Welcome to the Harvia H1 Results Call. Throughout the call, all participants will be in listen-only mode, and afterwards there'll be a question-and-answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Tapio Pajuharju. Please begin your meeting.
Hello, and welcome on board. This is Tapio Pajuharju, and next to me we have our CFO, Ari Vesterinen. Hello. I think today we'll go through briefly the results for the January-June period, and at the same token, we'll have a bit of a deeper look on the second quarter performance. We also have the opportunity to review our strategy in brief, and then we'll have a deep dive by Ari into the financials. I think this is going to be the program for today. Going on to page three, I'm very happy to announce that we had a very solid and stable performance for the first half, and I think on the top line, the top line was gradually increasing and had a very healthy growth on the quarter two on top line.
On the profitability, on the actual numbers, we were able to improve by EUR 200,000, and on the relative terms, we took a small dip, and that's mainly due to the headwind on the timber costs or wood costs on the sauna market, as well as on the projects where we were installing some of the sauna projects by external people. The price increases on the wood were coming into the picture, and our adjustments were coming in with a delay. Other than that, everything was according to the plan. On the cash flow, altogether improvement on that one, and as we all know, thanks to the IPO, our equity ratio is clearly better and stronger, and the same applies that we have a clearly less debt onboarding in the company.
On the next page, we have a bit more view on quarter two as such, and as said, the top line was gradually increasing, and we had a very healthy growth of 6.3% on the top line, and that's according to all of the main market. I think later on we learned that, okay, on the Russian market, we had a headwind on the wood-burning heaters on the local market, and then when we come into the control units or control panels, we have two issues. One is what we announced already when we were doing the IPO, that we discontinued two German customers on the market, and that's maybe 80% control panels.
The second thing is Russia-related, and the entry-level control panels, which will be shipped to Russia, will be closer to the starting season in the autumn, and that is a transition between the periods. Altogether, healthy profitability improvement, and on the cash flow, altogether we saw an increase, but when you see quarter two as a standalone, there was a big deviation compared to prior year because there was the shift between quarter one and quarter two and some of the other debts, and Ari will share some of the more detailed news on this one. Next page, which is page five, is a bit of a recap of what we are doing, and I think we can report that we have been doing most of the markets according to the plan, with the exception of Russia, and the headwind on the timber prices.
Sweden, very happy to announce that now our shop-in-shop upgrades are fully available and fully visible, and the first insights into the numbers is there, and we are very happy with the achievement together with our partners on that market. Later on, when we see the numbers by markets, we will learn that, okay, Central Europe is performing well, the EU is performing well, Germany as a standalone looks a bit funny, but when you eliminate the discontinued private label business, we are slightly on a positive note also on the German market. What we are doing, we will continue doing what we've been planning. There will be no new hocus pocus on the things. We will gradually increase the average purchase of our customers, both on the professional market as well as on the consumer market, and we have the means of doing that.
On the geographical expansion, I think we'd like to also add its geographical expansion, but at the same time, we are improving the quality of the distribution, both on the retail markets as well as on the B2B markets. We continue steady on improving the productivity, and that's productivity in the operations as well as in the logistics and in some of the core processes of the company. On page six, we see the actual numbers, and as said, enjoyed a very healthy growth on Finland and the EU countries.
Had a bit of a drawback on the Russian market where the local competition, especially on the wood-burning heaters, have started an extra effort on the distribution and is doing some of the consignment stocks on the regions, and we were not able to build our physical distribution on the wood-burning as fast as we would like to do it. As discussed, we had a very nice increase on the sauna sales, steam generator, steam room sales, but had a bit of a headwind on the control units and control panels, as discussed, due to the private label and the Russian seasonality in that respect. On the profitability, did a very good job on that one with the notion of the wood prices and the incremental cost of installing some of the sauna projects.
Next page, I think we have a rather similar split of the markets as before, very stable with the note on the Russian and the control panels. I think those are the only not-so-good news at this moment. On the other hand, now we know how to address the control panels and some of that is seasonality, and the Russian market, we seem to have a very good grip on the coming months over there. On the product split, I think the heater business is doing very steady, electric and wood-burning on the neighboring markets and domestic market good. Russia, as discussed, a bit of a tumbling on the local competition, and the delay of our Russian special new models, which are now delivered but were not delivered in the first half of this year.
I think later on we can entertain questions or comments on these market splits and on the sales by product group if you have further questions on this one. On the next page, roughly the same picture continues when we have a deeper look on the quarter two and no major things over here. I think I would leave it for questions if there is something on that. The next page is more of a reminder that we've been working on the Scandinavian sauna. We have the capabilities on the steam, and we've been doing a very good job on the steam generators as well as on the steam saunas and steam rooms on that respect.
Lately, when we've been able to introduce the hybrid sauna, which is combined with the Scandinavian heater style together with the infrared radiators, at least reception we have had on the markets and on the PR has been very good. On the domestic market, where we had a housing fair in Pori, we were giving in a way a sneak peek into the new trends on the sauna. We introduced the hybrid sauna and got a very good visibility, and then we also tested it close to home on the Finnish track and field sporting event where they share the Finnish championships. We had a test sauna for the sports people and the spectators and got an excellent feedback on the Sentio by Harvia offering on that respect.
The Sentio by Harvia offering, both on the premium heaters as well as on the premium equipment, will be available in the second half of this year. I think just to recap on what we do, and that is increasing the share of the wallet. On top of selling the heater, we intend to sell a premium heater together with the optional equipment of safety railing, control panels, and then gradually selling everything that is needed either on a privately owned sauna or a professional sauna, steam room, or infrared sauna. Geographical expansion will focus on Central Europe, then Scandinavia, where we have good inroads of improving the situation, as well as on the Russian regional distribution.
Having said that, now we also realize that even though we are very strong on the Moscow and Saint Petersburg with the electric heaters, with the wood-burning heaters, we also need to beef up our physical distribution in Moscow and Saint Petersburg with the wood-burning heaters. On the productivity improvement and versatility of the operational units, we've been doing a good job both on the productivity of the operations as well as on the logistics. We will have a short update on the China factory and its capabilities later on.
A couple of concrete examples of what we've been doing on the adding value and increasing purchase is that the novelties we've been launching have been doing good, and they are taking example of the three what's also visualized on the page, on the wall-mounted heaters where we've been introducing the new design of the heater called the Wall, which is both a user-friendly incremental consumer benefits with the illuminated knobs, and the easiness of operating together with the fast installation for the people who are installing it. We are commanding close to EUR 300 or EUR 300 and above on the heater, whereas a normal average wall-mounted heater is retailing between EUR 170-EUR 225.
On the pillar-style heaters where we've been doing an excellent job and dominating the market with the Cilindro, we launched a slightly taller, more design-oriented heater called the Glow, and now it's going to be followed with the E model together with the control unit, and soon available also a corner model for the very tight places where you don't have a lot of space for the sauna, so we'll have more ammunition on this front.
On the steam, where we've been doing an excellent job on the consumer steam market, we are launching one which is still directed for the consumer market but has all the benefits and all the equipment that is usually only seen in the professional quality of the steam generators, i.e., it has a clearly larger water tank which is enabling a large steam generation together with a titanium-based heating element which is basically guaranteeing that it's almost service-free and very easy for the people to use and maintain.
On top of that, on the spa area, even though it's not so visible on the numbers because it's in a way partly hidden on the product group, which is called other product groups, spare parts and services, done a good job on the steam rooms and spa modules together with the infrared componentry, and that's where we have a very healthy, nice growth, and that's all in a way incremental and additional value for the business going forward. There is more to come on the innovations. Next page is on the geographical expansion, but as said, it's not only expansion on the geography, it's also in a way improvement of the distribution, the visibility, and the, I would say, consumer experience on the retail market, as well as more guidance for the professional people on the B2B channel.
Good examples in the Central European marketplace, but I think the best and closest to home is the improvement on the Swedish market where we now are very happy to say that on the six shops which are operated by our partners, we have an excellent shopping shop built-in, and that's where you can basically explore and learn what is the newest trends on the Scandinavian sauna, but also what is available on the steam sauna as well as on the infrared and hybrid sauna. The ones which are latest on board is on Mölndal, close to Gothenburg, and then we have Täby and four other in the central part of Sweden available. Russia, even though the numbers show a slight decrease on the top line, the distribution on the regional arena has been improved, and we have a steady follow-up on the plans on the regional distribution.
Operational improvement, we'll be very happy to see what is happening on the Muuramäe plant on the operations, and the logistics investment we put in place on the first quarter is now up and running. We still need to do a bit of a fine-tuning on the setup of the automatic system on that. On the China factory, where we've been traditionally doing entry-level wall-mounted heaters, now we have the capability of two different advanced models on the pillar heaters. One is the Glow heater, and the other one is an addition of the Cilindro heater for the European markets. On top of that, we have the entry-level consumer-directed steam generators, and now we have the premium HGD model available also from the China factory, so we have clearly more versatility and opportunity for utilizing the China factory going forward.
I think I've shared most of my news and information on this stage. We'll come back when you have questions, and I would like to pass the word to Ari to dive a deeper on the financials. Ari, please.
Yeah, okay, thank you. When we look at page 15, there are actually the financial key figures, and as Tapio already told, we had a quite positive development in the net sales, but I would like to highlight a couple of other things there. The adjusted EBITDA level compared to the net sales, it stayed on the same good level what we had in Q1, and this is good news for this little more peaceful quarter. The adjusted operating profit, the percentage of the net sales went slightly down due to increased depreciations because of a couple of projects which we finished in our investment pipeline.
Operating free cash flow is now, for the quarter, clearly lower than a year ago, but please notice when you compare the 2017 figures that Harvia makes typically its very positive free cash flow during the second half of the year, and that's typical for the seasonality of the business. In this case, we had a bit higher increase of networking capital during Q2 compared to last year. There were also some so-called other debts in this networking capital calculation related to the IPO still which we paid at the end of Q2, and it changed also the figure a little. These are the highlights, and yeah, the return of capital employed for the time is very good, and the equity raise, thanks to the IPO, increased very much. Let's change then to page 16.
There we can see how the repayment of the shareholder loans and the restructuring of the bank loans significantly reduced the group's indebtedness. It means also that the net financing costs went down very much, so we had the net financing costs in Q2 roughly EUR 0.3 million. In Q1, we had, let's say, one-time restructuring cost for bank loans and interest rate swaps, but now we do not have those peaks anymore, so now the financing costs of the group is substantially on the lower level. Page 17, here we can see the level of the investments in tangible and intangible assets, and as we had in Q1, a bit higher than the normal level of the investments. Now we are back on the normal in Q2.
We invested in some machinery which is improving our productivity in production, and the investment level needed for the company is actually quite low on the long run, and we stay on that statement still. On page 18, you see the 10 biggest shareholders, the funds managed by CapMan Private Equity. They own about 25% still, and the rest of the biggest shareholders you can see there. You can review also the biggest shareholders, up to 100 biggest, on our web page. We are also happy to say that the Harvia family is still a substantial owner of the company, and we added it just altogether, their shareholding is about 7.5% of the total shares. On page 19, you can see the structure of our shareholding, and we have a quite high share of nominee-registered or outside Finland shareholders.
For this fact, we are happy; we have a very balanced shareholder structure in our group. CapMan have the 25%, banks, insurance companies, 16%, private corporations, and households, the rest. On page 20, we just remind you about our dividend policy, which was decided already in the beginning of the year, that the company aims to pay dividends twice a year, at least 60% of the net income, and there is already an authorization of the shareholders for payout of maximum EUR 3.5 million, and the board of directors intends to decide that dividend payment later in this autumn. On page 21, our financial targets, annual revenue growth rates, 5% at least on average annually, adjusted operating profit margin of 20% of the total net sales, and then quite flexible leverage ratio from 1.5-2.5. Now we landed at 2.4 at the end of Q2.
We don't give short-term guidance for the company, but as you can see, this is a very steady and resilient business, and our figures are quite stable, and we have a stable, nice growth. If you have any questions, please feel free to ask.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypad now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. Once again, that's zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Mika Karppinen of Handelsbanken. Please go ahead, your line is open.
Hi, this is Mika from Handelsbanken.
These wood costs have been increasing, so have you already carried out sales price hikes to cover those increased costs?
We have adjusted prices, but the prices we were now facing are in the way deals we've been doing earlier, actually some of them even on the year before, maybe not year before, but now much before. Now going forward, we've been adjusting prices, and not only on the wood but also other materials.
Is this the sort of increase in which we have seen again fluctuation in the currency markets? Do you have some additional needs to carry out further hikes?
On the markets like Russia, we've been having a very systematic follow-up on the currencies, and now when it's been going up and down, initially we've been adjusting our prices.
Lately, we adjusted, and then the currency came back, so we gave a small discount for the people to offset the recovery of the Russian ruble, but now the discount has been taken off as the ruble reduced value as of last week, Thursday.
Concerning this Sentio by Harvia, do you expect any sort of meaningful volumes to be delivered already this year, or how do you see the sort of ramp-up of these deliveries?
We do it in a gradual way, and the first launch is in Finland, and then on the neighboring markets. For the individual market, they are significant volumes for the premium segment, but as for the total Harvia, they are not significant in the totality of Harvia. For the premium market, yes, they are significant.
Okay.
Still concerning these price hikes, have you seen that some of your competitors would have carried out similar price hikes, or is there sort of whole industry discipline in carrying out hikes?
There are different ways of addressing the prices, but I think what we've been seeing and monitoring, and I think we cannot say that we have all the data available, but based on the information and insight on the industry, we are well on the picture, but we are not in a way clearly above the average. We are slightly above, and I think slightly higher than the industry average, but then the Central European market is usually only adjusting prices once a year. For the Central European marketplace, like competitor like EOS, we don't have the latest number, and that's why we only have an estimate and guesstimate on that.
Okay.
Okay, thank you very much, Tapio Pajuharju.
Thank you. I'll now hand back for the questions submitted via the web.
All right, the first question is from Mr. Ari Järvinen at Danske Bank. Do you expect termination of private label deals to have a negative impact on control unit sales also in H2? If so, could the impact be as big as in Q2, down by 19% year-on-year? Now, I don't remember the seasonality of the private label deal in detail, but I think we now take the most part of that in, and at the end of the day, the impact is mainly on top line only, so they were marginally profitable, if any. The next question: housing permits in Finland have declined in recent quarters. How would you assess risks related to expected decline in housing starts in Finland?
I think we've been monitoring the very same data, and as understood also on the media, like this week, it's been a hot topic. On the other hand, when they were going up, we didn't see a big increase in the demand, so I think it will be a similar situation with the reverse effect, so we don't see any major issue on that one. On the equipment, the componentary part of the business, like heaters, I think it's good to remind that 80% of the business is replacement, and in Finland, the share is maybe even slightly above the 80%. Okay, and still from Ari Järvinen: in Q1 report, you estimated that 2018 interest will be about EUR 2.5 million lower than in 2017. Is this statement still valid?
We haven't calculated it so exactly, but it's somewhere between 2.1-2.5, depending on the networking capital needs and so forth. All right, and the next question from Petri Kajaani at Inderes: how is the integration of Sentiotec acquisition progressing in terms of production efficiency, cross-selling opportunity, etc.? Have you already seen any synergies in increasing top line and/or profitability? It's a very good and accurate question because as of yesterday, we just had a review on the synergies. On the cross-selling and top line, yes, we do see the Central European impact quite well and according to the plan. In the heater and componentary market, yes, we do see some of the benefits on the profitability and on the volumes. When it comes to the accessories and the wood saunas and the entry-level saunas, they are not fully in as of today.
All right, and finally from Petri Kajaani: could you give some more color on the weak revenue levels in Germany and Russia in H1 2018? Was this only a temporary issue, or how do these markets look going forward? I think both markets stay healthy and seem to have a good demand. On the Russian market, I think the one issue, which is not so visible but it's actual, is the currency issue, and the other issue is then we have three distributors, and when growing, they seem to have not all of them very strong balance sheets, and we've been also having one leg on the gas, the other one on the brakes, not to increase the liabilities and risk on that area. I think the market as such is healthy and will go forward.
On the Central European market and Germany especially, I think we will see a solid journey on the German market. In Germany and in Central Europe, the sauna business is typical and autumn and winter business, and it usually grows very fast from the beginning of September and so forth. Now we have set up a closer relationship and good cooperation of the distribution of the Harvia products through the Central European operations, so I personally expect that this helps the Central European business quite much to be closer to the customers and to serve also smaller and more profitable customers. Two things which maybe are not so factual, but still when we talk with our customers and our partners and our sales guys, it's very visible, but it's hard to measure what is the actual impact and outcome.
Both countries, Germany and Russia, had a very nice hot summer in both May and June, and unfortunately both are very football-oriented. Luckily, Germany did not go to the final, so people were back on the normal business, but I think Russia got slightly impacted on the hot weather as well as on the football fanaticism over there, and that impacted the, but I think not only our part of the business, but quite many businesses on that market.
There are no more questions in the web. I think thank you for our part and our side, and I will come back to the topics later on. Thank you. All the best. Thanks.