Hi and welcome to Brødrene A & O's Q&A presentation of 2024. This call is being recorded. For the first part of this call, all participants will be 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 speakers. Please begin.
Good afternoon and welcome to our first quarter of 2024 webcast. Our first quarter ended in line with expectations. We were well aware that the first quarter of 2024 would fall significantly short of first quarter 2023, which was exceptionally strong. Furthermore, due to Easter, we lacked four sales days in March. The impact of Easter was a sales day delay of approximately DKK 90 million, which delayed earnings by approximately DKK 20 million. The market is still quite depressed, and the competition is extremely intense. However, we are seeing small signs of market optimism among customers, and there are signs of increased market activity. Let us look at some of the highlights of the first quarter. Sales in first quarter came in slightly higher than estimated.
Activity in the project market continued to be below index 70, and the repair and maintenance sales in A O ended close to index 95, compared to the very strong first quarter of last year. The rollout of the EA assortment continues. It is a high priority for A O to keep upgrading and investing in our outlets. During the first quarter, we included the EA assortment in the outlet in Horsens, and we included the A O assortment in the former EA outlet in Brøndby. Upgrading will continue, and we will introduce upgraded and bigger formats during Q2. Customer visits in our stores were higher than Q1 of last year. The high activity in repair and maintenance and the high number of customer visits confirms that our customer values to visit our outlets. The Q1 cash flow generation improved by DKK 100 million.
Normally, A O ties up money in working capital in the beginning of the year and generates strong cash flow in the second half of the year. This was also the case in the beginning of 2024, and the beginning of the year showed a satisfactory improvement compared to last year. A O aims to improve our position within the project market. A O is a market leader within repair and maintenance. We also aim to reach a leading position within the project market and will increasingly focus on this area. The B2C segment has returned to growth for the second quarter in a row. It is still early days to conclude on the trend, but it seems that consumers are showing appetite for increasing investment in house improvements. Let us look at the management's observations. As expected, we saw a low first quarter.
Indeed, we were prepared that the first quarter would look shy of the exceptional first quarter of last year. We expected a sales index of 85-90, and sales came in at index 89. Lower basket sizes call for internal manpower. The lower basket sizes result in more inventory picks per million of sales, and more logistics drops per millions of sales. On the short term, this puts a pressure and challenge 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 society in reaching the global targets set up. 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 number of new legislations and administrative burdens. This forces us and other companies to recruit more administrative personnel with no direct influence on increasing the sales. As I have stated many times, A O is not a quarterly-driven company. We do not adapt the organization to fit one tough quarter, but to fit the expected future, and A O has high ambitions. We are observing the increased geopolitical and macroeconomic tensions.
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 2024. Uncertainty is not beneficial for consumers' appetite to order projects nor to increase investments. A O has just acquired Svenska VA-Grossisten i Stockholm. AO has a leading position within water and drainage in the southwest of Sweden. With the acquisition of Svenska VA-Grossisten, AO gets a foothold in the Stockholm area. Svenska VA-Grossisten presently operates from one site and has sales of SEK 88 million. The activity and the capability within the team is a good platform for further growth for AO in the Stockholm region. Now, Per, please take us through the financial performance.
Thank you, Niels. Q1 sales came in at index 89, which was slightly higher than expected. Gross margin reduced 0.4 percentage points due to fierce price competition. External costs and salaries came in DKK 13 million higher than Q1 last year due to cost inflation, but also due to investing in capabilities. Number of employees was 2.5% below Q1 last year, but salaries ended 4% higher than last year due to salary increases. EBITDA came in at DKK 68.2 million and an EBITDA margin of 5.5%, reflecting lack of scale related to the low revenue. EBIT ended at DKK 34.2 million against DKK 83.3 million last year. As Niels said, Easter impact reduced Q1 earnings with approximately DKK 20 million. Earnings were as expected. Let's turn to the margins. Margins came in at the same level as full year 2023, but 0.4 percentage points shy of Q1 last year.
Project margins are impacted by the increased competition intensity related to the lower project activities. Margins benefited from a relatively higher B2C share of the revenues since the B2C margins are significantly higher than the B2B margins. Let's leave the margins and turn to the segment info. The B2B segment accounted for 87.8% of revenues, and the B2C segment accounted for 12.2% of revenues. The B2B segment delivered sales at index 87. The sales index for projects was below 70, while the repair and maintenance sales index was close to 95. B2C showed positive growth for the second quarter in a row. From a margin point of view, B2B came in at 22.3, and B2C came in at 27.2%. Indirect non-allocated cost was 15% higher than last year, among other due to increased IT costs and timings of cost. 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 AO. The investments in Q1 2024 came in higher than Q1 last year, among other due to an investment of slightly less than DKK 30 million in buying additional land and buildings in connection to the central warehouse in Albertslund. The remaining investments have primarily been driven by modernizations of the outlet network in order to facilitate the EA assortment. The outlets throughout the country are a cornerstone in AO's business model. This is where we meet thousands of customers each day. Let's turn to cash flow and the net interest bank debt.
From a Q1 perspective, cash flow was improved DKK 100 million compared to Q1 last year, working capital amounted to 6.7% of net revenue last 12 months, which is close to the normal level for AO. Dividend to shareholders at 50% of result after tax for 2023 was paid out in March 2024. The net interest bank debt ended at DKK 717 million against DKK 854 million end of Q1 last year, and financial gearing was 2.0 x EBITDA. Let's turn to the guidance for 2024, which is unchanged compared to the guidance that we communicated in February. It is AO's ambition to beat the market year by year. For 2024, we expect the market to reduce by 3%-7%.
AO expects to beat the market by 2%, and we thus expect to show a 1%-5% sales decline in 2024. Consequently, we expect a revenue of DKK 5.0 billion-DKK 5.2 billion. We guide an EBITDA in the range of DKK 340 million-DKK 370 million, and an earnings before tax in the range of DKK 200 million-DKK 230 million. We do stress the fact that the geopolitical and macroeconomic tension resulted in market activity being more volatile than normally, which put an additional uncertainty to estimates. This concludes our presentation, and we are ready to take your questions.
If you do wish to ask a question, please press the five star on your telephone keypad. To withdraw a question, you may do so by pressing the five star again. There will be a brief pause while questions are being registered. The first question will be from the line of K ristian Johansen from SEB. Please go ahead. Your line will now be unmuted.
Yes, thank you. A couple of questions from my side. Starting with your guidance and the commentary that you expect, I think the wording is sort of flattish development year-over-year in the second quarter and then growth to return during the second half of the year. Maybe just to understand the assumptions behind this, because obviously the comparison gets easier and easier as the year goes along considering how 2023 developed. So is your assumption that the run rate we are seeing in Q1 underlying should continue, or do you expect an underlying improvement in demand as the year goes along?
Hi, K ristian. Thanks for your question. Well, said short, we do expect a slight increase of run rates going forward compared to Q1.
Have you seen signs of that in Q2 so far?
That we will share with you later on, Kristian.
All right. Fair enough. Then my next question on the non-allocated costs, you highlighted the increase as related to IT. Can you elaborate a bit on what kind of IT investments you've been doing, and not least what we should expect on indirect costs for the full year? So last year, you had DKK 210 million in indirect non-allocated costs. I mean, should we expect a level higher than that for the full year?
It's a good catch with the 15% non-allocated, which we find in the segment note. And in non-allocated costs, you're right that this is, among other things, internal corporate projects, costs related to green transition readiness, costs related to the IT investments. And the IT investments are both offensive investments like preparing us for the future digitally-wise, etc. And it's also more defense costs when it comes to us being prepared for IT security point of view. You're right that the external costs last year were DKK 310 million, and you should expect a higher number for 2024 than what you saw in 2023.
Not at the pace, the increase will not be at the pace what you have seen in Q1 we expect because we had some timing issues and some front-loaded costs in Q1. But I wouldn't be too optimistic when it comes to reduced external costs. The investments in IT and digitalization will increase also in the future. The burdens we see when it comes to all kinds of registrations and green transition will draw costs. So don't expect a decrease, Kristian. You should not expect the Q1 times four increase, though.
Okay. So an increase somewhere between 0% and 15%, that's what you say?
Yeah. Closer to 15% than to 0%.
All right. Yeah, understood. Thank you for that clarification. And then moving on to the acquisition you also announced. So maybe if you can elaborate a bit on the strategy from here on for your business in Stockholm. So obviously, it's not a huge business you have acquired, so I'm assuming you now have sort of ambitions for organic growth in the Stockholm region based on this platform. So can you elaborate a bit on how much do you expect this can add to revenue, and what's the CapEx need related to this over time?
Yes. As you know, and I think we have been quite wordy about that in the past, we have a good team in AO Sweden within water and drainage. We are among the market leaders in a part of Sweden, southwest part of Sweden. The Greater Stockholm Area is approximately half the Swedish market, therefore also attractive for us to pursue the opportunities in that region. So the strategy by acquiring this company in the Stockholm area is, of course, both to serve the nationwide customers in Sweden, but also to serve customers in a larger part of Sweden. Now, we want to take a close look at the site. We are quite impressed about the team in Svenska VA-Grossisten. They have had a remarkable first year of doing business. They have plans for the future. We have plans for the future.
Now, we want to concentrate about harvesting the full potential of this site. And obviously, we will also be also as Niels said, be looking at this site as a platform for further growth in the area. When it comes to the CapEx level, opening new sites will take either a rental contract or buying land and buildings. And then, of course, getting the right competencies. Without the right competencies, you're nothing. So from a CapEx level, it's a relatively light investment, I would say.
Okay. Just to clarify, we shouldn't expect any sort of major increase to investments in the short term post this acquisition?
No. No.
Understood. And then you also highlight the people who spun this business. So it seems that besides the tangible assets, you are also buying sort of key employees for this region. Can you just talk about how you are making sure to retain these people and ensuring that they are not gone in 12 months or something like that?
Well, a part of the acquisition price for the company will be earnouts. So, in case they reach, together with us, plans on the shorter- and longer-term horizon, the payment for the company will increase slightly. Otherwise, I think that, and that's the sense we have had from the meetings with the team, is that their philosophy regarding servicing customers and AO Sweden's and AO's philosophy regarding servicing customers is pretty alike. So I think they will be quite motivated to join the AO family.
Okay. Great. And then just my last question because it seems to me also from sort of the data I've dug up that you actually have quite a well-run Swedish business. Have you considered to increase the transparency around this? Because today, I mean, you report very little financial details, at least on your business in Sweden.
Yeah. Up till now, we have seen the activities in Sweden being less than 10% of the group turnover or the group sales. So you're right that we may not have shed very much light into that activity. Let's discuss it internally, Kristian.
Great. Sounds good. That was all for me. Thank you so much.
Thank you, Kristian.
Thank you, Kristian. As no one else has lined up for questions in this call, I'll hand it back to the speakers for any written questions online.
Great. We have received quite a number of questions, and we are happy about the questions. So please keep up the activity. The first one is related to our purchase of the VA-Grossisten. If this buy was already included in the expectations for revenue for 2024 that we guided back in February, and the answer is no. Then another question related to Svenska VA-Grossisten. They have been stating in their annual reports of 2023 that they want to expand westwards from Stockholm, and we are asked, "How close are we to a new location or a location too in the Stockholm area?" I hope that I answered that to Kristian also. Now, we want to take our time to know the market, the region, the customers in the Stockholm area, and harvest the potentials of this site.
Then, as Niels also said, it is a platform for opening more sites at the right point of time. You shouldn't expect us to open new sites on the very, very short horizon, but of course, we are observant. Then we have another question, a specific question, I would say. It is related to a sale of AO Hvidovre, our shop in Hvidovre, to a developer, which is mentioned on the internet. It is right that there is a project going on where the intention is to build private apartments at our locations. If these plans materialize, it will probably be best for us not to be at this site and find another place in Hvidovre. In case we materialize with this, there will be a smaller gain we expect by selling the land and buildings. Not a big one, not one that will change our guidance.
And in fact, if we have smaller gains or losses when it comes to selling land and buildings, this is part of our guidance. Nothing is concluded yet with regard to Hvidovre, but what we can promise is what we can promise the customers in the Hvidovre area is that if we will no longer operate in this shop, we will find another shop in Hvidovre and operate, and we will not be closed one day. We have another question related to our M&A strategy and our multiples where I have said early on that we found the multiples during the COVID quite high, and we expected that they would be normalized after COVID and that the annual reports 2023 was kind of a moment of truth for many companies.
Then we are asked, "What is the normal multiple?" And I don't think there is a normal multiple, but I think in our line of business, you would probably often see an EBITDA multiple of 6 to 9, perhaps closer to 9 than 6. Then we have another question regarding the VA market, that it makes a lot of sense to focus on the water and drainage market due to the climate changes. We fully agree. And then we are asked, "What is our idea with the indoor air ventilation cooling market?" It's also a good question, and it's a market that we follow closely. Then we have a question about index. When we talk about index, is 2023 then index 100? Yeah, normally it will be unless other stated. Then we have another question related to the Svenska VA-Grossisten regarding the price.
How much of the price is goodwill, and how much is inventory, etc.? Most will actually be goodwill. We have an inventory of SEK 6 million-SEK 7 million, but most will be goodwill. Then we have the last question visible to me at least, and this is our target EBITDA margin is 10%. Can you elaborate on when you see this happening? Are we talking two, three, four, five years? That's also a good question. I think we have not been shy of sharing our financial ambition. We know that an EBITDA of 10% is a tough one, but we have tough ambitions in AO. I don't know when the 10% will happen, but I know it is our firm ambition, and we know what it takes to get there, and it will take growth.
We will not be able to reach 10% by keeping up the present level of sales or to exercise heavy saving exercises. It is a matter of scale. So, of course, we want to protect our margins, and some of the activities where we see growth, for instance, in B2C and for instance, in the tooling area, the EA synergies, they have higher margins than our average margins in the business.
As you also know, we have a pretty good position within repair and maintenance, which also carries a higher margin than, for instance, projects. So it is a matter of focusing on organic growth and also the right acquisitive growth, increase the top line, and then we will reach the 10%. But I don't dare guess which year it will be. I think those were the questions for now. Thanks for being active, and thanks for listening in. Talk to you again in August. Bye.