Earnings Call: Q4 2019

Feb 11, 2020

Ari Vestren, our CFO, will run the info and data together, but I will kick off with the outcome of 2019. I will briefly go through the performance of the last quarter as well as the full year of 'nineteen. Then we'll have a very brief look on our strategy, what we are doing, and I guarantee there is no magic. We'll stay loyal to the 3 points we've been addressing in the past. We'll stay focused on those ones. And then Harry will have a bit of a deep dive on the financials of last year. I think all in all, we had a very solid last quarter, and I think the Finns would tend to say not so very bad. And I think we are very happy for the top line growth of slightly shy of 20%. And at the same time, we were able to improve our relative profitability. So it was a good job done, and I think the team has done an excellent job in all of the units and all of the key markets. In the U. S, and I think you remember, we acquired almost Hermann Saunas at the very late of 2018. Since then, we've been focusing on improving on that one. And towards the year end, as I think Kari already indicated on the quarter 3, the market demand kept on going up on the U. S. Market place. And on the Sona factory in Renwick, we've been improving the productivity in a very nice scale, and we are slightly ahead of our plans in that respect. Then jumping on the hard numbers of the last quarter. The top line grew very nicely, 27%. We reached slightly above SEK 20,000,000 on the last quarter and an excellent growth compared to prior year. At the same time, we are very happy to be able to improve the profitability, and we exceeded SEK 4,000,000, SEK4.2 million to be exact. And the benchmark from last year, we beat that quite nicely. And we were also slightly ahead of our 20% target in that respect. So at least for 1 quarter, we've been able to beat that. And the earnings per share grew also very nicely. And the last quarter is really very strong on the cash flow, and that also makes the full year cash flow extremely strong in that respect. Then taking a look on the full year perspective, slightly shy of 20% top line growth, exceeding SEK 74,000,000, very good numbers in that respect. And then on the operating profitability, also a solid, solid performance in that respect and beating the prior year quite nicely. Earnings per share going to the right direction. Cash flow, SEK 15,200,000,000 And I think Ari will go in details in that respect. We'll be also beating our cash conversion benchmarking in that respect. Net debt, okay, going slightly down and equity ratio staying solid and slightly improving on that. Then checking what we've been doing on the 3 different paths, how to add value. First of all, on increasing the average share of our customers' wallet, we've been going up on the price point. Not very big steps, but plenty of baby steps in that respect. We've been introducing new models, which are slightly more premium compared to the previous ones. One is the pillar heater glow, and that has been quite a good success in most of the markets. Our top seller in the pillar heater, Cylinder, We launched Cylindra Plus, which is slightly improved, slightly higher, a bit of a more, I would say, classical design, been happy with that performance. And then especially on the professional market as well as Harvia launch has been very solid in most of the markets. Then in the world of digitalization and the user friendliness, we introduced the Cylindro Plus with the SPOT, which is the radio frequency controlled, no wires needed, easy to operate sauna heater. And then on the wood burning heaters, we updated and upgraded our top selling model, the PRO 20, and I will follow with the rest of the assortment going forward. On the geographical expansion, that's where we also consider expansion, meaning improving the quality of the distribution and improving the depth of the distribution. We've been doing a good job in the U. S. We renewed the offering. And thanks to that, we've been able to open new channels for distribution. On top of the previous online distribution, we've been opening also Home Depot, and they're very happy for our own direct sales performance, both on our web page based sales as well as on hotel sales, an excellent job for the second half of the year. Scandinavia, we've been upgrading our presence in the Swedish marketplace, both on the consumer channel as well as on the professional channel. Having said that, I think it's good to remember the professional channel is rather conservative. So when opening a new channel, it will not automatically gain a big share, but gradually, you can build a business on that respect. Same applies for Norway and, to a certain extent, Denmark. So Scandinavia, a good step forward. And then all of the markets, we've been slightly upgrading our distribution, more premium and then more professional. That's been taken not major step, but multiple baby steps in that direction. Then on the productivity, I think both in the Guangzhou China factory as well as in Mortem, excellent job done. And I think the team should be very happy with what they've been doing. And we are under continuous improvement path, so we'll keep on doing the same improvements going forward. In RENIC, the team has done a great job with rather minor incremental investments. We've been able to improve the productivity in big, big time over there. And then on top of that, we've been utilizing some of the sourcing synergies, and those are now coming through on the P and L as well. U. S, I think it was a good decision to renew the models in that respect. At the same time, our average price has gone up quite nicely, and we've been able to open multiple new channels on top of the existing ones. Then the direct sales, I think the team, in that respect, has done a good job. I think at the moment, almost 40% of the top line is generated by our own direct sales. That also means that the profitability on the direct sales is somewhat better than on the 3rd party sales. And then the productivity, both on operating on the wood as well as building and erecting the saunas, they've done a good job in that respect. And then on top of that, I think in the early phase of the 'nineteen, we were able to gain synergies in the sourcing and now they're coming through the P and L to the full. Then on the markets. I said on the last quarter, a very, very good performance in most of the markets. And I think the headline tells a lot about it. Even though we had a very solid performance on the local domestic marketplace, most of the other markets beat our solid performance on the Finnish market. And we know that we were gaining market share and gaining speed on the Finnish market with a slightly shy of 5% full year growth. Then all of the product groups, and I think especially the sauna, both in the U. S. But as well as in the Central Europe, have been growing very nicely. And then the steam generators, an extremely strong month the last 3 months. And then on the Sauna heater, both on the electric and wood burning heaters, a solid performance on that respect. Having said that, I have to say that the control units and in Germany, they go hand in hand together, and that's where we are slightly below our own estimates. But then knowing the market situation and the demand, I think we still did a good job on the German markets as well as on the control units. We are at par or slightly ahead of our competition in that respect. On the full year basis, the same trend, not so strong top line growth. But I think on the other markets, we'd like to highlight the Scandinavia. All three markets did an excellent job, and I think the speed was gradually going up towards the year end. Then on top of that, domestic market, both on the consumer, but especially on the professional, good job in that area, North America, we discussed. But also, I think let's not forget what we've been doing behind the almost 7 saunas, also on our heaters and component business, a very, very solid performance on the U. S. Marketplace. And upselling, upgrading and more professional offering also on the U. S. Marketplace. Other markets, Central Europe, France, solid development, very strong growth. Switzerland, U. K. And it's not only prior Brexit, it's going to continue on that level. We feel that there is some kind of a sauna trend in the U. K. Prevailing, and we are part of that. Benelux, Poland and then the Arab Emirates and related Arabian countries are good performance altogether. Germany, we discussed on the channels where we are. We've been able to upgrade our offering. We've been giving more professional service, but the top line was not according to our expectations. So that's also reflected on the product category control units to a certain extent. Russia, I think we have maintained, if not gained, share on the electric heaters, wood burning heaters. We unfortunately not been able to improve our position as we expected to improve on the Russian marketplace. And I will not go deeper into the product category in that respect. This gives you a good picture on the quarter 4, and I think Scandinavia is clearly highlighted on this one. Germany, okay, not as expected. Other European markets, solid, double our expected 5% growth. And then North America, very, very strong and solid. Maybe it's good to remember last year on quarter 4, our North America was not extremely strong because we were more or less focusing on making the deal with the almost 7 sauners. And during that time, I think the last month was not full in action with that customer, then we came back in business on the beginning of this year. And then for the full year, the picture is somewhat similar. Some of the relative growth rates are different, but altogether, roughly the same type of a ballpark figure. And then I think you may ask on the organic growth. And on the full year, organic growth is roughly 5.3 percent. Then on the last quarter, 8.3 percent is the relevant number for that. So I think based on our estimate of exceeding 5% growth, we just made it. So that's our benchmark on that. And then on the product groups, sauna heaters, very nice and happy for the 18% growth. Sauna rooms, as discussed. Control units, small plus, and I think that's a good job done in the marketplace. Steam generators, very strong and solid last quarter finishing of the year. And then year on year, a solid picture on all of the categories. And then I think this gives you a picture of the seasonality and of the market development. So the quarter 1 is a strong sauna and spa. Then we have bit of a more modest second and third and then gearing up for the 4th quarter in that respect. And goes both for the top line and then also on the bottom line in that respect. Then just recapping that Harvia is operating in all of the 3 sauna types, the Scandinavian traditional sauna as well as on the steam baths and saunas as well as the infrareds and the combination of the infrared and traditional sauna. We'll not do any magic. We'll keep on focused on working on the 3 parts to add value, increasing of the share of our customers' wallet as well as the geographical expansion, I. E, meaning also improving the quality of the distribution. So most likely, we'll not open many new markets, but it will improve distribution in the existing markets and on top of that, maybe open a couple of small markets. And the productivity, even though the visual and the illustration is a factory, we will not only improve productivity of our operations in the factory as well as all of the processes where how we are working with our team, with our customers and with our partners in that respect. Now I think it's time to pass the word to Adi, and Adi will have a bit of a deeper dive on the numbers. Thank you. Okay. Well, so now the seasonality of Harvia is quite close, what we think that is typically the international sauna business. So Q1 is strong, and the strongest is typically Q4. And now it happened also for us at the end of the year. So we had a very nice growth rate of 27.8% during Q4. And well, it's not only almost heaven, West Virginia and from Denver, we had really also very, very strong growth in our normal organic business, especially in the Heater business. And on group level, we had for the total year 19.6% growth, and that's really nice experience. And all the major profitability related figures improved. Especially what was for us internal target was to streamline a little our net working capital. So we were able actually to reduce the capital more effectively. And it shows up then in the adjusted return of capital employed without goodwill. Last year, we had in 2018, we had about 32% and now over 30 8% of the capital return. So that's really remarkable improvement. The headcount is actually was a little lower at the end of the year than end of the last year. And the main reason is that when we acquired the Almost Heaven Sauna business in U. S. At the end of 2018, we got 42 new colleagues in the group. And they were in that day already on our books. But the average number of employees grew during the year 2019, 5% compared to 2018. And when growing the sales almost 20%, this really shows that we were able to improve our productivity in all areas. What is really interesting is also the adjusted operating profit. It grew 28% on the annual level and during Q4, 46%. And that was really interesting to see how, for instance, our U. S. Operations got really up and running during Q4 for the high season of sauna business in U. S. But during the same time, all our other major units were improving their profitability too. So it wasn't only U. S. So our finance situation haven't changed too much. What is interesting is the leverage ratio. We have announced that we tend to be between 1.5 to 2.5. Now we are on the lower limit of 1.7 already. So we have some power on our balance sheet to maneuver or pay dividends or make investments. So it's nice to have that possibility. The interest costs, they vary from quarter to quarter quite much depending on the fair valuation of our fixed rate swap contracts. We actually pay quite the same cash flow of interest every quarter. The investments, they have been on the level of SEK1.8 million. Altogether, we haven't had very big machine investments. One major thing what was part of the Almost Heaven saunas deal was that we acquired in April also the premises in Rennig, West Virginia to be able to develop and co develop the premises better with the local management and team there. Otherwise, the investments have been pretty much replacements. In our China factory, we have acquired some sheet plate machines, but they are not very, very expensive. This is the structure of our shareholders. We have 53% of our shareholders in the nominee register. That means that in practice, they are more or less outside Finland. And then our biggest shareholder since last November is Onvest, a Finnish Investment Company. The share of the households has increased very nicely. In fact, we had during the IPO in after IPO in March 2018, about 2,000 shareholders. End of 2018, we had got already 3,200. And during 'nineteen, we got another 2,000 shareholders for Harvia. So thank you, everybody, very much to coming to the club of sauna investors. Hopefully, you will be satisfied with your investment. And to show also how committed our board and management is to the company, we also announced that we have 9.1% of our shares in the hands of the board members, management team and also our employees in the factories. In fact, our management team members slightly increased their shareholding during 2019. About the dividend policy, we have announced that we pay bi annually the dividends. They've been now typically in April October, at least 60% of the total income in total. And now the proposal of our Board to the Annual General Meeting is to pay altogether 0.38 dollars per share dividends, 1st, dollars 19 in April after the Annual General Meeting. And then according to the dividend policy, the next part in fall 20 20.19 maximum. We pay out now approximately 74% of our total net income of the group to our investors. So it's rather high dividend payouts. So just to repeat, which are our financial targets. The growth rate, 5%. It's organic, including some small add on acquisitions. Our profitability target is to have the adjusted operating profit over 20%. We exceeded that during Q4. And then the leverage ratio between 1.5 to 2.5. So any questions or comments? Now it's time to entertain questions or comments. So we It's Petr Kajani from Indres. It's Petr Kajani from Inderes. Could you elaborate how has your seasonality in this business changed since the prior Almost Heaven Sauna's acquisition? You said that international business has a little bit different Yes. Typically, sauna in Central Europe and in U. S, in Northern America in general is a winter product. People know about the healthy benefits of having sauna. It's good against the flu and all the relaxation and blood pressure things. But people also get like to get in the warm sauna during the wintertime. And then they also invest in sauna more than during the summer months in those areas. Here in Finland, in Scandinavia, we invest in sauna over the whole year, but the main season, main peak of the sauna related sales is actually during Q2 in the distribution channels in Finland. Your growth was very strong in North America, and it cannot be explained just by the Almost Heaven acquisition. There is big organic growth as well. From where channels this is actually came from this growth? And how do you see your coming quarters or years in North America? I think on the base business with the heaters and equipment, we continue with the same partners over there. Expanding a bit on the professional market over there, added a new distributor on that one. And then the North American Canadian part of the business, I think we found a bit of a new ways how to boost that. But that's not visible on the last quarter. That's visible on the total year numbers going forward. Okay. And do you still confirm that when you ramped up to almost Heavensaunas and it is running as it's supposed to be running, it can make about 10% EBIT? Or has that changed since you are bringing really good numbers from North America now? I think we have not disclosed in detail, but in the ballpark of that we bought the company when it was slightly on red numbers. We took it quite fast on the black numbers. Then we were between 10% for some time. And now I think we're on the 10% -ish and trying to continue to improve that. Almost 7 saunas or actually Harvia U. S. Inc, as it's obviously called, is also a platform for Northern American distribution of heaters. And we get also some profit for the heaters in the manufacturing plant in Finland. So that adds up also the profitability of the total group. And I think the analogy of what Ari has been explaining that the heater and equipment business is clearly more profitable than the sauna structure is still valid. But for sure, we try to improve the sauna business as well. You mentioned that in I think last time, you said that in Scandinavia, you had been granted access to some channels that you hadn't before been. And as it looks like the numbers that you are performing much better than your competitors out there, how is your business in progressing in these new channels going now? And how do you see the future? I think, first of all, this business is very conservative. So when opening a new channel, first, you need to show what you can do. And when you've been able to do that, then you can go for the next step, next step and the steps after that. So I think we've been opening the inroads for the premium channel. We've been opening the doors for the professional channel, but we've only been taking baby steps in that respect. Okay. And your 2019 numbers were excellent in revenues, EBIT, cash flow. Your balance sheet is in good position. Why such a small dividend increase? We are improving our dividends constantly, and now we did it 2 compared to last year. So we have a quite stable dividend policy, and we pay twice a year good dividend. And I think we announced we are gradually increasing the dividend, so this is gradual increase. Okay. So yes, because it seems that you are loading this sort of elephant gun in something that you're trying to shoot now in this MSA field. Is this a wrong assumption that you're I think we have no obsession to go strong on the M and A. On the other hand, we already, a long time ago, made a short list of candidates who could fit into our portfolio. They in the field of the professionals team, maybe premium sauna market, professional heaters and equipment with a global perspective. And if those companies will become available, for sure, we would have a look and potentially have an appetite as well. Okay. We really like M and A, and we think that we can do it also in future. Okay. And could you tell how is the coronavirus affecting your China factory at the moment? Yes. I think we the people are coming back from the Chinese New Year holidays this Monday. We were supposed to open the factory on Monday morning. The local authorities were inspecting all of the facilities on the Guangzhou. And by the way, our factories in Guangzhou, not Guangdong like in some of the data were mentioned in Guangzhou. They were inspected. We got stamps to be approved, and we are still waiting for the final stamp on the big paper and most likely going back to work on Wednesday morning, so tomorrow morning. All right. And do you see any big investments in your factories in the coming quarters or years? Or is this current level? I think this current level is rather sustainable. On the other hand, when you want to make a bit of larger steps in the productivity improvement. Some of the equipment is somewhat more expensive than we've been used to buy. And if we take those steps, then potentially, we may see a bit of a small hike on the capital needs in that respect, but not the big ones. Maria looked like having some questions, too. Okay. Yes. I'll leave the microphone to her. Thanks. I think you partly answered one of my questions, which was relating to the MFA. And you said that you had a short list of candidates. And if I recall Road Right, it's a professional segment. And then you mentioned steam as well. Yes. And if we look at the like geographically, like would these be more in the North American area? Or can you a little bit elaborate that? I mean, like is it like where in geographically you would see that this could add value? I think some of the companies have a regional platform, and they are either in the Central Europe or they are U. S.-related. Very few have a global distribution and platform, depending on the one which is potentially becoming for sale, then that will have an impact on the decision. But I think first, we try to shoot for the big sauna markets, and the sauna markets are Central Europe, Scandinavia and then the emerging markets are in U. S. And Asia. A very few companies have a global network as we speak. And if the acquisition targets have interesting technology or skills, we can also offer the international distribution then. So then the location isn't that important. The main thing is that we offer the distribution. You mentioned that the one that is probably coming to the sale, which has international reach, Would that be or I think that's not what I No, that's not what you said. No, no. And then a little bit of if you could like highlight that how the cooperation with K Raute? You had this new cooperation on sauna benches. And how has that cooperation started? We're just ramping up the factory in Tallinn the last quarter of 'nineteen, and now the business has been started. And I even don't have exact data how it's been running on the 1st months of this year, but it's been just started. But first deliveries have been already done, and they are in the showrooms already, the products. We are equipping the Keraota stores with our merchandise and displaying the benches, and I think that's going according to the plan. And I think we are now through 1 third of the stores in that respect. And then finally, you mentioned that you have done some of the improvements in the Renik factory. But if you could a little bit elaborate that, I mean, what kind of things you did and what else you could do, I mean, for the factory in order to bring the efficiency to the level what you have currently in Burame in China? Starting with the sourcing. I think we have changed the specification of the sourcing. So we get clearly more yield with the timber sourcing and on top of that, maybe more economical terms. Then we change the layout. That's automatically improving the productivity per man hours done. And then we have acquired some small incremental machines to improve and help the people to perform their work. And that has been doing a, what I call, not even anymore a baby step, but a big step forward on the productivity of the Rennig factory. And now we are still not ready with our plans on the Rennig factory, so do further improvement over there. We also sell European made saunas through our U. S. Operations. So we have also sauna factory sauna factories in Europe, and they help also to satisfy the U. S. Sauna demand. So on top of our local sourcing in the U. S, we are importing saunas made in Europe for the local market through the same logistics, but that's not improving the productivity of the factory. It's maybe improving the productivity of the logistics and service over there. Bjorn, Handelsbanken. A question on Germany. The sales development has been a bit sluggish already for some time. What needs to happen to turn the trend? And where is this sort of weakness really arising? What's the sort of the main reason why the market is so weak? I think the market in terms of the buying power is not changed to a big degree, but the consumers are clearly more conservative while making the decisions. So we realize that the top premium market is performing as it used to perform. The entry level and the new beginners is also performing as expected. The midrange, I think people are just potentially delaying the decisions and not so secure with their financial position. And hence, they are a bit conservative in decision making. We don't disclose the profitability of different areas, but I have to say that we have been concentrating on the improvement of profitability in Germany, too, during 2019 with success. Any other questions? You would like to entertain? Maria? Yes. Maybe one more on the Russian market because I think for an analyst, it has been the most difficult market to actually like follow the trends. And you said sales that the demand has been I don't know which word you used, like not fragile, but I guess, I mean, the changing from one quarter to another that sense yes. But if you could a little bit elaborate your feeling like going into 2020 that, I mean, how do you see the Russia market developing and the things that you did for improving the market shares through the wood burning heaters? I mean, has that paid off at all? And a little bit like telling more details on the market. Starting with the wood burning heaters, I think on the premium end, we have maintained our position. On the other hand, we've not been able to gain speed on the entry level wood burning heaters. And the market prices for the entry level wood burning heaters have gone even lower than they used to be. And hence, we've been not pushing that any further. Then on the electric heaters, the demand continues to be solid and steady. And we've been maintaining or even gaining our share in that respect. But the dynamics of doing business, people are conservative and very fast in decision making. I think most of our partners have been decreasing their inventories and are working on their cash position. And hence, it makes the business a bit volatile. But I think the total demand and the volumes are there, but the sensitivity of the business has increased. You may remember that we've been working with 3 partners and we are currently working with 3 partners on making some priority changes with our partners. Any other questions? If not, then we'll thank you for your attention. Have a good day. Thank you. Thank you very much.