Fiskars Oyj Abp (FSKRS) Earnings Call Transcript & Summary

Hello, and welcome to Fiskars Group's Q2 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 go through the Q2 highlights. And after that, we will have plenty of time for your questions. And you can type in your questions in the chat already during the presentation. Nathalie, please go ahead.

Thank you, Essi. Thank you, and welcome also, everybody from my side. It's a delight to be here to talk about Q2. First, to the highlights of Q2. We are very proud that we have two all-time highs in this quarter. Both our gross margin, driven by Vita's elevation of the portfolio upwards and then also all-time high of free cash flow. So gross margin, all-time high free cash flow, all-time high as a company for Fiskars Group. Also, we continue to deliver savings, thanks to the simplified way of operating we have today. And also, we are going to continue to accelerate the savings as we go forward. We keep our guidance intact, which means that we are slightly above last year's EBIT level. And as I've said in many webcasts, today, 9 months after we procured Georg Jensen, I'm going to talk about the integration that is progressing well on track, already 75% of the cost of synergies are in implementation. So now into the details. When we look at where we are in Q2, it's very evident that the only issue we have is volumes. This is on the volumes decline. It's driven by macro and especially in the U.S. where the consumer sentiment is down. Of course, it's a global macroeconomic environment. Despite the big volume drop, we were able to deliver, as said, the all-time high gross margin improvement and also the free cash flow. And this, of course, led then to the cash per share is up. And as I said, with the volume that impacted our EBIT and then earnings per share. But let's look at the details on Vita. Vita, this is where the challenge really was on the volume side in this challenging market environment. But considering this drop in volume, we are very proud that the Georg Jensen integration now is highly accretive to the EBIT of the whole group and to EBITDA. So already in Q2, making a profit in Georg Jensen compared to in the last time -- in last year. And Jussi will talk more about that. As I said, the all-time high gross margin of Vita that has driven the whole company up, so moving the portfolio upwards into the more premium luxury area. The gross margin improvement of Vita came both from organic actions we are doing, mainly supply chain improving and also, of course, pricing. And then the addition of Georg Jensen that from a portfolio point of view, sweetens the mix. We also have had a good growth building blocks. China continued to grow this time only at 5%, although when looking at the market, we are quite happy with the 5% growth in China. Sweden continued to grow and Moomin Arabia continues to be very strong. So these are the organic growth building blocks in addition, of course, to the inorganic of Georg Jensen. Then with Fiskars. Fiskars had soft sell-out in the market and the volume impact also here as in Vita and that's macroeconomic driven. At the same time, we had strong sales in Nordics. So good performance in Nordics by our team. And Gerber’, our outdoor brand continues to be a growth building block for us. Thanks to new listing, new doors where we are selling Gerber in the U.S. and also the category expansion to outdoor cooking with our camp cook range. Then looking at our strategy. We've continued to focus on winning -- focus on the winning brands, channels and countries. And with this with a clear focus on the winning, that's also how we are actively managing our portfolio. As I've said, we are moving upwards the whole profile of the company. The transformation levers continues to deliver also in this challenging market and they are important for us to build a strong foundation for future growth. As we said in the Capital Markets Day, we have our transformation is from 2021 to 2025, and we soon start to be at the final leg of our transformation, and I'll come soon to that. But looking first at the transformation levers, as said, these are good foundations when the volumes come back for the future growth. We are very happy with the gross margin. As you've heard me saying so many times already with all-time high, that is driven by Vita, now at 49.1% in the gross margin. This is also nearly 12 months ahead or when we look at the year to go and towards December, this is nearly 12 months ahead of what we said in the Capital Markets Day, where we're going to take the gross margin. So good development that we're going to continue to push upwards through the things we are doing on focus on the winning channels, winning brands, winning countries, so channel strategies and also the supply chain efficiency improvements that we are doing. Direct-to-consumer was weaker this time, this quarter. It's actually the weakest in a long time. And this is only one thing driving it. It's e-com in China, that was hit hard. So e-com our big channel there was down and so much down that it took the whole e-com of the group down. So one single area. When considering that, it's really amazing how well our China team did in China, despite e-com being so negative they still could grow organically without the Georg Jensen integration of 5%. So again, our local team is doing a stellar job in China. On U.S., we continue to see that the big box players and all our customers are very prudent with inventory management, extremely prudent and focused on working capital, and therefore, the market is -- continues to be sluggish in the U.S. So I talked about that we had the final leg on the transformation that we started in 2021. And we really see that the way we are operating, that the focus is on the business areas, Fiskars business area Vita, it's a simplified way of operating where the whole accountability, the P&L accountability sits with the BAs. The scalable platforms are there to drive efficiencies and synergies and also what we are doing now in supply chain, we see that, that's really benefiting and also that it's targeted BA specific actions that we are doing that's fit for the business. So our key principles is that it's systematic improvement and improving on the cost efficiency and then making it strong for future growth. There are some examples also of this rigorous focus on brand's first approach. And one is, of course, that we announced already in -- early in the year where we split sales into the business areas. Also, the supply chain transformation that we have reported a lot about is BA specifics and looks at the needs of the BAs. We also, in this report talking that we are accelerating efficiency improvements. They are not a new program we initiated. It's not anything. It's just that we continue this systematic approach. And one example that we are doing now is our distribution centers or warehouses in both U.S. -- Europe, U.S. and Asia, we're really making big changes there to drive further efficiencies that meets the demands of BA Fiskars and BA Vita. So a lot happening here at our final leg of the transformation with a focus on what does BA Fiskars need, what does BA Vita need? Then on the inorganic side, I said I'm going to talk about Georg Jensen. And the Georg Jensen integration is nearly at its completion, and the synergies are really on track. The rationale when we bought Georg Jensen was and still is the strategic rationale as we want to move the needle. We want to buy a big brand that moves the needle. It's also a brand with higher positioning, driving the luxury and also changing our portfolio. As we say in the group, we are portfolio managers. It's also category expansion where we thanks to Georg Jensen has expanded into lifestyle, more lifestyle brand and also jewelry and Georg Jensen is direct-to-consumer led. So this is a rational behind the purchase of Georg Jensen. Now when we look at -- when we acquired it, we said we are going to deliver EUR 18 million of cost synergies, and we bought it at a multiple of EUR 4.7 million. So where are we today? Only 9 months since we closed the deal, now, today, 75% of this EUR 18 million is already in implementation. We will not see it all this year. It will spill over to next year due to many of the things like procurement, are very volume dependent. But the actions are already taken. So 75% of the cost synergies done. Also, we have, as an example, what have we concretely done not only the procurement, integrating sales organization, but we've also reduced net 10% of head count in Georg Jensen. And this is all according to our disciplined M&A playbook that we have in place. The only thing outstanding from the integration of Georg Jensen is the IT ERP integration that's ongoing. So fantastic. 9 months ago, we bought the company for a multiple of EUR 4.7 million and now most of the integration already completed. Then looking at other areas we are transforming the company. It's not only -- on the financial side, it's, of course, also our stance on sustainability. And we are very proud of a sustainability where we are today. One of our key metrics is how much of our net sales is based on reserve content products for circular economy for biodiversity. And in Q2, we've jumped from -- in Q1, we had 15% was recycled content. Today, it's 24%. So it shows that our focused approach, we go for big needle movers, we focus and we get a big impact. So 24% of all our net sales today already recycled content product. In this quarter, we're also very happy to say that already today, 58% of our suppliers have science-based targets. We've said earlier that our target is 60%. So the remaining 2%, we will very soon close. Another ESG metric we are proud of is our diversity and inclusion metrics where we are within the top 10% of companies globally. So a lot of progress also on ESG and sustainability. And this has been recognized externally as well. EcoVadis awarded us with platinum grading this year. We are very happy about that and Time Magazine also listed us as one of the 500 top sustainability leaders globally. So a good place to be. But then looking at some other highlights from the quarter. I've spoken about growth building blocks. The key heroes in Q2 is -- continues to be Moomin and Gerber. Both Moomin and Gerber are opening new doors, having new distribution and at the same time, doing category expansion, Moomin expanding into textiles. Moomin also has opened 8 new stores now in this year-to-date and Gerber with the camp cook and also new stores, new open doors in U.S. Then Iittala. There's been a lot of discussion about Iittala and we are very happy to see that the consumer engagement continues to grow. And we have grown the subscription of MyIittala memberships by 9% compared to last year. So a lot of interest also from consumers to MyIittala, where they are voting with their wallet and joining MyIittala membership. We also talk about our luxury brands and the positioning of them and are proud of the cooperation between Wedgwood and Loewe, the luxury brand Loewe. And then from an ownership point of view, a mentality that we are all the owners of the company, we are entrepreneurs, we are driving the future of the company. We are happy that with MyFiskars program, the employee share savings plan we have in place, over 10% of our employees are owners of Fiskars. And then to the guidance. It's unchanged. Macroeconomics continues to be challenging. We don't foresee the second half to be any easier from a macroeconomic point of view and wage inflation is impacting us. At the same time, we talk about accelerating efficiency improvements. We talk about the savings and the simplified way of operating that we have where we are BA dedicated will continue to drive the efficiencies so that also we are set up for growth when the market macroeconomic changes. And as we all know, for Fiskars Group it's always very second half, Q4 heavy when we make the most of the profit. And with that, I hand over to Jussi. Thank you.

Thank you, Nathalie. Hello, everyone. So let's take a bit deeper dive into the financials here. First top line, as said, our organic currency neutral top line was down 5.3%. So the Fiskars' BA was down 2.7% and then Vita organically 8.7% down. When it comes to Fiskars BA there, we were up in most Nordic countries, including Finland. And why Finland is important is that after the U.S.A., Finland is the second biggest country for Fiskars BA. Central Europe, mainly Germany and Poland, which are important for our Fiskars BA, they were down. U.S.A. was flat for Fiskars BA. Bearing in mind that U.S.A. is the biggest country for Fiskars BA, roughly half of business is there, it's so important for us to get U.S. back on the growth track. Vita net sales were up in China and Sweden. And for the rest of the world, it was down. Important in Q2 is that China was the biggest country for Vita BA, now in Q2. Georg Jensen acquisition, it has been in our books from first of October '23 onwards. So Q4 last year was the first quarter, now not having comparison numbers there as a whole, EUR 28 million of top line, what we had in Georg Jensen was nicely contributing our total growth, which was 4.9%. Moving then on to EBIT. EBIT here. Organically, EBIT was down EUR 7.8 million with Georg Jensen EUR 4.2 million. What you can see here is our EBIT bridge and as Nathalie mentioned, this is very much a volume game where we are now in. So the negative sales and production volume impact, that was the main reason why our EBIT came down. Other negative items what we had was increased depreciation and amortization. These are very much digital driven. We have invested significantly in digital in the past couple of years. Roughly 40% of our annual CapEx is in digital. And then, of course, amortization and depreciations are impacting now these quarters. Then also employee cost. You can see it here in two places, the gross one shows how much our employee cost increased. And then we have also savings there. The saving programs we initiated last year. We had savings program initiated very early 2023, then in September, and we have continued those. We are very pleased with the results where we are with the saving programs at the moment. Even though if you take our P&L, you can figure out how much they are contributing our EBIT at the moment because we have a lot of these kind of negatives coming mainly from volumes. But when it comes to cost of goods, when it comes to SG&A, when it comes to our employee costs, all these programs are delivering savings at the moment. They are almost mitigating the negative part what we get there from the volumes. Then also the ones who have followed us a bit longer period, we have said that typical seasonal pattern, what we have in Georg Jensen is that the first 9 months, we are at breakeven level and all the profit is made then in Q4. Now we have succeeded through those synergies, Nathalie just mentioned, changed the model a bit, so that now already in Q2, we got EUR 3.7 million incremental EBIT from Georg Jensen. This very strong performance, especially bearing in mind the historical pattern. The same picture for the first half. where our EBIT came down EUR 10.4 million and then excluding Georg Jensen EUR 11.5 million. Here also, you can see the significant negative impact coming from the volumes. The saving programs also here, they are actually fully mitigating the negative volume impact what we have. And this shows that the underlying improvement what we have there is in place. So once we get the volumes back, it will have a huge impact on our profitability. The saving programs for the first half, they are delivering roughly EUR 10 million to EUR 12 million per quarter, so that we have roughly EUR 25 million in the first half numbers included of those savings. That's about profit. Let's move then to cash flow. We had a bit soft start for the year when it comes to free cash flow. It was negative EUR 20 million. Now in Q2 which is all-time high Q2 cash flow what we had in the recent history. We succeeded to get back on track also with the cash flow. The main driver for the improvement was our net working capital, especially when it comes to account receivables, account payables. We succeeded to get that back on the plans what we had. The rolling 12-month free cash flow stays at a high level of approximately EUR 160 million. Then on balance sheet. So capital turnover of our capital employed is at year-end level. It's temporarily elevated due to Georg Jensen. So this purchase price allocations, what we got from Georg Jensen acquisition, a big part of that was allocated to inventories. Now at the end of Q3, we get rid of that one. And therefore, we had this kind of quite natural capital turnover improvement coming, then we had a full 12-month net sales of Georg Jensen in and we get rid of this PPA part. That's also expected to improve our return on capital employed towards the year-end. On net debt, net debt was down EUR 32 million from Q1, driven by strong free cash flow. Our net debt to EBITDA of 2.7x is slightly above our max target of 2.1. For the rest of the year, bearing in mind that our EBITDA is seasonally higher in the second half and of course, Georg Jensen is now further increasing the year-end bias. Also, our free cash flow is seasonally stronger in the second half. That's partially offset then by our Q3 cash dividends. This year, it's EUR 33 million. So combining those two factors, we expect the net debt to EBITDA is to decline towards the year-end, provided the historical trends will continue. When it comes to our financial targets, four financial targets, net sales profitability, cash flow, and balance sheet and especially focusing on the last 3 years, which eliminates this kind of seasonality impacts there. On balance sheet and cash flow, we are pretty well in track. Cash flow also improving towards the target balance sheet being on the long-term perspective. What we need is the volumes, which has also helped our EBIT margin to improve. With that, I give it back to you.

Thank you, Jussi. So to wrap up Q2 and first half, when we look at this, what are the highlights and I've said it many times during this call, we focus on the things we can do ourselves. The macroeconomic is what it is. And therefore, we are so proud that we had two all-time highs. The all-time high of gross margin driven by Vita where we are moving the portfolio up. And that's then driving the whole company's, Fiskars Group's, gross margin also to the all-time high. And then like Jussi said, free cash flow in Q2. The savings we've announced earlier that continue to deliver. The problem is volumes that eat up many of these savings, and we also see that the simplified way of how we are operating with BA Fiskars, BA Vita continues to enable us to drive further and accelerate further savings in the second half. Our guidance is intact and we see that we are going to be slightly above last year's EBIT. And then Georg Jensen fantastic 9 months after closing the deal, we've already 75% of the cost synergies in implementation on track, and it's only IT remaining in the integration. So this is where we are in Q2 and now full focus on the second half.

Maybe we start with the guidance because there are quite many questions about that. You have maintained your guidance intact for full year. Does this mean that you are expecting the market situation to improve during the second half? Or do you see that the guidance could be achieved more with the cost efficiency measures than volume increases? Nathalie, if you take it?

Thank you. We don't foresee the macroeconomic to change. We don't foresee volumes to become easier. So how we keep our guidance intact for the full year? We focus on the accelerating cost efficiencies and drive the gross margin up. That really helps us these two, but no help from the outside world. We focus on what we can do ourselves.

Yes, exactly. Then a follow-up on that. How good visibility do you have into the second half and especially Q4 when considering Vita sell-in? Can you give any indications of your growth rate in June?

Well, when we look at Q4, a lot of the sales in Q4 is driven by our own stores. We have roughly 450 stores globally. So it's very just in time sales, so that we'll be very dependent on the consumer sentiment globally. Vita is big, both in Asia, Europe and U.S. And therefore, we focus on what we can do ourselves with the cost savings and gross margin and, of course, Georg Jensen integration, which will continue to help us.

Let me see. Well, this is maybe a bit repetitive, but I will still ask it. You had support from the various efficiency programs and from Georg Jensen in Q2, yet earnings were down year-on-year. What will change in H2, as you are not expecting the market to improve?

Yes. Nothing is actually changing. What is changing is we're accelerating the savings. We continue to drive the gross margin. We continue to deliver on Georg Jensen an integration.

Yes, exactly. Let me see. Maybe then about Georg Jensen and the synergies. Nathalie, if you can comment how much of the Georg Jensen synergies do you expect to be visible this year in earnings? Are the synergies coming through faster than you originally expected?

If I start with the second -- first half and Q2, and Jussi mentioned that already today, Georg Jensen is highly accretive to the profit that we are doing. So that shows that the synergies are already starting to come in. Many of those are the 10% net head count reductions we've done in -- we did it already in January, February. So that's continued to come down. The biggest synergy bucket we have is procurement, and that's regrettably volume dependent. So we don't get the procurement savings before we get the volumes in. So that will come much later in 2021 -- 2025. But the same rate as we are having now will continue. And with already having 75% of the cost out, synergies in implementation means that as the business picks up as volume eventually comes, then they will come faster. But we don't foresee the volumes to pick up in second half.

Actually, I can see here that there is a question about that, too. Are you expecting further volume decline in H2 or a more stable development?

The macroeconomic is what it is at the moment, and the consumer sentiment is what it is. So we focus on what we can do ourselves.

Another one related to the same topic. What in your view is the root cause for declining volumes as consumer purchasing power should be gradually improving, and destocking should be mostly behind?

We are in discretionary spend, discretionary consumer goods, so that's with the consumer sentiment, consumer behavior. In addition, in the U.S., the big box players, the big resellers of our products, they're extremely focused, much more than in Europe, on working capital on their own inventory levels.

And then Nathalie, a question related to that topic. In BA Fiskars, you mentioned softness in sellout. How have retailers' inventory evolved? And is there room for restocking -- not destocking, restocking?

In Nordics, the sellout -- and Fiskars BA had a strong Q2. It was in Central Europe, Poland and U.S. where we saw the softness in sellout. And as we are in gardening in Fiskars, it's a very seasonal business. So they will not stock up ahead of winter. However, we, of course, have back-to-school that comes now in Q3.

And it's a good thing. You mentioned back to school. The next question is about that. Was there any difference on timing of back-to-school sales compared to previous year?

Majority of back-to-school will now be in Q3 this year.

Okay. Let me see. Then maybe a question about China. And Nathalie if you still continue, following the slowdown in China growth, are you expecting any pickup in sales growth in the latter half of the year?

No. The market in China is challenging. And as we saw that our e-comm in China really went down. And despite that, our local team were able to deliver 5% growth, thanks to all the other actions they did in the market, all the other building blocks they are driving on in China. But no, we don't foresee the consumer sentiment, the macros in China to continue, but have fantastic trust in our local team.

Maybe then some questions to Jussi as well. Gross margin has improved quite nicely. How do you see that developing in the future? And what are the main drivers behind it?