Harvia Oyj (HARVIA) Earnings Call Transcript & Summary

Hello, and welcome on board on Harvia First Half Review. My name is Tapio Pajuharju, I'm the CEO of the company. And next to me, we have Ari Vesterinen, our CFO. I think I will share our view of the past, maybe share a bit about the future as well. And I think Harvia has been gaining market share in all of the markets. On the other hand, I think the impacts of the Ukraine war and also the fading away impact of the advanced demand had an impact on our top line and bottom line, and I'd add deeper on that one. Not our best quarter, on the other hand, it's good to remember that we were fighting against our all-time high quarter in that respect. Popularity of sauna continues to increase. Sauna penetration is growing in all of the markets. I think we're facing more challenges than we expected on the Q2. And some of those do continue going forward, but I'd add deeper on that one. Most of you remember that Harvia had a business of 6.5%, slightly ahead of EUR 11 million in Russia. That has been now impacted both directly and indirectly and then declining sales in Germany and especially on our e-commerce 3 large customers and these e-commerce, we were feeling some of that and experiencing some of that on the Q1. Unfortunately, that continued on the second quarter as well. And it's spreading around on the adjacent markets, mainly on the DACH area. Then market share, I think even with the softer number than expected on Germany and DACH area, we've been gaining share. The same applies for Finland, Scandinavia, U.S.A. and especially happy of the performance in the other markets. And I would like to highlight especially the Arabian region markets, Asian markets and of the Asian markets, maybe Japan, especially doing good on that one. The sales force we have had on the Russian marketplace, we'll be redirecting to new markets and to existing markets where we have been gaining speed. So very happy for that change. On the entry level, saunas and heaters, yes, the demand was weaker than expected. And I think the supply chain has been destocking and digesting the inventory. And in the past, I think everyone in the industry was buying whatever because everyone was pushing a high order stock forward, and now that has a bit of a backlash on that one. Having said that, very strong and solid on the premium and luxury categories, both on the heaters and equipment and saunas and especially the professional is now gradually returning very strongly back on that one. And then I think our strategic ambition and impact is to sell the whole sauna. We've been very, very good in that. On the other hand, then the heaters took a hit. And then I think something we were not able to fully forecast and predict is that the Kirami still-water hot tubs take a major hit partly due to the economic and partly due to the travel, and that's something which we need to tackle and figure out how to do that. Sales definitely had an impact on our profitability on the absolute terms. And then on the relative terms, I think the sales mix was good in strategic terms, but then on the profitability, in relative terms, unfortunately, we booked a very solid margin in saunas on the absolute [ euros or dollars ]. But then on the relative profitability, it's clearly less than we booked on the sauna heaters and other sauna equipment and that's now fully visible on this one. And then I think the slower rotation of some of the Russia-related receivables, we've been preparing for that and took an extra reserve for a potential write-down -- write-off on this one. I will later quantify that a bit more in detail. Then even though some of the cost inflation is also fading away, still quite a bit of the core raw materials going up, we've been able to mitigate that extremely well. On some areas, there is bit of a delay. And for those ones, we're going to be fully in place for the second half of this year. And I think on top of that, most of you may remember that we didn't have any own factory operations in Russia, but we were sourcing some of the steel componentry out of Russia. We've been now in-housing that to the full, main part to our own factory in Muurame and then part to a third-party in the southern part of Finland. That also increased cost a bit and now we've been covering with the incremental activities on the pricing, also that's for the second half. I think going forward, when we -- last year, we used to push a fairly heavy and high order stock in front of us, like all of our customers, that's now faded away. We've been going more to the normal. And the normal means that we have visibility for 2 to 3 weeks ahead. And we see that some of our customers are still destocking even though the fundamental demand is good. So I think that impact we cannot avoid. We're part of the same value chain. But I think the overall sales to the end consumer is good and solid. Then on the -- I think the energy price, and that's maybe especially Finland, it's been inflated to a level which may be beyond any means. But I think in general, all of these headlines may have an impact on some of the markets. At the end of the day, still the sauna use for a normal family, even if the cost would be double of today, then you would pay a maximum EUR 4 per sauna session. When you divide that with 3 or 4 or 5 people, the cost is actually not that much. But I think the perception may still have bit of an impact on the way forward. Long-term growth outlook, and I think the market penetration is unchanged and especially when stating that the market will grow double-digit in value, that's very, very foreseeable. And then volume and pieces, maybe for the short term, there will be a bit of an impact, longer term, also on the volume that will prevail and will be going forward on that. I think the team Harvia and our partners have been doing a very good job despite of the extremely challenging situations on the supply chain and on the market. Our cost base and operations, we've been addressing that to a certain extent. Net working capital, we've been also addressing, unfortunately, the softer top line did not bring the full impact of our activities visible, but we continue monitoring and acting very agile on both on the cost and the net working capital going forward. On our capital investments, which used to be on the very high side last year, for this year, we've been only doing fill-in investments, mainly improving our efficiency in the operations, something also in the logistics. And going forward, we will only increase automation to certain factories. And for this year, we're going to be substantially below prior year in that respect. Then having a look on the second quarter, and I think it's good to remember that we are now comparing to our all-time high quarter. Revenue decreased unfortunately slightly and then the mix changed rather big way in that one. Operating profitability took a hit and went down due to the sales volume as well as on the sales mix. And then on top of that, the potential reserve for the write-off of some of the Russian receivables, I think, had an impact. And I think now we are booking a 19% operating profit in relative terms. And if without that Russian reserve, we will be having 20.5% or 20.6%, depending on how you count. This time also the currency was luckily favorable, and we got bit of a tailwind on that one. Earnings per share, slightly down from prior year, almost EUR 0.50, now we had EUR 0.40. And then the net working capital did have an impact on our operating free cash flow, and we were not able to boost as much as we had in our plans. Debt has been increased and Ari will come back on that one, equity ratio is still very healthy, we had 44% as we speak. When taking a look for the first half, then we are still on a growth mode and having a decent top line growth and beating the market on that one. And then on the operating profitability, unfortunately, down from prior year all-time high numbers. And then on the earnings per share, we are also slightly below. But I think, all in all, very solid performance in a very challenging market situation. And by the way, for the ones who have been wondering what is happening in Asia, the picture on the left-hand side, that's from a very recent project in Tokyo. It's called [ Metsa Spa ] very close to the Tokyo Center, equipped with very nice Harvia equipment over there. So very happy for the performance over there. Then our 3 strategic paths for the continued profitable growth. We've been increasing value of the average purchase, and this time, maybe even ahead of the plan because our share of the complete sauna rooms taken a big step forward, unfortunately, then taking a hit back on the equipment sales, which is highly profitable for Harvia, but that's mainly and only related to the German and DACH area in that respect. Premium and professional, it's maybe hidden behind the numbers, but over there, we've been having very solid and strong performance of all of the brands. And especially on the EOS, they've been doing a good job on the luxury and on professional in that respect. And then I'm very happy to see that the professional channel is coming back after the COVID effects. And most of the markets are opening or reopening the facilities, and there are only very few markets where there are lockdowns on the saunas as we speak. On the geographical expansion, we continued solid game in the U.S. The Finland also extremely good growth and a good extension in our distribution. Scandinavia remained extremely solid and strong. And then maybe on the Asia and Arab countries, they don't get the spotlight because they are the other markets, but over there, we've been performing very, very good. And on the Japanese market, together with our partners, it's very systematic, solid [ wave ]. The showrooms we've been building together with Bergman, it's now up to 5 showrooms. And I think the quality of the showrooms, the customer contact and route to market is improving as we speak. And then the EOS launch, now we have the Finland, Scandinavia working and for the U.S., we have approvals for the heaters. We are still pending on the control unit approval, but they will be in the pocket very soon, and then we can do a full-blown launch in the U.S. And then on the productivity improvement, our operations, for sure, we've been working on the productivity. At the same time, we've been adjusting our capacity to meet the demand and work on the net working capital and that the team has done a good job on a challenging environment to adjust our capacity accordingly. The expansion investments are now a bit muted. On the other hand, we've been doing lot of small add-on investments to improve automation and productivity over there. The Lewisburg factory we acquired a bit more than a year ago and fully equipped, backed to be the factory of the future for U.S. for the latter half of last year, is now in full speed and actually slightly ahead of the plans and doing an extremely good job. And also the offering and the versatility of the offering has been improving and our capability in the U.S., both on the operational as well as on the offering has improved substantially. We are very happy for the performance and the team has done an excellent job on the U.S. marketplace. Then on the mergers and acquisitions. I think the Kirami, we are very happy for the acquisition and such, adding value on our backyard paradise concept. It's a pity that it took a big hit on the domestic marketplace and some of the European markets, mainly due to the economy and then the travel hit on that, which we have not been exploiting to the full is the capability on the saunas. And I think on the picture, you see one of the saunas they also make, they already made saunas which you can lift on your front yard or backyard, and this is something we're going to speed up the sauna development on Kirami. Sauna-Eurox, we've been very happy and pleased with the cooperation and also adding value to Harvia's stone portfolio, both on the premium as well as on the decorative as well as on the professional pre-heat-treated stones for the professional use doing good on the marketplace. It's a sad story on the Kirami taking a hit on the domestic marketplace with the hot tubs and on the core markets, but it will come back when the travel is easing out. Impacts of the war in Ukraine, I think this is partially already old news and most of you have been experiencing what is happening. We got both direct and indirect hit. The top line we used to have in Russia was slightly ahead of EUR 11 million. Harvia has stopped the business in Russia in month of March. EOS is continuing the pre-agreed and prepaid projects, where we still do have a, whether fortunately or unfortunately, this time unfortunately, a lot of projects to be finished, and we will be finishing towards year-end in that respect. And that's why when you look at the numbers on the year-to-date and last year, Russia looks a bit funny, but we've been speeding up the progress of the EOS project in Russia and try to complement them as fast as we can. Then the rotation, we still have some receivables from the Russian customers. They are in good faith and paying as fast as they can. And I think we will get the money. But to play safe, we took a reserve and precaution for roughly a value, which Ari will disclose later on. And today, we are monitoring the situation extremely closely and trying to stay agile and then move. And by the way, on the Ukrainian marketplace, even though they are badly suffering and really, really in a difficult situation, I was pleased couple of weeks ago to receive the first order from Ukrainian marketplace. So sauna is back on the agenda on the Ukraine. So that's, in a way, good news on that respect. Then on the geographical split, first. I think the impact on Germany is very visible on this chart, and that's also highlighting the impact of Finland and then rest of the markets and especially strong development on the other markets. And even though it's still a small share, it's been more than doubling from 3% to 7%. And the other markets is, in a way, hiding a lot of effort on the new markets, Asia, Arabian origin markets, some of the Latin America, where we have good inroads, so those are well-hidden over there. Then I think on the pie chart on the right, that's also a very fundamental change on that one. The ones who remember the old history, heaters always used to be more than -- clearly more than 50%. And last quarter 2 was a bit extraordinary, it was just 50%. And now the change on the saunas and heaters is really big. Saunas fell below 50%, now 42%. And I think on the heaters and equipment, the beauty of Harvia is that we've been able to obtain a very solid profitability even on the entry-level heaters, and that's why our relative profitability has taken a bit of a hit. Very happy on the development on the saunas in terms of strategy. Then in terms of the profitability, unfortunately, our skill set and capability to obtain equally good margin in the saunas is not there yet. We've been improving it day to day, and then going forward, we get better. But to reach the exactly same profitability will take minimum 18 months, 24 months going forward. So that's -- there is no magic route, we just need to take baby steps on that one. And then the rest of the portfolio is clear. The other product groups is also increasing quite nicely. That also tells that we've been selling the whole portfolio, which is exactly according to our strategy book in that respect. And then taking a first half look, picture is roughly the same, but the -- I think the volatility is less on the 6-month perspective. But I think the core message is exactly the same. Then diving deeper on the markets, individual markets and even though the numbers like in Finland is not very strong, we've been gaining share with our number in that respect. Same applies for Scandinavia. And even though the German market number looks awful and is soft, with this number, we are ahead of the game. So in the German marketplace, there has been a lot of destocking and net working capital actions by our customers. And in this stormy water, we've been sailing rather well. What has been evident in Germany on the Q1 has now been spreading to some of the other European markets, mainly on the DACH region. And then Russia, as said, the EOS impact on speeding of the project is visible on this number. And North America, sauna sales doing an extremely good job. On the heaters, bit of a destocking impact visible over there. And then the other markets doing a very, very good job. Unfortunately, still too small, but we've been increasing the efforts and actions on the other markets to basically offset and mitigate the Russian impact in that respect. And having said that, it's very evident we cannot immediately replace the lost Russian volumes, but we can gradually gain new business, and I think in the months and years to come, we're going to be easily replacing the lost Russian business, but not in a month, not in a quarter, not in a year, but in a midterm, that's very, very doable. And then on the first half, picture is roughly the same. The Germany impact is less drastic, but overall, the picture remains the same. And then having a look on the product groups, and this is maybe where, first of all, very happy for the sauna room. And when you keep in mind that the Scandinavian hot tubs has taken a major, major hit, the sauna rooms has been really selling well. Then unfortunately, the sauna heaters, due to the Germany and DACH region mainly, has taken a hit. For sure, Russia is also part of that impact. Control units tend to follow sauna heaters, but I think this is also a good indication that it's mainly been hitting on the entry-level heaters and the entry-level heaters are usually with the integrated control unit. So with the separate control unit, has taken a lesser hit than the heaters in general. Steam generators, unfortunately, suffering from the Russia and [ dead Soviet Union ] impact. And then the other category is doing a very good job and growing nicely. And then the same picture on the first half, it's a bit muted, but roughly the same core message on the first half. Then having a look on the revenue, and this is maybe the ones who have been longer on board may remember that the sauna business, we've been describing, it's seasonal business, quarter 1 and quarter 4 used to be the strong ones. And now for last year, we've been pushing a bit of the high order stock ahead of us. It's been becoming more, I would say, evenly split. And I think on top of our geographical expansion, the split will be more even. But I think due to the pandemic, the split has become even a bit too even, we foresee that the pattern to return a bit more seasonality is there. So we estimate the Q1 and Q4 to be stronger in the future as well. And I think that's part of the normalization we foresee. And on the adjusted operating profit, a big step down. On the other hand, we are still roughly on the 20% profitability. Going forward, we have good activities to bring it back to higher level than that. On our strategy, remain extremely loyal on the chosen path. And as we speak, we are actually very strong on the traditional sauna. We've been gaining a bit speed on the infrared saunas, but not to the extent we wish and we have in our plans. And then on the steam rooms, it's exactly the same. And on the project business, steam is very essential part of that. So that's where we still have lot of ideas and lot of action and ammunition to improve Harvia game plan on the infrared and steam. And not to mention maintaining the good speed and momentum on the traditional sauna. On our strategy, remain extremely loyal, also on the 3 paths for profitable growth and on increasing value of the average purchase on top of the heater on top of the sauna, I think on the accessories. And especially going further away on the new markets, we realized that the accessories play a bigger role. And then also the infrared and steam plays a bigger role. On the geographical expansion, I think on top of the emerging and reopening Asia, we have good inroads in the Americas. On top of the North America, i.e., Canada and U.S., the Latin America is waking up. And then lately, even though it's very, very small, but sauna is gaining speed on the northern part of Africa and then also on the southern part of Africa, so we'll also focus on that. But it's good to remember, when opening a new market, the first year is maybe EUR 20,000 to EUR 30,000, but thereafter, it starts like a snowball impact going forward. And on our productivity improvement, we will stay very loyal to the action plans we have taken. And then on the output and on the agility of addressing and adjusting the output, I think we've been increasing focus on that one. And then when market goes up, we are ready to make it, and if it goes down, we are ready to adjust our capacity in that respect. And the same applies for our cost base. So we remain extremely active and agile addressing our cost base going forward, if needed. Then I think on the acquisition of EOS, this is already also old news. And as agreed on the time of acquisition, now we have bought the remaining shares and became a full owner of the EOS company and all the assets of theirs. We are extremely happy of the performance. The team EOS has done a good job, and they've been both growing the top line and bottom line. And we use the same multiple for the valuation of the remaining shares. And I think the whole management team of Harvia and everyone on board is extremely happy and pleased that Mr. Kunz will continue in his current capacity, both as the Managing Director of EOS Group as well as a member of the management team of Harvia, so it's extremely good step in that respect. And then the transaction does not affect the ownership of EOS Russia, we still own 80%, and the remaining shares is with Vasilij Sosenkov, who is the CEO of EOS Russia. And then I think I would pass the word to Ari, and Ari will take a deeper dive on the financials.

Okay. Thank you. Actually, Tapio told already the essentials of the profitability of Q2 and H1. But probably you have noticed that the operating free cash flow has declined, and that's mainly due to the high level of net working capital. It's actually on a record high level, and that's mainly due to rather high inventories, which will go down during the next quarters. We have been serving our customers well, keeping high inventories and now they are on the top level. And since the advanced demand faded away a little, we will reduce also the levels of inventory in next months. The leverage 0.9 is still under our, let's say, long-term financial targets. And as Tapio told, we acquired EOS majority with EUR 19 million at the end of July. And if we would have had already that net debt or additional interest-bearing debt in our net debt, the leverage would have been in -- on the level of 1.4. So still quite low leverage. The number of employees at the end of the period, it hasn't actually increased anymore. We are now looking quite, let's say, actively at our capacity and the size of the organization and reducing some work staff where possible and needed. Here, we see the net debt and leverage development. As I said, in Q3, the net debt will go up about EUR 19.3 million, altogether, minus then what we can generate cash flow during the next quarter. The net finance costs, we have been quite successful actually in hedging our interest risks and swaps and the IFRS valuation of the swap derivatives have -- bring us value on paper, fair valuation has been quite positive during Q1 and Q2, and that's why we are showing actually negative net financing costs during that time. But as you see with the dotted line, the cash interests, they have not gone down so much, but they are also going down because of our new financing agreements at the end of the last year. Of course, the EOS acquisition will increase the level of finance costs slightly. But anyhow, yes, that's the story behind the negative interest right now. And as said, the investments in tangible and intangible assets, they have been now substantially lower than last year, and this will be also the base during this year. We have a lot of good capacity and machinery. But altogether, we always replace some machines and increase our production efficiencies when needed. The amount of shareholders at the end of June, it was 45,600 almost. And what I noted for July, it has been even going up. So especially households, private investors are very much interested in having the Harvia shares, and that's nice. The share of the international nominee registered shareholders has gone down slightly compared to last year, but no big steps there. And our long-term financial targets, they are still the same as in the past. And now in the profitability, we were slightly under this long-term target in Q2, but we still -- and believe in these targets, and they are intact. And as Tapio said, we believe also in the annual revenue growth over 5%, it might be 2 digit even at least in value. And Harvia's dividend policy, we pay increasing dividends biannually, twice a year, and the next dividend payout will be in October, EUR 0.30 per share. Questions?

Now I think we are ready for entertaining questions. So operator, please go ahead.

[Operator Instructions]

While we are waiting, I think we can also activate the chat, and I think you can post your questions on the chat as we wait.

I have here a long list of questions, and we can start to work on them to...

Unless the operator -- how does it look?

We have no question at this time.

So then we start entertaining from the chat.

Yes. So there is a first question or the most recent, let's put it that way. What is the value of the current outstanding receivables in Russia after the provision? We don't disclose that so exactly, but we have substantial receivable there still. And as you probably may -- can calculate, we made a reserve of potential write-offs based on the IFRS 9 rules of about EUR 670,000 in Q2. And there might come some other write-off reserves in future, but the fact is that our customers are willing to pay, and they will pay. But some payments are now overdue quite heavily. So that's the current fact. Do you have a view of inventory situation of your customers currently?

For some of the customers, we do keep some on the pulse, especially on the e-commerce customers, which are rather transparent. Then for some of the smaller, like, sauna builders in larger quantities, we don't have a call. Therefore, the do-it-yourself customers, we also have a good grip. And then for the wholesalers, we have a good grip. But I think overall, what we see in the -- especially in the European marketplace, destocking, depending on the category or not, it's just a -- maybe headquarter action. People are exercising and executing that in every category, even if there is need or not. And I think, unfortunately, we are part of the same theme, even if there is no need on that. So -- but I think that will ease out and now some of the customers are returning back, but that's what we've been experiencing for some time. And it will not fade away completely, but I think gradually fading away.

Is EOS doing business in North America yet? And there was another question also about the EOS product approvals in U.S.

Yes. At first start with the product approvals. We have now the approvals for all of the heaters. But the EOS premium and professional heater need to be operated with a control unit. The control unit is still pending, but we'll get it in almost in near future. And then we are good to start. We have met with the core customers. We are ready to launch and start. And as we speak, there are a couple -- actually one very nice luxury spa, which is already operating with EOS equipment. They've been recently opening that spa. So yes, we are in the market, but we have not sold a single heater as of yet. But when we get the control unit approved, then we can start business, both in the Eastern part of U.S. as well as on the West Coast. Midwest, we are still negotiating with our customers.

Okay. What is the estimate of Russian sales during H2 '22?

For Harvia, it's very easy, it's 0. For the EOS projects, we try to complement all of the projects, which are prepaid, and the amount was higher than we expected. It's EUR 2 million plus a change on that one. So that's roughly the volume we need to complete.

Any chance that you have to buy the last 20% of EOS Russia due to the sales option?

I think we -- there is no obligation as we speak today, and we've been investigating what are the alternatives or no. That's when we are ready, we'll come back with the way we move forward.

North American market outlook. Have you expanded your distribution partner network? What kind of plans you have going forward?

I think North American outlook remains strong and steady. But I think what I would try to explain in most of the markets, North America used to be a bit seasonal and then will be a bit seasonal now when the order stock is in a way normalized, but we've been just going through our demands and plans for the fall and our forward looks good.

When it comes to the infrared sauna, they are easier to install and all these advantages. You have mentioned many times that you need to improve that field. What is your strategy with infrared saunas? Is there something that prevents you to grow in that segment?

We are not known to be a big player in the infrared and infrared market is, in a way, two-folded. One is the North America, and they have 3 or 4, I would say, mainstream brands on the infrared. To break through with our brand and history in distribution, not easy. We've been doing it gradually, but then do it in big way, very slow. We do that. And then on the European marketplace, it's roughly the same, but the number of players are basically 2. To break through and be at par with this, not easy and not fast. So on top of our organic growth, we remain open for M&A actions as well. And if and when they prevail, we are ready to do some action on that.

Electricity prices, quite high in many European countries. And future indicates, it will stay on a higher level. How that will affect demand in coming 6 to 12 months? Will sales in Germany stop?