Ladies and gentlemen, welcome to Harvia's January to June 2023 results webcast. My name is Matias Järnefelt. I am the CEO of Harvia. I've been in this role since 1st of June this year. With me, I have Ari Vesterinen, our Chief Financial Officer. Hello. Next, I will be covering the key results and events during that reporting time.
After that, Ari will be sharing more light on the financials, and after the presentation, we will be happy to take your questions. You have a chat box underneath the screen that you're seeing in the webcast, and you can submit your questions via that link. I will summarize our results as follows: solid profitability, strong cash flow, but declining in sale. Our Q2 overall revenue decreased by 22.3%.
This was driven largely by sales decline in Europe and also due to our complete exit from the Russian market. The situation in key markets stays mixed. Europe is a very important market area for us, since around two-thirds of our sales are generated in Europe. In Europe, high inflation, increasing interest rates, and low consumer confidence, in particular in German-speaking Central Europe, what we call the DACH region, continued.
We also saw weakness in other parts of Europe. We saw good development in the overseas markets. Most notably, North America's market continued its strong growth trajectory, fueled by stronger economy overall than in Europe, good job market, and in particular, because of increasing awareness and interest towards saunas and sauna's health benefits. We also saw good development in number of Asian markets as well.
While sales declined, we were able to maintain a healthy level of profitability. Our Q2 adjusted operating profit was solid at 22.3%. This is very close to the level during the previous quarter, 1Q this year, but higher than compared to the comparison period a year before. We executed multiple actions across wide fronts to support our margin.
We worked on our pricing, we worked on our, on our cost structure, and we also optimized our operations to adjust well to the demand in market environment. We also saw some easing of cost pressure in certain key material classes, such as wood materials in North American markets. However, this was not covering all of the material classes, and in particular, for example, in electronics, we did not see similar development. Strong cash flow continued.
This was supported by both active work on optimizing our net working capital, but also due to moderate incremental investments during the reporting period. It is clear that for us as a company, key priority is to drive growth and turn the company back to growth trajectory. We are doing this by maintaining our full focus on our strategic cornerstones of geographic expansion, increasing the average purchase value, and also driving productivity, as always.
We are stepping up our systematic efforts to drive further growth beyond Europe, most notably to take advantage of the growing US market and also many opportunities we see in Japan. In the longer term, we see that the market is healthy and has strong growth drivers for the many years to come. Increasing awareness of sauna and its health benefits and interest is seen growing across the world.
Some more details about Quarter Two in particular. Revenue decreased to EUR 35.8 million from EUR 46 million compared to the last year. organic revenue growth was -17.8%. The difference to the reported revenue and organic revenue comes mainly from divestment of Russia EOS unit that was part of our exit plan when we exited the Russian markets. adjusted operating profit was at EUR 8.0 million compared to EUR 8.8 million last year. This is a decline of around 9%, and our operating profit margin was 22.3%, up from 19.1% year before.
Earnings per share were EUR 0.28 per share, operating free cash flow was strong, significant growth from last year's EUR 2.1 million to this year's EUR 9.1 million during the Quarter Two. Net debt was EUR 45.8 million, leverage 1.2. I would remind you of our long-term target range for leverage, which is 1.5-2.5, so we remained under that span. Equity ratio was 46.3%. The numbers for first half reflect closely the numbers during Quarter Two. Revenue decreased by around 20% to EUR 77.2 million, organic revenue growth was -17% versus the reported decline of 20%.
adjusted operating profit was at EUR 17.3 million, making up around 22% of our revenue. Earnings per share for first half this year was EUR 0.62. operating free cash flow, again, strong for the full first half of the year, EUR 20.8 million. Of course, these numbers required a lot of hard work, and Harvia team has been fully focused on systematic execution of our strategy, strategic cornerstones.
To increase the value of average purchase, we have been driving our sauna room business. This is very important for two reasons. There is significant consumer demand to buy total solutions and not having a need to worry about the individual components of sauna, but having a ready-made solution, ready to enjoy sauna.
On the other hand, sauna rooms provides an opportunity for Harvia to tap into a, a kind of bigger market potential than selling components or equipment individually. Here we are seeing significant development, in particular in North American markets. We are also investing in innovation and introducing new products, and bringing good, new, exciting reasons for consumers to buy, buy and invest in better sauna experience.
As an example, in our high-end brand, we, we launched EOS Structure, which is what I would call even an, a piece of art, bold design statement for the high-end of our heater range. Another example is that, we, we launched a product called Harvia Spirit some time ago. We have been selling that in, in European market.
It is a design-driven product, it's Wi-Fi-enabled product, and we are now bringing it to overseas markets, and most notably North America in the near future. Our activities to grow in the emerging market is also supporting this strategic imperative. The reason is that typically, the lead customers in new markets tend to invest in higher-end products than we see in the more mature markets.
We also continue our systematic work to strengthen our geographical footprint. We talked already about North Americas. There's also significant activities that we, we are executing in a number of other markets. Most notable example is, is Japan, where we are setting up a joint venture. We announced this intention during the Q1 this year, and the work to set up the new joint venture is going according to the plan.
The company will be called Harvia Japan Limited. We expect that to be fully functional by the end of this year. We are not waiting for this to happen. We are working closely with our local partner in Japan. Currently, we have already around 19 showrooms in Japan. We expect this number to roughly double by the end of the year.
We are also investing in ensuring that we have a good, attractive product range available in the new sauna markets. One of the key activities here is we ensure certifications and approvals that we need for market entry. Productivity improvement is also a key part of our strategy. As I mentioned before, we've been systematically working on our pricing, cost base, capacity, and net working capital. Again, this is hard work and has also required some hard decisions.
I would like to thank the whole Harvia team for your strong commitment, determination, and professionalism to make Harvia a stronger company. We have made investments to support further efficiencies and productivity, in particular, to automate further our production, and also to support energy efficiency of our facilities. I will be going through a little bit more detail, the revenue development through the reporting period.
Here, first, let's have a look of the revenue split by market area. A key notable development compared to the situation a year ago is that North America used to be our third-largest reported sales region. Now, it's our number one region, with 29% share of our revenues during Q2. Europe continues to play an important role, which delivers roughly two-thirds, to be exact, 64% of our sales currently.
Compared to last year, we don't see Russia here. Russia contributed to around 6% of our, of our revenues during this time, and we have exited the market completely. When we look at the product groups, there's not major changes. Heating equipment now includes, as we previously announced, sauna heaters, control units, and also infrared components, and that is just a little bit over half of our sales. Sauna room business has grown its share slightly. This is mainly driven by strong performance in North American market. First half figures closely mirror the Q2, Q2 numbers.
North America also for the 6 months, starting from January, finishing to June, has been our biggest geographical market, which of course, great development, because we want to expand our footprint beyond our home markets in the Nordics and in Europe. Revenue by product group stayed very much the same as during last year. Let's look at the revenue development across the market regions. First of all, we can see that we have red there quite a lot, except North America. North America was the only reported sales region that has been growing during the quarter two. It grew by 15%. It has been supported by both strong sales in equipment sales and also sauna room sales.
Europe declined, again, the most hard-hit area has been Germany, but we are also seeing weakness elsewhere. When we look at the other countries, significant impact of that decline is coming from Russia. Around EUR 2.6 million of that EUR 3.4 million decline is coming from Russia. Additionally, there are certain implications from our project business, in particular in Middle East, Africa region.
Looking at the 6 months of the year, again, the picture is rather similar. In terms of Q2, the rate of decline in Germany slightly decreased, while in the other European markets, we saw a slight increase in the decline, decline rate. North America performed on a very stable level during the whole first half of the year.
Again, in other countries, a significant part of that decline is from Russia. Out of EUR 6.1 million, EUR 4.9 million is coming from the Russian impact. Looking at the product groups, heating equipment and saunas and Scandinavian hot tubs are our biggest product categories, as shown before.
Heating equipment declined by 24% in value. However, at the same time, North America grew. Saunas and Scandinavian hot tubs decreased by 17%, however, North America and Asia grew here. When we look at the spare parts and services, there's the biggest percentage decline. This is heavily impacted by the exit from Russia, because there we had proportionate part of business coming from spare parts and services. Looking at the first half, the picture looks again, pretty much the same.
Heating equipment and saunas are declining by 19.5% both, Spare parts being the hardest hit area. The one area that I could pick up here is heater stones, which actually grew during this period of time. Let's look at the revenue and adjusted operating profit development over time. I would like to draw your attention to first the revenue development.
Essentially, historical context is that the peak period for Harvia so far started in Q2 2021 and ended in Q2 2022. During that time, the quarterly revenue was EUR 46 million or higher. Essentially, we still have a high comparison base for our Q2 revenue figures for this year.
When we go then towards quarter three this year, then the comparison base from last year is declining quite significantly. In terms of adjusted operating profit, the situation is slightly different, as our peak period ended in quarter one, 2022, and there was already a decline in quarter two last year.
The comparison base for us now in this quarter is slightly, I would say, less demanding than in terms of sales. This also is visible in the fact that with EUR 8.0 million delivered, that essentially is a 9% decline from last year. It is very clear that for Harvia, key imperative is to turn the company back to growth.
Part of it is that we want to be global leader in the categories where we play. We want to be the global sauna and spa player. This means that we want to lead across the different sauna types, in particular, the traditional Scandinavian or Nordic sauna, infrared sauna, and steam sauna, and we want to lead across all cultures.
When I'm looking at the current situation, our stronghold is the Nordic saunas. There, we see plenty of growth opportunities to grow with the market, drive market growth, and also there's many opportunities to increase regionally our market share. There's a significant growth opportunity in steam and infrared saunas, where, looking at it from global perspective, we are still a relatively small player. To further support our profitable growth ambitions, we keep driving our strategic key imperatives.
We increase the average purchase value, we innovate in new sauna solutions, we innovate with new products, we provide compelling reasons for consumers to invest in better sauna experience. We also are very determined to drive further our geographical expansion. North American market is an example of a currently growing market, but we see a lot of potential in many other markets as well, and we are well positioned to capitalize on the market growth worldwide.
Harvia's one of the strongholds has been productivity, and we continue to invest in making sure that we stay competitive and react to the prevailing market conditions. Now, I've been in this role for a couple of months now, and I think Harvia is in a really exciting position. First, Harvia is playing in a market which has attractive, good, fundamental, long-term growth drivers.
Second, Harvia is leading player in this market, and we have solid financials, and we have ability to invest. Third, despite being market leader, we see also a lot of opportunities for growth, we see opportunities to strengthen our product portfolio and assortment, and we see opportunities to further develop our way of working. With this, there is a great platform for us to take Harvia forward. Now, I would like to hand over to Ari Vesterinen, who will cover the finances in more detail.
Yeah. Thank you. Yeah, traditionally, the sales pattern between the quarters has been so in this sauna category that Q1 and Q4 are the with the highest sales. Typically, Q2 and Q3, they are more like summer, summer quarters.
They have lower, lower net sales. It looks that so that now after the a couple of very special years, we are coming back to that pattern, and that's also one, one reason for the revenue decline. Of course, it's also the low consumer confidence and other reasons we have already told earlier.
What we have been able to do, despite of this, this sales decline, we have been able to improve our relative profitability quite substantially actually, during Q2. Last year, we had the adjusted operating profit of 19% of the net sales, now 22.3%.
The Harvia is in a very good shape profit-wise. The basic earnings per share declined, and if to understand that, one has to go through our profit and loss statement and there is quite visible that now we are paying again some costs for the financing.
Last year, we actually booked profit from our interest swap contracts and so forth, but now we are back to, so to say, normal interest costs due to the changing on the interest market and so forth. That reduced our earnings per share compared to last year. The operating free cash flow has been really strong.
The investments, more like investments in the automation and replacements, improving certain functions. Net debt lower than a year ago, leverage in a good low level, and net working capital has been reduced clearly compared to last year or even compared to end of 2022. We also reduced during Q2 a few employees also still in the group.
Here we can see, how the operating free cash flow and cash conversion have changed. I have to say that Q3 2022, Q4 2022, and Q1 2023, they have been very exceptional times since the cash conversion has been over 100% of the EBIT during these times.
That's not the normal level. It has been exceptionally a high level since after the very special couple, couple of COVID years, we have been reducing our net working capital, and we have not needed as much investments as in the past.
Harvia has always been a very strong cash generator, but we are now more close to the, let's say, normal levels, where we used to be, 80%-90% of the EBIT as converted to cash. On the left picture, we see that actually the net debt stayed on the exactly same level end of Q2 compared to Q1, since we didn't increase.
Normally, we do it during the net working capital during Q2. We had sufficient inventories and all the other components there. We are now under the level of 2022 Q2 net debt level. In between, during that one year, we actually acquired the EOS minority with EUR 19 million.
We paid over EUR 11 million dividends, still we are under the same level as where we started a year ago. This really shows that how strong a cash generator Harvia is, and we have been able to accomplish that everything during that one year.
On the right side of this slide, we can see that now we are again on the, let's say, on the cost side of net financials. Last year, we booked over EUR 3 million income from the swap contracts, since the interest rates were increasing and the fair valuation, IFRS valuation of the contracts was also increasing. Now we are very well covered against the increases of the interest rates.
About half of our bank debt is, is covered with, with quite low interest rates. We are having quite normal situation again with, with the interests. We are having interest costs again. Here we see the fluctuation of the investments during the last 12 months, 15 months. We have had quite low investment levels, bearing in mind that in 2021, we invested almost EUR 12 million, enhancing our production capacity in many places.
Now we have plenty of good capacity at our disposal. We are just making useful automatization and improvement investments in our facilities nowadays. Here we see the structure of Harvia shareholders. The share of the international non-Finnish investors has increased again compared to last year.
A year ago, 40.8% of the shares in international hands, now 43% in total. The Finnish households, they are keeping almost one third of the Harvia shares, 31%. We have, of course, the funds, corporations, banks, and so forth, slightly over one quarter. The number of shareholders was at the end of June, almost 44,000.
It has declined a little, but I remember the times when we listed the company in spring 2018, we had about 2,500 shareholders. It really looks so that Harvia has turned to be a share for everybody in Finland.
Thank you for the club members to be our shareholders also now and in future. Board of directors, management, and personnel, they are also committed to own Harvia shares and follow very closely these numbers.
We have a certain built-in corporate culture to really make profits, and a lot of people are really keen on showing good profits. Our long-term financial targets haven't changed. Our growth target is to exceed 5% annual revenue growth and the adjusted EBIT to exceed 20%. During the hard times, we've been really able to prove that we are able to exceed the 20%.
Now, we had 2 quarters in row, 22+, and of course, there is always a risk that 1 quarter might be slightly under that, but we are really profit-oriented company. The leverage targets are between 1.5-2.5. Now, we are on 1.2, so we have there plenty of room to maneuver financially, if needed.
Harvia's dividend policy is still the same. We pay regularly increasing dividends 2 times a year. The annual general meeting in April approved EUR 0.64 per share to be paid this year. The first installment was paid in the beginning of May, EUR 0.32, and the second installment will be paid in the latter half of October.
Now it's time to answer and place questions. We have here a few questions already on the list, and I will read them. Currently, we don't have a telcon line since it hasn't been used so much in the past, we will start here with these chat questions. You will certainly, Matias, answer more of the business things, and if there are some financing or accounting or similar questions, I will answer them.
Could you please shed some light how you see the demand from North America to develop in coming quarters? North America is not suffering the same consumer themes like Europe, but had experienced similar pandemic boom in sauna demand.
Of course, kind of the future quarters are, you know, to be seen. However, I've been in close contact with our North American sales team, and they feel confident, and the messages I'm getting from the demand and the sustainability of the demand in the market is very solid. In particular, they quoted, for example, that awareness and interest, as I mentioned, is going through the r- roof there.
To me, that's... is a strong signal that the team, sales team is confident that kind of strength of the market is to continue. I think it's a combination, of course, of two things: one, what will happen in the individual market, and it's also dependent on how Harvia will be utilizing the market opportunities. Markets, we will see.
Long-term growth drivers are certainly there, and at the same time, we are fully focused on positioning Harvia to be able to capitalize on all market opportunities as, as, as good as possible.
Okay. What will be the impacts of declining new-built housing volumes in Finland to Harvia's heater demand in Finland?
Essentially, traditionally, Harvia's business has been more driven by replacement sales, so essentially, new equipment to existing sauna, sauna rooms. As such, there is not exactly direct link to the new-build activity that, of course, in many markets, in particular in Europe, we are seeing essentially a slowdown.
There is, for sure, certain impact, but majority, as said, in our traditional markets in Europe, is replacement. There is a larger share of new sauna sales when we go beyond the European continent. So for example, in North America and Japan, of course, there is a bigger share of, of, of new, new saunas. However, there, as I commented, the market seems to be solid.
Do you see the sales decline in Q2 versus Q1 mostly as seasonal, or do you see the underlying demand having weakened from H2 last year or Q3? Still see Q3 being seasonally the slowest quarter, seasonally weaker in sales, versus Q2?
As Ari mentioned in his, his speech, essentially before the pandemic, the typical seasonality within the year was that quarter one and quarter four were the stronger ones, and then quarter two and quarter three, which we would call the summer quarters, were slightly, slightly lower. We are essentially seeing some signs that we might be returning to that, I would say, traditional seasonality.
Putting quarter two and first half performance this year into context of, of, of the last year, of course, as it has been discussed in the previous results calls, Harvia got a lot of support during the pandemic. People were locked within the four walls. There was certainly a boom in terms of home improvement investments, and we did benefit from that.
Essentially then, during, during last year, there was unfortunate events, very sad events, like Russia's attack on Ukraine, higher inflation, et cetera. Easing of the pandemic that had, on part, pushed, people's interest in home improvement. I think over the last, 12 to 15 months, there's certainly been also, we'll say, reduction of inventory in the channels. There was a very natural development.
During the pandemic times, our channel partners and dealer network saw high sell-out, so they wanted to have a good inventory to be able to respond to the market need that they, they saw. At the same time, they also saw long lead times because the industry was ramping up, and there were supply shortages of certain critical components, like, electronics. Naturally, the channel was building up inventory.
What we have been seeing then over the last 12 months or so is, on the other hand, sell-out has been more moderate and due to reasons explained. Supply shortages are much less, and our lead times to respond to sales request is much faster. That, of course, reduces the need in the channel to have a, a sizable inventory.
Also, due to the increase in interest rates, the cost of carrying inventory is also more expensive. What we have been seeing is that, you know, throughout the channel, there has been more focus on optimizing the inventory levels, and this has a role to play in particular, when we compare the figures from quarter 2 last year to quarter 2 this year.
Sauna360 was acquired by U.S. company, Masco. Do you expect this to change the competitive landscape, as Sauna360 is owned by a company with the wider distribution network?
Of course, we are closely following the developments in the marketplace. We certainly have taken a note of, of this acquisition as well. I would say, to put it in the larger context, I think it's a positive sign for the sauna and spa market. It's an evidence that large companies are interested in this growth market, and that's a good thing.
Of course, we are keeping a close eye on what Masco will do with the acquired company once the acquisition is closed, and they get full control of the entity. Meanwhile, we are fully focused on our own strategy to make sure that our game is the strongest possible. As mentioned, we heavily invest in the US market, which is also the stronghold of Sauna360 and kind of the home market of Masco.
We feel that we have a strong game there, but of course, at the same time, we are looking at further opportunities to sharpen our strategy and sharpen our commercial execution in that region.
Your margin, material margin, was very high in Q2. Do you see that, that as a sustainable level, which I presume mostly depends on, are you able to maintain your prices even if, raw material costs are coming down?
Of course, you know, we can speculate about the future materials and components prices, but let's see. What we can do is we can be as professional as possible in our sourcing and procurement. Also leveraging the group-wide volumes to our maximal benefit to make sure that we get competitive prices, good lead times, and good terms and conditions from our suppliers.
At the same time, on the commercial end, we, what we do is we optimize our pricing strategy to make sure that we get a fair price and fair, essentially fair, fair return on the, on the, on the good products that we sell. Of course, it's also partly a balancing factor between growth ambitions and also driving gross margin.
We are very diligent on this, and we base our decisions on, on the solid analysis, where we balance these two factors.
Growth of 15% in North America, is this reflective of the underlying market growth, or are you growing faster than the market? If so, what is driving this outperformance versus the market?
In terms of the market share, we talk about market shares on a global level, and essentially, in particular, what's interesting for us is what happens over a number of quarters. When I'm looking at the longer-term development of Harvia, of course, it's very, very solid, and Harvia has emerged as, you know, leader of the market. We have also benefit from our strong performance in North American market. Of course, the market has been solid in America, and players that have had, relatively speaking, a large footprint there traditionally have also enjoyed. We don't comment kind of one single quarter.
We feel that, essentially, during this quarter, there has not been marked changes in the relative positions of the key players in the market. Also, this is the same in Northern American market.
I could probably answer the next one. Could you please provide some more color on the strong margin development? How is the margin profile in North America compared to Europe, for instance? We haven't disclosed traditionally, the margins of the different markets, but we have been, let's say, generally, saying that the gross margins are higher in the export, and the further you go from Finland, the higher, higher they are in practice. Then it comes to the cost of doing business there. We have a very, very effective business model in US, big distributors and online sales, so we have healthy margins there. We, we really don't disclose the margins market by market.
Your comments on the Asian markets are quite positive, but sales development continue to be weak, even excluding Russian sales. What is happening on the Asian markets?
Essentially, the figures that you saw there reflect or decline reflects really two things. One is Russia, which is by far the majority of that decline in so-called other markets, market region for us. Another one is kind of billing of project business, mainly from Middle East and Africa. It's not really reflective of our performance in the kind of Asia market more widely. Of course, still Asia for us is not so big, but we have high ambitions and essentially the comments I'm making is based on of course, the figures that I see internally. There's, you know, solid development in Japan, solid development in Australia, and we see significant potential there for the future, yes.
Okay. Well, one other question about gross margins, we have discussed it already. Are you happy with the growth achieved in, in the US? If the demand really is solid, there couldn't, couldn't you increase your marketing spend there to speed up the growth?
Mm-hmm. Maybe it's not kind of the... The, the wording happy or not happy is not the right one. I think we are pleased and very thankful for the performance of our sales region, North America, and during the time when we see, you know, softness in many of the other parts of our regions, this performance, of course, stands out.
At the same time, we need to put this in the context of the market dynamics. As you correctly pointed out, there is a strong dynamics in the US market. We are fully determined to maximize the chances, and hopefully we can keep pushing high growth rates there also in the coming years.
We are certainly, you know, you know, challenging ourselves, what is it that we could do more in terms of, you know, different sales channels, building our strength there, building strength across more widely in the product portfolio that sells in North America. As an example, infrared and steam businesses are quite significant there, and there we still are rather a small player, as mentioned before.
Okay, we don't have any, any other questions on the list right now, so...
Okay. Thank you everyone for following this webcast. I wish you have a great day, and see you next time. Thank you very much.
Thank you.