Good morning, and welcome to Nilfisk's earnings conference call for the third quarter of 2022. My name is Elisabeth Klintholm, and I'm the Head of Investor Relations and Group Communication here at Nilfisk. 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. To cover Nilfisk's Q3 2022 results today, we have our CEO, Torsten Türling, and our CFO, Reinhard Mayer, presenting. The agenda for today is as follows. Torsten will start off with some high-level commentary on our Q3 performance, as well as a short update on the progress we are making with implementing and realizing Business Plan 2026.
Following this, Reinhard will give a more detailed run-through of our financial performance in the quarter before handing back to Torsten, who will finish off, uh, us off with giving some comments in connection with our revised outlook for twenty twenty-two. We appreciate that you take the time to listen in on the call this morning, and we'll keep today's presentation short, and look forward to taking your questions during the Q&A session at the end of the webcast. And with that, welcome to you, Torsten. We are ready to hear your comments to the accounts.
Thank you, Elisabeth, and good morning to all of you. Thank you very much for joining the earnings webcast call today. We will be sharing our business highlights and comment on results for the third quarter of 2022. We will also go into some of the underlying dynamics in the quarter. Let's get started with our revenue development in Q3. If you turn the page. In the third quarter, we managed to continue the positive revenue developments from the first two quarters of 2022. This was achieved despite the current global economic slowdown and increasing headwinds. Sales reached EUR 263 million, up by EUR 23.8 million over the same quarter the prior year.
This translated into reported growth of 9.9% in the quarter and an organic revenue growth of 5.4% in the quarter. Nilfisk-branded professional business was the growth engine, with increased sales in all regions compared to the third quarter of 2021. Organic growth in the professional segment stood at 10.8%, with the Americas and APAC regions growing by a double-digit percentage, whereas Europe professional business grew organically by 6.4% in the quarter. Meanwhile, revenue from our consumer and private label business declined notably in Q3, in line with respective end markets. Supply chain constraints continued in the quarter. The lack of critical components like PCB boards still constrained sales growth in the quarter. Our ongoing work to mitigating the effects of supply chain shortages continued.
As you know, a tornado destroyed our U.S. distribution center in March this year. We resumed operation in the new facility in record time. However, in Q3, we continued to suffer from parts availability impacting our availability to supply. Furthermore, our dedicated pricing efforts continued successfully in the quarter and contributed to the revenue growth. In Q3, order intake once again exceeded invoiced revenue. With the continued solid demand for our professional cleaning equipment, the order book at the end of Q3 was marginally higher than end of Q2. On that note, let's move to slide six for comments on our margins and earnings. Overall, in the quarter, margin was temporarily challenged by parts availability issues and lower capacity utilization.
Continued parts availability issues from our U.S. distribution center impacted our ability to drive service business revenue and also caused some under-absorption in our manufacturing facilities. We consider those issues temporary. However, they had a significant impact on our margins in the quarter. Pricing largely mitigated raw material cost inflation and continued high freight rates. Furthermore, in the quarter, we continued to invest behind our key strategic initiatives. Overhead cost ratio increased with those strategic investments in growth platforms, our digital infrastructure, and our supply chain robustness. Overall, with this margin implications in the quarter, we achieved EUR 20.2 million EBITDA in the quarter, EBITDA margin of 11.1%. With this, I'd like to turn to page 7 with some commentary on our execution progress in the last quarter on our Business Plan 2026.
As we started with the announcement of the Business Plan and the long-term strategy to sustain long-term profitable growth, we continued strategy deployment throughout the organization. We continued touring our global operation site and shared with our employees the core content of the strategy and Business Plan. We also embarked on teaching a methodology which is called Nilfisk operating system, which is a proven methodology to secure successful execution. A very positive reception by our people on the key elements of the strategy, and we started to go into implementation full steam. One of the first results is in line with our ambition to drive our sustainability commitments towards new levels. As part of our renewed value proposition, we have targeted to set new benchmarks in our industry when it comes to sustainability.
As a part of the results that we have achieved with this is a gold rating by EcoVadis that we have been awarded just a few weeks ago. EcoVadis is one of the most renowned institutions for sustainability ratings. With a gold rating that we have achieved now, we are among the 5% most highly rated companies in the world when it comes to sustainability efforts. This is along our path to continue driving the boundaries of sustainability in our industry. Finally, on strategic priorities, where we have defined a short subset of initiative that shall help us to drive long-term sustainable growth. In particular, I'd like to mention one of those strategic priorities who did lead to great results in the third quarter.
Our ambition to grow in large-scale markets, and in particular in the U.S. market, did lead to remarkable results. The third quarter revenue did grow in the U.S. market by 14.5%. This let us grow in the U.S. market despite the tornado incident year-to-date by 11.4%. We continue to see upside opportunity for us in the U.S. market continuing gaining market share. With those updates, I pass it on to Reinhard for more details on our financial performance.
Thank you, Torsten. Let's look at the financials of Q3. I would like to start with our operating segments. Our branded professional business delivered revenue at EUR 237.2 million in the quarter, up 10.8% organically from last year. This performance was driven by a very strong growth in the Americas, which reported revenue of EUR 103 million and delivered organic growth of 15.9% in the quarter. In Europe, revenue in Q3 amounted to EUR 110.6 million and organic growth of 6.4%. The consumer business delivered revenue at EUR 12.7 million in the quarter and declined 29.6% organically compared to Q3 2021. Last year, we saw strong momentum from COVID-19 related home improvements benefiting the segment.
This year, we face a completely different sentiment in the consumer market. Significantly lower consumer confidence driven by the high inflation and economic slowdown is affecting our consumer business in line with the respective markets. The private label and other business reached revenue of EUR 13.1 million, down 22.2% organically versus Q3 last year. We see the demand from key customers slowing down in 2022, which in essence follows the same reasoning as for our consumer business. In total, we grew revenue in Q3 5.4% organically and reached net sales of EUR 263 million across all segments. Moving to slide 10 and our regions. Our overall revenue growth of 9.9% in the quarter was due to strong growth in the Americas and APAC region.
In Americas, revenue grew with a healthy 14.7% organically. U.S. experienced the largest improvement while Canada and LATAM grew notably compared to Q3 2021. The appreciation of U.S. dollar had a positive effect on reported growth. However, supply chain constraints within Americas continued to limit revenue growth in the region. Europe delivered revenue of EUR 132.4 million, a decline of 1% compared to Q3 2021. The professional floor care equipment and the aftermarket business grew in Europe in Q3 2022, while demand slowed across high-pressure washers and vacuum cleaner product segments. Europe South continued to outperform in Europe, driven by strong sales in France, Belgium and Turkey. Europe North and Europe Central faced challenges as demand was negatively impacted by the economic slowdown, though offset in part by solid execution on the price increases earlier this year.
In APAC, we saw a growth of 12.8%, leading to revenue of EUR 26.1 million. This was driven by a rebound from China during Q3 as lockdowns eased. Pacific and Southeast Asia markets experience also strong growth in Q3 2022. One can say our pricing actions supported revenue growth across all markets. Moving to slide 11 and the income statement. Our reported net sales of EUR 263 million led to reported growth of 9.9%. The foreign exchange rates had a favorable impact of 5.4%, mainly influenced by the U.S. dollar movements. The gross margin came in at 39.1%, 160 basis points lower than prior year. Following are the main influencing factors.
First, lower capacity utilization stemming from lower revenue in the private label and consumer business, as well as reduced volumes in vacuum cleaner and high-pressure washer product lines in the quarter. Parts availability issues, as mentioned by Torsten in the U.S. distribution center, is leading to constraints in the U.S. service business and the fulfillment of certain customer orders in the U.S. Impact from increasing material costs and continued high freight rates was, to a large extent, offset by our continued pricing actions. Even though we compare developments to Q3 last year, we note that the gross margin improved during the third quarter and is up versus Q2 level this year. EBITDA before special items came to EUR 29.2 million. This is EUR 5.3 million lower than in Q3 2021.
EBITDA before special items was affected negatively from gross margin pressures, only partly offset by positive impact from revenue and pricing. The EBITDA margin before special items came to 11.1%, a decline of 330 basis points compared to prior year. The decline was driven by lower gross margin and higher overhead costs. In the quarter, we recorded special items in the amount of EUR 3 million compared to EUR 0.5 million in Q3 2021. Special items were mainly legal and advisory costs incurred regarding strategic projects such as Business Plan 2026, as well as the ongoing liquidation of Nilfisk Russia. Turning now to the balance sheet and cash flow on slide 12. Let's start with inventories. In the quarter, we continued to actively manage our inventory levels to match business activity.
In addition, the quarter was affected by valuation effects following the price increases on raw materials as well as foreign exchange rate movements in U.S. dollar. As a result, inventory value rose by EUR 46.2 million compared to Q3 last year, and we ended the quarter at EUR 248.2 million. Working capital grew by EUR 90.7 million. This was a result of the higher inventories as described, lower trade payables, and an increase in other receivables in connection with insurance claims for our U.S. distribution center in Springdale. Consequently, last 12 months working capital ratio was up by 490 basis points compared to last year. CapEx increased in the quarter EUR 1.5 million, primarily from investments in R&D, including sustainable products and investments into I.T. systems.
Total R&D spend rose by EUR 1.6 million and came to 3% of revenue versus 2.6% in Q3 last year. The free cash flow in the quarter amounted to an inflow of EUR 17.7 million, up EUR 3.1 million compared to Q3 2021. Cash flow was positively affected by changes in working capital and higher financial income. Net interest-bearing debt at the end of the quarter stood at EUR 365.1 million, an increase of EUR 19 million compared to Q3 2021. Higher net interest-bearing debt in combination with the decline in last 12 months EBITDA led to an increase 0.3 in gearing to 2.7. With this, I close my presentation, and back to you, Torsten.
Thank you very much, Reinhard. Let's turn now to our outlook for the full year 2022 on the next slide. Our full year 2022 outlook was revised on October 26 with company announcement number 15 of 2022. Based on the first nine months of 2022 and the current visibility, we now expect organic revenue growth in the range of 4.5%-6.5% compared to our previous expectations of revenue growth between 4%-7%. We expect the EBITDA margin before special items to land around 13% for the full year of 2022. Previously, we expected an EBITDA margin between 13.5% and 15.5%. We mentioned earlier that the gross margin improved slightly during Q3, and consequently, we expect the margin to improve going into the last quarter of 2022.
We also know that the customer demand for professional cleaning equipment remains good. We still hold an all-time high order book at the end of the third quarter. We have been able to mitigate an increasing part of the inflationary pressures with pricing actions in Q2 and more so in Q3. Finally, we are progressing well with the implementation of our Business Plan 2026. This plan is focusing on long-term sustainable growth and focused on customer value creation. Key drivers like growth in the large-scale U.S. market, developing service as a business, as well as leading with sustainable products, will continue to contribute to this growth alongside with optimizing our leadership position in Europe and enhancing the robustness of our supply chain.
In addition, we are building our execution engine with the Nilfisk operating system and creating an execution culture where we see both opportunities and challenges and act accordingly, which is progressing. This concludes our presentation. Let me now open the call for your questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press * followed by one. If you wish to remove yourself from the question queue, you may press * followed by two. Anyone who has a question may press * followed by one at this time. One moment for the first question, please. The first question is from Claus Almer from Nordea. Your question, please.
Yeah, thank you. I have a few questions. The first goes to the gross margin, which declined year-over-year. According to the report, you are explaining this trend by lower utilization rate, but revenue growth organically is up by 11% for the branded products and 5% on group level. Can you try to put a little more color to this lower utilization rate? That will be the first question. Thanks.
Yeah. Thank you, Claus, for the question. This utilization topic is coming from different sources, not all across. Reinhard mentioned that in relation to the decline of consumer and private label business, there is some impacts on the vacuum cleaner high-pressure washer category. This has implications on capacity utilization in that category. Professional equipment overall is growing, primarily driven by the floor care and the service business. Here, of course, we continue to have a very, very good capacity utilization. We have capacity utilization issues in our U.S. manufacturing plant due to availability of supply. Also here, our sales growth has been constrained, could have been better, but given the fact we couldn't complete some of the kind of semi-finished products due to missing parts.
We also see an under-absorption of our fixed-cost structure in the U.S. manufacturing plants. Those are the two key contributing factors, Claus. The U.S. under-absorption in our U.S. manufacturing plant and the high-pressure washers and vacuum cleaner volume-driven absorption coming primarily from the private-label business decline.
On average for the group, you know, you're selling more volume, so that must be good for your utilization in general. Also, I guess the mix should also be positive for the gross margin or am I missing something here?
Claus, maybe to add here, I mean, the gross margin and when you look at the proportion of sales growth, you recognize also that Americas was growing stronger than Europe. In Americas, we do have somewhat lower overall gross margins than in Europe. There's a mix effect there. The second driver is, as well, that the pricing actions started end of Q2. They are leading into pricing improvements during the quarter, as we have highlighted. The price inflation effects were already strong in the second quarter, and basically were fully available to us in the third quarter. There's also a little bit of a delay effect. Those are the other two drivers to the margin.
Let's say somewhat muted versus last year, but as we said, up versus the second quarter, and that is really a good momentum.
Okay, thanks. My second question goes to these lawsuits that has been filed. One of them is from your insurer. What is actually going on? A bit more color to that.
Well, basically as it's a lawsuit, we are not making statements here in public. You are right that we are, let's say, discussing the values and the compensation of those values. More once we have clarity around, so to say, the positions.
Okay. There was a EUR 12 million received from insurance in the quarter. Did that impact your P&L in the quarter or how does that have an accounting impact?
No P&L impact. Only impacts on, let's say, the balance sheet. We had highlighted it in a way that there was other receivables movements on one side. That's our claims. Of course, there's cash flow coming in to actually compensate for some of the cash out, which we had earlier in Q2, but also in Q3 for the rebuild of this distribution center. It is, let's say, a mix of different things. No impact to the P&L.
Okay. That was good for the clarification. Thanks. That was all for me.
Okay.
The next question is from Casper Blom from Danske Bank. Your question, please.
Thank you very much. A couple of questions from my side also. Torsten, you mentioned that you still see good demand in the professional segment. How worried are you that the current weakness within consumer and private label will eventually also spread to the professional segment? If we could start there, please.
Yeah. No. Thank you, Casper. For sure, a very valid point. As reported, we have seen impacted revenue in the consumer and private label business. Although we report an all-time high order book end of the quarter, we see signs of a muted demand in some of the countries in Europe. This is clearly on the horizon. We still see, you know, more supply chain constrained sales growth in the Americas with a super high order book. In Europe, particularly in the categories that we mentioned before, vacuum cleaners, high pressure washers, we saw demand in Europe cooling down.
In the professional segment, yeah. To some degree, you see already in particular in those categories already some cross implications. Whereas floor care and the service business continue to drive the growth in volume terms, but also in value terms, topped up with the pricing activities.
When you have discussions with your larger customers, I suppose you already now have discussions for next year for the larger ones, the key accounts. Are there any signs there that their demand may cool off a bit next year compared to 2022?
We see slightly different dynamics when we talk, to your question, Casper, with our large key accounts. Most of them are still bullish also for next year. Where we see a little bit more hesitation is in the discussions with our dealers, in particular with smaller sized dealers. Right? They are more prudent in their outlook for the following year, and consequently keep the inventory levels rather on the lower level. A bit of different dynamics. Direct key account business, in those discussions still we see a good level of demand like for following year. We see on the dealership channel a bit of a more prudent behavior.
Okay. If one was to sort of maybe draw a scenario where demand actually cools off in the professional segment next year, can you give any kind of guidance to where volume is right now compared to, for example, 2019 as a pre-COVID level? I mean, can you talk about if 2019 was index 100, where are volumes right now? Just so we can better understand where it could potentially fall to.
Well, Casper, thank you for that question, but that of course going into what I would call an outlook 2023 question. As you know as well, we typically would basically provide an outlook alongside Q4 and the annual report. Basically, we will provide an outlook once we have finished our budget discussions with the markets, but also with the organization, and have basically a better grip around the market momentum. When we have that, whenever that is, we then will give an better outlook around the volume impacts. Other than that, we cannot really give a different perspective as of today.
No, I'm actually not looking for any outlook for 2023, but just sort of if you could provide where volumes are today versus 2019.
Yeah. We don't disclose, let's say, single product volume movements. I think we have disclosed clear the organic drivers. When you look at the professional segments, clearly we have overall for the year a volume growth over and above 2019. When you look to the private label and consumer segment, then you see where we are significantly declining alongside with the respective markets in Europe predominantly.
Fair enough. Thank you. Just my final question. You mentioned that you are investing in supply chain robustness. Can you maybe comment a little bit deeper on what it actually is you're doing? Maybe some examples on how to secure that robustness going forward?
Yeah. Casper, I give you a few examples. The most severe bottleneck that we have in a given plant is in our manufacturing facility in the U.S. When it comes to sourcing categories with electronics, we are impacted across, right? Here, of course, forward by diversifying supplier base, that's what we're doing. When it comes to investments, particular in our U.S. manufacturing facility, we just in the third quarter have completed an additional assembly line, all right? We put machinery up to equip additional assembly line.
We also have engineered, it's not yet implemented in the third quarter, but give you an example, we have engineered and brought on the way a project that will help us for some particularly critical constraining components to forward integrate manufacturing into this U.S. facility. Those are investments in machinery, in new lines that will help us to ease a bit the constraints of supply, in particular in our U.S. facility. We continue to have an all-time high order book in the group overall, but the biggest proportion of that order book and the biggest opportunity for further growth we have in the U.S. That's why we're investing in particular there in the capacity expansion.
Thank you very much.
Welcome.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press * followed by one. The next question is from Kristian Tornøe Johansen from SEB. Your question, please.
Yes, thank you. A couple of question from me as well. Just on the split between volumes and pricing, the 10.8% organic growth you report for the professional segment, how much of that comes from pricing?
Well, we will not be disclosing exactly the pricing increase, but it's a bigger share than the volume growth. Let's leave it there.
Okay. Obviously there is still positive volume growth.
Correct.
All right. In connection with Q2 results, you talked about these EUR 10 million-EUR 12 million revenue in the U.S., which you expected to be late from Q2 to second half of this year. Can you in any way update us on that and potentially also say how much was then realized of that in Q3?
Yeah. I mean, the EUR 10-EUR 12, which we had informed you about in, let's say, for the Q2 result, basically one could say that the lion's share of that revenue has been captured in Q3. It's, let's say, difficult to actually nail this number down to a precise value because there's a lot of moving parts. As we have said, we have long lead times anyhow. In this context, the exact shift is something which I would not like to actually disclose. I cannot disclose it here. It is the lion's share of the EUR 10-EUR 12 is captured in the third quarter. There are some minor rollovers in the fourth quarter. One of the reasons why we have also been growing our order book in the end of Q3.
Understood. To these supply chain constraint, I think you talked, you gave an example of the lack of PCB boards. Just curious with what we're seeing within sort of consumer demand. Obviously demand for consumer products in general is likely going down. Is there any, I mean, the potential spillovers to your supply chain? Can you give us any thoughts around that?
I mean, what we can acknowledge is that the supply chain constraints have started to become better. Some of the components that were constrained early in the year or last year started to become more available. We still have, however, in the electronics, the most severe supply chain limitations. We do hope indeed that this will get better over the next couple of quarters in the line with the overall normalization of the global economy. That's our expectation. However, we have not seen this in the third quarter and have seen this yet. Yeah. We are confident we'll see an improvement also in the electronics over the course of next year. The actuals that we see yet in our business is still constrained on this particular category.
It's probably the most constrained category that we have across all the categories. Other categories, as mentioned, have already improved.
Understood. Quite clear. Just my last question on special items. You booked EUR 3 million related to Russia and your Business Plan. How much more special item costs do you expect for these two elements, i.e., Russia and your Business Plan?
Well, we are not guiding on, let's say, the special items. I mean, like the Nilfisk Russia, we take them as they come, and it's, let's say, very difficult to predict activity. The legal and advisory cost for the special projects we named in connection to Business Plan 2026 are predominantly finished. That's for this part. Whatever is out there, where we would see, let's say, a need for it, there's no guidance at this moment in time, nor do we have any concrete plans. I cannot give you a more precise answer than this. If we would have a plan, we would tell you that and would guide on this, but that is not the case.
Understood. Well, I didn't exactly expect a specific number. It's more to understand the situation in Russia, for instance. How far along are you there? Obviously if there's still more to be done, I mean, this doesn't mean that potentially more special items could come.
I'm expecting that the Nilfisk Russia activity is being actually legally winded down by the end of the year. That's the last plan. Yep.
Understood. Thank you. That was all for me.
Thank you, Kristian.
This concludes our Q&A session, and I hand back to CEO Torsten Türling.
Thank you very much, operator. Thank you very much everyone who joined the call. Let me conclude. We have seen a very strong growth in the third quarter with continuation of growth in the first two quarters. I think we are well on the way with executing on key initiatives. We talked about over and above growth in the U.S. market. We talked about pricing, which we really execute tightly in line with our prior outlined plans. We also continue to make progress on our service as a business growth opportunity.
This will be, in the light of somewhat softening economy in the future, certainly one of the key elements which will support our ambition towards long-term sustainable growth. I'd like to conclude the presentation. Thank you very much for attending and your questions, and we're looking forward to see you soon. Thank you very much.