Harvia Oyj (HARVIA) Earnings Call Transcript & Summary

Hello, and welcome on board Harvia's '22 review and also a deep dive on the last quarter of last year. My name is Tapio Pajuharju, I'm the CEO; and next to me, we have Ari Vesterinen, our CFO.

Hello.

So let's jump on the journey. And I think we have a very nice background picture. We hope that our customers and customers' customers have been enjoying the sauna and the health well-being on that one. We've been doing something else as well, and I will share what we've been doing in the short while. So here we go. I think all in all, solid performance in a rather challenging market environment, I would maybe even call a good performance. And on the last quarter, we had a strong EBIT exceeding 20% despite of the headwind on the marketplace. Total revenue declined close to 18%, mainly driven by the European market and even more precise on the European market, still the so-called DACH region, especially Austria, Germany soft. Switzerland already gradually, I would say, recovering and then rather polarized, I think, especially in the Northern America and the Americas completely enjoying a very solid growth. And then the Asian markets and the new sauna markets are gradually reopening after the pandemic. I think on the European marketplace, we've been seeing high inflation, some geopolitical issue after the Russian invasion to Ukraine. And on top of that, I think consumer confidence due to the energy prices has been record low, gradually improving but still rather difficult. Initially, in the past quarters, it's been mainly focused on the entry-level offering. Now we've been experiencing that even the luxury premium and professional end has been hit a bit. And I think people are very careful on the higher spending as well in that respect. But I think overall, still a solid good picture in that respect. The higher prices of the electricity has been visible in the demand of the electric sauna heaters. On the other hand, I would say, a consequence of this we've never seen a so strong quarter on the wood-burning heaters on the last leg of the year. And that's not only limited to Finland. It's a Scandinavian phenomenon, also in the Central Europe, Americas included. And I think this is a good example of the people's willingness to enjoy the healing with the heat and the well being organized by the sauna. And I think they are considering alternative options for the sauna heating in that respect. That's good. And keeping in mind that on the EOS portfolio, we also have the gas-driven heaters available. And now when the gas prices have been taking a bit of a step back, I think we have more opportunities on the multiple energy solutions in that respect. Overall, I think we've been addressing to the conditions quite well. We take measures on the cost base. We've been taking measures on the pricing, quite dynamic in that respect. And then also we've been negotiating with our partners on the sourcing and related systems on that. Net working capital, despite of the turbulence in the demand, the team has done a good job. And especially on the inventories, we've been adjusting quite nicely, both on the ready-made goods as well as on the raw materials and component and that resulted in a rather favorable cash conversion at the year-end. Most of you have been following the events in Russia already at the end of February, beginning of March, Harvia-branded products were discontinued in the Russian marketplace. And now finally, we have a full on solution for the EOS Russia as well. I will have a bit of a more to share on that one at a later stage. Production capacity, we've been addressing quite a bit. And I have to say once again that the team Harvia has been very professional, highly ambitious in very uncertain environments and been doing good job. So special thanks on behalf of me and also from the Board for the entire Harvia team and our partners in that respect. I think as an example of the excellent performance, the Q4 outcome exceeding 20% adjusted EBIT is a good sign. And I think we consider rain or shine, this is in a way a level we could deliver. Having said that, if something really bad would happen maybe occasionally, we will be slightly below, but I think in general, we would be above 20% EBIT in that respect. Longer-term perspective, despite of the not so good visibility for the near future, I think, is unchanged. Sauna penetration continue to be going up in all of the markets. And even on the markets would have been impacted by the inflation, consumer confidence, we see that people go to the web pages, a lot of traffic, a lot of activity. And I think when things are easing out the push button on the buy will also happen in a much more frequent manner than today. So in that respect, rather optimistic. Product development has been addressing, first of all, convenience, safety and lately also the energy efficiency. And then we've been tweaking our offering slightly towards the more premium, more luxury and more professional because that market seems to be going steady in global marketplace. Investment levels going forward, we are more than willing to invest that we have invested. But on the other hand, the previous levels on '21 are now landing on a normalized level, I think the '23 will be roughly that type of numbers between EUR 4 million and EUR 5 million in that respect. Still, when looking at the sauna market and the health and well-being and the healing with heat, I think we are absolutely in the right positioning. Now that's going to be gaining share, sauna penetration in the newer sauna market is still in the beginning and there are many emerging markets opening up at the same time. So I think the company will have a very good long-term perspective on that respect. Then I think a bit on the numbers. As I said, revenue decreased 18%. We had a bit of a tailwind on the currency, not a lot. And then I think some of you may wonder why the organic growth is something else on the 18%. It's good to keep in mind that we have exited the Russia and that's, in a way, taken into account on that one. Adjusted operating profit, slightly shy of EUR 8 million, almost 21%. I think it's a good achievement. Earnings per share, roughly on the right ballpark and then operating free cash flow, I would say, rather good, if not excellent, on the last quarter. On the full year numbers, roughly above EUR 170 million, a bit of a decline from prior year. Profitability, solid, 20%, slightly down from prior year. Earnings per share, roughly on the right ballpark. Ari will explain the exact details on that one. Cash flow, very good performance on the cash flow. And the net debt leverage, I think we are in a good shape. And you may remember that our guidance on the leverage is we are at the lower end of our leverage in that respect. So that gives lot of room to maneuvering in that respect. But the equity ratio is also very healthy in that respect. And I think we stay loyal to our 3 pillars for the profitable strategic growth increasing value of the average purchase. We've been doing actually a rather good job when calculating the absolute business sold and taking the average price on that respect, our sauna sales have been improving a lot. That's in a way the ultimate success in our part of the business. Especially in the U.S. with the updated and upgraded offering, we'd be very happy to see the reception of the marketplace and then also the newer sauna models, which have now been introduced in the Harvia offering. Globally, they are gradually getting attention and getting traction on the marketplace. New markets, I think they are opening, and they are performing better. Pandemic still prevailing in some of the Asian market, but if you've been following the news, China has now been gradually, opening. Korea following most likely the same pattern. So I think we're going to see a lot of good activity over there. Then outside of our stronghold, the Scandinavian sauna. We've been gradually making baby steps on the steam. We have introduced our own self-standing steam sauna unit for the global marketplace. Still not a lot of orders in that respect, but I think a lot of attention on the fares and a lot of interest. And I think gradually, that will be converted into orders going forward. Infrared, we are still a micro company on the infrared marketplace. But I think during the year, we've been doubling our infrared business, and I think we have good ideas and good, I would say, openings to take that in a next level. On the geographical expansion on top of the U.S.A., the whole of Americas have been developing well. And then there are a number of smaller new markets where we have activities. And I think we've been planting the seed and seeing already the first orders. And I think as most of you remember, this is a bit of a snowball effect. The first orders maybe 10,000, 15,000, 20,000, but they tend to be doubling in the function of the time. So in that respect, we have a good planted seeds in the marketplace. EOS, we've been rather European and rather successful on the European professional as well as on the premium marketplace. Now we have opened the first doors in the North America. And by the way, now finally, we can happily say that we have the approvals for the control units as well and the first shipments for the U.S. have been done. And at the same time, we are contemplating new opportunities in the Asia marketplace. There will not be any express route. But I think gradually, with the hard work, we will gain share in new markets where professional and premium is highly appreciated. Then in terms of the productivity improvement, capacity expansion, and I think, in general, continuous improvement. The team and the company has been doing a good job despite of adjusting the capacity towards the lower demand. We've been able to keep the productivity and improving the productivity and actually getting the benefits out of the investments we've been making in '22 and also '21. So they are now in full force. Net working capital, I think we have found ways how to address that, especially in the inventory levels. And then on top of that, we've been gradually working on other components of that. Then in the U.S., I think most of you may remember that we were in an old factory in Renick. We moved to the new factory in Lewisburg, and then we invested quite a bit on the new layout automation level 1 and 2. And gradually, as we speak, we are installing the Level 3 automation in the U.S. factory. And we really have our best sauna factory in the group in the North America and had a luxury to visit it last week, and the team has done an amazing job over there. So it's a job well done. I'm very happy to have this factory in the team. Then regarding Russia, I will not go in all the details, but I think we've been taking the steps very decisive and gradually but landing on a sustainable solution. Maybe for some of you, it took a bit more than time than expected, but now we have the solution. We have also finally exited the EOS Russian business, and we sold it to the founder of the company and the minority shareholder and he paid now the EUR 400,000 that we have in our cash books and balance sheet. There is still EUR 200,000 to be paid, and that's based on performance, and we expect that to be paid in the beginning of '24. Then I think closing in Russia is not a walk in the park. We've been working on that quite detailed. Now we have, at least based on yesterday's information, we have received all of the needed steps from the local authorities. So we are ready for the closing in the very short term. So in that respect, I think we are finally completely out of the Russian business. And I'm very happy for the effort our team has done together with our partners on the Russian marketplace. Job well done. On the geographical split, I will not spend a lot of time. I will more go to the waterfalls. But I think on this chart, good to see that, okay, Finland is coming back and a rather good performance over there. U.S.A. and the Americas completely doing good. And then I think sometimes we tend to forget that the Scandinavia has done a good job. We've been doing a continuous 3-year improvement in Scandinavia. And I'm very happy to see that I think now we are no longer at par. I think we are ahead of the competition and we can claim that we have the #1 position in the Scandinavian heater business in that respect. And then having a look on the sales by category, we can say that, okay, the continuous development in the sauna has remained strong. And then on the heater business, we have got a bit of a drawback, and that's in a way seen in the figures. Then on the category of the other product groups, I think that's where we are most likely not hiding, but they are not so visible. That's where we have the steam and infrared. And on the steam and infrared, we've been doing a good job, and that's becoming rather visible over there. And by the way, just to make everyone clear, steam generators are on their own category, but then the steam rooms and the steam saunas fall into this category, and that's where we have had good success in the Arabian markets and in some of the faraway markets where we've been doing projects and doing some cruise liner business on that respect. Then on the waterfall for the Q4. I think on this one, North America is rather evident, a good development over there. Other countries, I think it looks gloomy on this 1, in real life it's not. It's been rather good. But just on the fourth quarter, a lot of the projects were booked in the third quarter, and that's why it looks in this respect. And then the other European countries, that's a mixed bag. We have countries where we have rather good performance. But then the closer you get to Germany and the German-speaking countries, the figures are soft, and then they follow the trend on the German marketplace. Scandinavia, our good performance on the heaters, unfortunately, is hidden bit behind the number. On this number, we're also booking the Kirami hot tubs and they've been having a rather tough ride. And I think they are not the must-have purchases. The heater business have been doing good but the Scandinavian hot tub business has been suffering quite a bit. And on the Finnish numbers, it's the same. Heater business doing better than this and the hot tub business has been suffering. So that's in a way behind the scenes picture on this one. And then for the full year, roughly the same. Other markets, rather favorable. That's because of the Arabian market, some of the Far East markets where we've been doing good job on the steam, saunas, heaters and the Scandinavian sauna business. And then I think the rest is roughly the same as on the fourth quarter. Then on the categories. Last quarter, sauna heaters really suffering mainly due to the softness in Central Europe, sauna rooms doing a good job. Once again, the Scandinavia hot tubs is, in a way, skewing the picture towards more gloomy than it is control units, I think, following rather close with the general heat and equipment business. Having said that, almost 90% of the heaters we sell in Germany or DACH area come with the control unit, whereas rest of the world is still operating with the integrated nobs, which are at the equipment. And that's why the control units is a bit deeper dive than the heaters in general. Steam, a good journey, but I think hampered a bit by the Russian impact and hampered a bit by the, I would call, ex-Soviet countries where we've been also discontinuing business and having challenges on this one. And on the full year picture, roughly the same on this one, sauna room still having a good performance and the other markets -- other category doing good because of the infrared and steam sauna in general. Then I think this is an important picture. This takes us basically us beyond the pandemic and then having a bit of look in the back mirror. And I think quarters are not alike. And I think in the historical performance, and Ari knows it very well. The Q1 and Q4 have been traditionally rather strong in the sauna business. And I think it's going to be like that when the markets are normalizing. Then on the profitability, our ability to really ramp up the profitability with the lower volume is visible on this chart. And then I think 1 thing to remember is the Q1 of '22. I think the markets are now normalizing, but still, Harvia is up against an all-time high quarter in '22. So in that respect, I think we assume to be very solid, very good, but we will not reach the top line nor the profitability of the Q1 of '22. We're still doing a very, very good job in that respect. And then having a bit look on the aggregate growth levels when comparing quarter against quarter. On a longer perspective, we can book 11% growth on the quarter against quarter basis. And then on the operating profit 18% growth. When taking the full year perspective, the numbers get slightly better. So we book a 19% growth on the top line and a 30% growth on the profitability. And I think these are well aligned actually ahead of our own ambition and guidance. So company has been doing a good job on the journey. Then maybe just back on the basics, we remain very, I would say, eager to strive the business also beyond the Scandinavian sauna. That's why the steam and infrared are in the high visibility of this visual as well. Having said that, we are not expecting any miracles. They're going to be baby steps. And then on top of our organic normal business as usual, we remain open for opportunities for the M&A. I think we made our short list. We stay at most layer to the short list. We stay in good dialogue with the potential partners in that respect. And when the time is right, valuation is right, the company is ready to act in that respect. And then on our plan forward, no major changes on that one, I think increasing the value we have more on the convenience, more on the digital platforms, more on the luxury and more on the professional. And then the energy efficiency comes as a new component on that one. Geographical expansion on top of the Americas expansion, we are working on the Asia, Japan, Korea and some of the other markets on top of that. And then we keep on opening gradually small new markets in order to plant the seeds for the new business going forward. On the productivity, I think the plans we have in place they will enhance our capability in productivity on the operations as well as on our commercial capability in that respect. So we're in a good shape on this one. Then I think, Ari it's time for the financials, and please have a deep dive on the numbers.

Yes. Thank you. Actually, Tapio told already the most essential parts of the profit and loss statement. So I will give some additional information behind the numbers. First of all, we had quite big nonrecurring items, restructuring costs during the Q4. They were all together EUR 1.4 million. And the biggest part of that is the loss we booked from the sale of EOS Russia, it was about EUR 1 million. So last year, we didn't have almost any restructuring costs in Q4. So this point reduced the earnings per share quite heavily EUR 0.05. And then we had some restructuring costs -- saving costs also in our operations. And this increased also the annual restructuring costs to EUR 1.8 million all together. So those numbers reduced really the earnings per share, and we wanted to clean the table with all this Russian things now until the end of the year, and now here we see the results. Then operative free cash flow was, of course, great. We were generating really nicely cash during Q4. The fact is that, that was extraordinary strong. You can't ever have a cash conversion rate of over 100% all of the time. Now we had 150%. So we were actively reducing the net working capital and without sacrificing any level of the customer service. So now it has been easier to reduce the inventories when the purchasing and material flows are easening. Investments CapEx have been rather low compared to last year. We will have another slide for that, and it's simply because we invested very well during '21, increased capacity in many places and improved also the efficiency. And now it was more like a replacement and efficiency improving investments we did during '21 -- '22 and Q4. Net debt increased by about EUR 11 million. And the biggest reason of that was the acquisition of the EOS minority shares in July last summer, and we paid for that EUR 11 million. And that's the main reason for the increase of net debt. But in fact, we also generated a lot of cash, so it didn't land everything to the net debt. Leverage, we are still outside or under our long-term target, which is 1.5 to 2.5. So we have there really room to maneuver as well as in the high equity ratio. We have been rightsizing our working capacity during Q3 and Q4. And now we here see the results then in the number of employees at the end of the period. End of last year, we had over 800 people and now end of '22 over 600. So -- but currently, we are not reducing any more. We have now right level. In some places, we may have still a shortage of working hours, but now we have the right capacity, right people for that capacity. Here, we see really the huge cash flow what we had during Q3 and Q4, and it will not continue on that level. But traditionally, Harvia has been very cash generating company in the past. And that -- and we are back on that track again. During '21, we were investing quite heavily to the new factories and also increasing the value of the net working capital. But now we are back from that track again since the business situation is much easier in that respect. The net debt increased, yes, but we are, on the other hand, generating cash all the time. So it went down already about EUR 6 million from the end of Q3. And this will continue if nothing special happens. Interest rates have -- the market interest rates, they have increased actually during '22 quite tremendously from, let's say, 0 or even under 0 to 3%, and that's not hitting us very much since half of our interest-bearing bank debt is actually hedged or covered with interest rate swaps, which actually set us rather favorable level of interest until the end of 2026. And this interest rate swap, we have to evaluate separately every quarter, and it brings these big changes in the net financial items, but the dotted line actually in this right picture shows the cash-based financing costs, what we are paying now. And well, the interest rates have increased, yes. And we have a slightly more net debt, but it's still quite on a low level compared to the size of the company and the balance sheet, the interest costs. Okay. The level of investments as discussed already earlier, has been clearly lower over the last 4 quarters. And we have been investing almost in all our operations, something, but nothing special now. We have enough capacity in all of our places and great machinery, which can be used for future growth. The structure of our shareholders, end of last year '22, we had about 40% nominal registered or international shareholders. About 1/3 households and they are Finnish households since the foreign households, they are in the nominal registers. Corporations, they have been also increasing their share. So only the international part of the shareholding has decreased during '22, but the household and corporation part of the shareholding has increased actually. So we have plenty of shareholders. On the right chart, we see that end of '22, we had 46,000 shareholders. They are -- most of them are Finnish households. So it's nice they may also be our customers. They are consumers, and they hopefully buy also Harvia heaters in future. The Harvia's long-term financial targets, they haven't changed. They are really long term. We don't give guidance for special years. And now we still believe that the market is growing about 5% annually despite of some turbulences what were there during the COVID time and after the COVID time during this more time and inflation. But in a long trend, the market is definitely growing, but there are some disturbances on it. And we think that we are able to grow over the market rate. And we have really been that as Tapio showed earlier. And the profitability rain or shine, we are targeting an adjusted operating profit always over 20%. And as you see, we were able to do that also during Q3 and Q4 last year, and we will do it and we will hope to be able to do it also in the future. There might be some single quarters where we are with some measures, for instance, late, then might happen something. But as we have seen during the past years, we had even 26% of the adjusted operating profit. There is also a potential when onetime the sales could also increase better. And as discussed also earlier, the leverage range in our financial target is between 1.5 to 2.5 and we are still below that. Harvia's dividend policy regularly increasing dividends and pay out twice a year. And here is the Harvia's Board of Directors proposal to the Annual General Meeting to distribute for the result of 2022. EUR 0.64 per share. And the payments would happen EUR 0.32 in April and EUR 0.32 in October. For '21 results, we paid out EUR 0.60. So this dividend payout is increasing as it is in our dividend strategy. So questions, comments?

I think now we are ready for the operator on the telephone line. So please go ahead.

[Operator Instructions] There are no questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. Then I think we are ready for the questions on the chat?

Yes. We have a few questions in the chat. And -- Okay. That was partially already answered earlier, but let's discuss it a little more. Is EOS able to deliver products to North America market at this point?

Yes, we have a condensed offering, which is now approved by the North American authorities. And we have some deferred shipment. At the same time, we are expanding the range. I think today, we have like a half a dozen heaters on the portfolio and then control units according to that. But I think during the time we are expanding the offering, but we only gradually expand the offering.

Then M&A-related question. Fully bearing in mind that it is a decision for the Board to appoint a new CEO. Could you, Tapio, describe -- Sorry, that was not the M&A question. Let's talk that first. So could you, Tapio, describe what kind of qualities, competence and work experience do you think would be the important for the next Harvia CEO to possess?

That beyond my turf. It's a question for the Board of Directors. But I know that Harvia is a very strong company, and I know that strong companies will get capable leadership as well. So in that respect, I think we are in a good, good shape, and we'll have a good succession in the certain time. But I'm not able to entertain this question any longer. I know that Harvia is a globally known company, and we have a lot of, I would say, interest on the Scandinavian marketplace, but also in the global marketplace, we have interest and let's see how it goes, but it's not my turf to comment this one. This is more for the Board of Directors. And when the time is right, they will come out with the announcement.

Okay. Now the M&A-related question. How has the turbulence in the sauna and spa demand influenced the availability and price of the M&A targets? How do the sellers become more willing to sell?

First of all, a very good question. And we monitor this in a very timely manner. Most of the companies in our target list are owned by private individuals or families, they tend to follow what is happening with the marketplace maybe a bit having a delay compared to the stock exchange valuations. But when the time is right, valuations are right, there will be a matching valuation for both parties. And then Harvia is ready to address the cases. Currently, I think we are not there as of yet, but I think that will help us in that respect.

Okay. And then North America related question, again. Can you discuss your thoughts on North American demand? Is it just coming after Europe, what comes to the weaker consumer demand? Or would you be ready to bet that the growth of sauna penetration is so strong that Harvia would be immune to a weaker consumer environment? How has the demand been so far in 2023 in Northern America?

I think no one is immune. I think that's in a way we're clear. But I think the -- how would I say, the laws of the physics apply also on this one. And when you see the sauna penetration in North America, it's still on its infants, and it's really the emerging market. Sauna is not something people generally have in U.S. When you see what is written on the social media, I think even New York Times, not this weekend, but the weekend before, see what is forecasted on the TV channels, what celebrities and famous people are talking and telling about the sauna experiences is it's bound to grow. The question is how fast and how much market share we can take. And we have made a bet on our own almost 7 sauna business. We have made a bet together with our sauna builders and partners of the American marketplace. We are not the only game in town where there is competition. But I think we are in a very good position to gain share, and we are in a very good position to be #1 in the marketplace when time is evolving. So in that respect, I think U.S. market is very strong for a long time. And it's not related to U.S. alone. It's also for the Canadian marketplace and it's also cascading down to the Americas. And even though it's a bit, I think, for the Fin, unique to see that you have saunas in Colombia, Argentina, Brazil, Chile, they are emerging and they are coming. So in that respect, I think we are in the beginning of a good long journey. On the long journey, you always may have a bit ups and downs, but I think the long-term trajectory is very good and solid for Harvia.

In some investor meetings, we sometimes tell that there are about 1 sauna in Finland for 2 persons. In Germany, there is 1 sauna for 30 persons. But in U.S., there is 1 sauna for 300 persons. So if the penetration in U.S. would reach at least the German level, it would be a huge business.

Yes. And then on the demand, what we see what is happening in the marketplace. It looks solid. And I think you yourself can go on the Internet and see what is happening on the Costco, wayfair.com and all of the platforms in the U.S. So I think a lot of activity on the sauna. It's not going to fade away.