Harvia Oyj (HARVIA) Earnings Call Transcript & Summary

[Audio Gap] Ari Vesterinen, our CFO, will run the info and data together, but I will kick off with the outcome of 2019. I will briefly go through the performance of the last quarter as well as the full year of '19. Then we will have a very brief look on our strategy, what we are doing. And I guarantee, there is no magic. We'll stay loyal to the trade points we've been addressing in the past. We'll stay focused on those ones. Then Ari will have a bit of a deep dive on the financials of last year. I think, all in all, we had a very solid last quarter. And I think the Finns would tend to say, not so very bad. And I think we are very happy for the top line growth of -- slightly shy of 20%. And at the same time, we were able to improve our relative profitability. So it was a good job done, and I think the team has done an excellent job in all of the units and all of the key markets. In the U.S., and I think you remember, we acquired Almost Heaven Saunas at the very late of '18. Since then, we've been focusing on improving on that one. And towards the year-end, as I think, Ari already indicated on the quarter 3, the market demand kept on going up on the U.S. marketplace. And on the sauna factory in Renick, we've been improving the productivity in a very nice scale, and we are slightly ahead of our plans in that respect. Then jumping on the hard numbers of the last quarter. The top line grew very nicely, 27%. We reached slightly above EUR 20 million on the last quarter and an excellent growth compared to prior year. At the same time, we are very happy to be able to improve the profitability, and we exceeded EUR 4 million, EUR 4.2 million to be exact. And on the benchmark from last year, we beat that quite nicely. And we were also slightly ahead of our 20% target in that respect. So at least for one quarter, we've been able to beat that. And the earnings per share grows very nicely. And the last quarter is really very strong on the cash flow, and that also makes the full year cash flow extremely strong in that respect. Then taking a look on the full year perspective. Slightly shy of 20% top line growth, exceeding EUR 74 million, very good, good numbers in that respect. And then on the operating profitability, also a solid, solid performance in that respect and beating the prior year quite nicely. Earnings per share going to the right direction. Cash flow, EUR 15.2 million. And I think Ari will go in details and in that respect, we will be also beating our cash conversion benchmark in that respect. Net debt, okay, going slightly down and equity ratio staying solid or slightly improving on that. Then checking what we've been doing on the trade different parts, how to add value. First of all, on increasing the average share of our customers' wallet, we've been going up on the price point. Not very big steps, but plenty of baby steps in that respect. We've been introducing model -- new models, which are slightly more premium compared to the previous ones. One is the pillar heater, Glow, and that has been quite a good success in most of the markets. Our top seller in the pillar heater is Cilindro. We launched Cilindro Plus, which has slightly improved, slightly higher, a bit of a more, I would say, classical design. Been happy with that performance. And then especially on the professional market as well as a bit on the premium market, the Sentio by Harvia launch has been very solid in most of the markets. Then in the world of digitalization and the user friendliness, we introduced the Cilindro Plus with the Spot, which is the radio frequency-controlled, no wires needed, easy to operate sauna heater. And then on the wood-burning heaters, we updated and upgraded our top-selling model, the Pro 20, and I will follow with the rest of the assortment going forward. On the geographical expansion, that's where we also consider expansion; meaning, improving the quality of the distribution and improving the depth of the distribution. We've been doing a good job in the U.S. We renewed the offering. And thanks to that, we've been able to open new channels for distribution. On top of the previous online distribution, we've been opening also Home Depot, and they're very happy for our own direct sales performance, both on our web page-based sales as well as our telesales, an excellent job for the second half of the year. Scandinavia, we've been upgrading our presence in the Swedish marketplace, both on the consumer channel as well as on the professional channel. Having said that, I think it's good to remember the professional channel is rather conservative. So when opening a new channel, it will not automatically gain a big share. But gradually, you can build a business on that respect. Same applies for Norway and, to a certain extent, Denmark. So Scandinavia, a good step forward. And then all of the markets, we've been slightly upgrading our distribution, more premium and then more professional. That's when taking, not major step, but multiple baby steps in that direction. Then on the productivity. I think, both in the Guangzhou, China factory as well as Muurame, excellent job done. And I think team should be very happy what they've been doing. We are on the continuous improvement path, so we'll keep on doing the same improvements going forward. In Renick, the team has done a great job. With rather minor incremental investments, we've been able to improve the productivity in big time over there. And then on top of that, we've been utilizing some of the sourcing synergies, and those are now coming through on the P&L as well. U.S., I think it was a good decision to renew the models. And in that respect, at the same time, our average price has gone up quite nicely, and we've been able to open multiple new channels on top of the existing ones. Then the direct sales, I think the team, in that respect, has done a good job. I think at the moment, almost 40% of the top line is generated by our own direct sales. That also means that the profitability of the direct sales is somewhat better than on the third-party sales. And then the productivity, both on operating, on the wood as well as building and erecting the saunas, they've done a good job in that respect. And then on top of that, I think, in the early phase of the '19, we were able to gain synergies in the sourcing, and now they are coming through the P&L to the full. Then on the markets. As said on the last quarter, a very, very good performance in most of the markets. And I think the headline tell us a lot about it. Even though we had a very solid performance on the local domestic marketplace, most of the other markets beat our solid performance on the Finnish market. And we know that we were gaining market share and gaining speed on the Finnish market with a slightly shy of 5% full year growth. Then all of the product groups, and I think especially the sauna, both in the U.S., but as well as on the Central Europe, been growing very nicely. And then the steam generators, an extremely strong month -- the last 3 months. And then on the sauna heater, both on the electric and wood-burning heaters, a solid performance on that respect. Having said that, I have to say that the control units and Germany, they go hand-in-hand together. And that's why we are slightly below our own estimates. But then knowing the market situation and the demand, I think, we still did a good job on the German market as well as on the control units. We are at par or slightly ahead of our competition in that respect. On the full year basis, the same trend, not so strong top line growth. But I think on the other markets, we'd like to highlight the Scandinavia, all 3 markets did an excellent job. And I think the speed was gradually going up towards the year-end. Then on top of that, domestic market, both on the consumer, but especially on the professional, good job in that area. North America, we discussed. But also, I think, let's not forget what we've been doing behind the Almost Heaven Saunas, also on our heaters and component business, a very, very solid performance on the U.S. marketplace and upselling, upgrading a more professional offering also in the U.S. marketplace. Other markets, Central Europe, France, solid development, very strong growth. Switzerland, U.K., and it's not only prior Brexit, it's going to continue on that level. We feel that there is some kind of a sauna trend in the U.K. prevailing, and we are part of that. Benelux, Poland and then the Arab Emirates and related Arabian countries, a good performance altogether. Germany, we discussed on the channels where we are. We've been able to upgrade our offering. We'll be giving more professional service, but the top line was not according to our expectations. So that's also reflected on the product category, control units, to certain extent. Russia, I think we have maintained, if not gained, share on the electric heaters, wood-burning heaters. We, unfortunately, not been able to improve our position as we expect it to improve on the Russian marketplace. And I will not go deeper into the product category in that respect. That give -- this gives you a good picture on the quarter 4, and I think Scandinavia is clearly highlighted on this one. Germany, okay, not as expected. Other European markets, solid, double our expected 5% growth. Then North America, very, very strong and solid. Maybe it's good to remember, last year, on quarter 4, our North America was not extremely strong because we were more or less focusing on making the deal with the Almost Heaven Saunas. And during that time, I think the last month was not full in action with that customer, then we gained back in business on the beginning of this year. And then for the full year, the picture is somewhat similar. Some of the relative growth rates are different, but altogether, roughly the same type of a ballpark figure. Then I think you may ask on the organic growth. And on the full year, organic growth is roughly 5.3%. Then on the last quarter, 8.3% is the relevant number for that. So I think based on our estimate of exceeding 5% growth, we just made it. So that's our benchmark on that. And then on the product groups. Sauna heaters, very nice and happy for the 18% growth. Sauna rooms, as discussed. Control units, small plus, and I think that's a good job done in the marketplace. Steam generators, very strong and solid last quarter, finishing of the year. And then year-on-year, a solid picture on all of the categories. And then I think this gives you a picture of the seasonality and of the market development. So the quarter 1 is a strong sauna and spa. Then we have a bit of a more modest second and third, and then gearing up for the fourth quarter in that respect and goes both for the top line and then also on the bottom one in that respect. Then just recapping that Harvia is operating in all of the 3 sauna types: the Scandinavian traditional sauna; as well as on the steam baths and saunas; as well as the infrareds and the combination of the infra and traditional sauna. We'll not do any magic. We'll keep on -- focused on working on the 3 paths to add value, increasing of the share of our customers' wallet as well as the geographical expansion, i.e., meaning, also improving the quality of the distribution. So most likely we'll not open many new markets, but we will improve distribution in the existing markets. And on top of that, maybe open a couple of small markets. And the productivity. Even though the visual and the illustration is a factory, we will not only improve productivity of our operations in the factory as well as all of the processes, how we are working with our team, with our customers and with our partners in that respect. Now I think it's time to pass the word to Ari, and Ari will have a bit of a deeper dive on the numbers.

Thank you. Okay. Hello. So now the seasonality of Harvia is quite close what we think that, that is typically the international sauna business. So Q1 is strong and the strongest is typically Q4, and now it happened also for us at the end of the year. So we had a very nice growth rate of 27.8% during Q4. And well, it's not only Almost Heaven, West Virginia, [ Hanson, Denver ]. We had really also very, very growth -- very, very strong growth in our normal organic business, especially in the heater business. And on a group level, we had, for the total year, 19.6% growth and that's a really nice experience. And all the major profitability-related figures [ in broad ], especially, what was for us -- internal target was to streamline a little our net working capital. So we were able actually to reduce slightly our net working capital even if the company was growing almost 20% and to use the capital more effectively. And it shows up then in the adjusted return of capital employed without goodwill. Last year, we had -- in 2018, we had about 32% and now over 38% of the capital return. So that's really a remarkable improvement. The head count is -- actually was a little lower at the end of the year than end of the last year. And the main reason is actually that when we acquired the Almost Heaven Sauna business in U.S. at the end of 2018, we got 42 new colleagues in the group, and they were in that day already on our books. But the average number of employees grew during the year 2019, 5%, 5% compared to 2018. And when growing the sales, almost 20%, this really shows that we were able to improve our productivity in all areas. What is really interesting is also the adjusted operating profit, it grew 28% on the annual level and during Q4, 46%. And that was really interesting to see how, for instance, our U.S. operations got really up and running during Q4 for the high season of sauna business in U.S. But during the same time, all our other major units were improving their profitability, too. So it wasn't only U.S. So our finance situation haven't changed too much. What is interesting is the leverage ratio. We have announced that we tend to be between 1.5 to 2.5. Now we are on the lower limit of 1.7 already. So we have some power on our balance sheet to maneuver or pay dividends or make investments. So it's nice to have that possibility. The interest costs, they vary from quarter to quarter, quite much depending on the fair valuation of our fixed rate swap contracts. We actually pay quite the same cash flow of interest every quarter. The investments, they have been on the level of EUR 1.8 million, altogether. We haven't had very big machine investments. One major thing, what was part of the Almost Heaven Saunas deal, was that we acquired in April also the premises in Renick, West Virginia to be able to develop and codevelop the premises better with local management and team there. Otherwise, the investments have been pretty much replacements. In our China factory, we have acquired some sheet plate machines, but they are not very, very expensive. This is the structure of our shareholders. We have 53% of our shareholders in the nominee register. That means that, in practice, they are more or less outside Finland. And then our biggest shareholder since last November is Onvest, a Finnish investment company. The share of the households has increased very nicely. In fact, we had, during the IPO in -- or after IPO in March 2018, about 2,000 shareholders. End of 2018, we had got already 3,200. And during '19, we got another 2,000 shareholders for Harvia. So thank you, everybody, very much to coming to the club of sauna investors. Hopefully, you will be satisfied with your investment. And to show also how committed our Board and management is to the company, we also announced that we have 9.1% of our shares in the hands of the Board members, management team and also our employees in the factories. In fact, our management team members slightly increased their shareholding during 2019. About the dividend policy, we have announced that we pay biannually the dividends that have been now typically in April and October, at least 60% of the total income in total. And now the proposal of our Board at the Annual General Meeting is to pay altogether EUR 0.38 per share dividend, first EUR 0.19 in April after the Annual General Meeting and then according to the dividend policy, the next part in fall 2020, EUR 0.19 maximum. We pay out now approximately 74% of our total net income of the group to our investors. So it's rather high dividend payout. So just to repeat, which are our financial targets, the growth rate, 5%, it's organic, including some small add-on acquisitions. Our profitability target is to have the adjusted operating profit over 20%. We exceeded that during Q4. And then the leverage ratio between 1.5 to 2.5. So any questions or comments?

And now it's time to entertain questions or comments. So we...

It's Petri Kajaani from Inderes. Could you elaborate how has your seasonality in this business changed since the prior Almost Heaven Saunas acquisition? You said that international business has a little bit different seasonality.

Yes. Typically, sauna, in Central Europe and in U.S., in Northern America, in general, is a winter product. People know about the healthy benefits of having sauna. It's good against the flu and all the relaxation and blood pressure things. But people also get -- like to get into the warm sauna during the wintertime. And then they also invest in sauna more than during the summer months in those areas. Here in Finland, in Scandinavia, we invest in sauna over the whole year. But the main season, main peak of the sauna-related sales, is actually during Q2 in the distribution channels in Finland.

And your growth was very strong in North America, and it cannot be explained just by the Almost Heaven acquisition. There is big organic growth as well. From where channels, this has actually came from this growth? And how do you see your coming quarters or years in North America?

I think on the base business with the heaters and equipment, we continue with the same partners over there. We have been expanding a bit on the professional market over there, added a new distributor on that one. And then the North American Canadian part of the business, I think, we found a bit of a new ways how to boost that. But that's not visible on the last quarter. That's visible on the total year numbers and going forward.

Okay. And do you still confirm that when you ramped up the Almost Heaven Saunas and it is running as it's supposed to be running, it can make about 10% EBIT? Or has that changed since you are bringing really good numbers from North America now?

I think we have not disclosed in detail. But in the ballpark of that, we bought the company when this was slightly on red numbers. We took it quite fast on the black numbers. Then we were between 0 and 10 for some time. And now I think we are on the 10-ish and trying to continue to improve that.

Almost Heaven Saunas are actually Harvia U.S. Inc., as it obviously called, is also a platform for Northern American distribution of heaters. And we get also some profit for the heaters in the manufacturing plant in Finland. So that adds up also the profitability of the total group.

And I think the analogy of what Ari has been explaining that the heater and equipment business is clearly more profitable than the sauna. So structure is still valid. But for sure, we try to improve the sauna business as well.

You mentioned that in -- I think last time you said that, in Scandinavia, you had been granted access to some channels that you hadn't before been. And as it looks like, the numbers that you are performing much better than your competitors out there. How is your business in progressing in these new channels going now? And how do you see the future?

I think, first of all, this business is very conservative. So when opening a new channel, first, you need to show what you can do. And when you've been able to do that, then you can go for the next step, next step and the steps after that. So I think we've been opening the inroads for the premium channel. We've been opening the doors for the professional channel, but we've only been taking baby steps in that respect.

Okay. And your 2019 numbers were excellent in revenues, EBIT, cash flow, your balance sheet is in good position. Why such a small dividend increase?

We are improving our dividends constantly, and now we did it too compared to last year. So we have a quite stable dividend policy, and we pay twice a year good dividend.

And I think we announced we are gradually increasing the dividend. So this is gradual increase.

Okay. So -- yes, because it seems that you are loading this sort of elephant gun in something that you're trying to shoot now in this M&A field. Is this a wrong assumption that you're?

I think we have no obsession to go strong on the M&A. On the other hand, we, already long time ago, made a short list of candidates who could fit into our portfolio. They're in the field of the professionals team, maybe premium sauna market, professional heaters and equipment with a global perspective. And if those companies will become available, for sure, we would have a look and potentially have an appetite as well.

And we really like M&A, and we think that we can do it also in future.

Okay. And could you tell how is the coronavirus affecting your China factory at the moment?

Yes. I think we -- the people are coming back from the Chinese New Year holidays this Monday. We were supposed to open the factory on Monday morning. The local authorities were inspecting all of the facilities on the Guangzhou. And by the way, our factory is in Guangzhou, not Guangdong, like in some of the data. We mentioned this is in Guangzhou. They were inspected. We got stamps to be approved, and we are still waiting for the final stamp on the big paper and most likely going back to work on Wednesday morning, so tomorrow morning.

All right. And do you see any big investments in your factories in the coming quarters or years? Or is this current level?

I think this current level is rather sustainable. On the other hand, when you want to make a bit of a larger steps in the productivity improvement, some of the equipment is somewhat more expensive than we've been used to buy. And if we take those steps, then potentially, we may see a bit of a small hike on the capital needs in that respect, but not the big ones.

Maria looked like having some questions, too.

Okay. Yes, I give the microphone to her. Thanks.