Okay. Welcome to Harvia's review. Today we have Ari Vesterinen over here, our CFO. My name is Tapio Pajuharju. I am the CEO. We'll run through the numbers of the last quarter, then also have a review on the full year of 2018. I will also briefly touch base with the Harvia strategy, and then Ari will have a deep dive on the financials. I think questions are welcomed during the presentation, and I think at the end we also have a chance to entertain the questions, and we also have the opportunity for web questions. All in all, we had a very solid and steady year. Profitability was solid, and we were investing for the future growth. We reached slightly shy of EUR 62 million.
We had a bit of a headwind on the currencies, and then taking the currency impact into account, we would have reached about 4.6% growth, which is slightly shy of our target of exceeding 5%. Operating profit was steady. We reached EUR 10.9 million, a slight improvement compared to prior year, and also on the currency impact, slightly negative on the bottom line, as you can see. The main pillars for the year, or the milestones for the year, were for sure the IPO, which we completed the first quarter successfully, and it got a very good ownership for the company and also capital for the future growth. On top of that, we've been going forward with a steady, strong speed on the Scandinavian marketplace, where we've been upgrading our offering, i.e., more premium models and more versatile offering for our Scandinavian consumers.
At the same token, we've been improving our in-store presence, and the most important stores, especially in Sweden, are now equipped both with the models but also with the in-store furniture, indicating and giving tips for the consumers to go for the higher price point equipment. At the same token, towards the year-end, beginning of November, we also got a new team member. Thomas Hjalmeby joined us as a Vice President of Sales for the Scandinavian arena, and he also became a management team member, our colleague in the company.
On the new product launches, the year has been very busy and extensive, and I think also on top of the premium end and the more complex professional offering, we've been overhauling our offering at the entry price point, and there we've been able to combine new features to the affordable price points, but at the same token, slightly increasing the average purchase at that end as well. Towards the year-end, we were launching the premium Sentia by Harvia line for the consumers, and very late in the year, we succeeded in launching the professional equipment up to 36 kilowatts, which I think also in our premises at the LSC pool, they have converted the men's sauna with the new 36 kilowatt heater, and later on can be tested over there.
At the very last days of the year, actually 28th of December, we completed the acquisition of Almost Heaven Saunas. I will dive deeper into the Almost Heaven Saunas later on the presentation. On the actual manufacturing operations, we've been investing and maintaining and improving our productivity both on the Muurame plant and on the China plant, and on top of that, we've been working both on the internal logistics and the external logistics to deliver more productivity and profitability. I think Ari will dive deeper on the actual financials, solid cash flow, and I think the equity ratio increased thanks to the IPO quite nicely, and on our net debt, we've been going down pretty nice, and we are now within the brackets as indicated during the listing process.
On the last quarter, I think the top line grew slightly, but only slightly, and there were a bit of delays in certain markets with the deliveries, and the longer than normal Christmas or winter break took its toll. We foresee that that's a transition of the deliveries for the coming quarters and coming months. On the other hand, the operating profitability was very solid and good, very happy for achieving that. Cash flow, including the Almost Heaven acquisition, solid performance on the free cash flow. I think on the strategy, as we've been indicating in the previous rounds, on North America, we are following the strategy of expansion, and now we completed the acquisition of Almost Heaven Saunas and made us a solid big player on the U.S. marketplace. We don't have the exact data.
We believe that we are either number two or number three in the American sauna market after the acquisition. By volume, by the sauna pieces sold, we are clearly the number one, but on value, we are either number two or number three. In the EU countries, distribution has been strengthened, and also the offering has been upgraded. Russia, even though we have a bit of currencies over there, we've been working on the field, and our offering on the regional level, but also Moscow and Saint Pie is clearly improved and more visible. As we speak, they are holding a major event in Moscow, a trade fair where we are also presenting what we presented in the last quarter in Europe on the new models and in that respect. Sweden, we went through that.
I think in Central and Southern Europe, we've been working with our existing partners, and we've been deepening our cooperation with the major swimming pool players, SCP, an American Pool Corp division, and for the European Fluidra, who is the number one on the pool market. I think SCP is the largest player on the market in the pool business. Almost Heaven Saunas, Ari will share the details and the secret about the name. It's based on a song, and he will reveal that later on. That's been in the business since 1978, and with the current owner from the early 2000s, we've been working with them for more than three and a half years. We've been a component supplier. We've been supplying basic heaters for the business for the past years.
We got the opportunity, and we actually studied the opportunity already earlier, but now we were having the time to finalize and complete the acquisition and made us into the second or third position on the U.S. sauna market. Having said that, we are still in the entry and medium price point level on the marketplace. They are based in Renick, West Virginia, where the operation is. They employ about 40 people, and then they have a showroom in Holland, Michigan, where the salespeople and the showroom locates. The main business is the outdoor saunas. It's mainly in the barrel format, and then they also do the indoor saunas on the entry and medium price point on that respect. Ari.
If you could repeat basically the action plan that you had to enhance the profitability, and could you give some idea of the timeline that you are planning on how to basically get the margin levels higher? Is it going to be three years down the road or faster?
We've done quite fast and rapid action. I cannot say exactly when it's having the full impact, but we started working with the purchasing synergies, and we have good inroads into the purchasing synergies in purchasing the raw materials and componentry. At the same token, we've been adjusting the pricing, and the pricing is some of that is already in place, some of that is coming in place shortly, and then we've been working on the models. One of the major customers we did stop the business, and now we are restarting the business with new models and new price points, and that's what we have done.
At the same token, on the operations, they do a very, very steady work, but we are thinking of some of the layout and flow of the operation, and then some minor investments to help and reduce the labor cost in certain areas.
The investment part of the CapEx, was that already in the Q4 numbers, or should we see it?
Everything was in Q4 numbers.
Still, the cash flow was pretty strong.
Yes, yes, yes. We have traditionally the best cash flow always in Q4, and paying out the dividends and acquiring the business of Almost Heaven Saunas did not harm that. I think we are doing quite strong and fast actions, but cannot exactly say when it will give the impact, but should give a good impact.
Like shorter than three years?
For sure, for sure. Going through the numbers, and I think this is familiar from the earlier today published material, but steady growth on the Finnish market, other Scandinavian countries, and then good growth on the other markets, which some people call rest of the world, but they are very important emerging sauna markets for us. I think the break on Central Europe when they go for Christmas holidays was slightly longer than normal, and Russians usually go just on the last day of the year for Christmas holidays. This year they took it a bit earlier, and that had a reflection on the last month deliveries. Profit, very solid, good profitability, and then some exchange impact on that.
Do you have like a good visibility that basically some deliveries were like postponed after the year-end maybe?
Basically, you're not like guessing that they might be coming or?
Some of that is for sure based on experience and estimation, not guesswork, but estimation. Some of that is a fact. The question is, are they hitting in January, February, March, or April, but they are coming. We know that they will come.
The Russian decline, you mentioned a little bit earlier that there might be some like slower deliveries in Russia. Was that also a timing issue or more cautious on the economy of the market?
I think we were a bit more cautious with some of our customers, but there was also the Christmas impact on the deliveries. On the revenue, this is something just slightly shy of EUR 62 million, a solid increase on the Finnish market. Sauna heaters and sauna rooms developed well, and the control unit is slightly below, and some of you may remember that we discontinued the private label control unit and sauna business, and that has an impact especially for Central Europe and on the Central German marketplace in special. On the profitability, just a very, very solid journey on the profitability. No major changes on the market split, and as you may remember, we have core markets, but then we have a lot of small emerging markets, and we supply sauna and spa equipment and products for more than 80 countries.
Outside of the other markets, I think we'll highlight some of the Asian markets, Taiwan, Singapore, Thailand, and then some of the Arabian origin countries where we had good growth on the year. Exchange rate mainly coming for the Russian ruble, where there was a softness on that one, and then a bit on the US dollar as we speak. When we go to the division of the products, sauna heaters still is slightly shy of 60%, solid growth on the electric heaters, but having said that, the wood burning heaters did not reach the growth on the Scandinavian marketplace, and a bit of the same impact on the Russian marketplace where we had a solid journey with the electric heaters, but the wood burning was not equally easy.
Maybe just as a bit of a piece of insight, usually the sauna componentry delivers slightly better profitability than the sauna business in general. The control units, we see that as a strong and important part of the business, and it is core to the business in the export markets, but still for Scandinavia, Finland, and partially Russia, we see that as an opportunity to increase the share of the control units or the ratio of heaters sold versus the control units in that respect. Revenue by market, most of the markets going up. Germany, we have the impact of the private label, and then Russia, it is the ruble. If we would eliminate the impact of the weakening ruble, we would be slightly on plus, not the big plus, but between 0.5-1.5 positive in that respect.
The North American market, I think while we were negotiating the deal with Almost Heaven Saunas, we had eye on the ball on closing the deal, and we didn't have the eye on the ball of shipping as we used to ship. I think going forward, it's also good to maybe think that currently, in the past, we used to book the sales when the goods were leaving from Muurame, and now we are booking the sales when they are shipped out from Almost Heaven Saunas inventory. There will be a slight delay on booking the sale on the U.S. business. By the product group, basically touch base on this one, sauna heaters, solid growth, a bit of a tough journey on the wood burning heaters, sauna rooms, solid control panels, steam actually delivering a very, very solid growth, and spare parts and others.
That's by the way also including the steam rooms, which had a solid, solid good growth on the marketplace. Maybe a reminder that we are working in all of the three different sauna types, the Scandinavian sauna type with the benches and the heater, steam room where we provide all of the componentry including the room itself, steam generator, scent pumps, illumination, and all of that, and then for the infrared or any combination thereof.
This is just maybe a piece for the memory and the three pillars for the strategy, increasing the average purchase value by selling more premium componentry and heaters and bundling things on the marketplace, and then the geographical expansion for new markets, but within the markets where we are, we try to expand as well and also put in a more premium offering for the consumer marketplace, but even more so on the professional B2B market. On the productivity improvement, a solid program for the Muurame plant, China plant, Romanian plant for the wood, and then later on also for the U.S. Renick plant in West Virginia. I think on the average purchase, we have done quite a bit to become a true one-stop shop for the professional marketplace, but also for the consumer marketplace, steam generators, infrared, a solid journey, good journey.
On the premium or more premium heaters, did a good job on the Sentia by Harvia launch, and that's coming through the professional channel, but that is maybe good to remember that those people tend to be rather conservative, and they don't come in with a wave. They come in gradually when people are exchanging the equipment, and exchanging the equipment, you need to have a solid proof of working, and that's what we are currently. We are placing these into prominent locations throughout the marketplace, and when we have a proven success, then the word is spreading out, and that's how we can combine. This is the one which is the Sentia Cube.
It's a 36 kilowatt heater, the strongest model we have, and the beauty of that one is that it's designed for heavy-duty use, 24/7 use, and if something happens, because it will happen on a day X, that something will happen with the heating elements, it's in a cassette, so it's basically just stop the equipment, take it out, plug it in, put it back in business. For the professional users, this is a very important thing that it's fast back in business. On the entry-level models and the more premium models, we've been including features which didn't be there in the past, childproof lock, illumination, all the type of benefits for the consumers. A bit of more modern saunas, which are for the European higher standards, and also the same standards for the Asian market. Good activity on the new products.
You were pretty active in several trade fairs in the second half. Could you just give us some idea, is it going to continue like this year as it was, or shall we expect to normalize in a way the marketing expenses, and if you could just open up a little bit how much expensive that is to participate in those big fairs, and kind of like what's the levels that we saw compared to some normalized level of marketing?
I think we had a very special activity on the 18th, and some of the fairs are bi-annual, so they are not every year. Last year, they seem to be having all the fairs on. The coming 2019 is having clearly less fairs. We still intend to participate as we want to really launch the premium models or more premium models plus the professional, but it will be clearly less than in 2018. The cost of participating into a fair, say, EUR 100,000 a fair plus the travel and plus other expenses, that's a good indication. In the last quarter, we had basically three big fairs where we participated, or four big fairs where we participated.
Three during the last quarter.
Yeah. We will have less activity on that front in 2019. Having said that, we will not be less active on the market. I will continue pushing and launching the products. I think it is time for passing it to Ari, and Ari will go deeper into the financials. Please.
Thank you. Yeah. Here is the table of the main figures, and you've already seen how our revenues did grow during the last year and during Q4. Also the operative profitability. The cash flow was asked, and I can dig a little deeper there. It is so that we have usually during Q4 the strongest operative cash flow in our group. There are certain seasonal reasons, inventories, trade receivables, and these kinds of things. This operative cash flow, it includes EBITDA, change of net working capital, and the operative normal investments, but it does not include the dividend payout or similar financial things. The net debt, what we have here, it includes everything, interest-bearing debt minus cash, and as you can see, we had a net debt of EUR 30.3 million end of the year, and it is only EUR 600,000 more than end of Q3.
The net debt did not increase even if we were paying EUR 3.0 million very much because of even if we were paying EUR 3.4 million dividends and investing in the Almost Heaven Saunas business. The crucial thing is that the networking capital went down during Q4 compared to end of Q3, almost EUR 3 million. That is always the source of the cash flow towards the end of the year together with the operative EBITDA. Are there any questions about the financials in this form? Yes, please.
If we compare the net debt level and the net finance costs on the Q4, they were up quite a bit compared to Q3. Was there something specific about the net financing with Q4, and what's the run rate to be expected?
You know we are making our financial statements according to the IFRS accounting standards, and we have to book always the fair value of the interest derivatives and similar agreements. There were some increases in the value or negative value of some interest swaps, but in fact, it did not hurt the cash flow at all. We had the very operative financing cash flow very similar also during Q4 compared to the other quarters. Basically, you can take an average here from the interest, the finance costs, and that is the good estimate also for the company if we do not change the level of the net debt. As you see, the net debt went down very clearly through the IPO during the first quarter, and it made also a lot of space for saving the interest costs and maneuvering also with other things.
We have all the time also EUR 8 million credit line unused for different things if we need to invest in some acquisitions or whatever. Usually, the investments in intangible goods, in machinery, and so they increase likely towards the year end, and that happened also during Q4 2018. We finished some warehouse logistic-oriented projects and also some product development projects which were partly activated, and the total amount of the investments for the year, it was EUR 1.6 million. Here are the 10 biggest shareholders. As you see, there are only in Finland registered shareholders, so the nominal registered international shareholders are not included. In fact, we have quite a big share of international investors in the group. Their share is 41% now, and end of Q4 it was 38%, so we are happy to see that international investor audience is very much interested in Harvia's business.
We have also noticed that the amount of private household investors has increased very rapidly during the last fall. When we had in the beginning of the year, or actually after the IPO, slightly over 2,000 shareholders, excluding the nominal registered, now we have over 3,200 shareholders, and it's nice to see the growing interest of the investors. The profit distribution, you remember our dividend policy. We are planning to pay twice a year the dividends, at least 60% of the net result, and growing dividends. That's the way how we follow the policy also during 2019. The Board of Directors of Harvia will propose to the annual shareholders' meeting to have EUR 0.37 per share the dividends paid in two payments, EUR 0.18 during the spring in April, and EUR 0.19 sometime in October 2019.
As you can calculate, we are paying about 88% out now of our net results, which is a rather high payout, but we have been able to invest from our cash inflow, and we have plenty of also free equity in our disposal that we are able to pay high dividends. Just to repeat our financial targets, long-term financial targets, we target the growth rate of 5% a year, and the profitability measured with adjusted EBIT, 20%, and the leverage ratio between 1.5-2.5. Yeah, then an interesting and important picture. What is this? This is a picture from West Virginia where our US Sauna Factory is located. West Virginia is a very nice place, and the name Almost Heaven Saunas, it comes from the old country lead sung by John Denver, "Country Roads." Please hear it. You can hear it in streaming services.
Right in the beginning of that piece, there is mentioned Almost Heaven. West Virginia is almost heaven for some country road people, and that's the origin of the name of the company. The company was already established in the 1970s when that music was very popular in the U.S. Middle-aged and older U.S. customers, they know very well that name. Any questions about the finances or anything else about the business? We are available here.
Maybe just to continue on this one.
As we don't publish any forward-looking statements, still can say that the business environment seems to be steady and solid. We don't foresee any major changes in that respect, so it looks a steady ride.
It's Ari from Danske again. A couple more from me. Continuing on that overall economy, you are not seeing anything specific in Germany either because the German export industry has been really in a much more volatile environment already like last year for most of the part.
I think we do foresee that there are some changes in the sentiment, but on the people who are considering investment in something like a sauna, we do not see a big change in that respect. Replacement business should not either have a big, maybe in the very entry level of the business can be some minor things, but do not see any strong movements on that respect.
Finally, related to this Almost Heaven Saunas acquisition, it's a fairly big transaction in terms of volume and scale for your business, but you didn't really book any non-recurring items. I mean, typically companies tend to do that when they're buying something or starting to integrate. Should we expect to see some one-off items related to the restructuring or the actions you're making or?
We did not make any major reservation for restructuring costs or layoff costs or anything like that because we saw that turning around the business is not that demanding for our capabilities of purchasing and controlling the selling prices. We have been giving also support for the administration and finances, so we did not make any extra reserve for that. We just booked the acquisition costs, lawyers, advisors, and so forth to the non-recurring items in 2018.
The operation as such is not that complex. It is a rather straightforward factory, and I think some of the things we need to do are basically just minor capital investments on that.
We took over some trade payables for the old company, and those trade payables will be paid during 2018. It has some financial burden, but it is quite limited for 2019.
To pay out those, it will need some cash, but it's quite a limited amount. The team over there is in good shape. We potentially consider strengthening some of the operational capability, but that's roughly what we are doing.
Hi, it's Petri Kajaani from Inderes. My first question is on your revenue drivers in 2019. What I see is going on here is that the positive drivers, you have the acquisition effect, you have some delay of deliveries in Q4, and then some new model launches and big fairs happening in Q3 and Q4. Am I right that these are the main drivers of pushing your revenue in 2019, or is there something more that I'm missing?
I think that's a good read of the things. On top of that, I think the drivers, we've been focusing on some of the core markets, and I think Scandinavia is something where we have a focus a bit, and then also for Central Europe. As we speak, we've been also considering and adjusting our prices, so that will also deliver some of that.
Okay. You had quite a lot of big sauna projects in 2018. How do you think of these big projects going forward? Was 2018 somehow kind of big for you in these sauna projects, or are you still going forward with these big sauna projects in 2019?
We are proceeding with the sauna projects, and we are taking on board projects we can comprehend and execute. We will foresee that we have roughly the same amount or slightly more of the project, but now we will be learning what to do and what not to do.
Yes. My second question is considering your productivity improvements in your factories. You talked a lot about what you did, investments in Muurame and China. Could you elaborate a bit more? What have you done during the last year and how these improvements are affecting your profitability?
We are measuring the productivity both in terms of business made per man hour and also the value created per man hour. Those indicators are clearly going up. On the Muurame factory, we changed some of the layout of the factory, invested in new machinery and new automation, and some of that is in the installation as we speak. On the China factory, we implemented a full layout change, implemented lean manufacturing in the China plant, and on Muurame, we implemented also the internal logistics setup. All the layout changes on the logistics setup are done and completed. What is still not fully working is the data system where the data is going from the barcode reader guns to the ERP. That is still missing, and that will be implemented by the end of Q1 this year.
For going forward, I think we'll do some minor things both in Muurame and China, and then on top of that, the Romania factory will get a bit of more modern machinery to improve the productivity. As said on the Almost Heaven Saunas, we'll do some minor investments to improve the productivity over there as well.
Okay. If we talk about the size of your whole production in volumes, have you pushed some more to the China factory lately? Is China factory volumes going up?
China factory volume is going up, maybe not due to pushing, but due to the more versatile offering. We used to be making their entry-level steam generators and entry-level sauna heaters. Now we are doing more of advanced steam generators, which are close to the professional standards already. We are doing four pillar models where we have also one of the corner models, both with the remote control and non-remote control models. That is automatically driving the volume in China factory. On top of that, we also be learning how to utilize some of the Chinese steel prices that we are doing some of the componentry in China.
Okay. The third part of my questions is for Almost Heaven Saunas. What's your next steps going forward in this acquisition? If you could give us a bit more color on what you're doing with the offering, the distribution, and the profitability improvements.
The distribution, we do not intend to change. We'll keep it as such, maybe adding one or two channels on top of that. The models we are basically reworking in order to improve the productivity. I think they are very outdoor and indoor entry-level driven. We are addressing and increasing some of our European offering to Almost Heaven Saunas, utilizing the Romania factory, especially for the indoor sauna offering, but also some of the Muurame-made medium to higher price point outdoor saunas. On top of that, we are building a, I don't know what is the right term, we call it the service center, having a wider portfolio of the US-approved heaters and componentry available for our other US customers in the Almost Heaven logistics.
If they need a, not the full container, but they would need three pallets of a higher-end US-approved heater, that would be available in West Virginia and can be in California in 48 hours, whereas they would wait six weeks or eight weeks from Europe.
Okay. Final question on the revenue implications of this acquisition. I understood that their revenue was EUR 8.7 million last year or.
Year before.
Year before.
2017 was 8.7.
Yes. You have been selling something to them, and now you have the delay effect that you talked about. Could you describe more how is this affecting your revenue?
I think year on year will have no impact, but for quarter to quarter, it can have an impact because some of the shipping, if we are shipping from Muurame today, they will be booked or used to be booked in sales today. In the new model, they will arrive to West Virginia warehouse, will be put into the Almost Heaven Saunas as a heater equipment and booked as a sale when it's leaving from the Almost Heaven. That will have anything from 6-12 week delay as we are booking it as sale. In between, it will be an intercompany transfer and booked as a sale when it's leaving from the West Virginia warehouse.
Okay. It could be.
Yes. The equipment, heater, control unit, and so forth, they make about 15%-20% of the value of the sauna cabin. We are talking in Almost Heaven's sales, the bulk of the sales is actually the wooden part, the sauna cabin, also a barrel sauna. Those sales run as they were, except one customer is re-entering the business again. That business is running normally. There we have, through our purchasing experience and connections, the possibility to improve the purchase prices and conditions. That will be one source of improvement in the company there.
Okay. Thanks. One bonus question still. Before the acquisition, you had this long-term target of doing 20% EBIT margin. You are still a bit away from that. Now you bought this company that does zero or even minus % EBIT, and you still reiterated your 20% EBIT margin guidance. How does this math work?
I think based on the experience in the sauna equipment and sauna business, we know that the 20% can be reached, and we are striving for that.
Thank you.
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Thank you. That was all for today. All the best.