Harvia Oyj (HARVIA) Earnings Call Transcript & Summary

Hello and welcome to Harvia's First Half Year Review. My name is Tapio Pajuharju. And next to me, we have Ari Vesterinen, our CFO.

Hello.

We'll run through our performance during the first half. I will delve a bit deeper on the second quarter performance and results. And I think healing with heat during the first half has been a winning concept -- winning phenomen, also in sauna spa business, but also for the ones who have been able to join holidays in June or July. So everyone has been enjoying the healing heat. Very happy for that. All in all, Team Harvia has once again done a great job, and I'm very pleased and happy about that. And a strong demand has been prevailing in most of the markets. That has been boosting the volumes and all of that has been driving an excellent profitability for the company. I'm very happy to say that in all of the product groups, and this time also steam included, I know all the market areas have been enjoying growth. The ones who've been following the social media, common awareness and the activity on the sauna spa market have been most likely paying attention to the increased activity on the social media and the PR and publicity of sauna spa and especially in the U.S. marketplace, but also lately in the Central Europe and emerging in the Asia market as well. Having said that, I think within the team, together with our partners, we've been monitoring the situation and the sentiment of the market. We repeat the previous information that part of the increased demand is advanced demand in that respect. Supply chain, I think we've not been immune to the phenomen in the global supply chain. But together with our good partners, long-term partners and multiple sourcing, we've been doing a good job, and the impact has been modest also on the availability as well as on the pricing in Harvia, Sentiotec, EOS and Almost Heaven Saunas in that respect. Capacity during the second quarter, especially, we've been facing some limitations. Even we've been preparing for the increased demand in Romania and China. Those projects have been completed now. Finland, the expansion in Muurame is in line with the time line and budget, and the U.S. sales also proceeding according to the plan. I think during the second quarter, we've been revising some of our plans and we've been beefing up our CapEx and especially the increased capacity. In that respect, that we made some acquisitions of machinery and equipment in the Muurame facility, and we are planning to add some machinery in the U.S. as well. And on top of that, we realized that our sauna capacity, both in Romania as well as in U.S., need some incremental machinery. And then EOS, we are considering an incremental capacity expansion for the German factory in that respect. Regarding integration, I think very pleased to say that EOS is already part of the family, and we operate like we've be working more than 5 years together. So it's a very, very good team play in that respect. Kirami, the newcomer in the team is onboarding extremely well. And I think also in the culture created by the Family Rantanen, it's very close to the Harvia culture, and we fit very well together. And we are in line with the timing, and the spirit is excellent. So very happy to work with the Kirami team. Then 1 issue regarding the EOS. They are performing slightly ahead of the original plan. The approvals for the U.S. and North America is ongoing very well. But we've been setting the applications for a certain type of componentry, especially the electronics. And now we need to be changing some of the componentry in the application. That is a process we can maneuver, but that makes about 4 to 6 weeks incremental lead time for the approval. So I will estimate this towards the year-end, not anymore -- for the December, towards the year-end, we should be receiving the approval. Okay. First half, I think the ones who have been seeing the pre-announcement, very familiar with the top line revenue, excellent growth altogether, even though we had a bit of a headwind due to the currencies, mainly due to the U.S. dollar, a bit about the Russian ruble. But I think organic growth exceeding 60% is a very good, solid achievement. Operating profit landing at EUR 24.4 million, and in relative terms 28.2%, also a very, very good achievement. Earnings per share EUR 0.93, also a very nice improvement, more than 3x the prior first half year. Cash flow may be softer than some of you may have expected, but that's due to the investments we've been making as well as on the net working capital. And due to the current volatile atmosphere in the supply chain, we've been beefing up our raw material stocks as well as on the components and especially on the electronics. So we've been able to maneuver with the volatile availability. Net debt landing at EUR 38.4 million and equity ratio slightly shy of 40%. Then on the Q2, roughly the same pattern continued. And once again, unfortunately, a bit of a headwind on the currencies, but still a very solid growth, organically 60% and slightly shy of 90% on the total terms. Adjusted operating profitability, EUR 13.2 million and once again exceeding 28%, and then earnings per share, EUR 0.49, a nice improvement on that respect. Operating free cash flow, we've been investing quite a bit on the capacity expansion and as well as working capital increased EUR 6.5 million. And of that, roughly EUR 3 million coming from the acquisitions, and rest is organic in that respect. Then when basically taking a quick look on the strategy and the application and implementation of that. On the first part, which is the increasing of the value of the average purchase, happy to announce that our digitalization is taking good steps forward. MyHarvia is being well received. And we've been selling it very nice on the markets where we've been introducing it. By the way, we are also getting applications for the North American market on this one. So most likely beginning of next year, we are ready for that. On the clean burning and the emissions, our GreenFlame family has been expanded, and we've been launching the Harvia GreenFlame Linear family on top of the Legend, and a good -- good feedback from the domestic market and gradually also in the Scandinavian marketplace. Complete sauna rooms doing an excellent job in Central Europe, the same in the U.S., but we've been slightly impacted by the available capacity and the lead times, which used to be traditionally calculated in weeks. Currently, we are calculating them in months and then a fairly high number of months in that respect. Kirami, we'll be not having it on board on the business for some time. First of all, it's completing the slot on the backyard paradise extremely well. And now we have the missing element available, especially for the Finland, Scandinavian countries, central part of Europe, but there is also traction elsewhere for this type of equipment. Geographical expansion, this time not opening many new markets, mainly focusing on where we are. Central Europe, we've been taking good steps forward, both on the Harvia Sentiotec and EOS platform. And then Scandinavia, we've been enjoying a very strong performance. And I think the last bullet point tells where we've been doing a good job. We've been overall gaining share in multiple markets. Good news is that I think pandemic hit the Southern Europe, Arabia market, Asia quite badly, especially on the professional part of the business. I think there are initial signs that they are emerging and getting closer to the normal, not yet to the normal, but closer to normal. Our Asian insight, even though we've been not able to travel, but our small but very capable team over there has been improving our insight to the market and we've been taking maybe steps forward on that respect. And I think later in the year and next year, we have more to report on this one. Productivity improvement. I think the investments we've been making, they have been both improving the productivity and increasing capacity. EOS transition into the new factory is in line with the initial time line. We should be producing in the new facility towards end of October, beginning of November. Finland doing extremely well. And then we also made a decision to beef bit of the machinery and already by the time when the new expansion is inaugurated, we will also have bit of an incremental machinery compared to the previous planning in that respect. Supply chain, not a dull day on that area, so to say. But I think we've been doing an excellent job in the supply chain globally, together with our partners and our innovation and R&D has also been finding ways how to tackle and how to do an alternative bill of material, i.e. changing some of the components or something which is available. So in that respect, our capacity to serve our customer has maintained to be on a good level. And then the new incremental projects are to be coming in place. Some of them later this year, some of them early part of next year, and we'll come back on those at the later stage. All in all, I think pandemic has done a bit of a hit for the sauna spa industry, especially the new markets. But altogether, the underlying solid demand has been favorable in that respect. Some of that is advanced demand, as we've been saying, and will not impact our long-term vision of the total market development. Our operational capability has been good. And even though we've been increasing the people, we've been able to stay safe and healthy in that respect. The productivity has been maintained or improved in all of the units. Sourcing environment, I think, repeating this on the third time and for a reason, it's not been normal, but the impact to Harvia has been modest. And on top of that, we've been able to address the pricing, some of those in terms of price increments and some in terms of surcharges. And we keep eye on the ball. And if needed, we have capability of addressing this going forward as well. And then the most important thing, we stay focused on the health and safety of our people, our customers and the whole ecosystem. And so far, we've been doing a good job on that respect, and we'll maintain focus on that area. Then on the geographical split by the markets, I think not the major change in that one. All the markets performing well. But the relative share of the domestic market is decreasing, still a substantial part, 21%. Other European markets already exceeding that. Germany becoming importer 1 , North America, slightly shy of 20%. And the share of Russian market stable compared to the past. Then on the product groups, even though we've been doing an excellent job on the sauna and spa business, heater is still more than 50% of the total business. It's not visible over here very well. But later on, we'll see that the steam business gradually balancing and actually increasing in that respect, and that's usually very good for us and for the markets where steam plays a big part in that respect. The same picture on the Q2, no major change in that respect, mainly the same phenom and same pattern, both in the geographical split as well as on the sales by product group altogether. But that may be more important is to have a look on the increase where it's coming from. Finland, slightly shy of 30% increase, maybe looking modest. But I can assure that means that we've been gaining share of the domestic marketplace and in multiple channels, both on the retail market as well as on the professional market, Harvia has been gaining share quite nicely. And our premium end offering as well as the more advanced offering has been gaining share quite nicely. Scandinavia, where we are not the market leader as of yet, but I think we've been closing the gap, and we are gradually catching up with the number player quite fast actually in that area. Germany, Central Europe, a good performance altogether; Russia, stabilizing and now delivering a, I would say, reasonable growth. North America, still growing very nicely. But I think due to the coming factory transition, some of the campaign activity we've been driving down, so that we don't disappoint the customer base. And on top of that, I think the ones will be monitoring how the summer has been in the northern part of the U.S., it's been extremely hot in the U.S. and the other countries, they've been coming back in a nice way, and we see emerging activity on the markets, which used to be either completely closed or they were quite silent or close to silent in that respect. And then the same picture, snapshot from the Q2. I think the overall message is more or less the same, maybe just Scandinavia are gaining a bit more speed, and then the rest is roughly the same. And then by the product group, the first half, sauna heaters enjoying a good growth. Sauna rooms and Scandinavian hot tubs, now we need to keep in mind that Kirami has been on board only for a very short time on that one and control units. And I think the high-growth on the control units, which is exceeding the growth of the sauna heaters, also tells that we've been successful in selling control units to some of our peers and competitors in the industry, and then we are very happy for that. And the steam generators are gradually coming back. And the ones who have been on board for a longer time, most likely remember that we were struggling a bit on last year, for the last 2 quarters, due to the pandemic we got to hit on this one. Now we are back, more or less back on track. Even though the category as such is still quite small for Harvia, but it delivers a good healthy profitability in an area where we would like to gain speed and put more effort on that one. And then on the Q2, the same pattern most likely prevails in all of the categories. And based on our read, no major change in the development or all the trends on that area. Then I think this picture is good to keep in mind. And traditionally, the Q1 and Q4 has been the strongest one on the industry. And then the 2 quarters in between have been a bit of a mild. This time, I think there was overlapping demand from Q1 to Q2. And then Q4 is going to be strong, but we see also that the indications for the whole year are very close to the -- I would -- and I haven't done a detailed analysis if the analysts have been updating their outlooks. But based on my last look, roughly at par with the ideas of the analyst in that respect for the whole year. Next one is just to remind that Harvia is a player for the sauna and spa industry. In all of the 3 sauna types, we have a very strong grip on the traditional so-called Scandinavian sauna culture. Our grip is okay, but not strong enough on the steam industry. And then on the infrared industry, which is gaining speed, especially on the U.S. market, we are still very early on our journey on the infrared. I would like to do more on these 2 latter ones. Then on the strategic plan, I think we will keep eye on the ball. We'll not deviate from the previous good strategy plan, and we'll keep focused on the 3 pillars on that one. And by the way, on the picture on the far-right corner, that's the expansion of the Harvia plant in Muurame. And as of last Friday, we already have the roof. We have the concrete floor. Concrete is drying. And when it's dry enough, we can start operating on the floor and gradually start building up an installing machinery over there. So we should be well in time on that expansion. Then maybe a word about Kirami. Very happy to have the Kirami team and the offering on board. It's one of the oldest still water hot tub, so-called Scandinavia hot tub suppliers in the marketplace. We paid EUR 7 million upfront on the company. And then there is a delay purchase price between EUR 0 million to EUR 4 million after 3 years when we see how it's performing. And on top of that, with the 100% of the Kirami [ Hawaii ] we've got 50% share of the Metagroupp, which is basically making the heater and heater components for the hot tubs, and then also for the sales unit in Sweden, where we got 51% share. Going forward, we expect to have roughly EUR 1 million synergy benefits out of the deal by the end of '23. The company, the brand and the offering and the management will continue independently, but they will get benefits in-sourcing and in distribution and marketing, working with the Harvia team. I'm very happy to have Mika, Eero Rantanen and the top management of Kirami onboard. And maybe just to recap on the magnitude of the Kirami net sales. As of last day of the April of this year, the last 12-month sales were slightly exceeding EUR 22 million. 42% of the sales came from the export markets. Domestic market is still the majority, close to 60%, but we've been seeing an increasing trend on the exports. And I think together with the Harvia team, that's an area where we can help support Kirami team to be even more successful going forward. I think this is all from my part at this stage, and I will pass the word for Ari for the Harvia figures, and Ari will take a deeper dive on that one. And thereafter, we'll have time for entertaining questions and comments. So Ari, please.

Yes. Thank you. So as you saw, we had a great growth of 83% during the Q2. And during that time, we also invested quite much in the production facilities. We also increased our net working capital. When our volumes increased over 80%, the net working capital increased only 30%. So the overall effectiveness improved quite nicely even if we invested more money there in net working capital. And the same actually happened with adjusted operating profit, it was almost 2.5x, as high as a year ago, the growth was 146% there. So that was really a great, great quarter. The operating cash flow, free cash flow, it was under the last year's level because of the quite high investments, we had over EUR 4 million during Q for investments. And overall, in first 6 months, EUR 5.5 million. So this affects also the operating free cash flow slightly. Here, you can see the net debt and CapEx and finance cost development. Our net debt increased about EUR 12 million compared to end of quarter 1 due to the investments and Kirami acquisition and also increase of the net working capital. End of Q2, we had cash resources of over EUR 20 million, and we have been able to buy and pay all the acquisitions and investments out of our cash resources during the springtime. So we haven't increased the interest-bearing bank debt at all. And that's also visible on the right side of the picture that our cash-based interest outflow hasn't increased at all. Here, you can see the investment amount what we had in Q1, EUR 1.5 million. And in Q2, EUR 4.1 million. And the biggest -- really the biggest part of the investments in Q2 were in U.S., and we will -- we have started already, as Tapio told, the construction works, and the hall is almost ready in Finland, but there will come also some machinery still during the 2021. So we estimate that for this year, end of this year, our CapEx, the investments will be in the group around EUR 10 million. Earlier this estimate was EUR 5 million to EUR 8 million, but now we have increased and fine-tuned our planning since these investments are really good. We need new capacity and effectiveness, productivity improvements and those investments, they have rather slow -- sorry, rather short payment times also paying back the investments. The structure of Harvia shareholders has changed a bit compared to last year, end of June. We had end of June 2020, about 48%, the nominal registered, that's foreign, outside Finland investors, shareholders. And now it's about 44%. And what has actually increased quite much is the share of households. There are many Finnish households, from 17% of the shares to almost 24%. And that's also visible on the right side of the picture, that end of June we had almost 24,000 shareholders holding Harvia shares. So very welcome all to the Harvia Club, and thank you for joining. And the value of the shares end of June, they were clearly higher than in the beginning of the year, EUR 950 million. Now they are slightly more again. So the Harvia long-term financial targets, we haven't changed them. We have experienced advanced demand. We have experienced short-term growth or midterm growth of the market. But in the long term, we still stick on these financial targets that the average annual revenue growth is over 5%. And adjusted operating profit margin is also exceeding 20%. And the leverage level is somewhere between 1.5x to 2.5x. Now the leverage was 0.9x. And Harvia is also a good dividend payer. We -- our target is to pay 60% of the group net results as dividends. And as you see, we had actually the highest dividend ever paid during Q2 to our shareholders; the Harvia 70 years anniversary dividend EUR 0.12 and EUR 0.20 the normal dividend. And there is also a dividend payout planned for the coming fall, maximum EUR 0.19. So that's our presentation. At this stage, any questions? I think we will take first the questions from the telephone line. We have also very nice questions, interesting questions in the text chat. But first, the telephone line, please.

By the way, regarding telephone line, we've been planning to maybe cut the telephone line as the chat system seems to work rather well. So this is just maybe pre-announcement that maybe next time, we will not have the telephone line. But if you insist, please let us know. So Please go ahead.

[Operator Instructions] We have an audio question from the line of Maria Wikstrom from Danske Bank.

I got to say in the beginning that maybe I'm sure like the telephone girl, but I actually like to ask the questions rather by phone than on the chat, but maybe you need to have consent on this one. So my first question is, I think this is probably the -- kind of like a first time, if I remember that you hinted about the order book strength in the report. That -- like, can you little bit like elaborate that? I mean, how you -- because -- I mean, I think previously, you have said that, I mean, we don't really have that long visibility in your sales going forward. So now you talked about the order book. So can you give us a little bit of color? I mean, what you said in your -- Tapio, in your statement in the CEO comments for the Europe, please?

Yes. I don't have the detailed information, but the ones who have been on board since the IPO. During that time, Harvia roughly had a 2 to 3-week horizon on the order stock. Gradually, it's been going up to a number of weeks up to months. And today, in certain categories, our order book is strong and exceeding my fingers in one hand on the months. So that's something we have not seen in the past. And that's why we've been increasing capacity in certain areas. And we'll continue doing that.

And then maybe continuing on this one, as I think you said in the presentation that you think that for the current market expectations for the second half, I mean, seems realistic to you and probably don't have the estimates now in front of me, but I have a feeling that, I mean, the market is currently expecting for the growth to come down on the second half, I mean, where is the growth figures that we looked in the first half. So is this, I mean, what you are currently seeing here as well that the growth is unlikely to continue as high as it has in the first half of the year?

Tough question because I didn't pay attention on the growth factor as such. I was more looking at the total numbers and maybe just taking average of all of the 3 ones, I know. But I think all in all, my own personal feeling is that the same trend what we've been seeing now seems to be continuing. But the phenomena of the first quarter and fourth quarter be the strongest will not go away. I think it will automatically, even though our geographical split is wider than in the past, the same phenomen will stay in the business. Ari maybe -- you've been longer in the business.

Yes. Yes. This is -- this has been traditionally window business in quarter 4, and quarter 1 have been the strongest. But now during this pandemic time, the pattern has changed a little during the summertime, customers also received goods quite well. And we have got also the company Kirami, which has the strongest sales during the summertime. So this pattern will stay. That's my prediction, but it will not be as strong as in the past.

I think in terms of the actual outcome, I'm not too much worried about the demand. I'm more worried about certain componentry if that's going to be available. And so far, we've been selling pretty well on a stormy ocean, and I expect to do the same going forward. But I think that's more my worries than the current demand atmosphere.

Yes. And that strong demand also encourages us to invest in the capacity. So we see there a certain need also in future.

Okay. And then finally, if I may touch on the -- I mean, the Russian market. I mean, you said that your new distribution structure has shown its benefit. So if you could little bit elaborate, I mean, the distribution set up in Russia and what you are currently seeing in the Russia market in terms of the demand?

In the past, we used to have -- and that's concerning Harvia, we used to have 3, I would say, equally powerful distributors. 2 in the Moscow region, but covering the whole of Russia; 1 originally from the St. Petersburg region, but also covering the whole of Russia. We limited the number of distributors into 2 and had a bit of a more consensus how to operate, how to deal with the physical distribution and especially how to deal with the web stores in Russia marketplace. In the electric heaters, Harvia has been doing a very good job, including new models, increased value of the purchase control units and the entry-level steam. In the sales of sauna, we still have work to do. And one of the themes for going forward is the sauna market. And then EOS is in the premium projects for the professionals as well as for the wealthy individuals, and they've been doing a good job despite of the pandemic, where the EOS team is also installing some of the machinery during the worst time of the pandemic. That has been a struggle, people not accepting people to go to their homes and not even into the hotels and spa. So that took a bit of a hit in the early part, but now it seems to be balancing out on the Russian marketplace. I hope this covers your question, Maria.

Okay. Perfect. I'll jump back on the queue. I might have one more to follow up. But let's take for other people first.

Any other questions on the telephone line, please?

There are no other audio questions at this moment.

Okay. I'll read here the questions, very good questions we have got through the chat. First one. The first cornerstone of the strategy is to increase the average purchase price. How much average purchase has increased during the time the company has been listed? How much the organic growth comes from the growth of the average purchase during H1 2021, for example?

That's something we don't openly disclose. But by the product group, we are internally monitoring it. And take an example from the heaters, it's been doing a very good job on the heater marketplace. Same applies for the ready-made saunas. Steam, yes, we've been doing it, maybe not equally successful. And then on the other parts of the thing, doing a good job in that respect. But we don't disclose the exact quantity or magnitude of this.

How is Harvia advancing in the steam and infrared market? And what is your comp position there? Do you have own capabilities to capture market share in these areas?

Maybe entertaining first with the steam. On the residential steam, I think we have all the means to make it happen. We have the physical product. We have the offering. We have the distribution network, and that's what we are driving forward. On the professional steam, it's more of a -- it's not the actual delivery business. It's more of the reputation business and to earn the reputation takes a number of years. And our number of years is still in the infancy. So we need to take steps going forward. But at the same token, we're also monitoring if there will be something where Harvia could speed up the development. And together with the EOS steam offering, I think we are closer to our target also on the professional area, but we still need to get number of installations and prove that our systems and solutions do work and deliver the West end result on the steam area. What was the other part of the -- was it infrared as well?

Yes.

Infrared, we continue doing the componentry for the infrared sauna market, but we are mainly focused currently on the premium and super premium. And where we are missing is the entry-level infrared cabin market where we do partner with some of our suppliers, and we operate on the Central European marketplace, especially close to Austria, Germany. Then on the Russian marketplace, we also do commercial business with that one. And lately, in the U.S., we have a very limited offering, testing the waters in the U.S. But having said that, infrared is an area where we could take bigger steps, we just need to find the right formula, how to make it happen, and that's what we are developing as we speak.

Okay. How strong is the order book at the moment compared to the beginning of the year?