Good morning, and welcome to Nilfisk's Earnings Conference Call for the Fourth Quarter and the Full Year of 2023. I'm Elisabeth Klintholm, I'm the Head of Investor Relations and Group Communications here at Nilfisk. And to cover our results today, we have our CEO René Svendsen-Tune and our CFO Reinhard Mayer presenting. For the call today, we'll cover a number of topics. First, René will give an update on the Q4 2023 and full year 2023 numbers, and then a Business Plan 2026 update. And René will also cover our progress with sustainability during 2023. Then Reinhard will give a detailed run-through of our financial performance in 2023 and comment on our outlook for the coming year 2024. We appreciate that you take the time to listen in on the call this morning.
The presentation 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. Moving on 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, please read the content on this slide. With this, welcome René, we are ready for your message on 2023.
Thank you, Elisabeth, and good morning to all of you. Thank you all for joining us on our earnings webcast this morning. Let's get started with some commentary on the main financial results, and please go to slide four. In Q4, the service and specialty business each contributed with growth, and for consumer we saw strong recovery. The professional business declined due to market headwinds in the U.S. and Canada. The quarter was generally impacted by a challenging climate with muted demand in North America and EMEA, but as a result we saw a total revenue of EUR 252.9 million. For the regions, APAC delivered growth, EMEA remained flattish, and Americas declined. Overall, organic growth was negative with -2.9% for the quarter. Growth was supported by the easing of supply chain constraints across all our production sites.
We do note that the order book has come down and now is lower than in Q4 of 2022, but it still remains elevated around large industrial floorcare. The gross profit margin recovery continued. Price management and lower freight costs more than offset headwinds from cost inflation on raw materials and labor. As a result, the gross margin reached 41.8%, up from 40% of last year. EBITDA before special items was EUR 35.1 million, and EBITDA margin before special items was 13.9% for the quarter. Free cash flow was strong, leading to continued improvement of net interest-bearing debt and our gearing. So let's move to slide five to look at the results for 2023 full year. So 2023 was a year of steady progress with our financial business metrics and with Business Plan 2026. I will revert to our progress with the strategy in more detail in a moment.
So in 2023, we delivered a set of results that we consider acceptable in a challenging climate. This was achieved by pursuing pockets of growth in a market impacted by a muted demand. Revenue landed at EUR 1,033 million, and EBITDA before special items was at EUR 132.4 million. This allowed us to deliver flattish organic growth of -0.3% and an EBITDA margin before special items of 12.8%, both in line with our outlook for the year. With the annual report, we also confirm our financial targets for 2026. These targets are supported by the foundations for future growth built during 2022 and 2023. With this, we conclude 2023 with strong foundations that will act as a catalyst for the acceleration of Business Plan 2026 in the years ahead. So let's move to slide six for an update on the Business Plan.
2023 was a year of steady progress with Business Plan 2026. We invested in our growth platforms and structured the organization to optimize the way we work. Let me cover the main progress areas. The service business benefited from our strategic focus and solid demand and delivered organic growth of 5.5% in the year. This increased the share of revenue from service to 29% in 2023 from 28% in 2022, while the contract detachment rate increased to 12% from 10% the year before. However, this progress is not fully according to expectations. To accelerate execution, we have adjusted the operating model, adopting an implementation that connects services closer with our regions. In practice, this means that the service business is integrated with EMEA, removing any geographical distance between the frontline and the backline of organizations.
Another measure taken to accelerate execution is ensuring that we have an increased focus on PAC. PAC is Parts, Accessories, and Consumables. This accounts currently for 59% of the revenue of our service business. For our priority to grow in large-scale markets, we saw flattish growth in the U.S. despite a muted second half of 2023. The soft demand was particularly within the high-pressure washer category and specialty business. Meanwhile, we continue to ramp up for large industrial equipment from our Brooklyn Park production facility. This will facilitate accelerated growth also in 2024. To serve another future large-scale market, the APAC region was established early 2023. During the year, we saw solid growth in most of this region driven by solid demand. Turning to products, we stepped up investments into innovation pipelines in 2022 and 2023 with increased R&D spend.
We saw the first results with a handful of products launched in 2023 that I will revert to in a moment. Most importantly, we now have a solid product roadmap for 2024 with increased focus on sustainability. For our largest market, EMEA, we finalized the operating model in 2023. This has led to the region being based on six equally sized markets and clusters driving all commercial activities, including the activation of service. With this structure and team in place, this market is well placed to pursue growth. On the supply chain robustness effort in 2023, these were centered around ensuring increased production capacity and enhancing efficiency across sites. In addition, we implemented dual production of high-selling floorcare products across geographies to improve delivery time. The focus on margin expansion continued with dedicated price management.
Finally, our focus with specialty business was centered around the industrial vacuum solutions, which is that part of the business. Here, we rebuilt a center of excellence back in 2022. In 2023, we have strengthened the R&D setup. Now we have a new and innovative product roadmap, and we are expanding our business into new segments. With that, let's turn to slide seven and product launches. Over the last years, we stepped up investments into innovation pipelines, and in 2023, we saw first results with a handful of product launches. Within our largest product category, floorcare, we relaunched our first autonomous machine, SC50, in a version 1.5. We also relaunched the popular SC650 Walk Behind. We relaunched one of our best-selling products, the professional vacuum VP930, used in hotels and offices all over the world.
We launched our first consumer cyclone stick vacuum S1, which has been very well received by the market. Today, we are excited to relaunch our new professional vacuum VP300. We are focused on meeting our customers' increased focus on sustainability by using 30% recycled plastic in the vacuum case. What really sets this product apart is the fact that we have succeeded in using post-consumer plastic rather than the more easily adaptable and less impactful route of using post-industrial plastic. This is the first machine in the market using post-consumer plastic. With this launch, Nilfisk is off to a strong start on our 2020 product roadmap. Please turn to slide eight. An area that developed faster than planned in 2023 is sustainability, where we accelerated our efforts to reduce emissions.
The progress with reducing Scope 1, Scope 2, and Scope 3 greenhouse gas emissions took a solid leap forward in 2023, and we are on track to meet our 2030 science-based targets. In addition, we took important steps to further increase gender diversity. To align with new Danish legislation, we revised our gender diversity target, and meanwhile, or at the same time, we increased our ambitions. The midterm target is revised from 25% women in senior management by 2026 to 34% women in top management in 2026. We also added a new longer-term target of equal representation in top management by 2030. Let's look into the numbers. We achieved a 16% reduction in Scope 1 and 2 greenhouse gas emissions in 2023 compared to the base year. This was a solid increase from a 10% reduction in 2022.
We reached a 25% reduction in Scope 3 greenhouse gas emissions relating to the use of sold products in 2023 compared to the base year. This was also a solid increase from an 11% reduction in 2022. For our new diversity target, the goal is minimum 34% women in top management in 2026 and equal representation, minimum 40/60, by 2030. We define top management at Nilfisk as a leadership team and its direct reports. For 2023, we reached 30% women in top management, an increase from 26% in 2022. On employee engagement score, we were stable at 8.1 versus 7.7 for the industry. This places us in the top 25% of manufacturing companies globally. Finally, Nilfisk was awarded an EcoVadis Silver Medal, scoring 65 out of 100 points, 3 points lower than the 68 points we scored in 2022.
The score is 20%, 20 points above the average in our industry, and we are placed at the 86th percentile. With that, I conclude my introductory remarks, and we will hand over to you, Reinhard.
Thank you, René. Let's turn to financials on slide 10. Total revenue was EUR 1,033.6 million, a reduction of 3.4% from 2022. Foreign exchange rates had a negative impact of 2.9%, with Turkish lira, U.S. dollars, and Argentinian pesos as the main drivers. Organic growth for the total business was flattish, at -0.3%. The organic decline was driven by muted demand, mostly driven by market headwinds in EMEA and Canada. This was partly offset by increased service revenue and active price management. Looking at our business segments, service delivered strong organic growth of 5.5%. Professional and specialty declined 1.8% and 2.6%, respectively.
We note that without the effect from private label, organic growth for professional was largely flattish, with just -0.4% growth. Consumer declined by 8.9%, negatively impacting overall organic growth for the full year. It should be noted that the consumer business returned to strong double-digit growth in the second half of 2023. Let's turn to slide 11 for a look at the regions. Revenue in our largest region, EMEA, was EUR 586 million, corresponding to -2.5% organic growth. Demand across the region was muted, while price management mitigated part of the negative volume. Central and Northern Europe saw volume decline, while Southern Europe remained relatively flat. In America, revenue was EUR 366 million, delivering 1.4% organic growth. The growth was driven by strong performance in Latin American markets throughout the year, benefiting from both higher volume and price management. The U.S. was flattish at 0.1%, while Canada saw negative organic growth.
Demand weakened in the second half of the year as the business climate became more challenging, resulting in lower volumes compared to last year. In APAC, revenue reached EUR 82 million for 2023, which corresponds to strong organic growth of 8.3%. Growth was driven by continued strong demand in Australia and New Zealand. China contributed significantly with double-digit organic growth, benefiting from the reopening after COVID-19 lockdowns that affected 2022. Moving to slide 12, the gross profit and gross margin development. Gross profit for 2023 came to EUR 423 million. The gross margin increased through dedicated actions, most importantly, price management, structural efficiency measures, and savings on material spend. The gross margin reached 40.9% compared to 39.5% in 2022.
Looking at the gross margin drivers, it is visible that the main positive was price management and, to a lesser extent, mixed effects. Lower freight and distribution costs also benefited the margin. Lower volumes increased costs and labor, and inflation on raw materials offset to a good part the margin expansion. We are satisfied with this progress that we made during 2023. Moving to costs on slide 13. Overhead costs came to EUR 351 million in 2023, and the overhead cost ratio was 34%. The overhead cost increase was primarily driven by merit and inflation, partly offset by a higher capitalization of R&D activities. We also continued investing in our growth platforms of Business Plan 26 while funding them through structural efficiency measures implemented in Q2 2023. The overhead cost ratio increased to 34% from 32% in 2022 because of lower revenue in combination with the increased overhead cost.
As usual, let's have a closer look into the evolution of our major spend categories. Sales and distribution costs increased by EUR 8.2 million, driven by merit, travel costs, and increased facility expenses. Administration costs rose EUR 4.5 million, mainly from merit in Hungary and Mexico, investments into BP26 with focus on our digitalization initiatives, and driven by general inflation. Total R&D spend increased by EUR 2.3 million compared to 2022. This is equivalent to 3.2% of revenue, an increase from 2.9% in 2022 and 2.6% in 2021. The increase was driven by investments into modular platforms and a new product pipeline related to our efforts of leading with sustainable products. This is in line with our Business Plan 2026. Total R&D expenses declined by EUR 3.7 million due to higher capitalization and lower depreciation and lower impairment costs.
Turning to slide 14 to look at the effects on costs from our structural efficiency measures. In connection with our Q1 2020 series results, we announced efficiency measures targeting structural cost improvements. We planned to reduce the cost by EUR 10 million-EUR 12 million in year, with full-year effect of EUR 15 million-EUR 18 million. The measures were concluded in 2023 and have delivered the targeted outcome, reducing our overhead run rate going into 2024. In Q1 2023, the overhead run rate was almost EUR 360 million. As reported, overhead costs landed just over EUR 350 million for the year. Costs were reduced by around EUR 8 million. During the year, costs rose from general inflation on freight and distribution, while we also kept investing into Business Plan 2026, increasing costs by around EUR 5 million.
This was then partly offset by increased R&D capitalization of EUR 3 million, and most importantly, by efficiency measures of EUR 10 million. Overhead costs in Q4 landed at EUR 86.3 million, indicating a full-year run rate of around EUR 345 million compared with the run rate of EUR 360 million in Q1. This indicates delivering the targeted full-year effect of around EUR 15 million. Moving to the EBITDA margin development on slide 15. EBITDA before special items amounted to EUR 132 million in 2023 compared to EUR 141 million in 2022. The soft demand in Q4 2023 negatively impacted EBITDA, but this was mostly offset by the strong gross margin expansion and cost management. Consequently, we realized an EBITDA margin before special items of 12.8% compared to 13.2% in 2022. Let's have a closer look at the moving parts.
Price management was the largest positive for the margin, while tailwinds from freight and distribution also benefited EBITDA. We saw headwinds from volumes and raw material inflation in combination with higher overhead year-on-year. As a result, EBITDA before special items declined by 0.4 percentage points. Looking into the business segments, professional contributed with an EBITDA margin expansion from 9.9% in 2022 to 11.4% in 2023. Service saw a decline in its EBITDA margin from 26.6% to 24.1% as investments in the ramp-up were taking effect. Specialty business realized the highest EBITDA margin across the businesses, with 32.3%, in line with 32.4% in prior year, maintaining the margin quality despite the negative organic growth in this business. The consumer business delivered an increase of 1 percentage point EBITDA margin to 6.9%. Lower overhead costs and gross margin expansion more than offset the negative volume.
Moving on to cash flow on slide 16. Free cash flow increased by EUR 60.7 million compared to 2022 and amounted to EUR 115.2 million in 2023. Operating cash flow amounted to a net inflow of EUR 143 million compared to a net inflow of EUR 82 million in 2022. The development was driven primarily through lower working capital in the amount of EUR 63 million, of which the non-recourse factoring program contributed with EUR 13 million. The CapEx ratio increased to 3% in 2023 from 2.5% in 2022, as CapEx spend increased in line with Business Plan 2026. Net interest-bearing debt was lowered to EUR 252 million, a decline of EUR 73 million from 2022. The decline was primarily driven by the initiatives to lower working capital. As a result, the gearing declined to 1.9x versus 2.3x a year ago.
The gearing is now within the Business Plan 2026 target range of 1.5%-2.0%. Please go to slide 17. Well, with this, we conclude the financial section. Let's move on to slide 18, the outlook for 2024. Looking into 2024, we expect that both demand and output will pick up. We expect this will lead to volume growth across both our products and our services. We know that the muted demand in North America that particularly affected the second half of 2023 brings some uncertainty around the top line. For organic revenue growth, we expect a range of 3%-6% growth in 2024. This is mainly supported by demand in combination with increased output and a solid order book. We know that we only expect minor effects on the top line from pricing actions.
The EBITDA margin before special items is expected in the range from 13%-15%. The margin is expected to be supported by increased revenue, continued gross margin expansion, and effects from the structural efficiency improvements realized in 2023. CapEx spend is expected around 4% of revenue, with more than half directed towards product investments. Finally, special items are expected in the range from low- to mid-single-digit million EUR. Now to slide 19. With this, we will conclude our presentation, and we are now ready and able to take any questions you may have. Operator, please.
We now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will be returned to confirm that you have entered the queue.
If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Claus Almer with Nordea. Please go ahead.
Thank you. Yeah, I have a few questions. So the first one goes for the guidance for 2024. I'm really struggling to bridge how you ended 2023 with the outlook of 2024. Maybe you could give a color to how, you know, yeah, revenue decline is going to grow 3%-6% in this year and then also the expanding margins. That would be the first question.
Thank you, Claus, for the question. Well, I think the main reasons for our, let's say, positive outlook with 3%-6% is clearly our product pipeline.
So we have launched more products in 2023 than in 2022 that will have a positive effect to 2024, and we will even launch more products in 2024 than in 2023, firstly. Secondly, we are going to increase our output from the healthy order book, which we still have, due to the investments we have taken in 2023, and that will support as well our volume growth. And thirdly, we have actually a continuum of good growth momentums in Asia-Pacific. We have actually seen the momentum changing as well in Europe and clearly got better perspectives in Europe. There is a bit of a, let's say, risk which we address. It's the North American markets where we have seen somewhat a declining and accelerating declining market in the United States.
Though, with the number of new products and especially also the initiatives and around our service business, we see clearly good perspectives to grow in 2024 over 2022 in the given range. And that volume growth, as we have talked about, is going to be the major driver for the margin expansion. And yeah, that's the reasons.
Just to understand this better, so if you look at 2023, is the main reason for the performance and/or, let's just call it, flattish revenue was caused by the product assortment? You know, it sounds like you will do new product, and that will drive revenue growth. Is that new segments or within current segments? Is that as simple as that?
I think what, this René here, so what Reinhard just said, I mean, there's a couple of matters here. One major driver is launch of new products that has already taken place.
I mean, so we have new products in the field that we just spoke about, and we have a pipeline. We are not going to tell, of course, at this point in time what exactly when will happen, but we have a pipeline of new products. We are still focusing on the same segments. I mean, floor care is a major part of our business. High-pressure washers is, you can say, has been in decline, but it's still a major part of our business. And the consumer execution is, as we speak, strong. So this is one contribution to the growth pattern. Second, what Reinhard talked to, of course, is that the environment we think is perhaps more predictable, except that we have this uncertainty about the U.S.
The output matters to somehow just finalize does support, you can say, if you have too high order backlog, the new orders don't come until you bring it back down. That's just so unnatural in many types of businesses. So product plays a big role, but it's not everything.
Right. Okay. And then, as you mentioned the order backlog, is it possible to get some flavor or number to how much a normalization or whatever you assume in 2024 of the backlog will contribute from revenue growth in 2024?
I don't think, for competitive reasons, that it's a good place to somehow be too detailed here. So we have an elevated order backlog still. It is down from a year back because of higher output. But exactly where it sits, we can't comment.
But is the meaningfulness of your revenue growth insignificant in any way of understanding this impact?
I mean, Claus, it is, let's say, a meaningful one, but it's not half of the growth. It's, so to say, at the lower end of the growth range where we expect to see some additional volume from the backlog reduction.
Okay. That's very helpful. Then my second question is about the 2026 targets. You reiterated these targets, but if you do the math, then the revenue growth on average until 2026 has to be 5%, even the low end of the guidance range. That's a lot, at least compared to what you have achieved in the past. Is this the most realistic scenario?
We have a very realistic, let's say, planning, and that takes into account what is in the product pipeline, what we are going to work on in the service business, and where we see, so to say, the markets to develop. And we should not forget that we come out of 2023 with significant volume declines in Europe, and that is normalizing as we expect that to be. And then with the new products, the relevant services, the innovations we bring to the market, we have actually a very tangible plan to arrive at our Business Plan 2026 target range.
That sounds promising. That was all from my side. Thanks so much.
The next question is from Casper Blom with Danske Bank. Please go ahead.
Yeah. Thanks a lot. Now, Claus asked about the revenue guidance, so I will ask about the EBITDA margin guidance. You have now, roughly two years in a row, delivered 13% EBITDA margin. And I can understand that in 2023 there was lack of growth, and there were also investments into improving the gross margin going forward. If I look into 2025 or, sorry, into 2024, you are now actually guiding for at least 3% organic growth, and you will also get the benefits of these initiatives that were started in the first half of 2023. You'll get the full year benefit in 2024. So what is it that could potentially drive the margin to 13%? I mean, wouldn't the sort of natural expectation be that you actually grow the margin in 2024 given these circumstances?
I mean, I would agree that we have an expectation to be, so to say, above just the 13%. That's our expectation, clearly. But there's uncertainty, and we have still wars out there, and we have still supply chain uncertainties given those wars. And then we have the North American, let's say, market dynamic, which we cannot fully judge. Though, obviously, we have, let's say, a clear perspective which, so to say, assumes when we are at the lower end of the revenue target range, then this would be definitely delivering, again, the lower end of our EBITDA range. Whilst with scale effects, volume effects supporting better utilization of factories, but also of our structure, organizational structure, we basically just can, so to say, see positive volume helping our profitability. So it's actually rather scalable, what we have now in our plan 2024.
But it almost sounds as if the revenue guidance and margin guidance hasn't been made on the same assumptions. I mean, when it comes to the revenue guidance, you say that there is an uncertainty, but when it comes to the margin guidance, it is as if you've already built that uncertainty into the range.
Well, on the margin guidance, we have several effects. I mean, first of all, we know already now what sort of price and cost inflation we have because we have just launched the salary increases at the beginning of the year. That we know. On the, let's say, top line effects, I mean, there's the volume. There we see, let's say, clearly upside potential from what we have been delivered in 2023. So this is a main driver. But how well price comes into play in 2024, this is the uncertainty piece. And that's where we need to be, let's say, cautious.
Okay. Fair enough. A second question goes to the working capital. A very, very strong and impressive development in 2023. Is it the expectation that you can sort of hang on to this working capital level in 2024, or should we expect some sort of reverse bounce back?
Well, there was a very good development in all aspects. So receivables, inventory, but also payables, obviously helped by somewhat lower revenue. Yeah? As we expand our top line, we will, so to say, have also higher receivables, and we expect actually not to expand our non-recourse factoring. This would rather be, let's say, slightly below the current level ending 2023. So there would be a slight negative on that. As we go out with new products, there is ramp-up of product inventory necessity, and that will lead into some increased inventory levels. So there, I would actually see not a further improvement currently with lower inventories.
Then the accounts payable will see what sort of improvements we can deliver, but not too much. So I would see that actually the working capital side is not going to be, in 2024, a major cash generator, but also not going to be a super strong cash consumer. So I think it's more EBITDA and profitability which will go and drive net cash flow.
Thank you. That was all from me.
We have a follow-up question from Claus Almer with Nordea. Please go ahead.
Thank you. Yeah. Just a question regarding pricing. So we discussed this after Q3, as I remember. What is your pricing strategy for 2024? Have you already communicated price increases both in EMEA and U.S.? Yeah. An update on that point would be interesting.
Yeah. So René here. So yes, there are pricing decisions out there in the field. We have seen solid price increases for a couple of years, and you should not expect anything like that for this year to come here. So we think we are well in the market, but it's clear we cannot grow by price increases to the extent we have seen in the recent two years.
And do you raise prices both in U.S. and Europe?
You can say it's segment and product-driven, exactly what it is, but it's across the world. Yeah.
Okay. Thanks.
The next question is from Mads Quistgaard with Carnegie. Please go ahead.
Yes. Thank you. I just have a question on your capital allocation because you're now within your target range of 1.5x-2x. But what is meant by the gearing to be sustainably within the target range before you will potentially pay out dividends?
Yeah. Thank you much for the question. I mean, for me, first of all, it's good that we have been really tapping into the range for 2023. Sustainability is, so to say, somewhere in the middle pocket. That's my definition. So around 1.7x or below, that's sustainably. And yeah, we are not yet there.
Okay. But given the question around working capital before, I guess you will be below 1.7x by the end of this year. That must be the target, right?
I would think that that is in a reachable range, and then we can basically discuss capital allocation. Maybe we have also good ideas on new products. Maybe we have other good ideas. And that certainly will drive the topic around how to use the available cash.
That's fair. Then I just have a final question on the backlog. Previously, you have commented that the order backlog was tilted to the industrial segment in the Americas. Is this the same thing going on in this quarter, or has it changed your order backlog?
It's the same thing. We have still, let's say, an elevated and higher than pre-COVID, so to say, level on industrial floor care, large industrial floor care machines tilted to the Americas. But that, of course, had also impact, as René stated, to all the other regions. As we have ramped up now manufacturing capacities in different sites, we certainly are more actively going to commercialize our, let's say, improved situation. So yes, higher order backlog still in the Americas for large industrial equipment is there.
Perfect. Very clear. Thank you so much for taking my questions.
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