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Edited Transcript of NLFSK.CO earnings conference call or presentation 15-May-20 8:00am GMT

Q1 2020 Nilfisk Holding A/S Earnings Call

BROENDBY May 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Nilfisk Holding A/S earnings conference call or presentation Friday, May 15, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hans Henrik Lund

Nilfisk Holding A/S - CEO & Member of Executive Management Board

* Jens Bak-Holder

Nilfisk Holding A/S - Head of IR

* Prisca Havranek-Kosicek

Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board

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Conference Call Participants

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* Casper Blom

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

* Claus Almer Nielsen

Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT

* Kristian Tornøe Johansen

Danske Bank A/S, Research Division - Senior Analyst

* Mikael Petersen

SEB, Research Division - Analyst

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Presentation

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Jens Bak-Holder, Nilfisk Holding A/S - Head of IR [1]

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Good morning. My name is Jens Bak-Holder, I am Head of Investor Relations here at Nilfisk. To present Nilfisk's results for the first quarter of 2020, we have CEO, Hans Henrik Lund; and we have CFO, Prisca Havranek.

Now let's go to Slide 2. Before we kick off today's presentation, I want to remind you that this presentation may contain forward-looking statements that, for a number of reasons, should not be relied upon as predictions of actual results. I, therefore, encourage you to read the content of this slide in connection with the full presentation.

Now if we look at Slide 3. The agenda of today's presentation is as follows: Hans Henrik will start by going through the highlights of the quarter, which includes an update on how the COVID-19 outbreak has impacted our business. This will be followed by Prisca going through the financial performance of Nilfisk and a brief status on our outlook for the financial year. As always, you are invited to ask questions during the Q&A session at the end of the presentation.

And with this, Hans Henrik, please go ahead.

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [2]

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Thank you, Jens. Good morning, everyone. First and foremost, I hope you're all well and safe during these troubled times, and I thank you for joining us on the call over today.

Let's go to Slide 4, please, for the highlights of Q1. It is safe to say that Q1 had a very challenging ending due to the COVID-19 spreading to Europe and Americas. And since the pandemic started to escalate in China in the beginning of the year, our main focus has been on keeping our employees safe and servicing our customers. During the quarter, we've implemented precautionary measures across the organization, and as a result, we've been able to continue our production, our distribution, our service activities throughout the quarter with little to no interruptions, also during the peak of the crisis.

So before we dive into the details of the quarter, I would want to send a warm thank you both to our employees and to our customers for their ability to handle the crisis and adapt to this new situation.

Looking at the numbers, the Q1 result was more or less in line with our expectations until mid-March, with the exception of China, which I'll get back to later. We had expected to see a negative growth rate in the quarter due to the Q1 numbers, we were up against from the year before. And because we were looking into a back-ended -- back-end loaded year as we communicated at that time. But from mid-March, things really started to escalate quite quickly, with a steep decline in customer demand in most markets, following all the lockdowns. That led to organic growth of minus 10.3% and an EBITDA margin before special items of 11.4% for the quarter in total. Our performance, which is significantly lower than last year, and Prisca will obviously walk you through the details later in the presentation.

Almost from day 1 -- from one day to the next, we experienced a steep decline in customer demand as most markets were locked down. And in general, we've seen a very strong correlation between COVID-19 restrictions and our performance in the business per country. We were only partly able to continue our sales efforts since many customers simply didn't want to see us and close down for sales assets. And in some cases, they also closed down for service visits.

In our production and supply chain, we've experienced little impact by the crisis, as I stated. We have remained operational across all of our production sites, with only minor interruptions, and we've not seen a material impact on the supply chain.

Now let's turn to Slide 5, please. If we look at the situation as of today, May 15, we continue being able to produce supply, service, products with very few interruptions, and we continue to see a significant lower demand in most markets. As such, our numbers for April show a drop in the organic growth of slightly more than 30%. Short term, we continue our focus on adjusting our capacity and our cost to the lower activity level in the market. A sizable number of employees have been sent on leave or furlough, and we've focused our strategic investments to fewer.

In addition, we are preparing right now a restructuring plan to adjust and lower our cost base. This includes a reduction in the workforce by an estimated 250 people across functions and regions, and the first reduction will take place this quarter, Q2. At the same time, we are preparing the business for the new normal that we expect to see on the other side of the crisis. We are very confident that the market for cleaning equipment will come out stronger post corona.

We stay fully committed to the Nilfisk next strategy, as you know it. And we see obviously continued potential in our 3 overall strategic objectives: to leverage our global setup; to be a solution provider for our customers; and to be a digital leader. What we've learned so far from this crisis makes us confident that this continues to be the right direction for Nilfisk, and we will continue to take the necessary steps to adjust our business accordingly.

That said, it is very difficult for us to predict how the demand and the crisis in general will develop moving forward. Many markets are beginning to ease some of the restrictions with very different strategies and speed. So there are definitely a number of local variations and scenarios for how the future might look, and the visibility is still very low for us. As a result of this highly unpredictable future, we maintain the suspension of the guidance that we told you about on March 19.

Let's turn to Slide 6, please, where I want to share some more insight in how the COVID-19 outbreak has impacted our business, and what we have done to mitigate it within 3 areas: first of all, demand; second, production; and finally, supply.

Starting with the customer demand. We saw this impact in China early on in the year as most Chinese cities were closed down in response to the outbreak. And we even had to temporarily close down our Shanghai office and all travel activities were, of course, prohibited, and that made it very challenging for the sales force in China to conduct customer visits and drive sales. That was the first taste of the crisis that we got. From mid-March, the crisis spread across Europe, impacting us most in Southern Europe, where we saw a very steep decline in customer demand in markets such as Italy, Spain and France, but also the rest of Europe with Northern Europe being impacted but less. Again, this reflects the correlation between the severity of the crisis locally, the restrictions imposed and then performance of our business.

During the latter part of March, the crisis, as you know, also spread to North and South America as well as to the rest of APAC, where many customers had to scale down and close their operations. In general, we've seen differences in drops, but obviously, the biggest drop in customer segment is directly impacted by the restrictions, such as hospitality, and we've seen good continued activity in more vital institutions as hospitals, a very natural demand distribution.

During the quarter, we've taken steps to mitigate the impact on the customer demand. First and foremost, we've taken the necessary measures to ensure that our sales force and service technicians have been able to continue supporting the customers we could visit. This has been particularly important for customers that are part of the critical infrastructure. And as a supplier to these customers, we've been granted a special status in U.S. and U.K. as essential business. This has allowed us to continue our operations also in markets where all nonessential businesses were shut down. In addition, we've made use of all of the digital tools, doing digital customer meetings and demos, with good feedback from the customers. That said, these actions have obviously not been able to compensate for the dramatic decline that we saw from mid-March.

Turning to production. The main headline is that we've been operational at all sites throughout the quarter, also during the peak of the crisis. Our employees have truly stepped up to the challenge, and it is because of their hard work and ability to adapt that we've been able to deliver products to our customers with little to no interruptions.

In China, we had a temporary close down of our Dongguan facility early in the year, following the government restrictions. However, we were one of the first ones to be allowed to resume operations. We're obviously part of that due to our contingency plan and the safety measures we had in place, and we've been able to catch up really quickly on that close. Our remaining production and distribution sites have all been operational, of course, at a lower-than-usual capacity due to the lower demand, but that's our choice. This also goes even for our site in Italy, where we've been allowed by local authorities to continue production to critical infrastructure customers. To mitigate impact on the production sites, we've had very strict guidelines in place for employee safety and hygiene. We've also seen our employees act extremely responsibly in terms of their own safety, and we truly appreciate that effort.

Finally, if we look at the impact on the supply chain, we've seen shortage on a very few parts, but not to an extent where it has had significant effect on our delivery performance. We did face shortage from a third-party supplier of consumer product based in China. They had to close down for a period following the restrictions, and this slightly impacted consumer sales in February. That's all.

To mitigate the impact on our supply chain, we conducted an extensive mapping of our suppliers early in the year to make sure we had the necessary backups in place should one of these be impacted. Overall, as I said, very minimal impact and good planning on our supply chain part of our business.

Trying to sum it all up, Slide 8, please. We've managed this crisis by making sure that we kept all of our production sites operational so that we could continue servicing the customers despite the lower demand. We remain fully committed to the strategic direction in Nilfisk Next, and we see unchanged potential in that strategy. And finally, we have, of course, responded to managing -- by managing our cost and preparing the restructuring plan that I mentioned earlier to mitigate the impact of the crisis.

That is the summary of a difficult quarter. So with that, I'll hand over the presentation to you, Prisca, for an overview into the financial performance. Please, go ahead.

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [3]

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Thank you, Hans Henrik. Let me start off with the profit and loss statements on Slide 9. In Q1, we reported total revenue of EUR 219.1 million and a reported growth of minus 11.2%. In nominal terms, our revenue was reduced by EUR 27.5 million. Out of this, EUR 3.2 million comes from our exit of the consumer business in the Pacific region in 2019. The FX impact is slightly positive, mainly due to a higher U.S. dollar. This gives us an underlying organic growth of minus 10.3%.

Now as we mentioned in our initial financial guidance for 2020, we did expect to realize negative organic growth in the first 2 quarters of the year. However, we did not expect a sharp decline in customer demand during late March or the very low demand we saw in China during most of the quarter. Because of this revenue decline, our gross profit dropped EUR 12.1 million in absolute terms. However, we've been able to keep our gross margin in line with last year, and this is despite lower capacity utilization and also the impact of U.S. tariffs. During Q1, we managed to reduce our overhead costs by EUR 3.4 million. We've been scrutinizing our spending across all functions in the company, and we've been very cautious on hiring throughout the quarter.

Our EBITDA before special items is down EUR 7.8 million as a result of lower sales, which we're only partially able to mitigate through our cost reductions. On the EBITDA margin before special items, we are down 1.9 percentage points, and we end up at 11.4%. As expected, our special items were considerably lower than last year and amount to minus EUR 0.6 million.

So in sum, despite of the positive impact of lower overhead costs and special items, our reported EBIT decreased with EUR 1.9 million as a result of the drop in revenue that we saw in the quarter.

Turning to Slide 10 for a review of our segments. And we're starting with EMEA. Until mid-March, our performance in EMEA was in line with our expectations. With EMEA North, performing steadily with positive organic growth and without our 2 other regions, EMEA Central and EMEA South, reporting negative organic growth, but all as expected. But as the crisis has escalated from mid-March, we experienced a sharp decline in demand following the lockdowns in most markets. EMEA South is most impacted, in particularly, France, Spain and also Italy as workplaces such as offices, manufacturing sites and even retail in some places were closed. The demand for cleaning in those customer segments obviously went to minimum, and so did the need for buying new cleaning equipment. We have, therefore, seen the biggest negative impacts on organic growth from these markets that are most affected by lockdowns. On the other end of the scale, we've seen the least impact in our EMEA North region that covers U.K., Scandinavia, Finland and Russia. The drop in demand obviously impacted our revenue, and we realized EUR 108.1 million and organic growth of minus 6.8%. The gross margin decline was 150 bps, and it came in at 46.6%. And our overhead cost ratio is in line with last year due to the active cost management that we have seen in Q1. All in all, this leads us to an EBITDA margin before special items of 25.9%, which represents a drop of 180 bps.

Moving on to Americas on Slide 11. Let's look first at the U.S. as the country makes most of the Americas revenues. With our Q4 performance in the U.S. in mind, as we headed into Q1 2020, we did expect negative organic growth in the U.S. in Q1. Until mid-March, performance in the U.S. was slightly lower than we had expected in both the industrial segment and with some of our strategic accounts. As the pandemic spread also to the Americas, we've experienced a sharp decline in demand across the U.S., and this added to the negative organic growth.

Finally, the loss of a high -- of a large high-pressure washer dealer in Q2 last year also added to the picture of the total performance in the U.S. in Q1. In Canada, however, we performed very well, and we delivered solid positive organic growth despite lower demand during late March. In Latin America, this is our market in Mexico, Brazil, Argentina and Chile, organic growth was negative, but with positive variations between the markets. In general, though, we experienced the same drop in demand due to the pandemic that we saw in the rest of the Americas markets. For the Americas region as a whole, we realized revenue of EUR 62.6 million and organic growth of minus 12.3%. Our gross margin declined by 130 bps and came in at 41.5%, which is mostly impacted by lower capacity utilization, but also by the U.S. imposed tariffs. As we did in EMEA, we also reduced costs in the Americas, but it was not enough to compensate for the sharp topline loss. As a result, our EBITDA margin was at 15.5%, a decline of 3.9 percentage points due to the lower gross margin and the cost ratio.

Moving on now to APAC on Slide 12. And let me start by giving you a little bit of color on China, where we have seen the biggest adverse development in the quarter. China started off well in January with the performance in line with our expectations. As the outbreak became evident during late January, commercial activity almost came to a halt, and we saw a sharp drop in demand that impacted the sales in February. In March, as the situation escalated in other parts of the world, the Chinese society started to reopen. Offices slowly returned to more normal conditions and factories resumed operations, and also Nilfisk China saw a substantially increased business activity. However, at the same time, other APAC markets begin to get impacted by the pandemic by diminishing demand and lower business activity.

So in conclusion, the impact has been significant in APAC, where we reported revenue of EUR 15.1 million and organic growth of minus 25%. Our gross margin improved slightly at 42.4%, and that's mainly due to an improved product mix. We have kept our overhead costs in line with last year, but of course, we see a worse effect on cost ratio from the reduction of top line. This gives us a decline in our EBITDA before special items of EUR 2.2 million and EBITDA margin before special items of 3.3%, which is a drop of nearly 10 percentage points.

Now for the other 2 businesses, consumer and private label, please turn to Slide 13. In the consumer business, our revenue declined by 14.9%. But out of this, 13 percentage points comes from our exit of the consumer business in the Pacific region. The FX effect was positive, and so we managed, actually, a flat underlying organic growth in the consumer business. The performance of the business has been better than we expected in Q1, mainly due to a strong high spring season of sales of high-pressure waters. We saw a minor negative impact from sales in February, as was mentioned before, due to supplier constraints. But apart from this, we've seen a very strong pickup of demand during the quarter. We believe this is linked to the pandemic. During lockdowns, consumers have spent a lot more time at home with more time for home improvements, and this is reflected, in particular, in the sales of pressure washers. As you know, we concluded the strategic review of the consumer business in the second quarter last year, and we decided to focus the business on the core EMEA markets and integrate back-end functions into the general Nilfisk business. In Q1, we've seen the positive effect of this restructuring, which is also a contributing factor to the good performance in Q1. The gross margin in consumer is up by 60 basis points to 36.5%, mainly due to one-off effect in connection with the outsourcing of the production that we did last year.

In the Private label business, organic growth was negative by 21.8%, but this is in line with our expectations. Despite lower revenue, gross profit of the segment increased by EUR 0.3 million, and the gross profit margin improved by 7.8 percentage points, which is mainly a result of product and customer mix.

Now turning to the balance sheet and the cash flow for Q1, presented on Slide 14. Working capital was reduced by EUR 33 million, which is mainly a result of lower trade receivables due to the lower top line. Inventories also decreased, partly because we exited the consumer business in the Pacific region, as I've mentioned, but also because we have reduced inventories at a more general level. We have reduced our investments and CapEx by EUR 7.6 million. About 2/3 of this comes from lower capitalization of R&D projects, the rest is related to tangible CapEx. A small part of this comes from the change in the way we have handled the sale of rental machines in our accounting historically. As a result, our CapEx ratio was significantly lower than last year at 2.3%. Free cash flow was EUR 2.2 million, that's an improvement of EUR 25.6 million. Roughly half of this comes from lower working capital and the rest comes from lower CapEx and special item costs.

Our return on capital employed is lower by -- is lowered by 7.8 percentage points due to the lower EBIT before special items. We've been able to reduce our net interest-bearing debt with EUR 40.5 million through our improved cash flow. The financial gearing stands at 3.7x, which compares to 3.4 at the end of 2019.

Before we continue to the Q&A session, please turn to Slide 16 for the 2020 outlook. As we have announced on March 19, we expected that the pandemic would have a negative impact both on market demand and in our operations. As we have described in this presentation, the escalation of the crisis has so far impacted demand across most of our markets. Predictability and our visibility remain very low across all markets, and we are still unable to accurately assess the potential negative impact of the pandemic. Our financial guidance for 2020 is, therefore, still suspended.

To wrap up our presentation, let me reiterate that we are proactively managing the COVID-19 crisis. We are focused on adapting our business and commercial activities to the situation to service our customers in the segments and in the industries where we do see activity, and we are preparing for the rebound in the other customer segments. In addition, we are actively managing our cost level, and we believe it's prudent to scale down our investment. We have taken a number of actions to reduce our variable costs across the company. In addition, we are preparing to implement the restructuring plan that Hans Henrik has mentioned earlier in the call.

This concludes our presentation, and we're now ready to take your questions. Operator, will you please proceed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Claus Almer of Nordea.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [2]

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Yes. A few questions from my side. I will take them one by one. The first question goes to your balance sheet or your net debt situation. There's no information in the report or in your presentation today how you are managing your current, I would guess, a slightly high net debt situation. So maybe you could give an update on committed but unused credit facilities. That would be my first question.

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [3]

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Thank you, Claus, for your question. And we are giving the net interest-bearing debt in our report, as you know. And as I've mentioned in my presentation, if you compare it to Q1 last year, so end of March 2019, we've actually reduced our net interest-bearing debt by EUR 40 million. So that's from EUR 465 million to EUR 425 million. And if you -- you know that we have facilities available, committed credit facilities of EUR 450 million. And so that at quarter end, we have a headroom that we can draw of around EUR 67 million.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [4]

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But -- and would that be enough in not maybe all possible scenarios, but do you think you have enough financial flexibilities given high uncertainty in the given COVID-19 world?

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [5]

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Now as you see yourself, it's a very uncertain world and all possible scenarios, we cannot really think of. But what I can definitely tell you is that the headroom has actually increased since the balance sheet date Q1. And also if you look at the trajectory of Nilfisk over the past 2 years, we have actually roughly EUR 30 million more headroom now than we had a year ago. So in that, while we, of course, remain sort of cautious about the development of the company over the next month because of the pandemic, we actually feel comfortable with our headroom.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [6]

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Okay. So just to be 100% sure, so it's an active decision from your side that you're not addressing your capital structure at this point, at least?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [7]

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With...

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [8]

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I don't think I said that, Claus. Now that's a different question. What your question was, was around headroom, and I've tried to give you that answer.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [9]

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Okay. So then, it will be my second question. It's an active decision, not -- I mean, you've just seen so many other covenants reporting Q1 numbers that being out, either raising their committed lines or issuing new shares, to make sure that their financial situation is strong enough, given all the uncertainties we have in these days and you don't. I'm just a bit curious how you're thinking about the balance sheet.

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [10]

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So basically, Claus, let me answer that question, at least, try to answer it for you. We're very, very focused on seeing what we can do with the business, and we're taking swift actions on our cost structures. We are looking at working capital. We're looking at all of the internal measures, and that's our prime target here. So that's where our focus is.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [11]

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Okay. So my second question goes to your new restructuring program. Although details are few, but as I read the report is that you'll also do some structural lower cost initiatives. We have been through 4, 5 years with a lot of cost savings that have been implemented. How is it possible that you can do additional lower-cost savings? That will be my second question.

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [12]

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So Claus, honestly, what's happening here is, some of the stuff we've built over the last couple of years enables us to be more efficient, and we are now leveraging that, and we are accelerating some of it. You know that we have globalized the organization, which means that -- I'll just give you examples -- a few examples. Take campaigns, marketing campaigns, we can do them more globally now than we could before. There is definitely a benefit from that. There are other examples of the globalization we've done that can help us moving forward. There are examples of us being more digital compared to what we used to be. That's helping us as well. So there are a number of the things that we've done for the last 2 years where we look at each other and say, oh, quite happy, we've done those. And we can leverage it. The way we've looked at it, Claus, I don't want to discuss functions or countries or anything because reality is that we are now going into negotiation processes with our partners in the impacted countries. So I can't share too much details, but I can say that we've looked at every function and every geo, and we've found these potentials.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [13]

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Okay. Then just a follow-up on all of this. If you look at your number of employees year-over-year, so it's down by 10%, something like that. And I know part of that is due to your divestments made back in 2019. But if you just look at the number of reductions in employees and multiply it by the average salary, it might not be the right way to do it, but that's at least the best way I can do it. Then your cost savings on overheads should be around EUR 7 million. And still your overhead is only down by EUR 3 million, EUR 4 million year-over-year. So can you try to explain, on absolute terms, why the cost base is not coming down more than it did in Q1? That would be my question and last question.

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [14]

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Thank you, Claus, for the question. And you are right, we have reduced our full-term equivalent FTEs, if you look at last quarter '19 to our first quarter '19 to this quarter. But of course, you have to bear in mind that there's a lot of mix effects, depending on is it blue collar, is it white collar, and which region of the world it is. And as you've mentioned yourself, we, of course, have had a lot of divestments during that period as well. So I don't think you can conclude with the math of 10% reduction times average personnel cost. What I can tell you is that we have been actively managing our costs. You also saw that we have been able to reduce our overhead costs in the quarter. We are more than ever managing our costs. We have -- I think I've mentioned that in the call. We've put measures in place to reduce our variable spend, in particular, ever since the crisis started. And we're actually seeing, in the second quarter, already quite some nice effects from that. And on top of that, as Hans Henrik has mentioned, and you have also -- I mentioned before, we are structurally addressing the cost with the overhead, basically, with the restructuring program that we have just announced.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [15]

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And sorry, but why is it so difficult to understand the numbers. You're doing all these things, and there's no traveling, there's no restaurants visits and all of that, hotels. And when we then -- in addition to that, adds fewer employees. Let's just say, they're at half average salary on group level. We still don't see the effects. I really don't get to understand the math behind the numbers.

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [16]

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So as I've explained also, I believe, in the Q4 call, if you look into last year versus this year and that's valid for last year, but also for the first quarter, you know that apart from what I've already said around divestments and mix in the workforce, of course, we -- Nilfisk has invested throughout the year 2019 into strategic initiatives. And we've discussed that, I believe, at the year-end result conference call, that some of those initiatives, of course, will carry also costs and realizations of costs into 2020. Now these have been compensated by the cost savings that you all know about. But the net effect, as I've already explained before, is that it's not fully compensated. But we have been able to reduce our costs in Q1, and as I've already pointed out, and I'm actually very happy with the results that I see in Q2, we will continue to do that. And of course, now with the crisis, we are in a somewhat different situation regarding the uncertainty of the future. And we will even more be prudent both on our cost levels, but also on our investments going forward.

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Operator [17]

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Our next question comes from the line of Kristian Johansen of Danske Bank.

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Kristian Tornøe Johansen, Danske Bank A/S, Research Division - Senior Analyst [18]

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So first question is on the performance up until mid-March. You say it is in line with expectations, but if we go back to your original guidance on organic growth, it was rather wide, ranging from minus 4% to plus 1%. So is it fair to assume that the trend up until mid-March was still towards the lower end of your initial expectation?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [19]

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You're right about that, and we communicated that upfront, Kristian, that we had a back-end loaded year, as I also talked about in the presentation. So we didn't have high expectations for Q1, Q2. We had higher expectations for Q3 and Q4. So your assumption is right.

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Kristian Tornøe Johansen, Danske Bank A/S, Research Division - Senior Analyst [20]

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All right. Good. Then getting back to the balance sheet, your financial leverage goes up from 3.4x at the end of Q4 to 3.7x in Q1. Can you just confirm whether you are in breach of covenants at the end of Q1?

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [21]

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I can absolutely confirm that we are not in breach of any covenants or any financial obligations that we have.

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Kristian Tornøe Johansen, Danske Bank A/S, Research Division - Senior Analyst [22]

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That is great. Would it be fair to assume, though, with what you're seeing going into Q2, that it is very likely that your leverage will continue up in Q2?

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [23]

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No, it's hard to speculate on those things, given the volatility we see in the markets right now. But I -- if I were to do that, then I would say, yes, I probably would anticipate an increase in leverage.

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Kristian Tornøe Johansen, Danske Bank A/S, Research Division - Senior Analyst [24]

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Okay, great. Then in terms of this restructuring plan, you're doing -- you've -- as Claus also mentioned, you've done quite a lot of strategic actions over the past many years. How do you ensure that you now, I mean, are forced to go out and restructure without sort of damaging any of the potential you have established and invested heavily in over the past years?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [25]

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That's a great question, Kristian. And the reality, as I said before, is that we're building on some of the strategic initiatives that we've implemented, right? The fact -- I've always said to you that having a global organization will make us more effective in certain areas, and we're now ready to harvest some of that. That's really what it is. So I can say to you very, very clear that the 3 strategic pillars that we have: being a global company; being a solution provider for our customers; and being digital, those cornerstones of our strategy will remain, and everything that we do will align up against those 3 strategies. So I feel very comfortable that we are intact in terms of following our strategy. And of course, I also feel happy about the fact that cleaning is becoming more a discussion topic in our daily world. Hence, of course, the market eventually, post corona, will also be there for high-quality cleaning machines.

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Kristian Tornøe Johansen, Danske Bank A/S, Research Division - Senior Analyst [26]

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Okay. And then just housekeeping, special item cost for 2020, what should we expect for that line?

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [27]

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So I'm afraid we have withdrawn our guidance, and therefore, I can't really comment on that. What you see in Q1 is that we are fairly low in special items, but that is mainly related to phasing of projects.

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Kristian Tornøe Johansen, Danske Bank A/S, Research Division - Senior Analyst [28]

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But I guess I can ask in a different way. I mean in terms of your original guidance, is there anything you've taken out or postponed or anything like that?

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [29]

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I can't guide on the special items. As you can imagine, we are working on the restructuring plan, and this will come with special items, but I can't quantify this at this point. And then at the same time, as I've mentioned before, we're, of course, readjusting the projects that we are executing, while we assured that the cost saving programs, that those projects will continue. But it's hard to basically combine the 2 without being able to give a guidance .

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Operator [30]

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Our next question comes from the line of Casper Blom of ABG Sundal Collier.

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Casper Blom, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [31]

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A couple of questions from my side as well. First of all, regarding the Americas and especially, the U.S., I think it's pretty clear that you had some challenges in the U.S. also before COVID-19. I also think the general perception is that the U.S. was rather late to get affected by COVID-19 during the first quarter. Still you post 12% negative organic revenue decline in the Americas in Q1. What is sort of the underlying development of what is happening, especially in the U.S.? I mean those challenges that you've talked about in previous quarters, how are you turning around that business underlying looking aside from COVID-19? That's the first question, please.

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [32]

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Thank you, Casper. If we go back to our Q4, we had a very challenging Q4 in U.S. and Americas. And we basically said, look, we expect that to continue into Q1. And I'm ready to give you at least some insight, Casper, and say, "Hey, if I give you a number for end of February, the first 2 months, we were probably at about minus 6% over there." So that gives you a feel for what happened through the quarter. That minus 6% is, of course, not winning us any market share on the contrary. However, if you compare it to -- so what we did in Q4, it was an improvement, right? So that was pretty much in line with what we had expected for Q1.

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Casper Blom, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [33]

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And what was the sort of tangible decisions that changed the minus 13% in Q4 to minus 6% in the first 2 months of the year?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [34]

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You can really see it as a tangible decision and such, it's time. I mean we were too optimistic in '19 to how fast we could make an impact in the market, and we communicated that to you. What we're doing is still the same, Casper. We've gotten much better in the commercial channels that we've been good with. And of course, we need some improvement in the industrial channel, and we need some more major account wins. And Jamie is working on that on a daily basis, and we just -- we have to keep going at it. This is not something that will happen by a miracle after having been in a difficult position in U.S. for many years. This will take very consistent, very, very persistent work, and that's what we do quarter-over-quarter.

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Casper Blom, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [35]

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Okay. Turning to EMEA and Europe then. Last year, we heard you talk about how a lot of your customers, especially in Germany, were holding back on investments as they were a bit afraid about the business outlook. How did that trend develop in the first quarter? Were -- especially before COVID-19? I mean, were these clients still reluctant to place orders? And maybe if we could get that January, February development for EMEA as well, that would be very interesting.

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [36]

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I'm sorry, I don't have that in my head, Casper, but we might have to come back on that one. But I can talk to what we experienced. We know that the German economy was in real trouble in Q3 and Q4, and it kind of stabilized through that period. So we went into it with conservative expectations for Q1, and we were actually ahead of our own plans in EMEA up until end of February. I can't remember the specific number, Casper, but it went well in Central, which I was very worried about last year. So good with that. And then, of course, when Italy closes down and France closes down and all of that, then it becomes difficult.

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Casper Blom, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [37]

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Sure. That's understandable. And talking about that I'm talking about the difficulty in getting out to meet new clients and show them the product and convince them to make the sale. I understand that's really difficult when most of your markets is shutting down. But do you see any kind of like pent-up demand, customers that you have a dialogue with that wants to do business once society opens up again, once they actually have an airport that needs cleaning and a gymnasium that needs cleaning and so on.

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [38]

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Casper, it's back to the same basic as you have pointed out also earlier. The machines can be used for 1 year, 1.5 years longer than you normally would, but then they need to change, right? So ultimately, the demand will be there. Now let's see when. And this is the lack of visibility, right? We don't know when. But of course, people need to buy new cleaning machines.

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Casper Blom, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [39]

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Do you see any kind of change in the type of machines that the customers might ask for after COVID-19? I mean there's -- everything is being disinfected at the moment. So is there any change in the demand for what kind of products? And do you have the right products for a potential change in the demand?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [40]

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So there are 2 -- there are actually 2 things you can debate, and I'm speculating a little bit with you. I can say, first of all, which is not speculation, we're not seeing a trade down. So it's not like the Viper range is booming and premium is not. So the trading down is not happening, Casper. When I speculate with you, I honestly believe that the cleaning market, moving forward, will be much more concerned about making sure that it's cleaned really, really well. So I foresee that the premium products will be the ones that people want to buy. So I'm not seeing the trade down trend in any way, shape or form.

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Casper Blom, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [41]

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Okay. And then my last question. Looking a little bit into the second quarter with the more than 30% decline you talked about in April, in organic growth. It's probably fair to assume that organic growth for the whole quarter will be hit even harder than Q1 was. How should we think about your gross margin in that perspective? How much of the cost of goods sold are truly flexible and linked to revenue? And to what degree will there be some stickiness? So a little bit the -- I can say, operational leverage on the gross profit, Prisca?

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [42]

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Yes, it's a very good question. And you are right, we cannot speculate for Q1, and obviously, we cannot -- about Q2, and we cannot guide about Q2. But I think it's a fair assumption that the revenue decline will be worse than what we saw in Q1. I think, I can say that safely. Now as for gross margin impact, roughly 15-ish percent of our cost of goods sold are fixed. So of course, that is something that we cannot address, short term, because it's basically facilities overhead and energies. So that is something that will definitely hit us in the form of underutilization in the gross profit.

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Casper Blom, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [43]

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Okay. And the other 50 percent-ish are then flexible?

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [44]

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15%, sorry, 1-5. 15%, 1-5. 1-5, yes.

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Casper Blom, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [45]

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1-5? Okay. That's different. So 1-5, fixed and 85%, not fixed. But the part that is not fixed, does that move, or I can say, totally in tandem with revenue?

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [46]

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No. Because, of course, it depends on mix. It depends on the way we phase our manufacturing. So you cannot assume that it's a one-to-one relationship. And mix, as you've seen also in Q1, has quite an impact on the total gross margin.

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Operator [47]

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Our next question comes from the line of Mikael Petersen of SEB.

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Mikael Petersen, SEB, Research Division - Analyst [48]

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I'm a little surprised about the gross margin hold-up in this world due to the decline in revenue. But you mentioned that the mix is positive, but you also mentioned that the raw material was positive. Can you try to quantify how much the positive effect from the raw material was?

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [49]

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Yes. Let me -- just give me a second on that one. So overall, we've seen -- of course, the tariffs and the raw materials cancel each other out to a certain extent, but we do see a favorable net, and I would estimate that at around 0.3% of the total margin.

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Mikael Petersen, SEB, Research Division - Analyst [50]

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All right. And then maybe, if I may, a little bit in relation to what Kristian was asking about. Due to the restructuring program that you mentioned earlier, you were exactly like a run rate of close to EUR 50 million impact by the end of 2020. Now that you're doing the restructuring, I assume the positive effect will be above EUR 50 million in the end of 2020.

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [51]

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Will you repeat your question? We have some acoustic problems here in the room.

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Mikael Petersen, SEB, Research Division - Analyst [52]

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Your previous guidance on the restructuring cost and the benefits of the cost-saving program. Previously, you've guided that the cost-saving program have a target of realizing EUR 50 million annual savings. Now that you're doing additional restructuring, I assume the number will be higher than the EUR 50 million in the end of 2020.

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [53]

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Absolutely.

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Mikael Petersen, SEB, Research Division - Analyst [54]

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Is that correct?

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [55]

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Yes, absolutely.

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Mikael Petersen, SEB, Research Division - Analyst [56]

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Okay. Then maybe a final question, if I may. You were talking about the implementation of the new structure in the U.S., and you also have implemented ServiceMax, et cetera. Have you seen any positive effect of this yet? You can maybe answer it differently -- or separately on both in the U.S., the new organizational sales structure, how much that have benefited? And then secondarily, how the ServiceMax implementation have benefited your organization and sales?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [57]

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Mikael, it's very, very difficult to put a number to your question. So that, I can't do, but I can talk about it. It's clear, on ServiceMax, that it helps us to be more efficient. I cannot put a percentage to it yet. It's early days because quite frankly, when you implement a new system, you initially have to do more training, more learning, and that is sort of masking some of the later efficiencies you gain. So it's a little early, but I'm absolutely convinced we will get those clearer after everybody is used to using the system, which is the phase we're approaching now. On the sales structure in the U.S., again, you're not seeing that month-to-month. I'm very confident with what Jamie's building. And all of the channel conflicts and all of the stuff we had in the past has been dealt with. He has gathered a strong leadership team around him. There's much more clarity in the market amongst our customers, how we do things, much more consistent to what we used to be. We're touching on the right customers much more than we used to. All of that, Mikael, eventually, will turn right.

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Operator [58]

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The next question comes from the line of Claus Almer of Nordea.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [59]

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Yes. I just have a few follow-up questions. The first is, coming back to your new restructuring initiatives. When are you ready to make a communication about the structure, the impact, both for one-off costs, but also the positive impact? That would be the first question.

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [60]

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Thank you, Claus. Right now, we are very, very focused on discussing this with the right representatives in the different countries. It will take us a little bit more time. We've communicated that we expect to see the first impacts in Q2. At this point, I'm not really firm on a date where we can tell you about the financial impact. We will come back on the question when saw it. We are in the middle of the planning. We are in the middle of the planning.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [61]

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Sure. Sorry, just thinking, is it -- will it be Q2 in August? Or would it be a -- whenever you are ready to quantify the effects?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [62]

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What I said, Claus, was not the communication. I said, we would start seeing the first impacts of the program in Q2, meaning the first things will roll out and be implemented in Q2. So that gives you a feel for where we are in our planning, and then we will come back to you after that.

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Prisca Havranek-Kosicek, Nilfisk Holding A/S - Executive VP, CFO & Member of the Executive Management Board [63]

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And then maybe -- well, I realized that it's not all the information that you might completely require, but I think the 250 FTEs gives you some indication of the magnitude of the program.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [64]

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Right. Okay. Then just my next question or final question, which goes back to Casper's question regarding machines or equipment to disinfection, which I guess is enjoying high demand in these days. Can you give an update on where you are in that space?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [65]

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I can. And we've seen customers come to us and say, we really like that you are a total supplier for us. What can you do to help us with steamers for disinfection? And we've immediately included them in the program, so the customers can buy them from us. We've had requirements in terms of products that can spread -- I lost the word, can disinfect. We have those -- we've included those in the programs as well. So we've done some pretty good stuff. You might even have seen one of the more interesting things that's happened. We're doing tests with ultraviolet SC50 products in Pittsburgh airport. That's another outcome of this. So we're doing -- we're adding things to the program. We are doing a few changes to some of our existing products. And then as I said, SC50 with UV lighting is an interesting one as well. So the opportunities are there, Claus, and we need to pick the right ones.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [66]

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So these new products, you said you are adding these products to the portfolio. So it's newly developed products? Or how should we understand? And what is the potential, by the way?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [67]

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This is partnership products, Claus, that we -- where we partner with those companies who have developed the products, and we sell them for them. And it's obviously -- do you want to go ahead, Claus?

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [68]

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No, no, just continue.

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [69]

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Thank you. Then -- so we have basically introduced them to our channels. There's not, of course, the same margin as we see with our own products, but there is a decent margin on it, and we are helping customers through this period. Then you asked me about the long-term potential of what is in this. And that's, of course, too early, Claus, to answer. There's a huge need right now for these products, and we're addressing that. Is it a sustainable need a year from now? That is the bigger question.

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Claus Almer Nielsen, Nordea Markets, Research Division - Senior Analyst of Capital Goods and IT [70]

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Sure. So just to be sure, so this is, let's call it, reverse OEM partnerships. So you are in-sourcing product from a third-party and selling it via your distribution network. Or how we should understand it?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [71]

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That's exactly how it is.

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Operator [72]

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Our next question comes from the line of Kristian Johansen of Danske Bank.

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Kristian Tornøe Johansen, Danske Bank A/S, Research Division - Senior Analyst [73]

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Just a follow-up question on this slightly more than 30% drop in April, which you highlight. And whether you can elaborate on any geographical differences, especially whether you've seen sort of recovery in APAC, which I guess, was impacted already in -- earlier in Q1.

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [74]

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Honestly, it is pretty much across the board, Kristian. There's not much difference. And if I speak to APAC, you should remember that it was a China problem early in the year in Q1, starting there, but they got back into the other countries in APAC. So if you look at the lockdown schedules, we have a lockdown schedule in Singapore that goes until early June. We have a lockdown schedule in Australia, New Zealand, that was about mid this month. We've had a lockdown in Japan, which is also about mid this month. Those -- and Singapore, I talked about already. So that was again -- then Malaysia, Thailand, same lockdown schedules, opening up now potentially mid month, potentially start of June. So APAC is in the same situation as the rest of the world.

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Kristian Tornøe Johansen, Danske Bank A/S, Research Division - Senior Analyst [75]

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Okay. But for China, specifically, then have you seen a recovery rate here?

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [76]

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Yes, we have. Not a full recovery, obviously, but we see improvement month-over-month, starting from a very low level that we had in February, so we're getting there.

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Operator [77]

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(Operator Instructions) And there are no further questions. Please go ahead, speakers.

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Hans Henrik Lund, Nilfisk Holding A/S - CEO & Member of Executive Management Board [78]

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Thank you so much for joining us today and asking lots of questions. We like that. So have a good day and stay safe out there. Thank you. Bye.