Hello and welcome to the Harvia Q1 results. Throughout the call, all participants will be in listen-only mode, and afterwards there will 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 go ahead with your meeting.
Welcome on board. This is Tapio Pajuharju, and next to me I have our CFO, Ari Vesterinen.
Hello.
We plan to run through briefly the first quarter numbers, both on the top line and on the financials. We will have a brief look on the Harvia strategy plan and the pillars for the profitable growth. We will have a bit of a deeper dive on the financials. Thereafter, we will have a good opportunity for questions after that. Also during the presentation, please, you are welcome to present questions when you feel so. I think all in all, very happy to announce the first quarter results. We were benchmarked against a record high top line sales in the Harvia history, and we barely beat it, but had a good go on that one.
Also on the profitability, we had a very solid, consistent result and delivered a strong bottom line, EUR 3.2 million, and on the relative terms, close to the 20% benchmark, just 19.5%, and a slight improvement compared to prior year. On the cash flow, also a favorable trend, partially due to the delayed wood burning heater season, where we've been granting long payment terms for some of the customers, but partly based on the working capital as such. Thanks to the IPO and the share issue, our balance sheet is clearly stronger, and a very solid equity ratio now is up to 53%. Also net debt decreased very nicely, and we are now at EUR 29.8 million. Jumping on the markets, a bit of a reflection on the demand and competition on the markets. Overall, on the EU countries, very stable and solid development.
I think also highlighting Germany, where we basically taken over one of our long-term distribution partners, Marno, and transferred the setup into our Sentiotec Rega Logistics. We bought the inventory and both the customer base and started supplying over there. At the same token, we also discontinued two of less profitable private label operations in Germany. When accounting these three impacts, we are clearly on positive numbers. Even though Germany, as a standalone numbers, looks negative, it is actually slightly positive on that respect. Scandinavia, solid development, especially Sweden and Norway. Asia-Pacific in general, no major movements on any of the markets or no big new markets, mainly gradual, good work on the markets. CIS markets developing very nicely, and the same we can say about the Arab countries and the related countries that respect.
Finland and Russia, both were partially hit by the delayed wood burning heater season. The ones who have not been enjoying the harsh winter in Finland and Russia, I can tell that it really was a cold winter, and that was part of the reason why the season is starting later. The other thing is that one of the Finnish customers has changed their purchasing pattern. They used to make a fairly large pre-purchase for the season. For the coming season, they made a decision not to make any pre-purchase, but they buy gradually, and throughout the years, the numbers will catch up and most likely will be exceeded in that respect. I think one of the extraordinary things as a company we were experiencing was the IPO. I'm very happy that we did a good job, and we get a very good, solid international ownership base.
I am equally happy that we get a large number of our colleagues participating in the IPO, and now we have good, solid ownership within the Finnish organization as well as in the Austrian team. I think thanks to the refinancing and the stronger balance sheet, we are clearly even stronger to go forward and pursue our mission to become the leading sauna and spa company in the market. Jumping on the graphics, as you can see, the top line development was good. I think when seeing it as a comparison to the prior year quarter one, we feel it is actually stronger than it looks on the graphics.
We had an ever all-time high number on the prior year, and then on top of that, we were bit hurt by the delayed wood burning season, and then we got a bit of a headwind from the currencies. In constant currencies, the number is actually slightly better, about 2% up compared to what we see over here. The same applies for the bottom line. The prior year quarter one was rock solid, a very good performance, and then on this year, we were even slightly better. As a team, we are very happy for what we delivered on the bottom line as well. We are getting very close to our target, 20%, so we are now 19.5 in that respect on relative terms.
On the markets, I think no major development on the markets. Taking Finland first, I think when seeing how we've been performing on the electric heaters, saunas, and the componentry is very good. The wood burning, we are clearly behind, and that's becoming visible on the total number as well. Hence, we are booking a small minus on the domestic market. Overall, the market is solid, and we keep on performing better than the market in that respect. Other EU countries, very solid, nice growth on that area. As I said, German market, even though as an individual market, it may look it was not up to the par or on plus overall when eliminating the two private label customers. The Marno thing, we are slightly on plus and in a good way going forward.
Other countries, I think the Sweden and Norway will dive deeper into details on that one. Then when having a look on the sales by product category, sauna as such, we've been doing a very good job both on the individual saunas and some of the projects, control units, very solid job. I think the one which is orange pie on this chart is the spare parts services and other, which is a bit, I would say, complicated headline for the category because it's also including infrared componentry and also including the services we supply as a Sauna Max and then the spare parts. Overall, the infrared did a very good job and sauna max as well. Hence, we have a nice solid number on that area as well.
Maybe a bit of a reminder that Harvia, even though we are an original Finnish sauna company, we do operate in all three different sauna types. We have the Scandinavian sauna type with the heater and the benches. We also have a slightly expanding offering on the infrared. We also do a comprehensive supply on the steam rooms. We supply the steam generator, the control units, illumination, and the wall and ceiling components. What we do not do is the final waterproofing and the tiling, that is done by a construction company or by a partner. We have a comprehensive offering on the sauna and spa in that respect.
Maybe also for some of you, this is very familiar, but I thought we'll use the opportunity to, in a way, reflect it once again on our journey to become the leader in the sauna and spa market. We basically have three pillars for profitable growth. One is adding the average purchase and selling to our existing customers, both on the consumer market, but even more so on the professional market. On the geographical expansion, we are looking both for the expansion of the distribution platform and also the quality of the distribution in that respect. We also are targeting some new markets, but not actually too many. We'll do a gradual improvement on that area. The last leg is the productivity improvement, which basically is on the operations, i.e., manufacturing and logistics, as well as on the sourcing.
Those are basically the three pillars for the profitable growth. Maybe reflecting a bit deeper in the first one, which is the average purchase. That is where we can see that our sales of the control units, safety railings, and sauna interior has been doing a good job. Basically, as we've been known as a heater company, our intention is to not only sell the heater, but on top of that, sell a premium heater and then sell the adjacent componentry to the heater, i.e., the safety railing, the illumination, control units, and the embedding flange. A typical illustration of a successful deal is on the right-hand side visual, which is actually our brand new Glow heater, which has an excellent visual impact as a standalone. When you install the illuminated embedding flange, you get a very, very nice feeling for the sauna.
On top of that, the functionality is excellent. It is one of the new ones coming out of the gates. In the Scandinavian market, we have been addressing the market. Some of you may remember that we realized about a year ago that our offering for the Scandinavian market was a bit too Finnish. We have been swedifying and updating the model offering. Basically, did not develop anything new, but picked up different models for the Swedish market to be closer to the competition, i.e., the number one on the market. We have been installing the new offering into roughly half of the stores where we are visible on the Swedish market. On top of that, we have also been installing the first shop-in-shops in the greater Stockholm area in Täby, Uppsala, and the place close to Gothenburg.
We will do three more throughout the year on that area. On the new product pipeline, on top of the Glow heater, we also ramped up a modern version for the wall-mounted heater called the Wall. That has got a very good reception on the market. It is a simplistic Scandinavian style heater, which is very easy to install. The installation will take seven to nine minutes for an advanced installer, whereas a normal electrical heater you may install in 20 35 minutes. For the ones who are doing it day in, day out in a professional service, that is a good value added. The other one additional benefit on that one is that you have the control is illuminated, and you only have the thermostat to be adjusted once before you start using the sauna. Thereafter, you can operate very conveniently.
That's a good addition to Harvia offering. I think that also follows the journey on increasing the purchase price. A normal wall-mounted heater may be retailing at, say, EUR 150-EUR 200. This is starting at EUR 269-EUR 289 and going upwards. Adding value in that respect. On the geographical expansion, we are proceeding according to the plan. We have no major new countries included, but we've been expanding distribution platform in the European, especially Central Europe. As said earlier, we acquired the operations of our long-term partner in Germany and transferred the operation into our Austrian Rega Logistics Center and both the customer base of Marno. In Russia, some of you may remember that we have a leading position in the electric heaters, but we are maybe number five, number six on the wood burning heaters.
We realized that we are lacking some of the regional distribution in the Russian cities outside of Saint Petersburg and Moscow, where we have good distribution. We have been gradually now entertaining the markets. We have been establishing a shop-in-a-shop type of a setup in Yekaterinburg, in Ufa, in Kazan, and in Nizhny Novgorod. That is four places. The point of sales are not equally fancy and good looking as they are in Sweden, but in Russian terms, they are good enough to do the job on the Russian market. We continue progressing on that front. With the Sentiotec, the integration has proceeded according to plan. I think the cultures are getting matched. At the same token, we are seeing the first insights of the benefits of the integration.
We have the gross selling in selected markets and some of the synergies coming out of the sourcing as well. On the operational platform, all of the plants are doing a good job. Muurame and Guangzhou, very good. In Muurame, we just finalized our largest investment of this year. We relocated a sauna factory, built a modern logistics center into that. Now we have the benefits of the logistics center, which are also supporting the efficient and timely assembly on the production floor. In the Guangzhou factory, we've been on top of the very good lean operations. We've been expanding our portfolio over there. We've been introducing a new second-generation steam generator with improved functionality on the steam generation as well as on the long lasting of the professional equipment. It is coming with a titanium-based heating element.
Then on top of that, on the heater models where we used to be doing only the entry-level wall-mounted heaters for the mainly building industry and some of the CIS markets, we've now been introducing a more premium heaters, pillar type. There is also a very nice-looking corner model coming up on the portfolio. Thereafter, I may pass to Ari. Ari, you may dive deeper into the numbers and financials of Harvia's first quarter, please.
Okay, thank you. The key figures for the first quarter in 2018, in the financial perspective, they were dominated quite much with the IPO we had during March. Despite that, we had also very good operative business during Q1. We exceeded our record high net sales of Q1 in 2017, even if the Easter holiday started already at the end of Q1 this year.
Last year, they were in the middle of April, so in Q2. We were able to keep up our good profitability. As you may remember, it's typical for Harvia that it has quite high EBITDA level. Our adjusted EBITDA level was 22.5%, increased slightly compared to last year. The adjusted operating profit improved also slightly to 19.5%. Our financial target in the long run is there to reach 20%. We've been on that level for many years. Now, after some investments in distribution and marketing, we are now slightly under the 20% level. As you see, we are increasing it again, for instance, compared to 2017 as a whole. Our operating free cash flow improved clearly compared to last year. This operating cash flow means adjusted EBITDA plus minus the changes in net working capital minus the investments.
We paid extra attention on the net working capital management during Q1 and also did not give or were obligated not to give so much financing, trade financing for the campaigns, which did not start yet during the end of Q1. We had rather high investments compared to our normal annual level. We had typically EUR 1.2 million-EUR 1.5 million investments in tangible and intangible assets during the last years. Now we had already during Q1, EUR 0.6 million. I have to say that is not the normal level over the whole year. It is just Q1. We had the highest and the biggest investments in our Finnish operations in improving the operational efficiency of our logistics in the production. That was the biggest part of the investments.
The annual level will remain in the EUR 1.2 million-EUR 1.5 million range.
Yeah, that is right. That is right.
Thanks to the share issue, our net debt went down very heavily. End of last year, we had EUR 73 million net debt, now under EUR 30 million. Thus, the leverage is now also clearly under the level we have had in the past, now 2.4. As you may remember, it is typical for Harvia to have very high adjusted return of capital. Now we had it again over 30%. Thanks to the share issue, the equity ratio also improved quite much compared to last year. The next page, please. Here are some, let's say, key findings of the finances, so to say. The biggest changes we have had during Q1 compared to the past: the net debt went down and leverage as well. This helps us now and in future to reduce the normal financing costs. We paid out shareholder loans.
Our estimate is that for this year, 2018, along that decrease, our financing costs are about EUR 2.5 million. We had some extraordinary financing costs in Q1 because of the restructuring costs of the bank loans. We changed bank and agreed new interest swap notations and so forth. This EUR 0.8 million is one time only in connection of the restructuring of the financing of the total balance sheet. Next, please. On page 15, we can see now the increased level of investments. The biggest, as I mentioned earlier, biggest investments were to improve the operational efficiency in our operations in Finland. We also invested in some point of sales, furnitures and marketing and machinery and equipment. This level will go down now again in future. Our estimate is, as we said, between EUR 1.2 million-EUR 1.5 million for the whole year.
Okay, on page 16, you see the 10 largest shareholders we had end of the quarter. Actually, the nominee registered shareholders are not on that list. When we change on page 17, there we see better the distribution of Harvia shareholders by segment. With the IPO end of March, we got actually quite much shareholders outside of Finland. They are now on that part of 34% nominee registered and outside Finland shareholders. CapMan Funds, they still keep a quarter of the shares. We have plenty of banks, insurance companies, private corporations as shareholders here in Finland, as well as households. What was also nice to notice is that about 20% of our employees invested also or have invested in the company shares. Our employees are also interested in the financial success of the company. We have parallel interest, so to say, with other shareholders.
Yes. Just to remind on page 18, what is our dividend policy for the future? We are aiming to pay at least 60% of the net income in total and increasing amount of money annually, two times a year. This is now the first year to pay out. This is the special year. We will pay only once in this year in fall, around EUR 3.5 million. That has been already accepted by the annual general meeting. The board of directors can then decide, make the final decision in autumn to pay out that dividend. In the coming years, we will pay twice a year. Also to remind a little our financial targets and outlook on page 19. Our financial target is really to grow about 5% on average annually.
An international management consulting company has made a study and figured out that the market is currently international sauna market growing annually about 5%. We want to exceed or keep at least that pace in our growth. What is also typical for Harvia is the high level of profitability. Our target is really to keep the adjusted operating profit margin of 20%. We have been on that level for many years as Harvia. Now, during the last year or year and a half, we have been investing a little more on growth. Now it's improving again. The leverage ratio gives us flexibility to finance smaller acquisitions also out of our normal cash flow. The leverage ratio target is between 1.5-2.5. We don't publish a short-term outlook. We don't give guidance for this year in general.
As you may already have noticed, this is a very resilient, very stable business. We are looking forward to the future very positively. I think one may say that we had a very strong first quarter, but we have no intention to readjust our financial targets. They are mid and long-term targets, and they are valid. Now I think it would be a good time to entertain some questions or comments. Please.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause while questions are being registered. We've received the first question. It comes from Mika Karppinen of Handelsbanken. Please go ahead. Your line is now open.
Hi, this is Mika from Handelsbanken.
A couple of questions. Could you comment on the launch of new premium brand Sentiotec by Harvia? What's the situation with that one? Concerning currencies, many currencies have been weakened, for example, Russian ruble and Swedish krona. You are exporting to many of those countries. Have you carried out some price hikes in those countries to mitigate the negative impact on your profitability?
If maybe first addressing the currency question, the main currencies for us are basically U.S. dollar, Russian ruble, and Swedish krona. On the Russian ruble, we took a price increase of roughly 10% in the middle of April. For the other currencies, we have not taken any major measures as we speak. On the constant currencies, the first quarter was roughly 2% up. We have been having impact on both Russian ruble and the US dollar in the first quarter.
When it comes to the Sentiotec by Harvia, which is the premium range of the Harvia for the sauna and spa, the catalog is currently being prepared and getting ready. It will be presented before summer. The actual shipments will convene actually at the, say, back-to-school period when this sauna season is restarting in Central Europe and also on the Finnish market.
Okay, good. Thank you.
Thank you. At the moment, there are no further questions. As a reminder, if you would like to ask a question, please press 01 on your telephone keypad. We've received a follow-up question. Please go ahead. The line is now open.
Yeah, still Mika from Handelsbanken. Still continuing on that outlook. You don't publish any guidance for this year. Even though the sort of the business should be very resilient, do you have some or why so?
Why not publishing any outlook for this year?
I think that's been a decision by our board of directors and analyzed by them. We stick to that. If we do agree that it's a 15 million sauna installations and sauna bays, the replacement part of the business is very resilient. On top of that, we have good plans to proceed on the markets. We have a favorable outlook on the year as such, but cannot give out any specific number or target on the outlook.
Okay, okay. Still continuing on those sort of price hikes and related issues. Do you see some kind of cost inflation? Has it been worsening after the IPO? What's the situation there?
I think on the starting of the cost issues, I think we follow the plan of what we've been having prior to the IPO and during the IPO and after the IPO. On the key component for what we are sourcing for the sauna heaters, spas, and sauna business in general, the key raw materials tend to be rather stable. Some of the steel grades even may be slightly downward, but no major movements. The one which is volatile, but has been volatile in the past and will be volatile in the future, is the lumber prices and the timber prices, which we are using for the paneling and the benches of the saunas.
We have a fairly solid mechanism how to pass on or how to even adjust the offers before we give them out so that we know exactly what the price will be on the actual grade of the timber. Ari, would you like to add anything?
Yeah, yeah, yeah. That's true. One thing what is also good to remind that we use metal plates in Europe, in Finland. We have also a heater and steam generator factory in China. In China, in Asia, the market level of certain metals' price levels are lower actually than here in the E.U. area. We have also the possibility to switch a little the production place for certain product families according to the, well, the general efficiency of the price structure.
Okay, good. Thank you very much.
Thank you. There are no further questions at this time.
Please go ahead, speakers.
I think I would like to thank you for the attention. We remain available for further questions or comments over the phone. If needed, our phone numbers are available on the webp
age. Wish you a very good day. Thank you. Thank you very much.