Hi everyone and welcome to the Brødrene A & O Johansen's Full Year Results of 2023. This call is being recorded. For the first part of this call, all participants are in a listen-only mode. Afterwards there'll be a question-and-answer session. To ask a question, please press five star on your telephone keypad. I'll now turn the call over to your speakers. Please begin.
Good afternoon and welcome to our webcast on our fourth quarter of 2023. This webcast will focus on our fourth quarter and full year 2023 performance, and we will share with you the highlights and management observations. Full year ended in line with latest guidance. Sales were slightly higher than expected in the fourth quarter and ended in the high end of the range. EBITDA and EBIT were impacted by lower margins and ended in the lower end of the range. Let us look at some of the highlights of the fourth quarter. In many ways, the fourth quarter showed progress in our strategic focus areas. Sales in the fourth quarter came in 2% higher than estimated, and in spite of the slowdown in the market activity, the number of customers visiting our outlets were higher than in the fourth quarter of last year.
The high number of customers confirms that our customers value to visit our outlets. It is a high priority of A & O to keep upgrading and investing in our outlets. During the fourth quarter, we opened two flagship stores: a new flagship store in Aarhus and an upgrade in Roskilde. The upgrading will continue, and more flagship stores will be launched during 2024, mainly in the bigger cities and in areas where A & O holds a very strong position. The EA assortment sold from A & O outlets continues to increase, and in the fourth quarter, sales of the EA assortment from A & O outlets increased to 25% against 20% in the third quarter. We will continue the journey in making EA nationwide, with more A & O outlets adding the EA assortment during 2024. B2C returned to a positive growth in Q4.
We had a record-breaking Black Week sales campaign, and the B2C segment showed a 9% growth in Q4. The 2023 sales were distributed to 448,000 households, which is 60% of all households in Denmark. A & O saw a strong cash flow in Q4 and the full year. Cash flows from operation in the year mounted to DKK 346 million against DKK 206 million last year. Financial leverage ended in 1.3 in 2023. In the first quarter of 2023, management defined a target to reduce inventories by DKK 150 million during the remainder of 2023. The reduction reached DKK 172 million and was a significant contribution to the strong cash flow. Green transition is a key focus area. Green transition consists of energy and climate. Both in assortment planning and in developing the data needed, the A & O organization is working hard to facilitate future demand.
Let us now look at the management's observations. The geopolitical and macroeconomic tensions create uncertainty. Uncertainty is never positive in a project-driven sector with high investment needs. We see projects being put on hold and postponed due to the uncertainty and due to the high increases of interest hampering the project economy. The activity slowdown kicked in beginning of September and never lost its grip during the fourth quarter. Lower basket sizes called for internal manpower. The lower basket sizes result in more inventory picked per million sales and more logistics drops per million sales. Short-term, this puts pressure and risk on plans to improve the cost of doing business ratio. Demand is falling short of wholesaler capacity, creating fierce competition, which puts a challenge on the margin level, primarily in project sales.
In A & O, we stay selective to not take orders with an unsatisfactory margin, but it is still our aim to grow our share, also within projects. This fact is likely to have a short-term negative impact on margins. Consumers have paused green transition when it comes to installation of heat pumps. This is a pity not only for our sales, but much more importantly towards the society in reaching the target set. We note that the subsidy scheme seems complex and not easy for consumers to use. Cost inflation makes it tough to reduce the cost of doing business. In parallel with most costs increasing rapidly, we also face a significant amount of new legislation and administrative burdens. This forces us and other companies to recruit more administrative personnel with no direct influence on increasing the sales.
In times where administrative burdens are increased, the A & O purpose, we lend a hand, makes it important for us to enable our smaller customers to maneuver in their daily life doing what they are good at. We aim to serve them also in administration issues, to assist them to stay efficient and customer-focused. 2024 is going to be a challenging year. In the short run, we do not see significant changes to the geopolitical and macroeconomic tensions, and we foresee continued uncertainty and fierce competition throughout the year. In times like this, it is important to be agile, consistent, and robust. A & O is prepared for a challenging market. A & O has a good momentum. A & O's business model is to serve customers through our omnichannel, by modern outlets, and a superior variety of digital solutions.
We are confident that this is the best way to serve our customers now and in future. We will continue to invest in and optimize our outlet network, and more upgraded outlets will be launched throughout Denmark during 2024. A & O warehouses have the capacity to embrace growth. Next investment will be to further increase efficiency and to enable logistics to lead the way in new customer service solutions. Although maintaining tightly managed costs of doing business, we will invest in onboarding new competencies within our focus areas during 2024. A & O has a growth agenda, and we expect that our organic growth will be complemented by an active M&A agenda, looking for acquisitions within B2B and B2C in Denmark, Sweden, and Norway. A & O sees green transition as a significant growth opportunity. The assortment will gradually change with increased focus on environmentally sustainable solutions.
Driven by the climate changes, we are also defining relevant new products and solutions. We want to lead by example, and we have set up ambitious targets to reduce by half our emissions in 2025 compared to 2020. Three years into this journey, we are on schedule and have reduced emissions by 30%. In fact, we have reduced it even more since the 2023 emission included EA, which was not part of the 2020 numbers. A & O has a robust capital structure. End of 2023, the net interest-bearing debt consisted exclusively of mortgage loans and leasing debts, and A & O had no bank drawings end of 2023. From a capital point of view, A & O is well positioned to face challenging market conditions.
Summing up: Under the present market conditions, the A & O management considers the results in 2023 satisfactory, and to our opinion, our outlook for 2024 is realistic. Having said that, let me stress and clearly express that, to the management's views, neither the performance in 2023 nor the outlook 2024 represent the full and long-term potentials for A & O. Now, Per, please take us through the financial performance.
Thank you, Niels. Q4 sales came in at Index 92, slightly higher than expected, as Niels said. As expected, gross margins reduced in Q4. This was partly due to the significant one-off from supplier-driven price increases back in 2022. Furthermore, a larger part of supplier bonuses ended up in Q4 in 2022, while these supplier bonuses were distributed more equally to each quarter during 2023. This time change amounts to approximately DKK 25 million in Q4 2023.
External costs and salaries came in lower than Q4 2022, but when adjusting for the provision made last year regarding restructuring costs and provision for accounts receivables, the costs were at par. We ended 2023 being 17 employees less than end of 2022. EBITDA came in at DKK 95.4 million, reflecting an EBITDA margin of 7%. EBIT ended at DKK 57.9 million against DKK 109.1 million last year. Let's turn to the full year performance.
2023 sales came in at Index 98. The beginning of 2023 showed positive growth. Growth was stagnating mid-year and showing negative growth during the second half. We saw a market activity slowdown from September. Adjusted for the supplier-driven one-offs in margins in 2022, the gross profit margin was maintained in 2023. External costs and salaries were slightly higher than last year, but when adjusting for EA being included four quarters in 2023 and only three quarters in 2022, the adjusted cost level was actually slightly lower than in 2022. EBITDA came in at DKK 405 million, reflecting an EBITDA margin of 7.7% against DKK 492 million and 9.1% in 2022. EBIT ended at DKK 262 million against DKK 377 million last year. The remaining part of the presentation will be full year numbers. Let's turn to the margin development, comparing 2023 to last year.
The year saw a margin slip from 24.4% to 23.5%. Given that the supplier-driven one-offs in 2022 amounted to 0.8 percent points, the underlying margin in 2023 was kept, adjusting for the one-offs. Let's leave the margins and turn to the segment info. The B2B segment accounted for 88.5% of revenues, and the B2C segment accounted for 11.5% of revenues. B2B delivered a growth of -1.6%, and B2C delivered a growth of -5.8%. On a happy note, B2C returned to positive growth in Q4. From a margin point of view, B2B came in at 23%, and B2C came in at 27.2%. Indirect non-allocated cost was 5% higher than last year. Let's turn to the investments. Please be aware that the chart does not include M&A investments. The highlighted band shows the normal level of maintenance investments in A & O.
As expected, the investments in 2023 came in lower than 2022 and 2021, however higher than maintenance investments. Apart from maintenance investments, investments have primarily been driven by upgrades of the outlet network in order to facilitate EA assortment. The outlets throughout the country are a cornerstone in A & O's business model. This is where we meet thousands of customers each day. Let's turn to cash flow and net interest-bearing debt. A & O saw a strong cash flow in Q4 and in 2023. Full year cash flow from operations amounted to 6.6% of revenue. As Niels mentioned, we have continued to reduce the inventory levels as supply chain uncertainty has reduced. Inventories have reduced DKK 172 million from the level of end of March 2023.
Working capital at year-end amounted to 5.6% of net revenue, which is back to a more normal level than what we saw during the supply chain uncertainty in 2022 and beginning of 2023. Dividend to shareholders payout during 2023 at 50% of result after tax. Our gearing ended at 1.3x EBITDA and in line with the target gearing range. The board has decided to change the target range from 0.5x-1.5x EBITDA to 1.0x-2.5x EBITDA. This is in order to ensure flexibility and in order to be able to utilize potential M&A opportunities. Now, let's leave the financial and turn to Outlook 2024. Our guidance for 2024 is: A sales guidance of DKK 5.0 billion-DKK 5.2 billion, reflecting a -1% to -5% decline. We expect EBITDA to be DKK 340 million-DKK 370 million, down from DKK 405 million in 2023.
We expect EBIT to be DKK 200 million-DKK 230 million, down from DKK 262 million in 2023. Let's look at the assumptions to the Outlook 2024. We expect to see a 10%-15% negative growth in Q1 2024, partly reflecting a very strong Q1 last year and also partly due to the Easter hitting Q1 this year. It is A & O's expectations to beat the market year by year. For 2024, we expect the market to reduce by 3%-7.5%. A & O expect to beat the market by 2%, and thus we expect to show a -1% to -5% sales decline in 2024. The impact on earnings from the expected sales decline will be approximately DKK 38 million. The investment in growth areas, the cost inflation, and the margin pressure is expected to amount to a negative impact of slightly above DKK 50 million.
We have initiated cost and margin containment initiatives that are expected to mitigate the impact by approximately DKK 40 million, which brings us to the mid of the EBITDA guidance of DKK 355 million. We do stress the fact that the geopolitical and macroeconomic tension result in market activity being more volatile than normally, which puts an additional uncertainty to estimates. This concludes the presentation, and we are ready to take your questions.
If you do wish to ask questions, please press five-star on your telephone keypad. To withdraw your question, you may do so by pressing five-star again. There will be a brief pause while questions are being registered. The first question will be from the line of Kristian Johansen from SEB. Please go ahead, and your line will be unmuted.
Yes, thank you. A couple of questions from my side. You talk about this competitive pressure and the pressure on your margins as a consequence. Can you just elaborate a bit on this dynamic and also how long we should expect that to last, especially in a scenario where revenue and demand actually does pick up? Would you expect this pressure to ease?
Hi, Kristian. Thank you for your question. It's a good one, also a difficult one to answer. We foresee a tough 2024 where capacity is higher than demand. That will for sure increase the price pressure. In the longer run, when we see an increased market activity, normally we would expect that the pressure will be lower than in 2024. Having said that, I think that the wholesaler business is year by year to be facing tough market conditions and pressured margins, as we have also been in the past. But I think you are right that 2024 is probably going to be tougher than 2025 and onwards.
That makes sense. And then maybe just slightly along the same line, so you're quite explicit in your expectations for the first quarter. So maybe just what you are assuming then for the end of the year, I mean, should we expect increasing revenue sort of by Q4 then? Or what's your sort of view on the development over the year, towards the end of the year?
Yeah. When we made the Outlook for 2023, what we were estimating back then was a relatively good start of the year and then a slower ending. This year, guiding 2024, we foresee a tough start and a better ending of the year, which is actually a nicer picture from our side. I think it's too early to say whether we will return to positive growth. That's probably uncertain, but we will definitely, in our mind and in our guidance, not see us being significant below 100. That's for sure. It's also the math and the guidance, right? If you have the first quarter divided by four, we have eaten quite a lot of our guidance headroom.
Understood. And then, Niels, in your presentation, you highlight the expansion opportunities in AO Sweden yet again. Should we expect any sort of tangible actions in 2024? And obviously, I'm particularly asking whether there are any acquisitions near-term to be expected.
Well, if and when we are entering negotiations and we have signed a deal or will be close to signing a deal, we will have the duty to inform the market. You are right that we have now repeated this wish or expectation for a number of times. We have a very good management in Sweden. We have a good business, and we are liked by the customers in Sweden. We are serving a smaller part of Sweden now. We have a healthy market share in that region, and it will be natural for us to expand the geographical footprint. I think you should expect something to happen when we find something that fits our business.
All right. But are you accelerating your efforts to find something? I could then ask.
Yes. We have been transparent also throughout 2023 that we felt that the multiples during COVID were unattractive from a buyer point of view. We think that the annual reports for many companies will be a moment of truth when it comes to defining multiples. So we will be interested readers of annual reports during this spring. And yes, we will have an eye on each finger when it comes to options out there.
Sounds good. Just to end off here, two more housekeeping questions. Indirect costs in the fourth quarter are somewhat high. Can you just explain what the dynamic is?
As Niels mentioned, we are facing quite a number of new legislations within green transition, environmental reporting, what have you. Furthermore, I think A & O has been a slim-listed company. It's getting tougher, Kristian, during these times with more legislation and reporting requirements, what have you. So this is also just a picture of us increasing competencies, basically, and getting ready to grow the company.
When we look at indirect costs for 2024, should we expect that to increase then year-on-year?
I think so. Yes, I think so, Kristian.
Yeah. And then my last question is working capital, obviously impressive performance. What should we expect in terms of working capital development in 2024?
Back before COVID, I think the net working capital tying up capital and net working capital were actually lower than what we see now. I think the wholesaler, us as wholesalers, have to realize that from a customer point of view, there is a consolidation going on, and customers, they expect us to give a healthy credit. So it may not be possible to return to the ratios one had in the old days. I think this is probably the normal level. What we have also said is that should we see supply chain uncertainties, and we are observing this very closely, then we would any day prefer to stock a little bit extra than to disappoint customers. But I think the present level, Kristian, should be a normal level.
Understood. Very clear. That was all from me. Thank you so much.
Thank you, Kristian. As there are no more questions in this call, I'll hand it back to the speakers.
Thank you. We have had quite some questions coming in, and that's great. Thanks for that. We have one question that you are about to launch a B2C shop in Sweden for LampeGuru. Are you about to launch more net shops like, for instance, Workers' Clothing? Actually, not a bad idea. Now we are excited to see how the Swedes are going to welcome our new webshop. It has the high-quality assortment that we know from LampeGuru in Denmark. So we hope that this will be lightening the dark days in Sweden. So we hope for a warm welcome. If we are to open new shops, for instance, Workers' Clothing, you will be among the first to know. Then we got a comment. It was that the presentation we enclosed was actually Q1 2023 and not the actual one, the full year report.
Hopefully, that has been changed, or it will be changed very, very soon. Then we had a question in line with one of the questions from Kristian. You talk about the acquisitions in Scandinavia. Have any negotiations started? We are not in the midst of any negotiations for the time being. We are observing the markets closely and paying attention to the opportunities, the potential opportunities out there. Then we have a question asking the investments, if you include the investments this year, how far are you from having launched the EA assortment nationwide in the A & O outlet network? And has this been fully rolled out or launched end of 2024? I think we have included EA in seven A & O shops for the time being. And EA themselves had seven shops when we acquired EA.
A couple of those shops have been merged to A & O shops. We are now at 1,213. I think we should be looking higher than that level. As Niels said, we will also open shops in 2024. We have some very exciting openings coming up in 2024. We will probably not be at the end of the journey in 2024, but we will be yeah, it's difficult to put a ratio, but in my mind, we'll be significantly above half of the rollout. If I should just add a comment to the outlets, and as Niels said, we are going also in 2024 to invest quite a bit in our outlets. If you look at our B2B revenues in fourth quarter and the overall index of 92, and you break down the B2B revenues into activities, we saw a heat pump index below 30.
We saw a project index of around 80. We saw a removal, modernization, and maintenance activity above 95 in index. It's quite a stronghold for us. It's a very attractive activity. It doesn't come without investing. Our customers do most of the maintenance in visiting our shops. They demand appealing, close-to-customer shops, one-stop supermarkets. And as Niels also said, it is one of the cornerstones in our business model. We are happy with our network of outlets, and we are going to keep investing. You can look forward to 2024. We are going to open a number of very appealing outlets. We have a question. The pickup in activity you expect in the second half, is that driven by project sales or maintenance? Actually, it's a combination.
It's also due to—you could say—due to you need to bear in mind how 2023 composed between quarters. We had a very, very strong Q1, a bit more moderate Q2, and lower Q3 and Q4. So relative to 2023, our sales index will be lower in third quarter. And then it will be getting closer and closer to the sales index of 2023. We also expect—you can say, yeah, basically—we expect both projects and maintenance to be in okay shape. We see some project activities. We also see a lot of margin pressure related to the projects. Then we have a question. If it's possible to know your market share in Denmark in B2B and B2C segments? Sorry, we don't disclose that number. How large a part of our inventory is heat pumps?
Has the market price of heat pumps moved lower given lack of demand? Less than 10% of our inventories are heat pumps. Yes, it is. You are right to expect that the price of heat pumps has reduced due to the lower demand. It's a pity for us to see the low demand of heat pumps, and it's, I dare say, almost unacceptable from a society point of view in my mind. I think that concludes the questions. Thank you for listening in. Thank you for your good questions. Looking forward to seeing you again in April.