Fiskars Oyj Abp (FSKRS) Earnings Call Transcript & Summary

Hello, and welcome to Fiskars Q3 2022 Results Webcast. My name is Essi Lipponen, I'm the Head of Investor Relations. As usual, I'm here with our President and CEO, Nathalie Ahlstrom; and our CFO, Jussi Siitonen. Nathalie and Jussi will first go through the Q3 highlights. And after that, we have plenty of time for your questions. You can type in your questions in the chat already during the presentation. Nathalie, please go ahead.

Thank you, Essi. And good morning, everybody from my side as well. It's really a pleasure to be here today to talk about the Q3. And first, some highlights. When we look at the Q3, our sales development was flat, but we are proud of that, because it was flat against the Q3 last year, which was an all-time high in the history of Fiskars Group. So in this turbulent environment, we are quite satisfied with that performance. Secondly, our multiple actions to mitigate the cost inflation are now paying off. So we were also able to maintain a flattish profitability EBIT in Q3. Thirdly, as we go forward, we continue to focus on our growth strategy, and this means that we continue to invest in our fundamentals in the direct-to-consumer and digital. This is so important to future proof of the company. And with all of that, we keep our full year outlook intact. That means that our comparable profit is going to increase from last year. But let's look at the details. On net sales, as I said, we are in Q3 on par with a comparison period where we had the all-time high Q3 last year. And year-to-date, we are still at 7.2% net sales growth. In this turbulent environment, I think that's okay-ish. And what I'm especially happy about is Asia Pacific is booming. Asia Pacific is really driving growth. And we also have multiple channels and brands that are driving the growth, and you will see more about that in the presentations. So our well-balanced portfolio really is delivering as we go forward in this turbulent environment. You can also see on the left side, you see here Q3 2019, just as a comparison where were we before COVID hit. And there you see it's truly a transformation we've done on the top line in Fiskars Group. Then looking at profit. Here you can see that Q3 and year-to-date is flat compared to last year. It's been a bumpy road. For sure, it's been a bumpy road with the cost inflation that is there. And now we're happy to say that the gross margin improvements they are paying off, and we are seeing them coming through. Gross margin increased already now in Q3 of 100 basis points and then being flattish on a year-to-date level, we are quite satisfied with that. And gross margin development is also the one going to drive us as we go forward. Then looking at our strategy. As I said, we have a very firm focus on our growth strategy, so that we ensure that we continue to transform Fiskars Group. We focus on the brands, channels and countries where we are winning and where the opportunities is the biggest and allocate our investment money accordingly. Also, when it comes to marketing money, this is where we allocate it to have the biggest yield. On transformation levers, full focus, laser focus on commercial excellence, direct-to-consumer U.S. and China. And I'll talk soon about also where are we going with this? How are we progressing as a company. And of course, enable us being important here to support us with people, our digital journey, innovation and design and sustainability. But let's look at where do we stand with the transformation levers. What is the progress in this time in Q3. Starting with gross margin. As I said in Q3, we started now to see the impact of the gross margin. So 100 basis points up. And if you look at reported, it's 290 basis points up in Q3, despite energy increase, inflations and so on. So this, we feel very strongly about that the focus on commercial excellence is paying off. Then direct-to-consumer continues again to grow, especially e-comm. So e-comm in Q3 grew 5%. And if you look at year-to-date, the growth in e-comm is 9%. So again, showing where we focus, we are truly transforming the company. On the direct-to-consumer, the share also of direct-to-consumer in the whole company is increasing. Now in Q3, it was 21% of the whole company, whereas last year, direct-to-consumer was 18%. So we're increasing the share of direct-to-consumer, which we are very happy about because it's relevant to the consumers and of course, the earnings logic is very good there. And thirdly, we get the data. We get the data all the time supporting also what is the consumer sentiment. So this that we can in these times, show 5% growth in e-comm, 9% year-to-date and also in owned stores, 10%. We get an incredible amount of data that we then also can use for our wholesale to show these other levers to pull to continue to grow. Then on U.S., U.S. was challenged in Q3. It's our big retailers who are worried about inventories as we all know. And they are being very careful in taking in inventory. So U.S. went backwards in Q3. However, if we look at the whole year-to-date, we are still growing at plus 5% in U.S. And then finally, transformation, our strong transformation lever China. As I always say, our China team continues to deliver. Whatever happens in China, they continue to deliver. And with a solid 35% net sales improvement in Q3. I just think it's astonishing result of the team when taking into account the COVID restrictions that come and go, come and go. And in China, we see it's clearly the e-comm and our investment in digital and our focus on digital, not only the capabilities, but marketing and so on, that is paying off and means that we can in tough times, grow in, in China in e-comm. So this is where we stand on transformation levers. However, this is not all. If we then look at sustainability, of course, sustainability is at the core of our strategy. Where are we? What are we doing there? And I'm very happy to share this news that we already announced in October, so it's after the reporting period. But this investment we are doing in the Iittala factory, where we're doing step change, step change in our Scope 1 and 2 and really step change for the whole Fiskars Group. So with this investment, we are reducing our Scope 1 emission by 26% in whole of Fiskars Group. So this shows that there are actions we can take to step change the future of the company and also, of course, towards our commitment to the climate change. So not only transformation levers delivering, but also the important enablers to future-proof the company. A lot of cool stuff going on. And then we come to the outlook. We keep our outlook intact. We have a flattish year-to-date at the moment, profit, and we have the Q4 ahead of us. Going into the holiday season, of course, we are not immune to what happens around the world. We are not immune to the consumer sentiment. However, we have a well-balanced portfolio in many geographies, many different kind of brands and consumer behaviors. So we keep our outlook intact. Also with the holiday season, just a small note about that, it's not only the traditional Christmas we see here in the Western world. 11/11 in China is huge. So we have multiple events, Christmas, 11/11, Thanksgiving and so on. And of course, Q4 is a Vita quarter. And here, really, I want to say how are we going to make this. It's with the resilience and grit that we delivered this year so far and also the fantastic talented team we have in Fiskars Group. So outlook for the year unchanged, intact. And finally, a bit about where do we stand, what is the basis. I mean, the power of our brand. We can't just highlight the importance of the power of our brand. And of course, that's also behind driving commercial excellence behind direct-to-consumer U.S. and China growth. The power of the brand is strong in Fiskars. And here is an example, the Fiskars brand, again, ranked the top brand in Finland, yet again this year. Arabia, our brand that turns 150 years next year also rose up to the top 10. So we have a good, well-balanced portfolio of beloved brands that are relevant to the consumers also as we go forward. With that, thank you from my side, and I hand over to Jussi.

Thank you, Nathalie, and hello, everyone. On Q3, let's start first with our financial targets, how we are performing the financial targets we have set for ourselves. So first, net sales target being at mid-single-digit growth organically. So rolling 12 months end of September, we are still at 8% growth. So take the box there, we are delivering the targets. On profitability, the target being at mid-teen EBIT margin by 2025, so next 3 years' time. And the target what we have is that we are getting gradually there step by step. Now we are coming a bit backwards with 11.8% at the last 12 months, end of September. So that's why it's blinking yellow here. Then I'll take first the balance sheet. Strong balance sheet target net debt to EBITDA, less than 2.5%. We are still below that with 1.8%. However, as you can see the trend, we are now gradually getting closer to that target. On cash flow, and I'm getting back to cash flow in more detail after a couple of slides there. But having negative cash flow now for the first 9 months there, of course, we are out of the range when it comes to target. Then about Q3 and year-to-date, more specifically. So Nathalie already mentioned the gross margin improvement, what we have. And the actions we put in place in the first half this year, we also mentioned those in our earlier calls what we have had after Q1 and Q2, mainly the price increase driven, but the whole commercial toolbox has been in place there. They started to pay off in Q3. So from August onwards, we have seen gross margin improving. And you can see here quite significant gross margin improvement, if improvement, if we used reported numbers. But excluding the sale of U.S. Water with 100 basis points up in Q3. Still year-to-date basis, we were 30 basis points down, but the trend is good, what we have now seen there. Importantly, all the 3 BAs improved their gross margin versus last year in Q3. When it comes to inflation, we saw some stabilization there or even declines when it comes to raw materials, inbound logistics. But these were the only ones. Outbound logistics as well as especially energy price, there, we still see being some increase or we are at least much higher level than where we were in comparison period. The 3 OpEx drivers. So the OpEx overall, EUR 11 million up in Q3, EUR 38 million up year-to-date basis. For both periods, 60% of this OpEx increase came mainly from those investments we have decided to do investment in DTC, investments in digital and then also marketing. Marketing especially it's digital marketing here, supporting our D2C growth. On EBIT, for both period for Q3 and year-to-date, we were quite flattish. And I'll go through a bit more detail how we ended up with this flattish EBIT. What you can see here on the left is our Q3. So admittedly, we got some help there from FX translation, a bit less than EUR 3 million. But the main driver for this improvement was improved gross margin. So that contributed most of our EBIT improvement. And then those investments worth of EUR 11 million, I already mentioned, they took us back to this last year's level. When it comes to year-to-date, the FX impact was a bit shy of EUR 6 million positive. But still, when it comes to 9 months here, we got a lot of push on the volumes. So that was the biggest driver of our EBIT improvement in the first 9 months period. Then more about businesses. First, Vita. So Vita, 2% like-for-like growth. And this was very much driven by combination of D2C, Wedgwood brand and China. And Wedgwood brand, just to give you an example, mid-teen growth in Q3. So that was a great profit contributor -- top line contributor for Vita. Vita's profit was quite flattish. Gross margin improved, and that was invested back in those capabilities I just referred. Terra, very good development with outdoor Gerber brand in U.S.A. We all know that U.S. market was lukewarm at the best, but Gerber succeeded to grow 14% in that market. Another growth driver what we had was gardening in Continental Europe. So we succeeded to continue growing there also double-digit number. That together brought us to a bit more than 3% organic growth versus previous year. Then when it comes to profitability, excluding this U.S. water impact there, we were quite flattish. There also, we saw volume improvement, slight gross margin improvement, and that was offset, especially with marketing, marketing expenses. On Crea. Crea, we saw some shift from Q3 to Q2 actually. So back-to-school season was more biased into Q2 this year. We were 15% up in Q2, now 12% down in Q3. So that's the main reason there. Also we have seen some softness there in consumer demand in Crea's categories. On EBIT, volumes were down, but we improved the margin. And that was the factor here that we remain practically flattish also with this business. When it comes to regional sales, what you can see here is Europe, minus low single-digit number, that was very much driven by Finland and Sweden. So both countries were down both Q3 and year-to-date basis. Same also applies to D2C in this region. So it was very much Finnish and Swedish D2C, which went down. Americas down quite significantly, both in U.S. and Canada. D2C, especially in e-comm in U.S.A., however, was up. Then APAC is only having 13% growth. It might even sound quite lukewarm growth, 13%. But it's hidden the fact that China was up over 30%. China was up over 30% in all channels in the air to see in e-commerce and retail. And then what you can see here also is that China is not so dominant -- has not so dominant role in our global sales, but they are almost half of our D2C sales now for Q3. Then about cash flow. And as I mentioned that earlier in my presentation, let's take a more deeper dive here. So free cash flow, down EUR 63 million in Q3 and now 100 -- a bit shy of EUR 140 million for a year-to-date basis. This is very much working capital, very much inventory driven. If we split this inventory growth that we have, more than half of year-to-date inventory growth is coming from Terra. Vita is roughly 1/3 and the rest is then in Crea. The silver line, what we have here is that Q3, as Nathalie -- Q4, as Nathalie mentioned, is very much Vita driven. So we believe that we get at least in Vita inventories back to a bit lower level than we are at the moment. We have funded this negative cash flow through short-term funding. But of course, at a certain point, we need to start converting that more long term to be safe in our long-term funding position. On balance sheet. Balance sheet is still solid. It's -- our leverage ratios are up due to the working capital growth, but net debt to EBITDA is still well in line with the target. One KPI, we are following quite closely even though it's not in our formal financial targets is our return on capital employed. Now we are at a level of 15%. And of course, target is to get a much higher level. With that, I'll give it back to you, Nathalie.

Thank you, Jussi. And just to summarize and recap where do we stand. Q3 despite the turbulent environment we are in. We're happy with the flat sales in Q3 compared to the all-time high Q3 last year. Also, the actions we put in place to mitigate the cost increases, the inflation and delivering results. And our gross margin is increasing comparable 100 basis points up. So that's working. We continue to focus on our growth strategy and investing behind direct-to-consumer and digital to continue to future-proof the company and be relevant to consumers as we go forward. And with that, we keep our outlook for 2022 intact. But with that, let's go to the questions.

Thank you, Nathalie and Jussi. And we do already have some questions. So let's start with what makes you confident when Fiskars can grow its earnings in Q4, considering that the consumer confidence is very weak in both Europe and the U.S. and maybe Nathalie, you can start.

Of course, this is top of mind of everybody this question. Q4, when we look at it, it's very much focused on the bottom line. It's very much focused to continue with the gross margin development that we already saw now in Q3. We also have a well-balanced portfolio. We -- you also mentioned many areas where we are growing China Wedgwood, Continental Europe in Terra, and so on. So we have pockets of growth in the company. At the same time, of course, we are not immune to the surrounding world. It's a turbulent world out there. But with the focus on execution and the resilience of the team, we keep the outlook intact.

Yes. Then we have a question about the price increases. Maybe you see if you want to take this one. Could you give some more flavor on the magnitude of price increases during the quarter, please, differences between segments would be helpful as well.

Yes. The price increases we put in place actually earlier this year in the first half, early Q2. They are the ones now impacting positively. As I mentioned about inflation. So also there we expect some little help. At the same time, we see outbound freights. We see energy prices being at a very high level. So that's what we are using as a benchmark how we can compensate it. The expectations with the price increases is that we can fully mitigate the inflation there, not going very specific into segment categories, what kind of price increases we have set there. But our main target is to mitigate cost inflation. Nathalie, I don't know whether you'd like to continue with that.

Well, I could just come to the how, how do we do it? Of course, diligent, the execution and also the power of the brand. We have very strong brands in our portfolio that the consumers love.

Yes, exactly. And maybe another one for Jussi. Please remind us about the OpEx dynamic. Last year's H2 growth OpEx was extra high. How much lower will growth of XP in Q4 year-on-year? So maybe we'll...

That's a very good question. That's also part the logic of our guidance for full year. So last year, the OpEx growth was very much focused on the year-end Q4 there. This year, we expect OpEx growth to be much more stable between the quarters.

Yes. Then we have quite a few on inventories. That seems to be a hot topic. Can you describe in detail how you will reduce your inventory levels? So maybe we'll start with that one and then continue if you just want to go...

Okay. I can start with that one. The one thing is, of course, our S&OP process, how we plan our demand and then operations accordingly. Now we have taken down those. We have cut supplies. We have reduced the orders, but we have our sourcing partners. At the same time, when it comes to our older inventories there, we are trying to divest it through our own network, what we have in our own stores, our websites. So that's the way the actions put in place. It takes time. That is if you remember that when we start adjusting supply accordingly, it's not coming overnight, but it takes some time.

And then maybe a follow-up on that. When do you think the U.S. retailers are willing to take inventories again?

That's more than a million dollar questions there. Overall, Nathalie, if you like to comment that. But our view is that we will see still tough times in the first half, at least next year in U.S. But then second half next year, we should start seeing some improvement there. That's the current view of what we have for U.S. market.

And does this impact Vita in Q4? Or is it more a Crea or Terra, topic?

Yes. Vita, of course, it's not immune, but what we need to remember that the Vita business is more in Asia Pacific than any of our others business. So that's continued growing there. So there are more levers than only U.S. market for Crea and Vita. But as I said, Vita it is not immune, the decline in the U.S.