Fiskars Oyj Abp (FSKRS) Earnings Call Transcript & Summary

Hello, and welcome to Fiskars Group Q3 2023 Results Webcast. My name is Essi Lipponen, and I'm the Director of Investor Relations. I'm here with our President and CEO, Nathalie Ahlstrom; and our CFO, Jussi Siitonen. Nathalie and Jussi will first present the Q3 highlights. And after that, we will have 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 welcome also from my side here for our Q3 report. Starting with the highlights of the quarter. It's a tough time. Sales and EBIT came down in this challenging market. However, on the bright side, we're very proud of the free cash flow and the gross margin improvement we delivered. Also, the profile of our company is moving with DTC continuing to grow especially e-com growing, which talks about the attraction consumers have to our e-comm and our brands. We also in September and in Q3 accelerated our strategy significantly. We combined Terra and Crea into one business area of Fiskars because it's about the brands -- making the big brands bigger and what the consumers care about. In addition, we enhanced our Vita portfolio with the acquisition of Georg Jensen. As a consequence of the challenging market environment in early October, we renewed our guidance, and now we expect our full year EBIT to be between EUR 100 million and EUR 120 million. But let's look a bit at the details of the Q3. As said, volume was a challenge in Q3 continues to be a challenge. It's from the wholesale, we see the volume dropping. And at the same time, thanks to the actions we are doing on gross margin, we were able to mitigate some of the volume drop with the gross margin increasing 240 basis points. That was across the businesses and really talks about the power of the brands. And as said, free cash flow, very strong, EUR 170 million improvement from last year. As a consequence of the EBIT coming down, our EPS also followed the same way. Looking then at the businesses Vita was supported by the strong growth in e-com. E-com grew overall for the whole company, 16%. And now in Vita, the share of direct-to-consumer in Q3 is 45%. Last year, at this time, it was 37%. So we are clearly seeing that we are changing the mix of the portfolio in Vita. Also, China continued strongly with 14%. Despite the lower volumes in wholesale, we were able with cost mitigation also to keep the EBIT margin at 14% in Q3 in Vita. Then Terra. In Terra, we saw the biggest volume drop of our businesses, and it's really the wholesale area where the wholesale players are very careful with inventories. On the bright side, Gerber in U.S. won some new accounts, and we saw that new footprint of distribution. Also Terra, like all our other BAs improved the gross margin and especially Terra was really good at inventory management in Q3 that had helped in our trade working capital. Then Crea, amazing EBIT margin, 26%. Gross margin improved like all the rest. But what really makes Crea standout is despite the volume drop, the OpEx management was phenomenal, and that led to the being able to deliver the 26% EBIT margin. Then about the strategy, as I said, we took many transformative steps in strategy execution in September. The first one, when we talk about our logic, where we say that making the big brands bigger, of course, it's natural then that we have -- we combined Terra and Crea into one Fiskars and that we did now in Q3, also to ensure that we benefit of all the potentials under the Fiskars brand. So now today, half of the company is Fiskars and half is Vita. Then on the inorganic side, we acquired Georg Jensen, which is a fantastic strategic fit when we look at the transformation levers. I'll come to that a bit later. Looking at the transformation levers. And like I said, we're always going to report to you where we are standing with the transformation levers. Commercial excellence, really taking a step up. And this really talks about the power of the brands. It's the channel rights assortment. It's the channel choices we are making and enhancing the portfolio upwards. Gross margin growing 240 basis points in Q3 and year-to-date, 220. So a strong development quarter-by-quarter. As I said earlier also, direct-to-consumer continued to excel. Overall direct-to-consumer growing 6%. For the whole group, it's now 25% of net sales in Q3. So we see that direct consumer is growing. The challenge we're having is on the wholesale volume side. And the bright spot, of course, of direct-to-consumer is e-com growing 16%. We talked about consumers' interest towards our brands, they're starting the journey in the direct-to-consumer and they come in to our website and buying there, thanks to the power of the brand, the story telling, the experience they're getting there. U.S. has been a challenge for us already 5 quarters. The bright side here is that when we look at the year-to-date decline in U.S., minus 16%, we improved that a bit to minus 11% in Q3 so it's a bit easing. Then China, despite softer consumer sentiment in China, our local team continued to deliver a 14% growth in China. It's not only on transformation levers we are transforming the company. It's also on the sustainability and ESG side that we continue to deliver. Looking at the ESG, our target towards circular economy today, 8% of our net sales is already with circular products. It talks about what we are bringing to ensure the biodiversity of the planet. On Scope 1 and Scope 2, we are today at -- have reduced already 53% on our CO2 emissions. The improvement we saw in Q3 is on our suppliers who have signed up to science-based targets that increased from Q2 from 42% to now to 46%. So we are making step by step. What is also important is that when we look at Scope 1 and Scope 2, there, we start to see that the investments we've made in the energy efficiency they are starting to impact. They also, of course, when it's energy efficiency, they also starting to impact the P&L. Then about Georg Jensen. I said this is a fantastic strategic fit to our portfolio. It's enhancing our transformation strategy, our growth strategy, and it's also impacting our company profile. Now with Georg Jensen with us since the first day of October, 1/3 of our portfolio is luxury brands. And we know luxury brands are much more resilient in tough times. Georg Jensen is also not a small brand. Net sales is more than EUR 100 million, much more than EUR 100 million. So it's transformative acquisition that supports us going forward. Also, 1/4 of the net sales will after or now with Georg Jensen in our portfolio, be direct-to-consumer and much higher for Vita as we go forward. Also, we are in the bias market. So the multiples and in addition with the multiples, then with the synergies are very attractive. And with the cost-out synergies are quite significant because of the good strategic fit. It's not only inorganic growth. Of course, we also need to make sure that we win in the tough times, but we do the measures needed in the tough times, in the tough environment around us, but also what's right for our strategy, and we continue to simplify our operating model so that it's fit for the brands, fit for the businesses. And I already mentioned the combination of Terra and Crea into Fiskars into one big making the big brands big and unlocking the opportunities. At the same time, when we talk about the simplifying operation model and what's really needed for the brands to excel and grow. We also do delayering, especially in the supply chain where we are doing delayering. And this is the measures we're also doing in the tough times to win in the tough times. And the outcome is, as we have reported a reduction of 400 roles. These will be completed in end of November, the proposed outcome. And then in addition, we have the 100 headcount reductions already communicated in January. So where we are looking at the guidance for the full year, and I mentioned a few times, it's tough times. We're doing a lot of measures, but we continue to see volatility. What we also see is inflation in our G&A in the general admin. And at the same time, we continue to, of course, invest behind our strategy. The savings are supporting us and also Georg Jensen's addition to our Q4 EBIT will contribute. And with that, our updated guidance since earlier October maintains that we are forecasting our EBIT between EUR 100 million to EUR 120 million for the full year. Thank you. And over to you, Jussi.

Thank you, Nathalie, and hello, everyone. So let's start first with our net sales here. So as Nathalie said, we were 12.7% down in a comparative basis in Q3. We were down in all BAs. When it comes to Vita so Vita was down roughly 10% there. It was nicely partially offset by this good growth, what we have in DTC. As mentioned, DTC is 45% of Vita Q3. So that was nicely offset the decline what we have there. When it comes to Terra and Crea, where we have own 90% of business in wholesale and roughly 50% of business in U.S.A. The board were taking down the net sales quite dramatically there. So they were exposed to this what we have seen there when it comes to big retailers, how they are focusing on inventories. When it comes to geographies there, we had 4 countries in our portfolio, which grew in Q4. We had growth in Norway, Canada, Japan and China. All the other countries were down in Q3. So it was a very broad base decline what we saw in this particular quarter. On EBIT, as said, we are roughly EUR 11 million down on comparative basis in Q3 versus last year, down in all BAs when it comes to absolute EBIT. However, in Crea, we succeeded to improve profitability. The main and I would say the only reason why we see this kind of decline on our EBIT is the wholesale volumes. So here on the right, you can see our EBIT bridged by component. And the decline what we get there from sales volumes, roughly EUR 15 million. We were only partially able to offset that by improving gross margin. Marketing expenses, we were able to keep quite flattish. And when it comes to SG&A, those programs, Nathalie talked about a bit earlier, especially the one we introduced in January saying that the annual impact will be EUR 30 million, out of which roughly EUR 15 million in half should be in the second half this year. We started to see impact of that program already now in SG&A. So the component or the items where we had increase in SG&A was digital. So we continue to investing in digital. All the others were down, which means that some of those savings are flowing in. However, the quite rapid inflations what we have still seen, especially when it comes to salaries, that was partially offset the impact of this program. So those were the components why we came down to the EUR 17.9 million for Q3. Then as said, we control what we can control and cash flow is the one we can control. So therefore, after quite volatile last year, when we went down even to EUR 100 million there, we have succeeded to make quite significant recovery. So now our Q3 cash flow of EUR 53 million, it was EUR 117 million better than Q3 last year and almost EUR 250 million better than year-to-date last year. So significant rebound there is all coming from our supply chain volume adjusted and what we have done. We have cut our sourcing more than 50%. We have got our own manufacturing more than 1/3, and the impact can be seen in our own inventory levels. When it comes to inventories, overall, the trade working capital there it's EUR 120 million down versus same period last year and almost EUR 60 million down versus year-end last year. The main driver is inventories, especially in Terra. We have had also good development there when it comes to Crea inventories and still work to do with Vita. You can see that we have now coming down also as a percentage of sales there. We are not yet at the level where we want to be. So we still have a lot of unlisted potential there in our trade working capital. The first step is to get back to pre-COVID levels. And no one is saying that that's the target -- ultimate target. So we believe that when it comes to cash flow, we still have potential to further improvement. When it comes to net debt, it decreased in Q3, still about a year-end level due to increased lease liabilities. We have renewed a couple of our quite big lease contracts there, especially when it comes to our distribution centers, but that's why lease liabilities are up, senior net debt down EUR 44 million from the same period last year and also slightly down from the year-end. These numbers here, these are September end, and they don't include any impact yet from Georg Jensen acquisition. When we came out with Georg Jensen acquisition, we said that it will be first funded by bridge. And now today, we have announced that we are considering also the bond funding for the takeout financing. But those numbers are not yet in these net debt figures what we have here. On balance sheet, balance sheet capital employed slightly down from the year-end, driven by the trade working capital reduction. Our capital turnover asset efficiency, however, is still somewhat declining due to a very rapid top line drop what we have had. Return on capital employed, a bit more than 9% is still over our weighted average cost of capital. To KPIs what we have in our financial targets, high cash conversion and then net debt EBITDA. Those are the ones which are now green. So net debt EBITDA target being 2.5 or less. It's now 2.24. And then free cash flow, net profit target being over 80%. The fact that we have such a strong free cash flow at the moment and whilst the profitability or net profit is coming down, we are significantly above our targets. The ones we stop blinking red here that's organic net sales growth and an EBIT margin, it's EBIT margin by 2025. Those are the ones where we still have work to do. When it comes to full year guidance, how we said it on 12th of October when we came down, we said that Georg Jensen acquisitions will have a role in our full year guidance, especially when it comes to Q4 here. Georg Jensen will be consolidated into our numbers from October 1 onwards. And when it comes to organic EBIT contribution from this acquisition, we believe that being positive. Here, you can see the last 4 Q4s from Georg Jensen publicly disclosed Q4 results. I would say when it's now in our books, these last 4 years, Q4s, they are pretty good proxy also what we are now expecting for Q4, bearing in mind, of course, the current consumer sentiment. Then another thing is that this purchase price allocation is, what we have to do since we get the final closing balance sheet of Georg Jensen. The amortization of intangible assets, we do not expect them to be material negative impact on our Q4 EBIT there. On a full year basis, it seems that amortization from those items will be there at low single-digit millions, which means that for 1 quarter, we are not expecting any material number. Most of the fair values will be addressed to inventory and which will be valued at a net realizable values. And then once we get this inventory turned around once we get rid of those fair values there. This significant negative impact will be reported as items affecting comparability. And therefore, in our guidance, they are excluded. That's very shortly about where we are with finance.

Thank you, Jussi. And then just to wrap up Q3. As I said, it's a tough market out there with the consumer sentiment. What we are proud of is what we've achieved ourselves with a strong cash flow and strong gross margin improvement yet again 1 quarter where we're improving the gross margin. We also moving the mix of the company, more DTC, even more DTC and continue to execute our strategy with the formulation of business area of Fiskars and also the acquisition of Georg Jensen and then, of course, our guidance update from early October. With that, open up for questions. Or...

Yes. Before going into questions, a reminder of our Capital Markets Day. We will have that next week on Thursday, you can still sign up for the physical event until tomorrow. And after that, of course, you can also sign up for the webcast still. And what you will hear in the Capital Markets Day is an update on the progress of our growth strategy and our value creation model. You can find more information on our website or of course, you can contact me. But then I think we are ready for questions. Maybe the first one for you, Nathalie. Have you started to ramp up on production and sourcing volumes?

We have -- in certain areas, I mean, the factory is up there. It's seasonal, but not in any material way.

Then to Jussi. What caused adjusted EBIT to decline clearly in other segments? What's the main reason development expenses related to strategic programs? And how long these last.

Yes. The question refers to our other segments, which came down from minus EUR 6.6 million to EUR 10 million, down EUR 3.4 million there. I would split in 2 pieces. Roughly half of that is that we still have some business there in other segments and the gross profit, absolute gross profit came down roughly EUR 1.5 million. Then the later part is exactly those strategic programs there, a bit less than EUR 2 million. We expect them to stabilize now towards the year-end. As you might remember, one of those items what we had there in our efficiency improvement program announced in January, is to get rid of this kind of external services. And therefore, we assume that, that will be visible in other segment.

Yes. Then Nathalie, what are your thoughts currently about inventories in the U.S. and possible shipments for Terra in Q4?

Thank you. And I assume you're talking about inventories at the wholesale of the big box players. We see that the inventories have come significantly down. We have a very good transparency into what the inventories are by location and by customer. However, we see that this is a new normal with the high capital costs, we don't expect wholesale to start to take significant inventory. So we are adjusting as we go.

Yes. Then Jussi, if you take this one. Sales in China were up 14% year-on-year. How did sales develop during the quarter?