Okay, welcome to Harvia's first half-year results. I'm Tapio Pajuharju, the CEO of the company. Next to me is Ari Vesterinen, our CFO.
Hello, welcome.
I will run through the events, numbers, and then we have time for questions and comments at the end. I think also during the session we can entertain questions and comments. I just need to remember to repeat the questions, otherwise they will not be recorded on the stream. First of all, both on the top line and on the bottom line, the numbers were strong and solid, and I'm very happy for the top line growth. As you may see, especially on the sauna sales, we were enjoying a very healthy, strong growth. At the same token, I'm happy to say that on the sauna equipment, especially on the heaters, we are above the 5% benchmark in that respect. Most of the markets, we were enjoying steady health growth, and I think on the key markets, the U.S. was performing extremely strong.
On top of that, the European markets, especially in France, Benelux, U.K., a rock-solid performance. I think some of you may remember that our first quarter in Germany was not what we expected, and I think we did a rather good, strong recovery on that respect. I think as a consequence of that, also our control unit sales turned back on growth. Not the big growth, but a slight growth in that respect. All in all, a good start for the year. I think on behalf of our team in Harvia, all of our key customers, our suppliers, and all of the stakeholders done a very good collaboration and good job. My thanks for everyone involved in that respect. Let's jump on the agenda. We'll briefly go through the first half.
We'll also dive a bit deeper on the second quarter number in details and events during that. We'll have a bit of a recap on our strategy, and then Ari will have a deep dive on the numbers, as you may expect as well. All in all, first half presented a double-digit growth on the top line, very close to 15%. A bit of a tailwind from the currencies this time, not a big, but a bit, both on the U.S. dollar and a bit on the Russian ruble as well. Operating profit, we were a bit more than a million ahead of the prior year, and I think if you compare relative profitability, close to 20% improvement in that respect. I think that's a good step forward.
On the earnings per share, yes, we are going up, and then cash flow also strong and solid development of the cash flow area. Net debt slightly going down, and the equity ratio going to the right direction. All the key indicators going to the right direction as we speak. The second quarter, I think not exactly up to 15% growth, but still a solid, steady growth in that respect. Also on the profitability, a very good, healthy, a bit shy of $500,000 improvement on the bottom line. In that respect, a solid performance. Earnings per share going up, and cash flow also improving from prior year in that. How we've been performing and how we've been doing on our three steps on the strategy.
I think the value of the average purchase, we've been able to gradually take up, and I think these are a bit of good examples of how we've been doing and what we've been doing. Most of you may remember that this is not a fast-moving consumer goods where things are launched on a given week or on a given month. Our business is by nature quite conservative, and our launch process takes from 12-18 months before it's hitting the eye of the consumer because we go through the rather conservative partners to the marketplace, and hence we'll keep on repeating some of these things in the future as well. Glow is the visually very impactful pillar heater, a bit more premium than our Cylindro, which is the best-selling premium pillar heater. That's doing well.
Cylindro Plus, which is the upgraded version of the Cylindro, is being launched, and now it's also becoming available with the Spot, which is the wireless radio frequency control unit. I think that's visible nowadays in Finland, will become visible in Sweden as well. Later in the fall in Finland, we'll see also some campaigning and advertising around that. That's maybe not a really big game changer, but that's one of the fast tracks how to have a remote control unit also on the Finnish marketplace for the sauna experience. I think some of you who may read Tekniikan Maailma, which is one of the magazines telling consumers about the advanced things on the world of techniques.
We were very happy to see the latest test of our Harvia Wall Combi, which is the first combi heater ever basically presented to the Finnish consumer, and the review was good. We are very happy for that. The experience boosted by the small steam generator attached to the heater was good, and that's, I think, something we will push through the market. It will not happen immediately. It will take a long time, but now we are working on that. The product itself is now visible for the consumers in, say, 40 retail places in Finland, and we'll keep on boosting that elsewhere as well.
On the wood burning heater market, Harvia Pro 20, which is our, I would call it the strong workhorse on the wood burning market, has been upgraded, and gradually we see that the upgraded, improved version is doing a good job on the marketplace. Geographical expansion, I think we've been walking the talk on the US, and I think when we first stepped out in some of the old distribution of the Almost Heaven Saunas, now we are back in business with that respect. We've also been able to upgrade and renew the models we have available for the local consumers over there. In Scandinavia, I think now we see the first insight of the extended distribution, especially in Sweden and later on in Norway as well, so those will become in play.
They are in the special retail arena as well as on the professional marketplace where we operate. In China, I think on our journey closer to the consumer, we have opened our first pilot store. It's not owned by Harvia, it's run by a franchisee, but it's a Harvia shop with the saunas and sauna equipment. This one is in Shandong, in the northern part of China, and during the year, we'll open two more of the pilot stores in saunas. We learn a bit more about the Chinese marketplace demand over there, and we are doing it together with the franchise retailers over there. On the productivity improvement, been very good, rock solid on the performance on the sauna equipment and heater factories, both in Finland and in China.
In the U.S., the wood manufacturing of Almost Heaven Saunas, we've also been improving in that respect. The warehouse efficiency, and I shall also say shipping and picking efficiency, has been improved in Muurame. On our sourcing, the procurement play, what we've been doing with our partners is now showing off on the bottom line as well. Regarding the U.S., I think as we stated when we did the acquisition, the offering was not fully up to date, so we've been upgrading and renewing that. That's now been mainly done on the barrel saunas. We still have work to do on the indoor sauna arena in that respect. When we acquired it, the stock levels of the ready-made goods were below the standard, and we were letting some of our customers down in the customer service.
We no longer do that, and our on-time and complete is very healthy on the U.S. marketplace, so we are up to 95% and above, so we do a good job in that respect. In April, we acquired also the premises, both the factory and the logistics warehousing building, and we've been doing some minor renovations and improvements over there. We hired, okay, this is a Production Manager. He's actually COO and number two guy in the U.S. business, so he's now fully on board and been doing a good job. We have been investing in some of the productivity improvement as well as on the safety in the U.S. plant. Having a look on the geographical split, Finland doing solid.
I think if you dive a bit deeper behind the Finnish numbers, and some of you may remember that last year we had a couple of projects which delivered a quite nice top line, but I would say they delivered empty calories. We no longer did that. That is why the Finnish top line growth number is slightly less than we would have expected. On the other hand, on the heater business, we do still a very good, solid job as the first half is concerned. On the Finnish marketplace, the first quarter was extremely strong, maybe a bit too strong, and now we have been digesting some of the inventory during the second quarter, and now the inventory levels at our partners have been normalized, and we are back on steady journey in that respect.
Central Europe, turnaround in Germany, back on growth, not the exact 5%, but we are 3% growth after a very slow start in the first quarter. France, Benelux, U.K. doing a good job, and we are moving ahead both on the offering and distribution and premiumization in that respect. Scandinavia, thanks to Sweden and Norway, we've been now having a healthy growth over there. Russia, Russia has been a bit of, I would call, sensitive in terms of the pricing, and we elected not to go for the heavy price competition, and that's why it's been a bit softer. On North America, we've been enjoying both on our traditional heater and component business, a good growth, as well as on the saunas, extremely good growth thanks to Almost Heaven Saunas in that respect.
On the by-product group, sauna heater still is a big part, growing slightly above the 5% benchmark. Control panels, we are now on plus, not the big plus. Sauna rooms doing very good. Steam generators, I think that's also partially related to the Russian price sensitivity. We were not able to post the 5% growth. We are just minor growth on that respect. Spare part and services basically flat in that respect. Having a look on the bridge from 2018 to 2019, we can see that the markets, Finland growing, Scandinavia turning into growth, Germany back to growth, other European countries solid. Russia slightly down, minus 1.7%, North America delivering a good growth, and the other countries doing a steady job, and we landed at EUR 36.3 million on the first half.
By the product group, basically the same as we just looked at the pie chart. Sauna heaters, 6.4, sauna rooms altogether, very nice, almost double. Control panels from the negative on the first half turning back on positive, and then steam generators, just a minor growth, and others flat. I think it's good to remember that even though we are in a rather steady business, this still has a bit of cycles, and the first quarter and the last quarter traditionally strong, second quarter a bit softer, and third quarter due to the summer weather in Central Europe and partially in the U.S. is lower in demand. I think we've been doing a good job on our strategy, offering our equipment and services into all three different sauna types.
The typical Finnish-Scandinavian sauna type where we have the heater and benches, and we've been upgrading our offering on the equipment as well as on the total package of the sauna in that respect. The same we've done with the spa market. We will supply the steam generators, illumination, fragrance pumps, and all of that for the steam rooms. On the other hand, on the infrared, I think we could do still a better job, and our journey on the infrared, we need to boost that a bit. We've been very good in supplying the infrared panels, but as the total set for the infrared saunas, we still have lesson to be done on that respect. I think on the three steps, increasing value of the average purchase, we are on a good inroads into that.
We still need to do a bit more on the Sentio by Harvia, where we are upgrading our price points and also for the professional market, and on the super professional, where we are selling up to 36 kilowatt heaters. We've been doing a good job. Then on the premium consumer market, where we are selling heaters and componentry above EUR 1,000 per piece, that's still something we need to work, and we have some plans to boost that. Geographical expansion, we've been doing good in the U.S. Scandinavia, we'll continue doing that in Central Europe. China, we've now opened the first pilot store. We'll open two more pilot stores in that region. In Russia, we need to continue the regional expansion, which now has been stopped due to the pricing situation over there. For the latter half, we put effort on that.
On top of the geographical expansion, it's equally important that we improve our visibility in the in-store, especially in the professional area, and we've been trying to upgrade our best partners throughout the European marketplace that the Harvia offering on the heaters and components is displayed so that the top premium innovative products are visible for all of the consumers. I think we've done the, I would say, first step of the three-step program on that rep. We still have three more to go on that area. On the productivity improvement, what we invested on the China plant in the equipment and capabilities is now in place and working. In the Muurame, for the warehouse and shipping and picking, working. In the U.S., the streamlining is now up and running. In that respect, seems to be doing a good, solid job over there.
Unless you would have any questions for me at this stage, I will let Ari dive deeper into the financials. So Ari, welcome.
Yeah, thank you. These financials have already been distributed, and you know the growth of the revenues and relative profitability. The adjusted operating profit was EUR 2.8 million for Q2 and cumulative EUR 6.8 million, so we are 20% over the level and speed of last year with adjusted operating profit. The relative profitability is improving there. What is also positive is the cash flow. We've been able to improve our cash flow during the H1 in both quarters, in the first and the second quarter, even if traditionally Harvia Group makes the best cash flow during the second half of the year.
As what happened also last year, end of June, we had operative cash flow of EUR 2.3 million, and end of the year, we had EUR 10 million. This pattern, we have been now able to improve also in the beginning of the year. The investments, the biggest investments we have had are actually the Rennick factory in West Virginia, and then some machinery and improvements on our China factory. Our production facilities in Finland, they are really in a good shape and currently no need for bigger investments there. Net debt has, sorry, I'm looking for the beamer. Net debt has increased compared to last year, but EUR 2.7 million is actually based on the IFRS 16 changes. We apply the IFRS 16 for leases from the beginning of this year, and it added the net debt level that much. The leverage has also improved.
We have less debt compared to our EBIT level here. Networking capital, there have been some changes in different units. Actually, we have been raising the inventory levels in our U.S. unit quite much in the beginning of the year. The warehouse was really quite empty, but now after the acquisition, we have a very good service level there, and we've been able, on the other hand, to reduce the inventory levels in some other units. As traditionally, the level of profitability and return on capital is very good in Harvia. The increase in personal headcount is seasonally related, more like the replacements for the summer holidays and so forth, but not really new staff for new functions. Here we once more see the net debt development, and really EUR 2.7 million is IFRS 16 related.
We also paid EUR 3.4 million dividends out in the beginning of Q2. The interest level of the group has declined substantially, and our interests are quite steady. We have made certain swaps there for the future. This shows also that the quarterly investments, they increased during Q2, mainly due to the Rennick factory and facilities there. The structure of the shareholders in Harvia Group, it hasn't changed so much since the end of Q1, but the only major change is that we get all the time more households and small shareholders, new shareholders to the ownership. After the IPO in March 2018, we had about 2,000 new shareholders, and now end of June, it was over 4,000 plus. The foreign investors who are behind the nominee register, and we don't know the count of those shareholders so exactly.
Anyhow, the share of the foreign and outside Finland investors is actually over 50%. The share of Capman Funds, 12.3%, and here you see the others. The share of households owning Harvia shares is increasing, and we are really delighted for that. It's nice to see that people want to own this traditional Finnish sauna and heater company. The dividend policy, you remember, we pay over 60% of the net result twice a year altogether, and we are targeting increasing dividend payout. At the end of April, middle of April, we paid already EUR 0.18 per share out, and now our board has the authority to decide up to EUR 0.19 per share dividends to be paid out at the end of October. They have the final decision given by annual general meeting, but we are expecting that dividend for the fall.
Here once more, the financial targets, they haven't been changed. We are targeting annual revenue growth over 5%. Now we are above it and adjusted operating profit over 20% and a certain quite wide range of the leverage. This is, by the way, one reference object near Kuopio in Central Finland. The heaters in this bar, they are from Harvia. Any questions?
Hi, it's Petri Kajaani from Inderes. You had a really good Q1 in Finland, and you mentioned you did some price hikes in the early part of the year. Did these price hikes now have some impact on your partly weak Q2 numbers in Finland or in sauna heater sales in general?
Not really, on my understanding.
We did for the wood burning heaters and some of the other equipment, we do campaign pre-sales ahead of the season, and we were extremely successful on the campaign pre-sales. Now during the summer, the inventories have been in a way digested away, and now we are back to normal on the inventories. I think in that respect, we did a good job of occupying the floor space in the retail stores and at least being on the forefront of the consumer on that respect. This typically happens in Q1, end of Q1.
Okay, the revenue decline in Finland in Q2 was part of the strong comparable period and very strong Q1.
Yeah, and actually heater sales did not decline.
If I remember correctly, heater sales on the Q2 did not decline, but Finland did not grow up to 5% because some of you may remember we elected to do some of the project work last year, and this year we did not do projects like a couple of the big hotels in Helsinki and the area, so we elected not to do those.
Thanks.
Ari has a question in the front.
Yes, Ari from Danske. A couple of questions on the U.S. first. Could you be a little bit more precise about the inventory buildup or the working capital like increases in the U.S. operation now that you have acquired more like logistics and warehousing there? The working capital was stable, group level, but how much roughly did the U.S. inventories grow?
Ari may remember the exact number.
The exact number is EUR 1 million from the beginning of this year.
When we acquired the company, it was financially challenged, and basically they were out of inventory on basically every component what is needed to make sauna as well as on the ready-made goods. We have been now beefing it up to normal level. It really pays out in the U.S. to be quick in service.
Okay, could you maybe bring a little bit more color to the profitability dynamics of the acquired company, what you expect? We saw a big increase in the sauna room sales, but the margin was still pretty good and improving. Could you describe how you see the profitability going forward?
We started from a slightly negative company when we acquired it. On the first quarter, we were able to make it basically break even.
After second quarter, we've been continuing to improve. I think when we acquired, we announced it's not going to be a 20% EBIT generator, but can deliver double digits. We are slightly ahead of halfway of the target in that respect.
Okay, if I just jump back to Europe and Central Europe, Germany, second half is seasonally better usually there. Q2 was pretty good in Germany. How do you see the starting point and how do you expect the second half to play out in the Central European markets?
I think currently as we speak now, we are in the holiday season, but when we go forward on the month of September and onward, should be going back to normal sauna season. I think we are in a good place in the starting blocks before the season starts.
There was no inventory buildup like boosting the second quarter?
Not to my knowledge. Our distributors in Central Europe, they do not keep as much inventories as, for instance, here in Finland.
Okay, and then if you could just open up the window a little bit into next year, could you describe the highlights, what you expect to focus next year, maybe the new product launches, do you see big marketing campaigns, and what about the acquisition side? If you were to decide, what would you like to buy?
There are a couple of, if starting first on the next year, I think we will maybe a bit of a boring answer, but we will keep on doing the three steps on the strategy. And on the increasing the value of the average purchase, we will introduce a couple of items supporting that.
Not only that, I think we will become more holistic. I would like to sell not only the heaters, but the other componentry. Now we learned how to sell a certain type of sauna, so we will play a role on the sauna segment, but not to compete with our core customers. We will only complement our customers' offering in that respect. On the productivity, we will do investments. Most likely next year, we will not buy any real estate, so we will be improving the productivity and that type of things in Finland, in Romania, and maybe in the U.S. China, I think now we are in a good shape on that. On the geographical expansion, we will continue focusing on the same areas we have been focusing today. I think we will not open any new market.
On the acquisition front, we are very interested to look forward for opportunities on that area. I think it's evident that if something becomes available on areas where we are not super strong, i.e., for example, in professional steam, if on the heater and componentry business, one of our peers would become for sale, we would definitely consider that. If there's a special company on the sauna and spa area, we would also consider that, but not to compete with our customers. Having said all of that, if the opportunity comes, it has to be also good for the pricing. I think we benchmark what we are willing to pay. If terms and conditions are on that front, then we are good to go.
You don't see any cyclical clouds in the horizon?
I think I would expect someone to ask about the building industry, but most of our business is replacing industry. As we are not dealing so much with the local construction companies and helping them to build the basic saunas, we do not see a big impact on that area. The same applies for Scandinavia as well as Germany.
I have been quite a long time in this business also in the past, and I have to say that when, for instance, the consumer confidence is going down, people spend more time cocooning at home, and they make small fixes and repairs at home. That is also really our market when they fix and repair their old sauna.
Okay, thanks. Thank you.
Mika. Mika Arpinen, Handelsbanken. Could you elaborate a bit more on the Almost Heaven Saunas sales contribution in H1?
What's the sales mix in the North American operations? Snowly Knoll, sauna rooms are nowadays a big part, but rough split if possible.
If I would remember out of my head. I think with the heater and component business, with our existing traditional customers, we've been able to grow together with them. In that front, we've been doing a steady job on these Almost Heaven Saunas, if I would just remember how much. Almost Heaven Saunas is very much concentrated on sauna sales, barrel and element sauna sales, and probably about 15% of the total sales are equipment and accessories. On the direct sales from Almost Heaven Saunas, we've been extremely successful and hitting the targets over there. On the other channels, dealer channels, yes, close to targets.
On the two large customers, one of them we exited in the beginning of the year, and now we came back, I think, in the month of April. That is now becoming into play as well. Actually, the U.S. business has a wider customer base than what it had during the last year. For instance, we have found new customer segments and new sales for the company, and that is reducing the risk of bigger customers. What we have been doing on top of the Almost Heaven Saunas traditional offering, we have also been introducing some of our Finland-made more premium saunas and a bit of the Romanian-made entry-level saunas into the offering. We have a European offering. Once again, not competing with our U.S. customers in that respect. They are complementing the offering. In North America, there are a lot of opportunities.
It is winter business, so we are now heading the main season very soon. Any other questions or comments? Maria.
Yeah, one more question, Maria Steffensen from Danske Bank. Now when your geographical sales split becomes more versatile, do you think your organizational, the ERP system that you have is strong enough to actually follow the trends in the different markets? Because of course, the complexity increases when you expand outside Finland. Is that something that you are happy with and you think that you actually have the business in your hands, or do you think you would need further investments in the IT?
The ERP systems are partly decentralized. We have acquired certain companies during the couple of years. They have still their own system compared to Finland, but we have very centralized reporting of the sales on the group level and also the financial reporting.
Material management, local sales systems, they are local. On the group level, we follow very tightly the financials with centralized systems. Of course, there could be in the future some requests or wishes to have a centralized ERP, but we do not see that need to come very soon. I think on top of the ERP system, we have been able to develop supportive sales monitoring setups, which are basically visible for our sales guys globally in that respect. I think those are becoming very helpful when it is in the business. For the operations, we have the same set of KPIs to monitor globally. For the financials, Ari and Katarina have developed a good set how to make it work.
Then one follow-up that, because now it becomes evident that for a lot of the consumer companies, data is the key and how you actually, like when you have the client in your own hand, I mean when you get the data and of course you have the distributors, but how much actual client data you have so you can have a feeling that if the consumer sentiment changes or the consumer willingness, what kind of products they want. How do you see that currently you are in terms of the customer data and how much you get it?
Excellent question. I think to the point on the development, most of the markets, we do not have direct consumer data available on a timely manner. U.S. being the place where we have direct consumer data becoming available.
We know to whom we are shipping, what we've been shipping. I think based on that, we have data which we can use also going forward. For most of the markets, what we may have is when people register their equipment when they have purchased it. We can follow only the ones who've been registered. I think going forward, that's something we need to clearly develop. I think on our home ground and close by home ground, that's doable. For Central Europe, for the time being, we have not developed any mechanism how to obtain relevant data, but we'll need to dive deeper on that. Excellent question.
Petri Kajaani from Inderes. Some of the consumer goods companies have been saying lately that the consolidation of the big box retail has been challenging for their own price hikes and have been pressuring their margins.
Have you seen any of this, any implications of this in your business?
I think we are not immune to that. I think we feel exactly the same. I think our category by upgrading and changing the portfolio and the offering, we've been able to maneuver in a very healthy manner together with our customers. We try to collaborate with our retailers in that front. Thanks. If no more questions, I would like to thank you for the attention and wish you a very good day and coming weekend. Thank you.
Thank you.