Earnings Call: Q3 2019

Nov 8, 2019

Welcome to Harvea Quarterly Reporting. My name is Tapio Paio Harjo. And next to me is Ari Vestren, our CFO. Hello. Today is a perfect day. It's plus 1 or 0 outside. It's slush or snow on the streets, and it's about to rain. So this is perfect southern day. So we are in Helsinki, our sea pool. I will review how we've been performing on the quarter 3 for year to date on Harvevias part. So I will start and Adi will continue with the numbers, and I think we'll have an agenda going through the numbers and actions in brief. Then we'll have a bit of a recap on the strategy, nothing specific, basically highlighting what we've been doing and where we are heading. And then Adi will go deep dive on the financials. And on the go, you have the people who are in the audience here today. You can have live questions during the journey. I think I'm very happy to see that our top line has been performing strong. And at the same token, we've been able to deliver a very good profitability. And I think that's among all the product groups and most of our key markets. And later on, we'll say we've been very strong, and then we've been also having areas where we've been not so strong, but we'll go through that in detail. In the U. S, most of you may remember that we acquired almost Hermann Saunas very late last year. We've been integrating, taking it over and honing and improving the business performance. And at the same time, the operation and the sourcing, we've been working on that one. And I think very happy to see the team working together with us, highly professional team over there. And I think altogether, we've been able to respect. On the operational performance, I think most of the factories have been developing favorably, and especially Murame and the China in Panyu have been developing extremely well. On top of that, the logistics in Murame has been solid and are performing very good. Our offering, both on the value added incremental sales and also the mix, has developed favorably and according to the plans. And I think it's worth saying that our plans in the Scandinavian marketplace, Sweden, especially, bit in Denmark and bit in Norway, we've been now proving that, hey, we can make an improvement on that market, and that will be visible also on the numbers. Then diving deeper in the pure numbers. And I think the quarter 3, a very good top line growth, slightly exceeding 20%. And at the same time, we've been doing that with a solid good profitability. And also the relative profitability, we've been able to take it one step further, and that's good earnings per share going to the right direction. And at the same token, we have been enjoying very solid cash flow. And the cash flow basically is just an outcome of the good performance on the profitability. And at the same time, we've been having exactly a part of the plan with the capital expenditure, and our inventories have been roughly flat. And that's why we've been having a good cash flow. Year to date, we're having a look on the end of September this year, also very solid 16% change on the top line, A bit of a, this time, tailwind for the currencies, not a bit, but a bit both on the Russian ruble as well as on the U. S. Dollar. Operating profitability, slightly shy of €10,000,000 and a nice improvement, I think, 25%, 26% compared to prior year. Earnings per share, good. Cash flow, solid SEK 8,000,000 compared to last year, SEK 5,000,000 Net debt, we've been taking the ratio from €2,500,000,000 now at €2,000,000 And then the equity ratio is also on the same level as we started. So a good job in that respect. Unless you have any questions on this moment, I will dive a bit deeper on the three parts where we are adding value for the company. I think the product offering, we've been developing favorably. We've been gradually improving and always offering slightly better, and our premium products are now already taken a bit more share than in the past. At the same time, the professional area where we have the professional heaters now available, we have semi professional and professional steam generators on board. Those have been picking up. Spare parts may be not the right word. I think it's more of the accessories. We've been increasing the accessories, safety railings, accessories to the illumination. And then at the very bottom, you will see some of the soft things where we've launched for the Scandinavian marketplace as well as for the Central European market, a new Harivya collection together with LUKTA for the sauna clothing on that one. On the product launches, where we've been also putting bit of an effort on the marketing and an investment on that, Cylinder Plus is now available for the Finnish market, Swedish market, gradually becoming available for the Russian marketplace as well. And I think there is also demand on other markets for that. The high power, high output sent here by Harvia, 36 kilowatt heaters, they've been enjoying a very solid development, and that's in a way a completely new area for Harvia to conquer, and we've been very happy for that. On the geographical expansion, I think we've been taking good solid steps forward on the U. S. Marketplace on top of the existing customer base. We've been now restarting the business with the previous number one customer with full speed on the U. S. And at the same token, we've been opening 2 new accounts, so one of them being homedepot.com, where we've been now selling both the barrel saunas and indoor saunas quite successfully. On the Scandinavian marketplace, especially in Sweden, we have now expanded to the professional channel as well as on the premium channel. We've been taking baby steps on the same way in Norway and in Denmark. Productivity improvement, I think most of the processes we've been addressing, no major changes, but a very gradual solid continuous improvement on the operations. And the Mortimer plant especially have been doing extremely good job on the KPIs as well as on the logistics. China factory, solid operation and continuous improvement becoming very visible on the numbers as well. On the wood manufacturing, especially the U. S. Operation have been gaining speed and gaining efficiency, both on the productivity of the factory as well as on the procurement and sourcing in that respect. So all of the three avenues of adding value quite a solid performance. And then I will show just a short 15 second videotape on the spot. And those of you may remember, spot is in a way the easy way to learn on how to use a control unit without organizing a major overhaul of your home. Basically, what you need, just to buy the new heater, get an electrician on board, then you have a wireless radio frequency controlled controller unit called the SPOT. Here we go. This is Harvia SPOT, the new wireless control switch So this basically offers both convenience for the consumers as well as safety because if you put it on, say, 145, 150 centimeters height, none of the children can touch it. So then you have also very childproof sauna in that area. So it's a multifunctional, very neat equipment. Regarding U. S, I think the integration has been performing well. We've been honing bit of the product range. We have extended some of the offering. We also have been redesigning some of the modules to deliver better profitability, and I think that's been doing quite well. Cross selling, maybe the better word could be upselling. And I think we've been able to do both cross selling, but especially upselling. So we've been selling improved better heaters, increased accessories and all of that as a package for the customers. And our value add, thanks to the upselling, has been gradually going up. I'm very happy for the U. S. Team to learn fast how to do that. In the factory in Renick, I think we've been doing very solid steps on the KPIs, both on the operations as well as on the sourcing. So very happy for their performance in the team. And I think I said, we are slightly ahead of the schedule, and I'm very happy for them. And those of you may remember, we acquired the company. They were slightly on red figures. Now they are solid on black numbers, and they are approaching good levels on that respect. On the geographical split, I think it's worth to say that, okay, Finland, the home market, we had a very strong quarter, and I think clearly beat the market and gaining share on that one. U. S, both with the existing customer base as well as with the almost 7,000,000,000, a solid performance. And even though we are not highlighting it here, I think it's worth saying that the Scandinavian marketplace was enjoying a very solid growth. It's on the high teens on the top line growth, so good work over there. On the hindsight of the coin, the German market was not performing as expected, and it's been bit of a up and down. The first quarter, not good. 2nd quarter, very good. Now once again, a bit of a softer quarter. But I think going forward for the year, we foresee that it's a flat or slightly plus on the German marketplace, but it's compensated with the rest of the European markets, basically France, Switzerland, Spain, Italy and all of that area supporting quite strongly the rest of the European marketplace. Russia, I think we had a very good strong quarter. But having said that, I think Russian market still remains slightly sensitive, and I think we'll do a good, good year on Russia. But still, the market has some issues we need to address. By product groups, I think very happy to see that the sauna category has had strong development and not only in the U. S. Marketplace, but sauna heaters and especially steam generators, a very good quarter on that respect. And maybe just as an education for maybe some of the new listeners. On the sauna heaters and equipment, we command a very good profitability. On the complete saunas and saunas, the profitability is slightly below the average profitability. And I think even though the German market was not rock solid, we are happy to post a small growth on the control unit business as such. Then for the full year to date numbers, roughly the same story, But I would like to highlight the Scandinavia on top of the Finland and U. S. And rest of the Europe product categories. I think we are very happy with the sauna heater sales being slightly shy of 10% growth on that respect. Then market by market, year to date numbers. I think Finland, we are posting a 5% growth. That's beyond the market growth. So we'll be gaining slightly share. Scandinavia is approaching teens, a good number. Germany, not where we would like it to be, but I think the actions we are taking should bring it flat or better. Other European markets, slightly ahead of our schedule. Russia, solid performance. And then North America, with our existing distributors, a solid performance and on top of that, highly successful with the almost 7 saunas. And in the U. S, the sauna season is just about starting in the September, October onwards. So I think we are in a good shape towards the top of the season. Then by the categories, sauna heaters, a solid growth. Sauna rooms, for sure, a nice growth. Control units, slightly on plus. And now I think Q1 was not good for with the steam generators, but the 2 other quarters have been obviously now we have a good number on the steam generators as well. Then looking at the sales by quarter, I think we had a very strong quarter and nice on that one. And then on the profitability, I think also a jump from 2.3% to 2.9% is good work by the team. And I think that's not only us, we've been doing good job, but all of our partners, both on the distribution side as well as our suppliers for the componentry and raw materials done an excellent job. I think this is just a reminder that we operate in all three sauna types. Now we see that the Scandinavian typical standard sauna is doing good. There is a good demand on the steam rooms. Infrared is a bit of a mix. I think there is the premium and is doing quite well. Then the entry level is price points are slightly below what we expected. But altogether, I think we are in a good place to service all of the 3 categories. I think we remain very committed to deliver our strategy, and I think we are gradually increasing the average purchase by our customers and then offering them basically convenience and easiness in working with us. Geographical expansion focus on the Central Europe, Scandinavia, Russian market and then improving in U. S. And on the operations, we focus on the Murame China factory and then the wood factories in U. S. And Romania in that respect. So that's all from me at this point. And now I will let Ari to continue a deeper dive on the numbers. Please, Ari. So actually, Q3 was a very good quarter as you see. But if we look at the revenue row of the worksheet and calculate backwards. We have had actually already during the last 12 months net sales of almost €70,000,000 And the same way, if you take also the quite good earnings before interest and taxes, EBIT, the adjusted figure 12 months backwards, we are landing already on 12,600,000. So and as Tapio said, we are heading now the main season in our new company in U. S. We didn't have that company yet in our Q4 figures last year. So the dynamics between the quarters have changed a little. And we are expecting, as Tapio said, quite nice Q4 still for the rest of the year. So yes, then one thing is operating cash flow. We have been able to improve it due to the concentration of the net working capital. We've been able to reduce the net working capital, for instance, in inventories in the, let's say, old Harvia Companies quite substantially since now we are with inventories on the same level than a year ago, but we have one site in U. S. More having almost €2,000,000 on the stock to sell to customers there. So there have been some efficiency improvements in these figures as well. Then one minor thing, but worth mentioning that we booked at the end of Q3 certain reserves for the key personnel for their incentive program for the beginning of the year end that landed everything to Q3. It was about 300,000. And so I would say that about 200,000 of that was semi extraordinary. But we didn't adjust it because it's, well, normal operative costs due to good success in the business. So that some background additional information. The investments, they have been quite on the same level as last year in Q3 replacement and saw small efficiency improvements. In the beginning of the year, we invested in the RENIC U. S. Sauna factory. So the cumulative level is slightly higher than a year ago in investments, but we will we have talked to our investors that we will stay under SEK 2,000,000 anyhow for this year. Net debt is slightly higher than a year ago, but actually there is €2,600,000 of the IFRS correction in this year, but it's missing from the last year. So our leverage, saying the net interest bearing net debt divided by the adjusted EBITDA is now between our range, planning range. We have said that we will land somewhere between 1.5 to 2.5. So now we are at 2, and we've been able to improve that also during the year. The return on capital employed improved clearly, and we were able also to keep a high equity ratio level. So this has been a quite good quarter actually and the year also until now. Some old pictures you have seen already, but what is interesting here is that our leverage is really going down now and also the net debt. Somebody might wonder a little why our interest or finance costs vary so much from quarter to quarter. In fact, we have actually cash flow wise very, very stable interest payments, but you know we have €25,000,000 of swap interest swap between the variable and fixed interests. And its fair valuation, as they call the bankers, changes from month to month quite much. And if the fixed interests change, then we will have a change there. So actually, money flow wise, the interest costs are always quite stable. Yes, investments quite on the same level as last year on Q3. Then the structure of our shareholders. The nominal registered or actually outside Finland investors, they own 53% of our shares. CATMAN Investment Funds 12.3%. And what is interesting is the share of the households. We have been able to increase the number of the shareholders, small shareholders, quite much after the IPO. 1.5 years ago, we had about 2,000 shareholders and now 4,500 roughly. So people are really interested in the Harvia sauna story, and we are very happy to have them as club members. Yes. So and then the dividend payout, we really, really want to tell to the investment community that we pay twice a year the dividends, at least 60% of the net results and growing dividends. And this happened also this year. So April 15, we paid SEK0.18 per share. And now 28th October, we paid SEK0.19 dividend per share. And while having quite strong cash flow, we it doesn't change our cash position very much. But in fact, this happened in Q4, so it will be visible in Q4 figures then in cash flow. Okay. Just to repeat a little our financial targets and outlooks, our long term annual revenue growth goal is 5%. On average, now we've been much over that level. Profitability, meaning of adjusted operating profit margin, 20%. Actually, the last 12 months, we had already 18.1%. So we are not so far away, and we are improving our efficiency all the time. And the leverage ratio, as I mentioned earlier, between 1.5 to 2.5, and now we are right in the middle. We don't publish short term outlook, but as you can hear from the CEO and me, we can comment the business anyhow quite openly. So do you have any questions to Tapio on me? Please, Marie. By the way, sorry, I didn't show this. This is 1 Harvia sauna or a camping place on the mountains in Austria. That's how modern camping looks like. I think it looks like camping of my style. Yes. This is Maria Wikstrom from Danske Bank. I had a couple of questions. First of all, could you comment how much the almost heaven saunas were on sales in the Q3 figure? That's I wanted to go back and like see the organic growth, like without the acquisitions. Okay. The organic growth, I think, on the quarter 3, we are on the 6% range on the organic growth. Exactly 5.6% percent to be exact. Perfect. I can then backward calculate from there. Then you had a good sales growth in Finland of, I guess, it was a little bit more than 10% for the quarter. And I mean, you always said that you are more dependent on the replacement demand. But still, the outlook for the new construction in Finland, I mean, start to be fairly gloomy. So is there like have you ever commented any figure that how much of your products, I mean, goes to these constructors for the new builds so that we get a little bit of an idea that, I mean, what percentage that would represent in the Finnish sales. It's actually quite a small percentage. What is impacting a bit more compared to prior year is that last year, during the whole of 'eighteen, we did quite many projects for the building companies and the hotel complexes. And for this year, on the sauna sales and projects, we don't have that. The share in the heaters and equipment is actually very, very small and doesn't have a major impact in our numbers. Okay. And then the final question is you could a little bit elaborate that the Russia was good in this quarter. That I mean, where does it come from? Is it the wood burning heaters or the electrical heaters? And then a little bit more that if it's like with geographical areas? And is there like what is currently happening in the economy? And how you how we should model it, I mean, going forward? Russian ruble has been strong and steady, and I think the fundamental market is rather steady as well. Having said that, I think we've not been highly successful in expanding our physical distribution in the regions. Still, our sales are very dependent on the Santhvi, Moscow and the surroundings. And hence, we see a bit of a sensitivity over there. And the price points on the Russian market, and I think they've not been growing up. And that's why we remain cautious. But I think going forward should be still a rather steady ride, but not a double digit growth, more of a small single digit growth going forward. Petri? It's Peter Kajani from Inderes. You mentioned Redic and Murame KPI is going to better direction. Could you elaborate what KPIs are you following? And how far are you from them being at the 100% target level? No, I think we are not even close to the 100%, but we follow very basic measurements over there. And it's man hours per pieces and man hours per euro. And in that respect, we've been going the right direction gradually. And on the logistics, we basically monitor our picking capacity and accuracy, and those also go into the right direction in I think already for quite some time. So I think we have a good program how to continuously improve that. So it's not going to be a major step upwards, but it's a continuous improvement in that respect. Okay. I would like to hear more of your opportunities and expansion in Scandinavia. You have been doing very well there this year. And what are the reasons behind it? I think we'll be learning how to grow beyond the do it yourself market. Also the do it yourself market, we've been offering different models than we used to offer. And I think now the price points are gradually going up. And some of you may remember that compared to our peers in the Scandinavian marketplace, first of all, we are not number 1. So we are number 2, and the gap is quite large for the number 1. And the price points we are commanding, I'll take an example of a simple wall mounted heater for Harivya can be €299,000,000 and for the competitor, it's almost €500,000,000 So I think that's where we've been closing the gap and offering more suitable models for the Scandinavian marketplace. Then for the premium distribution, we've been teaming up with 2 partners over there. Then we also get a better share of the project business together with the partner on the Swedish marketplace. And then for Denmark and Norway, with the existing partners, we've been revamping the offering. We've been entering some of the project business together with them. So that's basically where we are. Okay. Sales are also quite much people business. We have got a good team there and also with long experience of sauna sales in Scandinavia. Okay, good. Let's talk about your U. S. Opportunity then. It's a huge market, but not that advanced in sauna lifestyle as we are here in Finland. What are you doing to increase the And how are you growing your business there? And how are you growing your business there? I think we have an excellent position to help people to learn the on the entry level and then upgrading from that. And together with our partners who are more at the premium end, we are approaching the market on both sides with almost 100 saunas on the entry level, which is basically the active outdoor living type of a segmentation, together with a minor part on the in house saunas. And then together with our 4 partners, we are addressing the premium end of the market. And I think the PR is coming from the premium end, but this is where people have the word-of-mouth going for the larger population, and that's where we are gaining speed. Okay. And then what sort of product categories or geographic areas are you now missing from your portfolio, I. E, what attributes would be your optimal targets in organic growth? We have made a matrix and figured out what we have, where we are strong and what we are still missing. And I think the professional team is an area where we are not the expert. We know how to become an expert, and we are on that path. But if there would be ways how to speed up the journey, we would definitely have a look. Then on the professional and premium end of the sauna heaters and equipments, we still have holes and especially on the high power and the super premium level where we are not the player today. We know that we can become a player, but takes a lot of time. So if something becomes available on that area, for sure, we'll have a look. And then if there is something which is basically helping us to improve our game in the U. S. Marketplace or in the Asian marketplace in that respect. But that's basically where we are. There is not a large pool of the companies. It's a fairly small pond. If and when they become available, we'll definitely have a professional look. And if the price point is right, we have the ability to act as well. Okay. And final question. You are pretty close already, but what sort of steps do you have going forward to achieve your 20% EBIT level? I think it's basically on the 3 parts we are working on, always selling slightly better and doing more of the not heater related business, where we earn better margin. And then on the professional and premium business, also the margins are better. In the distribution expansion on the markets where we are not the number one and we are behind the market price points, we can do step changes over there. And then on top of that, we still have a room to improve our both on the physical operations productivity as well as on the logistics. And I think sourcing is not really yet either. So I think those are the avenues we are working on. Traditional sauna heater business in Finland, and that has been extremely profitable and old Harvia, so to say. But we have acquired during the last years a couple of bigger companies abroad, and they have been improving very nicely. They have done good work and so forth. But we also believe that we can support and take them together to the next level of profitability. And final question after the final question still. This almost Heaven Sarnas acquisition, you told us that it was making a loss when you bought it. And now in Q2, I think you said that you are halfway through to the your target profitability levels. Where are you now? I hope I didn't say that. I said we are halfway from 0 to 10. And now I think we Yes. That's actually what you said, yes. Okay. Yes. And I think now we are slightly better than that. Halfway from halfway to 10%. Yes. It's clearly profitable. And now we are heading the main sales season. And normally in the production business, it improves the profitability as well. We've been doing some of the issues with the remodeling and repricing. We've been working on the logistics. Then we'll be working on the sourcing, and we feel rather confident that we can keep it where it is and take steps forward on the profitability. Thank you. Maria? I had a couple of follow-up questions. Firstly, on the German market, it has been a little bit problematic this year. So can you elaborate like what are the measures that you are taking in order to basically turn around the trend in Germany? We are trying to increase our physical presence at our partners. So we are building up showrooms, not megashorerooms, but showrooms where we can also present the top end of the offering, the medium end of the offering, all the accessories, all the upsell opportunities and then teaching and learning together with our partners how to do that for their audience and customers. And at the same time, we also and I think who has been gaining on the marketplace is mainly the low end heaters and componentry. And we will not let that go alone. So we'll also address that. So we will be in the game on that area as well. We want to be also close to our customers. For instance, this week, there is a major swimming pool, a beer pool trade show in Cologne, Aquanal, and we are there present with our team and with our booth. Okay. Good. And then I just need to ask that. I mean, everything looks going like super well for you guys. And like is there something like, okay, well, like anything that could disturb this picture? What is something that, I mean, like would you would stay awake the night? Or is something that, I mean, like what could go wrong in this journey? I think we don't see any gloomy clouds or pictures around, but I think we are not risk free either. And I think already when we were entertaining the IPO, I think we said our single biggest risk is something happens with the modem factory. And I think that's still a potential issue. But we've been planning not to that happen, and I think we've been taking precautions that, that will not happen. And we have a serious risk management process in the whole group, and it will be reviewed the risk situation at least annually with our Board. And we haven't noticed any new major risks. And would you see any risk arising for like new EU level regulations like basically prohibiting burning wood or things like I mean, currently, like I think big changes have happened like suddenly like plastics have become very bad for the society and it's basically everybody prefers for paper. So would there be something like regulatory wise that I mean good? I think we stay very close, and we are both on the local level as well as on the EU level. We are part of the team who is basically discussing and preparing and designing those. Don't foresee any major changes. And I think if the changes happen, and I think it's for cleaner burning and less microparticles on the process. That's automatically basically increasing the cost of the equipment. And I think in that respect, even though it might take a bit of a time to convert the whole assortment basically into the new if there will be a new standard and new regulation, we'll not be ready on day 1. But we are clearly ahead of the game compared to many of the others. And I think if that would happen, the price points will take a quite hike, and it's not 5%, 10%, it's going to be more. And I think that's in a way beneficial for our type of business in that respect as long as it's not completely forbidden. All right. Thank you. If no other questions, I would like to thank you for the attention. Thank you. Have a good day.