity and higher sales in the period, our working capital grew by EUR 15.1 million year-over-year to EUR 159.7 million. Inventories increased by EUR 54.6 million. Key driver are the increased demand, longer goods in transit time and our cautious approach to the challenges on the global supply chain, which triggered us to expand on safety stock for critical components where possible. Trade payables increased by EUR 41.5 million as a result of the higher inventories. The increase in receivables is purely driven by our strong sales growth. In consequence, we saw for this quarter, a strong reduction of the working capital ratio to net sales of 4.4 percentage points to the prior year period. As indicated in the Q2 earnings call, we are also increasing our efforts in R&D to revitalize our product portfolio, but also expand investments into operations and manufacturing. Hence, we see a CapEx growth of EUR 1.6 million versus Q3 2020. The third quarter delivered a strong free cash flow of EUR 14.6 million and is up by EUR 9 million compared to last year. At the end of the third quarter, the total net interest-bearing debt was EUR 346.1 million, down by EUR 56.2 million versus Q3 2020. The financial gearing of Nilfisk continues to improve. Excluding the effect of IFRS 16, the leverage ratio was 2.4 at the end of the third quarter '21 versus 4.3 at the end of 2020 and 4.9 a year ago. With this, I conclude the review of our financials for the quarter and the first 9 months of 2021. Summing up, we have seen another strong quarter of growth, yielding strong financial results for Nilfisk. The excellent order book we have, the visible signs that our price increase showed tangible effects and the displayed ability of the whole organization to manage and navigate through the current supply chain constraints give us confidence for the next months and the closing of the year. This leads me now to our outlook, which we, as Torsten mentioned earlier, adjust upwards for the third time this year. As a result of our current trading performance, strong order book and an improved supply chain visibility, we can lift our revenue guidance for the full year to an organic growth in the range of 17% to 18%. And for the EBITDA margin before special items, we today increased the lower end of the guidance to 14% and expect EBITDA margin for the full year to materialize in the range of 14% to 15%. Please also note that we expect that the exceptionally high freight and material costs which we are experiencing at the moment will affect us in the next quarters as well and are potentially overcompensating the positive effects of price and operational leverage. With this, I hand over again to Torsten.

[Torsten Turling, Chief Executive Officer]

Thank you, Reinhard, and thanks, everyone, for the patience going through the presentation. Now we have an important fourth topic on our agenda today, which is an update on the status of our strategy review process. During the last couple of months, we progressed very well towards clarifying our strategic direction. Nilfisk is a global market leader for professional cleaning products, technologies and services. The macro environment for the professional cleaning industry is favorable, and we expect solid market growth rates over the coming years. The rising importance of clean and the increased labor shortage and rising labor costs across mature markets, drive the demand for professional cleaning solutions. There is above-average growth in a number of sectors, including warehouse and logistics as well as health care. Nilfisk's products and services play an important role in providing healthier and safer environments for our customers. We intend to set a strategic direction towards focusing on sustainable, long-term growth. There are 2 strategic priorities that stand out as value creation opportunities: service as business and growth in large-scale market. Services as business offers the opportunity to optimize customers' value of clean over the life cycle of utilization. The growth in large-scale markets is the opportunity to strengthen our position in segments where we have good opportunities to win. This is supported by a product architecture with enhanced sustainability. And above all, we are currently strengthening our execution capability with the introduction of the so-called Nilfisk operating system. This is a proven methodology to secure reliable execution and performance management. We are currently finalizing our 5-year financial plan and will share its highlights in the Capital Market Day in Q1 2022. And with this, we conclude our presentation, and we're now ready to take your questions. Operator, please go ahead.

[Operator]

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

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Yes, I have 2 questions, and I will do that one by one. The first goes to the solid revenue growth reported, yes, in Q3, but also in full year 2021 so far. So what is it actually that is starting to work in your sales [indiscernible]

[Torsten Turling, Chief Executive Officer]

All right. Clause, good question. Of course, there are 2 things that come together, right? So we do benefit from a rebound of the markets, in general, part of the global economy, but also when it comes to the importance of clean. This is not limited to [Technical difficulty]. As a company, we have initiated earlier determined action to grow into segments in which we have been underrepresented. And this disciplined follow-up, I think, is now bearing fruits. We also, I talked about just before the introduction of a different way of performance management. And I think the team joins in very well to keep the eye on the ball and execute on the targets that we have set ourselves. So it's not the one miracle thing that's happening. I think the movement overall is starting to gain more and more traction.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

It's quite difficult from the outside to see the market shares, but do you see yourself taking market shares especially outside Europe? Or is more, as you also said, is the benefit of the rebound of the market?

[Torsten Turling, Chief Executive Officer]

I mentioned it's a rebound of the market plus the effect of our activities that lead to our results. And we believe our results, at least in some of the geographies are ahead of competition. So in conclusion, we do take market share, reported our 20.9% revenue growth in the Americas region which we believe is significantly ahead of the market growth. So we do indeed do market share over and above the general market rebound.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Okay. And then my second question, and it goes to the cost level. So you're warning that you will see cost inflation in the coming quarters, probably also more than the implemented price increases. But you'll probably also see some higher overhead cost levels. Hopefully, pre or post COVID-19 travel will start to come back in marketing, you probably also need to do some sort of investments within the organization. So maybe you could share some color to what we should expect both from a gross margin. So this is cost inflation, but also the more normalized overhead cost level, that would be very helpful.

[Reinhard Mayer, Executive VP & CFO]

Certainly. Yes. Claus, let me answer that question, and I'll start with the overhead topic. I mean on one side, yes, we actually see our markets picking up again with the travel activities alongside our growth. Specifically in the United States, we have intensified our market activities there, which has driven up also cost. But then we see as well going into the overhead cost, our outbound freight costs. So there is what I would call an exceptional cost driver in this section, driven by exceptionally high freight rates, which everybody in the industry is now experiencing. How long this high freight cost environment is actually maintaining, we don't know. And that's why we also give today this warning. I mean I guess when you ask the freight forwarding companies, nobody can give you a decent expectation how the price curve will develop over the next quarters in front of us. So we see in this context, our gross profit margins seeing an effect. And we cannot predict precisely now, is it going over and above our pricing effects and capacity utilization effects or does it, so to say, turn south again. This is so difficult to predict, as you most probably have followed as well, the price curves on the freight rates.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Sure. I know it's maybe the impossible question to ask, but -- so a starting point could be how the world looks today. If that continues in the coming quarters, have you implemented enough price increases? Or how would that picture -- how would that impact the coming quarters?

[Torsten Turling, Chief Executive Officer]

Just on this, and we commented on this, the exceptional price increase that we have done midyear. So we tailor our price increase dimension to fully compensate for the inflationary impact, but over a 12-month period. So we cannot recover all of this within a year. So as we move through the second half, we saw a continuation of exceptionally high freight cost, which has informed our pricing decision that I mentioned of the price increase going into the next year. So cost might remain high. That's our current assumption. Freight costs remain high well into the year '22. We also don't expect relaxation from the material cost side but the contrary, but we baked this in into dimensioning our '22 price increase. And with this, of course, rolls in and the timing of course, first, price increase effect a bit delayed, but is dimensioned to cover the entire dimension of inflation.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Okay. So can you maybe for Q3 isolated, how much behind the curve, so to speak, where -- how much gross margin pressure did you see due to higher cost inflation and price increases?

[Reinhard Mayer, Executive VP & CFO]

Well, we would not basically be specific on this one, but I can tell you it's above 1%.

[Operator]

[Operator Instructions] There seems to be no further questions on the phones at this time.

[Torsten Turling, Chief Executive Officer]

Very good. So then we would like to conclude this call. Thank you, everyone, for participating in today's call. I apologize again for the technical issues. Thanks for your patience. We look forward to welcome you once again when we announce our annual results beginning of next year. So thank you very much, and have a great day.