Fiskars Oyj Abp (FSKRS) Earnings Call Transcript & Summary

Hello, and welcome to Fiskars Fiscal Group's Q2 2022 Results Webcast. My name is Essi Lipponen, I'm the Investor Relations Director. I'm here with our President and CEO, Nathalie Ahlstrom; and our CFO, Jussi Siitonen. As usual, we will first hear about the quarter highlights from Nathalie and Jussi. And after that, we have plenty of time for your questions. You can type in your questions in the chat during the presentation also after it. Without any further ado, Nathalie, please go ahead.

Thank you, Essi. And it's really a pleasure to be here today to talk about our first half and Q2. We're really happy to be here talking about it. Starting with the highlights of Q2. This was our ninth consecutive growth quarter. This shows that we are in a transformation, and we are delivering on the growth. Net sales in Q2 grew 7.7%. So we have a strong growth foundation in place. We also show that the growth we delivered is broad-based. We have a well-balanced portfolio. In Q1, we talked a lot about the bumpy road ahead of us. And yes, it was a bumpy road. We had cost inflation that is now partially mitigate -- shown also in the EBIT. And the actions that we put in place during Q2 are fully then going to show in second half. But it's been on period, and we weathered it and where we are happy is that then when you compare first half in totality versus last year's first half, we are at par. At the same time, despite the bumpy road and the environment we are living in, we are able to continue to invest in our growth fundamentals so that we can future-proof the company going forward and continue to execute our growth strategy. So we still have the firepower to continue to invest. And with that, we keep our outlook unchanged for the full year. It is a dynamic world, but we have a lot of things in our hands. And as said, we are company in transformation. And we have a broad base of growth pockets in the company. Looking at the net sales. Here, we really see that the growth came from all business areas. It came from the brands from regions and channels. And this makes the performance so solid because we have so many places where the broad-based growth comes from. Then resulting in this comparable 7.7% net sales growth in Q2 and for the first half, 10.6% growth. That, of course, is then translating into the profit and here, we can also see in the Q2 performance on profit that it's a volatile environment with a bumpy road. Despite this, all the BAs delivered profit improvement in Q2 and also despite the cold spring for Terra. As I said, for first half, we are at par with last year and we've been able to continue to invest significantly in our growth fundamentals into digital and direct-to-consumer. Also, our ability to show to be at par with the first half last year shows that the team is winning. Our team is winning. Our team is having great to weather this going forward. Then if we look at the growth strategy here, again, I want to say this growth strategy is the foundation of our transformation. This is also the one that keeps our focus. Focused on what are the true levers really to deliver and continue to win as we go forward. And when we then look at where are we in the transformation levers, how are we delivering against those in second half -- sorry, in Q2 and also in the first half, we see that we are delivering. And let me go through that. If we look at the commercial excellence, here, we see that it's a broad-based growth. It's coming from all the parts of the company. What we also especially proud of is that of this growth, the 7.7% growth that we performed in Q2, 50% of it is volume and 50% value. So it's healthy growth, healthy growth driving the company forward. Yes, we had the challenges with cost inflation. And therefore, we see with underlying gross margin decline in the operating performance. And Jussi will talk more about that also the impact of the cost inflation and the gross margin. Then direct-to-consumer. This is a transformation lever that's really delivering for us at the moment. And as I said, this is also where we have invested behind. So we see investments are paying itself back. E-comm growing 16%, owned retail globally 15%. So good growth in the channels that's in our own hands. In U.S., the growth was merely 4%. Anyway, we are proud of this 4% because we had a very exceptional spring, a cold spring for Terra and at the same time Vita, thanks to the very good gifting season with Waterford, Wedgwood in the U.S. was able to mitigate that and Crea with a broad-based growth also back to school. So again, a well-balanced portfolio when there's challenges with the cold weather in one place, the other places can help and support. And then China. China, despite the lockdowns, our local team continued to have the can-do attitude, have the winning mentality. And in totality for Q2 delivered a 17% growth in Q2. Then when we look at what's the run rate where was the business heading, when we look at June, for example, where the lockdowns were using, we already see 1.5x growth. So the business is bouncing back very fast along with the lockdowns. And I think this performance in U.S. and China is a good example of the well-balanced and broad-based growth that we are having in the company despite the many underlying consumer sentiments, we have such a broad portfolio so we can work on it as we go forward. Then looking at sustainability, one of the key enablers also for our strategy going forward, of course. On greenhouse gas emissions, we reduced in first half 7%, in totality since 2017, 44%. So we are advancing step-by-step on greenhouse gas emission. Then our commitment to reduce -- to use more recycled materials. Now in first half, it's 5%. Our products are used of recycled materials. And I think a good example of that is, of course, our pots and pans that are already today used to recycle steel, but where we further took a strategic step in our commitment to sustainability with the partnership with Outokumpu. Fiskars is first company globally using the new lowest emission steel from Outokumpu. The steel is minus 92% less emission compared to normal. So a true showcase of how big steps you can take through partnerships. And then outlook. As I said, our outlook is unchanged. We're committed that our comparable EBIT for the full year will be above last year's. And this is what we are working towards. And with that, I hand over to Jussi.

Thank you, Nathalie, and hello, everyone. Let's start first going through our Q2 financials and the big picture first where we are tracking with our financial targets. So our net sales, the target being this FX-neutral mid-single-digit growth year-on-year. And how we measure it now is the last 12-month basis. You can see that we were still strongish, double-digit growth there, 10.5% for the last 12 months. So we are well on track with our financial target on growth. Also on the balance sheet. What we have said about both balance sheet and cash flow is that, first and foremost, they are there to safeguard our organic growth. Net debt EBITDA, the target being maximum at 2.5, we are now 1.5 there. So we are still well below to maximum target what we have set for ourselves. Then on EBIT, still okay, it's level 11.9% for the last 12 months. However, the direction is wrong because we have committed to this 15% by 2025. And we have also said that this is a non hockey-stick approach and all the improvement coming in late of the glide path. So there, we still have work to do. Then on cash flow, no drama in that sense, we were negative of 8% there. When it comes to free cash flow. We have inventory growth, and I'll get back to that later in my presentation. A couple of callouts on Q2 and first half income statement. If you just -- let's start first with gross margin. If you just take a look on our reported gross margin you see improvement there 30 basis points in Q2 and 110 basis points in first half. However, this improvement, what you can see here is due to structural changes we made when we sold U.S. watering in the beginning of this year. If you take like-for-like gross margin, it was down 220 basis points in Q2 and 90 basis points in first half, respectively. And the reason for this drop, what we have in like-for-like gross margin is the cost inflation. So we haven't yet been able to fully mitigate. So both in first half and Q2 the gross cost inflation what we had on our gross profit was roughly 400 basis points. And as you can see, when we came out with a 220 basis point drop, we succeeded to mitigate a bit less than half of the cost inflation in Q2 and then 3 quarters in the first half. This exactly what Nathalie talked about down the road. So we continue driving up gross margin the actions what we have put in place start impacting positively in the second half. And then about those investment in fundamentals. So operational expenses were up EUR 14 million in Q2 and EUR 27 million in the first half. Both in Q2 and first half, if you take sales and marketing expenses, 2/3 of that increase is from investments, both in digital capabilities, what we have in marketing side as well as B2C capabilities, especially in e-comm. And then on general admin cost, half of that growth, what we had in Q2 and first half are driven by those investments in other digital capabilities but marketing. So you can see that the main drivers of our OpEx growth are coming from those investment fundamentals. Then when it comes to EBIT, the comparable EBIT was down EUR 5.1 million in Q2, and we were quite flattish on the first half. If we look at the bridge of our EBIT. So you can see that when we're carving out the impact of the U.S. [ weather event ], EUR 2.9 million we are slightly improving our like-for-like EBIT, but the growth of EBIT improvement is coming from volume growth. And then that partially offset by cost inflations, net of mitigations and then sales and marketing, as I said, B2C investment, 2/3 of that. And then this is our capabilities half of general admin growth. So we start second half at the same level with last year. Moving on to BAs. First Vita on top line. As said, strong high single-digit growth organically, 7.3%. Waterford, Royal Copenhagen, Wedgwood, Moomin all at high single-digit or double-digit growth. So they really boosted this e-commerce growth also. So the B2C -- both online and offline B2C continued growing nicely, now double digit in this specific quarter. Then Finland and Sweden, down as they were also in Q1. And when Iittala brand is 60% in Finland and Sweden, Iittala came down. On EBIT, on the right-hand side here, Vita succeeded to improve gross margin also when it comes to value there. So gross profit improvement is not only volumes what we had in Vita, but also margin improved. So that shows the power of portfolio. What we have in Vita there, we succeeded to mitigate inflation impact. Then we continued investments, mainly those B2C investments, what I referred. They are in Vita business and also these capabilities are big time on Vita segment. Then Terra, which is mostly exposed U.S.A. and when U.S.A. came down, of course, that has an impact on Terra. The positive side, however, is that also in Terra, we continued growing, and that growth came from Europe. So Terra Europe was a double-digit growth in Q2, and that's why the whole business was a mid-single-digit growth. In Terra, the like-for-like EBIT improved slightly and all improvement what we had there came from volume growth, which was then almost fully offset by gross margin decline. Crea, strong growth over 15% there in Q2, and the growth was very broad-based. Approximately 7% of Q2 net sales came from countries with declining top line. So you can see that growth came from very various sources. It was not only back to school, which was driving growth. But it also -- it came also from other segments there. We continued investing also in Crea. We have started B2C in Crea business and then also digital capabilities are now in Crea to boost our further growth in this business. That's about P&L side. Then regions, this is mainly a summary of what I just said. All the regions continued growing. Europe, a bit shy of 6% there. Americas 6.3%. And then Asia Pacific overperformed all the other regions, mainly driven by China and then also Japan. This shows that our portfolio, no matter whether it's countries, whether it's brands, whether it's categories, it's very broad-based. And then the ones which are going down are offset by the ones which are improving. Then on cash flow, no drama in that sense, but even though we are now minus EUR 73 million for the first half. You can see that the big negative came already in the Q1 there. The cash flow is very much now heavily weighted by inventory growth what we had. That was the biggest single driver of slightly negative cash flow also in Q2. We continue monitoring inventories when it comes to inventories in Vita and Crea. Those are now to be prepared for second-half deliveries. And then in Terra, especially Americas inventories are something we are very closely monitoring to make sure that we are up to speed with potential consumer sentiment changes there. We also continued share buybacks. We bought back shares worth of EUR 7 million in Q2, and we increased our cash level by EUR 30 million to EUR 74 million to be ready for any challenges and liquidity in the second half. On balance sheet, you can see the inventory growth here, what we had. But first and foremost, even though inventory growth, we continued improving our asset efficiency in terms of capital turnover. So capital turnover up to 1.4. However, when the last 12 months EBIT came down, our return on capital employed went down slightly to 16.6%. As I mentioned earlier, balance sheet continued being very strong. Our net debt to EBITDA is solid at 1.11 and net debt equity, 27%. With that back to you, Nathalie.

Thank you, Jussi. And then just to summarize where we stand after the second -- Q2 and the first half. This is our ninth consecutive growth quarter. We are very proud of this. This is sharing the winning spirit of our teams. At the same time, of course, we are not immune to the cost inflation, the dynamic world we are living in. And even though we were able to mitigate already now part of that, the actions we put in place are there to support the second half. What we are proud of is that our first half is at par with last year's first half. At the same time, we are able to continue to invest in the growth fundamentals to continue to execute our growth strategy and execute on the transformation levers. And with that, of course, we keep our outlook unchanged and continue to deliver as we go forward. Thank you.

Thank you, Nathalie, and Jussi, and we do have some questions already, but please continue to typing your questions if you have any. But first on Terra can comment on the sell-through of your products/inventory levels at retail, i.e., has also the end demand remains solid for your products?

When we look at Terra, it's 2 stories. As Jussi was mentioning, our growth in Europe was double digit. It was very strong, our growth in Europe. In U.S., we were more hit by the cold spring, the late arrival of the spring. So Europe going all well. And then in U.S., the weather challenging and also then leading now that the high inventories at the retailers. The sell-through data is, of course, weather dependent. But again, dependent if you look at Europe or U.S.

Another one on Crea. Is there any impact of timing of sales driving the sales growth?

Interesting question. Well, it's -- Crea is the business -- of our businesses that has least seasonalities. Back-to-school, of course, is one a bit, but no. Crea is a very solid business delivering every quarter.

Thank you. Then a question on the price increases. Can you be more specific on the price increases in H2? When do they come in which months? And will we have all cost inflation offset by end of 2022? Maybe Jussi, if you can take that?

Sure. The price increases what we have implemented, they are coming in Q3, 1st of August, 1st of September, no specific time there. But during Q3, we are expecting quite all the price increases in. Then when it comes to inflation coverage there, of course, you'll never know where the inflation is now heading to. But the plan what we have in place and where the guidance is based on is that those mitigation actions, we have now put in place price increases being the one start yielding positive impact now in the second half, and that's where the pace of the guidance.

Then there was also a question, would you like to dive deeper into the actions planned for offsetting the cost inflation in H2? Maybe other than pricing?

Yes, I can start. And then Nathalie, feel free to add. For sure, we continue growth in our own channels, B2C where the margin levels are better. And also, we can use that channel for our high inventories. So that's, of course, one, then there's continuous improvement. What we have in expert in our own production, they continue yielding back and very much then focusing on commercial excellence because that's the best tool that we currently have to drive gross margins up on top of the pricing. It's also how we look and feel in the stores and very basic commercial excellence things, which are then delivering results.

I would just add to what Jussi was saying, pricing is only one of the components in the commercial excellence toolbox that we are having. And we are using all the tools that we have in that box. So there're multiple things we are working on.

Thank you. Then a question about U.S. Can you tell us more what you see in the U.S. consumer landscape? Maybe this is for you, Nathalie? A good festive season but what else are you seeing in the U.S?

Thank you. Happy to answer that. As we are in so different categories, different brands with different brand positioning and also different consumer segments it's a place where we can really balance the portfolio. If I start with Vita, in Vita we are predominantly with Wedgwood and Waterford that the products of more higher added value -- higher value products, and that's a different kind of a consumer group who buys that kind of products. And the current challenges that we see may be more in the big consumer group. That's not the same kind of a consumer group. Then when we come to Crea with the back-to-school season that we have in Q3. Yes, consumer inflation sentiment is hitting in the U.S. At the same time, there are a few things that are always important for everybody, and the schooling of your children is very important. So the gifting and the high-end position of the brands of Vita and then the importance of schooling and the well-being of your children is supporting Vita and Crea as we go forward. And then with Terra, the season starts to be a bit over. So we are gearing up for next year.

And then regarding the demand in Finland and Sweden. Are there any signs of demand picking up now in the start of Q3?

When we look at Finland and Sweden, even there, the countries are quite different and the underlying drivers are different. Overall, I would say the consumer sentiment is maybe a bit weaker in Finland compared to Sweden. And in Sweden, one of the impacts we had also in Q2 was many of our big e-com retailers had quite big inventories at the start of the year. So also -- even though we are so close Finland and Sweden, even here, we see different drivers in the market. And again, that's a benefit for us because then we can offset in the different places.

Okay. And then maybe a question for Jussi. The adjusted EBIT margin declined. Is there anything in particular that we should keep in mind regarding the decline? Any changes to the SG&A going forward that we should consider?

Yes. The targeted P&L structure. How we have built this is very much gross margin and gross profit improvement driven. And of course, then all the OpEx savings that we will have a part of the OpEx leverage, why top line continue growing faster than the OpEx there, this is the main driver. We have no specific savings program in place. It's this kind of OpEx efficiency, what we are doing every day and then prioritizing those investments what we have in fundamentals. So we continue investing in B2C. We continue investing in digital. And at the same time, are very much scrutinizing this kind of non-value add spend there.

Yes. Actually, I think you already answered this question, but I will read it anyway. If meeting the 2022 EBIT guidance proves tough, will you cut your growth investments towards year-end to achieve the guidance?

As said, the way we have built the guidance, i.e., improving absolute EBIT, which was EUR 154 million last year. It's very much based on the facts that we have said, especially coming from commercial excellence, which are then improving gross profit and therefore, also absolute EBIT. We're also very mindful of monitoring the Op expense there, but we are not too much sacrificing our long-term targets with other.

Great. Then another one for Jussi. The working capital increased year-on-year, mainly driven by higher inventory level. Would you mind elaborating on that?

Yes, indeed. And there are -- it's a bit twofold when it comes to inventory peaks, what we had in Vita and Crea, I'm less worried about those. Those are now prepared for second-half deliveries, and we are expecting inventory levels going down in those 2 businesses. Also in Vita where we have some manufacturing where we might face some disruptions due to natural gas. We are now prepared for shipping even though we have these kind of disruptions there. Then one -- the one we are monitoring very closely is Terra, especially Terra U.S., how we are then delivering the existing inventories there. So as said, it's twofold, 2 businesses very much in the plans what we have had. And in Terra the focus is now to mitigate the inventory growth.

Thank you, Jussi. Then foreign exchange related question for Jussi, can you comment on the impact of stronger USD versus euro? And how long are your hedges currently?

Sure. so overall, less than 20% of our commercial flows are exposed to currency fluctuation. So you can see that we are quite well naturally hedged. On U.S.A., we are a net buyer of U.S. dollar worth of roughly EUR 30 million per year. We have hedged the U.S. dollar for June 2023. So we have 12 months hedge in place at level of 1.13. So you can see that we are well hedged also for this kind of power position of U.S. dollar.

Then maybe one for Nathalie. Can you specify your exposure to natural gas?

When we look at natural gas, the biggest places where we use natural as every day is in our glass manufacturing in Italy here in Finland and Rogaška in Slovenia. As Jussi was saying already, we have built up inventory for Vita, so that we are in a good place for the second half whatever happens in the energy part in Europe. So we have backup plans in place also for the rest of the operation.

Great. Then final one at this point and for Nathalie. What were the main surprises in the results? Was there something surprising?

No, no. We have a very clear growth strategy that keeps us focused. That keeps us focused on things that really matter as the transformation levers. And yes, it's a bumpy road. Yes, the world is unprecedented. But we have a clear focus, and we have a fantastic team focused on winning and having the grid. So no, no surprises.

Exactly. Thanks. It seems that there are no more questions at this point. So thank you for active participation. If there are any questions afterwards, just please contact me, and I'll be happy to help. Wishing you all a very nice day. Thank you.