Harvia Oyj (HARVIA) Earnings Call Transcript & Summary

Hi, everyone, and welcome to Harvia's January to September '23 Earnings Webcast. My name is Matias Jarnefelt. I'm Harvia's CEO. And with me, I have Ari Vesterinen, who is Harvia's CFO.

Hello.

We will be first covering the key developments and numbers through my presentation. That will be followed by Ari's session where he will be covering the numbers in more detail. And after that, we would be happy to answer your questions. You can submit your questions via the chat box that you see on the screen in front of you. The highlights of quarter 3. I will summarize it in 3 ways; strong profitability, strong cash flow, but sales declined. In terms of our profitability for quarter 3, our adjusted operating profit was good at 20.3%. And this is in line with our long-term financial targets of 20% and above. This result was due to our systematic and diligent work on pricing, cost structure, and also optimizing our operations to fit the market conditions and opportunities we have. Our cash flow remained strong. This was also reflecting successful inventory management and net working capital management. We executed a small acquisition through the quarter as we bought an electric mechanical timer manufacturer in Italy. They have been supplying components to our volume heaters, and this was an opportunity for us to secure supply and optimize our supply network. In terms of sales, we saw a decline. It was mainly driven by our performance in Europe. Actually, outside Europe, the market and our performance was good. The overall revenue decreased by 9.2%. As I said, it was mainly driven by Europe, but it also was impacted by our exit from Russia, and we also had some exchange rate impact. In terms of organic growth, we delivered minus 4.9%. There were big differences across markets. The traditionally largest area for Harvia is Europe and, in Europe, market headwind continued. On the other hand, in our overseas markets, in particular North America and key markets in Asia, we saw strong support in the market, and we were successfully utilizing the opportunities. As the group sales declined, we also saw a decline in most of our product groups. Sauna sales was stable, and there were some smaller categories where we actually saw growth. Now, it's very clear that our main priority going forward is to drive growth. We see the biggest opportunities, at least in the short-term, in the markets outside Europe, because the overall market dynamics are stronger and these are emerging with lower current sauna penetration. At the same time, we are working heavily to utilize the market opportunities that exist in Europe, and we also are working to make sure that once the European market will return, we are best positioned to capitalize on the opportunity. To support our future success, we have optimized our structure and made some changes to our management team. I will be covering this more in detail later, but the idea here is that we have now a structure that is aimed at helping us to drive organic growth, increase our customer orientation, in particular in the very important overseas markets, and also help us drive more innovation and more exciting product portfolio that we can then sell. We also hope that this structure will support our future M&A activities. We will continue to drive geographical expansion and also increase the average purchase and, as always, we keep on optimizing our operations and drive productivity. Looking at the quarter 3 figures, revenue decreased by 9.3% to EUR 34 million, as said. Part of it is coming from decline in Europe, also part is coming from exchange rates. At comparable exchange rate, revenue decrease was 6.8%. Organic revenue growth was minus 4.9%, the difference comes from a Russian business where we exited the market and, as part of the exit plan, sold unit EOS Russia. That transaction was complete end of last year, still some of the figures were in our base during the quarter 3. In terms of adjusted operating profit, it was at EUR 6.9 million, making 20.3% of revenue. At comparable exchange rates, the adjusted operating profit was 20.6% of the revenue. Earnings per share were EUR 0.24, operating free cash flow was strong at EUR 8.3 million. We have very solid balance sheet and cash position. Our net debt was EUR 40.6 million and leverage 1.1. And just a note that this is below our long-term financial target of 1.5 to 2.5. Equity ratio at 47.7%. Looking at then the 9 months of this year, picture is rather similar, revenue decreased more during the first half and we saw a, I would say, less decline during the quarter 3, but for the 9 months, it's still at 17%. At organic -- when we look at the organic revenue growth, it was minus 13.6%. The adjusted operating profit for the 9 months was EUR 24.1 million, and that's 21.7% of revenue. Earnings per share, EUR 0.86, and operating free cash flow of nearly EUR 30 million. To deliver these results, we have been executing systematically the cornerstones of our strategy; increasing the value of the average purchase, geographical expansion and driving productivity improvement. In terms of the average purchase value, a key priority for us is to grow our sauna room business. The reason is simple. If we sell a heater to a sauna, we talk typically of sales of some hundreds of euros. When we sell a full sauna room solution, we talk about thousands of euros. Also, the customer preference in the overseas markets is ease of buying, ease of owning. And there, these full solutions, ready-made solutions are something that the market prefers. We also sell complete systems, not just the heater. For example, in the wood burning heaters, we not only sell the heater but the chimney connection kit, safety rails, floor protective panels, et cetera, et cetera. One of our means to drive average purchase value is also that we drive geographical expansion. Because what we see is that when we go to what I would call growth markets, the typical customer is more involved and they want a great sauna experience and they are more ready to invest more. In terms of geographical expansion, we continue to drive hard our expansion outside Europe. North America has been a great story for us for a number of years, and we are seeing very positive signs also in Asia Pacific. We established our joint venture. We announced in March this year, kind of the intention to set up this joint venture with a local partner, and that has now been registered and that happened in August this year. And we are full swing in preparing the joint venture to begin operations soon. We are also making sure that more of our portfolio is available in the overseas markets. In this business, certifications and market approvals play a key role, and we are also taking steps to accelerate our market entry work in this respect. In terms of productivity improvement, this has been for a long time Harvia's core competence and the work has continued. We always see opportunities for optimization, and we take all the opportunities we find. Supply chain, pricing, cost structure, as I discussed, have all been tools we have been using to improve our performance. Net working capital, we have still been able to reduce it while keeping good availability and service level to our customers. And as I mentioned, we made a small acquisition to improve and strengthen the robustness of our supply chain for our volume heaters. Some more details about that. Relatively speaking, it's quite small in the scope of Harvia, but this actually is a critical component that we use in our basic sauna heaters. And it's also key for the existing certifications and approvals that we have for these products. And there was a need to secure supply for the coming years, and there was an opportunity then for us to do this investment. The company was founded around 10 years ago. It's based in Italy, close to Venice, employs 13 people, and we are now fully taking control at the date of announcement. They will continue in the existing premises and also will be serving not only Harvia, but Phoenix El-Mec, other customers as well. Looking at the revenue split first by market, North America, which is on red here, is our largest reported geographical segment, growing from 21% share a year ago to 28%. Another significant change here is that the orange or yellowish bar, which represents Germany, has decreased quite significantly. A year ago, it was 15% of our sales, now it's 10%. The overseas markets beyond North America represent 10% of our sales. In terms of revenue by product group, the largest product area is heating equipment, which includes sauna heaters, control units and also infrared heating elements. And that's the red on the right-hand side chart. We saw increase in the share of sauna room sales to 30% of our revenue, mainly this was driven by growth in North America, where majority of our business is fully ready-made solution sauna room sales. January-September figures for your reference, reflecting a rather similar picture that I covered on quarter 3. Then looking at revenue changes per geographic reported area, we can see that there's the big red bars in particular in Germany, where our sales decreased by 40%, which is on top of a significant drop already a year ago. So, German market is very much on a low point, as we see at the moment. We also saw decline in other European countries. In terms of the other markets, other countries declined, as reported, by EUR 0.5 million. But actually, this includes EUR 1.7 million decline from Russia. So excluding Russia, this would have grown by EUR 1.2 million. This was mainly driven by few key markets in Asia. And North America, the star of the group, growing over 20% during the reported period. And again, for your reference, the similar numbers for the first 9 months of the year. Here I would make a point on the other countries where decline was minus EUR 6.6 million, and that's exactly what we lost with our Russian exit during that comparison period from last year. So excluding Russia, the change would have been 0. In terms of product groups, the largest decline in heating equipment, which is natural, as that follows closely our total revenue performance, being the largest product area for us. Saunas and Scandinavian hot tubs was flat. Looking into this, saunas grew and Scandinavian hot tubs declined. Accessories and heater stones, very slight growth. Spare parts and services declined, and this was also impacted by Russian business, because there we had an over-proportionate part of service business. Here, again, the numbers for the 9 months of the year, for your reference. Then, looking at the kind of performance with top line and bottom line over kind of a few past years, this chart shows you that. So, the red bars represent this year, and dark blue bars represent last year. Now, looking at the revenue development during the previous 4 reported quarters, our revenue drop was, give or take, roughly EUR 10 million from the comparison period. Now, in quarter 3 this year, the decline is clearly less, EUR 3.4 million. Then, looking at the adjusted operating profit, again, the red one being this year, dark blue being last year, we can see that 21%, which is the light blue, was kind of the peak period for us, and still quarter 1 last year. Now, the earnings benchmark started to decline already quarter 2, and also they have been on lower level during quarter 3, so we have been delivering rather close to the same level with decline of EUR 700,000. Now, we see plenty of opportunities for growth, because growth is the key priority for us. And we're playing in all 3 sauna types, and we play across geographies. In the traditional saunas, there's plenty of opportunities, although it's our stronghold. We see opportunities to grow with the heater sales as the sauna business continues to grow. In particular, in the short term, we see growth outside Europe. We also see opportunities to grow our heavy-duty commercial equipment sales, and we see definitely a lot of opportunities to grow our sauna room and complete solutions business for the traditional sauna market. At the same time, we see that infrared and steam play a really important role in the global sauna market. And there we are, relatively speaking, still small, and we are actively looking for opportunities, both organic and acquisitions, to accelerate our growth path in these areas. And the objective is clear. We are and we intend to be the leading player in the sauna and spa market. We continue to drive our strategic cornerstones. We continue to increase average purchase value. We continue to innovate. We continue to deliver excitement and new reasons for consumers and customers, also on the commercial side, to invest in even a better sauna experience. We continue to invest in our geographical expansion, and we keep on working on our productivity. Now, I would hand over to Ari, who will cover the financials in more detail.

Okay. So, this format you've been seeing probably multiple times. It's good also to compare this with Q2 figures, when we look at Q3. So, now we had a revenue decline of 9%, and it's substantially less than what we had in Q2. In Q2, we had a minus 22%. So, the decline of the sales has gone down, and we see positive development. But on the other hand, also our comparison figures are now on the lower level. So, it's easier to get closer to the last year's levels. Harvia is, generally speaking, a very, very profitable company. And our adjusted operating profit reached, again, the 20%. We've been actually slightly over that quite a while. But 1 day, it might be 0.5% or whatever under it, but we consider it internally as a floor. We don't want to go under it. If we go under it in 1 single quarter, we will adjust the cost structure and pricing and everything as quickly as possible. Okay. If we 1 day have some bigger acquisition where the relative profitability might be under that level, it might take some time to come to the level. But you know Harvia is a quality company with high profitability and also with high operating cash flow. Our net debt went down during the last year altogether EUR 20 million, even if we have been paying about EUR 12 million dividends to our shareholders, and so we can generate very strong cash flow. And the reason for that is, of course, the relative profitability. It's quite on a higher level, but we also manage our net working capital actively. And since we don't need so high inventories right now, the availability of insourcing has improved quite much, and we have also had some decline in the sales, so we've been actively reducing, especially the inventory levels in the group, and we can serve still the customers very well. What we have also reduced or had to reduce in certain units is the headcount of employees. The biggest change is, you can review that from the interim report, have been in Romania. Almost half of the headcount has been reduced due to the weakness in German-speaking area in the sauna sales, but we look at the opportunities very closely and continue developing that company further. We exited the Russian business a year ago, so actually the headcount because of the Russian exit is 26 lower than a year ago. And in all the other companies, we have had some minor reductions of the headcount, except in U.S., where we have employed more people for the production and for the office work and for the sales work, and also due to the Italian acquisition, we got 13 new colleagues. As I mentioned, the cash flow of Harvia has been always very strong, and we have had now altogether 5 quarters in a row where we actually have stronger or the same cash flow as our adjusted EBIT. So that has been possible because of the reduction of the net working capital and rather low investment demands. This isn't the normal level. We might be somewhere between 80% to 90% cash conversion in the long run, but currently this is the case. We've been able to produce cash quite quickly. The net debt is going down quite rapidly. A year ago in Q3, we had net debt of EUR 60 million. That was due to the acquisition of the minority of EOS shares in July. We paid about EUR 19 million. And now end of Q3, we have actually earned already that cash back. So we are now with EUR 20 million less net debt. We have a very strong cash position compared to the size of the balance sheet and the activity of the company. We want to keep [ watch ], so to say. We want to be able to act in smaller acquisitions out of our own cash resources, bigger acquisitions. We have, of course, much more capacity to get new financing from banks or other sources. The net financial items are now under, let's say, on the normal side as a cost side, since we have about EUR 75 million interest-bearing debt in the banks. And we are paying almost market-level interests on top of that. But we had quite good interest swap contract converting the variable interests to fixed interests, and that swap contract produced us quite much positive value when the market interest were growing in 2022. Now that contract just helps us to keep the average interest rate level a bit lower than what are the market interests. We had our peak investment year in 2021, almost EUR 12 million. After that, we have been able to maintain our capacity with lower replacement investments, which concentrate more on improving the efficiency of the production or other activities. And we have also free capacity still to use in our factories due to the current market situation. The development of the shareholder amounts. You see on the right side of this chart, we had end of September about 42,900 shareholders. And most of them in amount are Finnish households, left picture, but we have been also able to increase again the share of international shareholders. International share funds seem to be interested in Harvia still and looking for the opportunity to have positive yield out of the dividends and the value increase. We've been able to increase or the company's share capital has increased in the value from last year end of September EUR 260 million, now end of September EUR 480 million. So, at least during the last 1 year, this has been a pretty good investment for the shareholders. We haven't changed our long-term financial targets. Okay, somebody may have asked -- when we had a growth rate of about 60%, why don't we change? Now we have a decline of 9%, why don't we change? We stick on our long-term financial targets. We see them coming from the market development and we want to be very profitable as we have been always. And our target of the adjusted operating profit exceeds 20% and the leverage range is between 1.5 to 2.5. Currently, we are substantially under that range, but, well, we have then cash to maneuver, for instance, on M&A market. We pay also twice a year the dividends and the last payment actually happened on Monday this week. And that was the second installment of the 2023 payment, and the first payment happened on the 2nd of May this year. So, probably you would comment this part.

So, one slide before we finish this part and take your questions. So, as we announced a couple of weeks ago, we are changing our organization structure and we are making also some changes to the group management team as a result of it. The target of these changes is, first of all, to increase our customer and market orientation. We will have stronger regional teams that can serve our customers better, cross-sell, essentially sell everything Harvia has in the portfolio that fits the market needs, and also represent the voice of the market towards our research and development. With the establishment of innovation and technology and products and solutions functions, we aim at having kind of a more holistic portfolio, less overlaps, fill the gaps, and also we want to have the most exciting and most innovative portfolio. As we want to be the leaders, we want to make sure that it will also be visible going forward, even more strongly in our portfolio and offering. The new structure also allows us to leverage group synergies. Many of the acquisitions that we have done over the past years, of course, there was a pandemic as an example. But we saw when we looked at the structure currently that there were further opportunities for us to optimize the way we work and with this structure we believe that we can deliver additional synergies to what we already have done. Now also this clarification and shaping of the organizational structure will also make it easier for us going forward to integrate potential new acquisition targets as the ways kind of have been already clarified and optimized on Harvia site. The key elements of the new organization are 4 geographical sales regions. Now we're really elevating North America as it deserves, with being nearly 30% of our revenue. So, North America will be led by Head of North America going forward; Northern Europe, which is of course our traditional home market; Continental Europe, which is our European home market; and Asia Pacific, Middle East and Africa, where the main role of the sales region is to create, almost like a replicate, the success we've seen in the U.S. and Canada. They are very interesting markets like Japan, South Korea, Australia, China, et cetera, where we see multi-million potential for growth going forward. And the role of this region is to make sure that we actively drive market growth and actively position Harvia as a leader in these key markets in Asia Pacific MEA. 5 group functions, I said, deliver innovation, deliver even a more competitive and complete products and solutions portfolio, make sure that we have maximally utilize the synergies, we run our operations and logistics network globally as efficiently as possible, and also we have very professional support functions that support the performance of our units. EOS is a very important brand for us. Say, the master brands in the group are Harvia, which is the mother brand of the group. Great sauna experience for the volume market. EOS is our #1 brand for the highest end market with the best sauna experience. And to make sure that EOS will maintain its distinct, exciting brand identity and that we can develop it even further, we decided we want to have EOS represented directly in the management group also going forward. This new organization structure will be effective as of 1st of January and the preparations to have it up and running are in full swing. So that completes our presentation. Now we are ready to take your questions.

Actually, we don't have currently a telephone line, but we have got through the chat very much very good questions to discuss, and let's start the dialogue, so to say. I read and then we can probably answer together or you or whatever. Could you give us some insights in Harvia's market share evolution in different areas? The evolution of Harvia's revenues in different areas, for instance, North America versus Germany, North America plus 17.5%, Germany minus 43% in 9 months seems to be very different. Does this solely relate to the general market conditions or does Harvia wins/loses market share in some areas? Does Harvia consider Germany as a less important and end market for the long future?

Well, a long question, but maybe I kind of position and look at the long term, because long term development of market shares for us is the most important. And instead of looking at single month or single quarter, we want to see kind of what happens over time. And to put things in perspective of Harvia's performance over essentially last 5 years, Harvia went public IPO 2018. And in the following 5 years as we now look at the last sort of reported 4 quarters, we can see kind of roughly the run rate of the business. So, 2018, our revenue was EUR 60 million, and our last 4 reported quarters run rate is around EUR 150 million. This means that in 5 years, we have grown the business by 250%. And that is significantly faster than the market growth. So, over a longer period of time, it is clear that Harvia has been taking significantly share from the market. And of course that's something we're very pleased with. Another perspective by the way on this long term development is, if we look at the adjusted EBIT or operating profit, 2018, it was around EUR 10 million and now during the last 4 quarters, the run rate is around EUR 30 million. So we have grown EBIT roughly 300%. It's not bad performance either. So overall, we would say that we are, of course, satisfied with the performance, but also we are hungry for more. Now we don't give detail on our market share performance by geographical area, but it's clear that when you look at the results that we have been delivering lately, there is a significant impact on the market conditions. We have seen a significant slowdown in German-speaking Europe. Of course, we are talking with other companies outside even our business that have significant business in Central Europe, and it seems that the picture is quite consistent that companies are really struggling in that market. At the same time, the economy has been strong in the U.S. and sauna penetration, there is plenty of growth potential. And with increasing awareness of saunas, we indeed see the market grow. And we have been, I would say, quite successful in utilizing that market tailwind to also grow our business there. Could we have done more? Could we do more in the future? These are, of course, questions that we constantly discuss. And one part of this change that we announced in the organization to elevate the role of North America in the management group is to make sure that going forward, we will also see great developments in North America. Germany will stay important for us. It's at the moment in a -- clearly very much a low point, but traditionally it's a large market, there is a large installed base of saunas. I think it's only a matter of time when the natural need from the replacement business will start support the market there.

There are estimates that there are about 2.5 million saunas in Germany, and we are living about 80% out of the replacement business. So I see personally Germany almost already has a potential for the future, because of the turnaround 1 day, which will certainly come, but we don't know the day. Okay. Could you give more information about Harvia's general capital allocation strategy, and more especially about the difference between paying dividends versus paybacks? Under what conditions would Harvia consider buying back shares? I can probably answer that. We've been actually buying some shares annually from the market, but just for the incentive program, for the management and also for the Board members. So we want to keep our management and Board members also as shareholders, and support that way the company and its share price. But we haven't considered or announced anything about bigger share buyback programs, and it's actually outside of our authority, that's more the decision of the Board. But the Board has certain authorization from the AGM, which has been renewed annually. So, the Board can also decide to buy shares from the market in a bigger amount, or use the shares also as a payment instrument for some acquisition or other needs. And increasing the dividends, our dividend policy is really that we increase continuously our dividends. We have done that every year, but there isn't any fixed percentage out of the result how much we pay dividends, but the strategy and dividend policy is really to increase annually the dividends. That's probably the answer to that. Probably this is a bit more repetition, but I ask it anyhow from a bit different angle. Have you seen any pickup in replacement sales in European markets, or is this yet to occur in the coming quarters?

Of course, when customers buy our products, we don't exactly know whether -- in most cases, whether it goes to an existing sauna, whether it goes to a new build. Of course, we've been discussing quite a lot with our key dealer partners, retail partners, and we do get some insight from there. Now, when looking at, for example, Finland, it seems that vast majority of the business indeed is replacement sales, as construction new build market is very much frozen in this market. Similar situation in Germany that we see that kind of clearly majority of the demand that we currently see there is actually replacement equipment to the existing saunas. We expect that once the market picks up and sort of consumer confidence is elevated, probably there's going to be again more investment in also newer facilities during this time, probably priority for people is just to keep the existing facilities operational running. Now, of course, when we go then outside Europe there as the market is more like an emerging, and there's a smaller install base of sauna, the share of replacement market is less compared to the new sauna business.

How was the market sentiment in Europe at the end of the quarter? And the second part we can probably not answer, but discuss. And what have you seen in October?

Yes, we need to concentrate only on the quarter 3. And as you know, we don't give forward guidance. But essentially the picture remains the same as it has been now for some time. Europe is challenging. And when we look at the quarter 3 figures, we are yet to see clear signs of recovery. And there is no crystal ball for us to tell when the turnaround will happen. For the time being, we expect that Europe will stay challenged for still some time. At the same time, then we have been very pleased to see that there's good growth momentum that we have seen continue over many, many quarters in the overseas markets. And this is also something that we, the base assumption is that this will also continue going forward.

There is a question about visibility for 2024, but it's basically the same story.

That's right.

Okay. It looks like you grow underlying the other countries, adjusting for Russia. So, could you elaborate around this, as well as comment on the potential you see in Japan? Do you have any feeling of the penetration of the market in Japan compared to North America, for instance?

Yes. Now when we announced the establishment of the joint venture, Harvia Japan Limited, earlier this year, kind of the goal for that move was quite clear. Of course, we saw the market opportunity there. And at the same time, we were losing a big market, Russia. And we see that Japan having 125 million people, strong sauna and spa culture, it's a high income country, does have the potential to replace what we lost with Russia. Now, in quarter 3, the other markets declined, as said, by EUR 0.5 million, but excluding Russia it would have grown by EUR 1.2 million. The majority of that growth came from essentially 2 countries, Japan and China. So this just tells you the importance that Japan started from a rather low level, but it already now starts to support our figures. Now maybe it's a little bit too early to judge on the Japanese progress. I think, still during quarter 3, part of the Japan sales increase was related to us opening kind of -- and expanding the dealer network and there has been some element of filling the channel in a sense to have products to sell to the customers in Japan. But of course, it's still a very encouraging sign of the potential of Japanese market. I said, we, of course, have been looking at Japanese market and the potential there. And when we look at the sort of residential or private customer market, we can see that there is still very, very low penetrations of sauna, and there's plenty of growth opportunity. But we, on the other hand, see that in terms of the commercial market, there's a very strong public sauna culture, onsen culture, and there we see there's a massive opportunity for, say, heavier duty commercial equipment and materials and solutions that we can provide in that market. And there's many facilities like this that we are going after with this joint venture.

Given your efficiency in cost savings, would you say, once you get back to the growth, you expect to see a higher normalized margin level than historically?

Basically, we don't give, again, guidance on the margin level, but I can say that we do everything we can do to maintain a good healthy level of margin that gives us the appropriate return for the good work that we are doing. And we are, of course, playing the full pallet pricing. And from a pricing perspective, I don't see a really downwards pressure for us. We are highly, I would say, cost competitive towards the customers, both consumers and the commercial customers. Harvia provides great value for money. And that helps us now also to sustain our pricing level and, at the same time, our sourcing and procurement and operations teams are, of course, working diligently to make sure that the prices that we pay to our suppliers remain competitive. So that's kind of the overall philosophy that we have for margin management.

Of course, the mathematics function saw that fixed costs, well, they increase also when the sales increase, but they don't increase as quickly as the revenues. And usually when you increase the sales with the same fixed costs, the profitability, the margin levels just mathematically improve. And we had, for instance, in '21 adjusted EBIT level of 26.7% that happened during that time. We don't give any guidance for the future, but that's the math how it functions. What was sales growth in North America in comparison exchange rates in Q3? Well, the exchange rate correction what we had there in this report, you can almost totally allocate to U.S., so you get there the difference. But, yes, there are other markets also where we are selling, for instance, with U.S. dollars, but it has very, very minor importance for this comparison. Can you also comment how sales were performing in online channel and wholesale? Now we are speaking about North America. Have you seen any changes in the competitive landscape post-Masco or Sauna360 deal?

In North America, our main sales channels are through our retail partners and also through our own online sales channel. And there we haven't seen significant shifts between these channels. Both channels have been performing very well, as you can see from the figures. In terms of the changes in the market dynamics in the U.S., and in particular then questions related to Masco's acquisition of Sauna360. We haven't really yet seen kind of changes in that market. Of course, we are anticipating that Masco does have a plan what they will do with that wide entity, and meanwhile they are implementing their plans. We are busy and focused on implementing our plans to make us as competitive in the Northern American market as possible. And as part of this, as already mentioned, we are now strengthening our Northern American organization. Overall, of course, we are not the only spa and sauna player that has seen that overall economy in the U.S. is stronger, and there is a lot of growth opportunity in sauna and spa. So actually for already many quarters, it's been a busy place. There's been a lot of options, a lot of competitors and a lot of customers. Both commercial and consumers have had a lot of choice, and we are of course very pleased that we have been performing well during this time.

Speaking about the Sauna360 deal, we don't know yet if the deal has been approved that was subject to some approvals. And we haven't seen any confirmation yet that the deal would have been closed. But that's my -- just private observation, no market data. In terms of CapEx, over the past years because of COVID-19, Harvia invested significantly in expanding the production capacity. What should we expect for CapEx in next years if the revenue growth turns positive again? Stated otherwise, at which occupancy rate do you now operate? And secondly, working capital continues to normalize. Which inventory levels as percentage of the revenues seem reasonable without hampering the service level? Quite many. But it was the capacity utilization, future CapEx for capacity, and then the inventory levels.

Overall, in the production facilities, we see essentially plenty of opportunities to deliver more without significant investment. As I mentioned, 2021 and early 2022 were years of quite significant investments. Since then, the volume growth has been negative, and we do have good availability, good capacity. Now there are some, I would say, minor areas where we do see already now some investment needs. In particular, it relates to certain investment we expect to do in our Northern American production facility as the market keeps growing there. In terms of net working capital and inventory management, there is no single percentage figure that we are aiming at. We are constantly looking at opportunities to optimize. We are looking at our [ essential ] global logistics and supply chain network for any opportunities. And I would expect that there still is some opportunities, but at the same time we are very much focused on making sure that our customers are satisfied, they get a great level of service from us, and part of it is ensuring good availability. So it's of course a bit of a balancing act, but usually there's always some opportunities for optimization.

Okay. Can you open up the impact of the Japan joint venture to your numbers on an annual level?

I said, we are still in early days. But as I said already in 1 of the previous questions that if you look at the others -- market area for quarter 3, it would have grown by EUR 1.2 million if there wasn't the impact of Russia. So, Russia declined by EUR 500,000. So, roughly speaking, we talk about then the others would have grown by EUR 1.7 million. And majority of this actually is coming from Japan and, of course, there's also a significant contribution from China. But what we see in Asia, instead of like, I would say, carpet bombing, like doing a little bit of here and there, what seems to be working well is kind of what we've done in the U.S. Acquisition of Almost Heaven Saunas in the U.S. provided us a great presence and base platform for driving growth in a significant size market where we saw a lot of opportunity. And kind of the basic idea we have for Asia is that, of course, we want to utilize all sales opportunities there are, but we also want to be even more clear what are the key markets where we really want to win. And Japan does play a really important role here. And of course, now as we are ramping up the joint venture, I would say, a significant portion of our focus in the Asian region is, of course, directed to making sure that this joint venture is successful and will fly. And then, in the pipeline, we, of course, already have ideas of what can we do to replicate in the Japan case elsewhere in the area. But ultimately, when we think about this sort of significant size markets, we talk about markets where we see potential for double-digit million annual revenue and plus. So, this should be then, I would say, decent size markets for us in the longer term.

And the Japanese joint venture was registered on the 21st of August. It wasn't operative yet during Q3, but we've been selling through our great partner Bergman in Japan all the time, and we've been growing through that concept as well. Should we continue to expect the seasonality to be such that Q4 would be better in terms of sales than Q2 and Q3? Or has there been a deterioration in the market during 2023 which would impact this?

So, of course, you have a longer history with the sauna market also, so the pre-COVID seasonality, so maybe we will take it.

Yes. The fact has been in the past really that Q4 and Q1 have been the biggest quarters in this business, especially in Central Europe. In the past, we have been working most of the years, and -- but now, we are on different markets as well. So, we can't guarantee that this happens really, for instance, this year also. There is also, as you see, we had some decline in the sales in Finland and some news about the interest rates and general economical development. So, we will see how it develops. But in the past, it was really that way, and I personally believe that it will come that way also. At least what has been sure is that Q3 has been historically always the lowest -- always historically the lowest quarter. Would you like to add something?

Nothing to add.

You've done an amazing job maintaining your margin with lower revenue. At what level of revenue would you start to see margin drop below 20%? At what level would you start to see declining margins?

There's no -- I would say, no single kind of euro number for the revenue when we would see that. That's definitely the trigger point. And we've been showing over the quarters that even significant changes we can absorb and manage, and we intend to stay vigilant. Of course, we hope that with our investments and effort to drive growth that we can more start to shift in the coming years to more kind of managing growth and managing -- scaling up efficiently. But if that is not to happen, then it is clear that we will be better diligent in managing all cost levers that we have, including, of course, materials, variable costs, but also fixed costs.

And 20% is actually a mix of different earnings levels in different units. And we, of course, also observe closely units which are underperforming that, how we will raise their profitability or what shall we do with that kind of business. So, inside the group, there are also some levers to adjust this kind of thing. How much more variable workforce cost do you have left to adjust? Could you drop another shift? Drop another shift? You mean, leave out or...? Currently, we have reduced quite actively the capacity which is not needed. And despite of the small reductions we had, for instance, in Finland announced in September, October in the press also. We have quite good workload, and we have potential for the future also increase the shifts in our factories, especially in the heater factories, if needed. And we have a lot of capacity available there.

Maybe I can take it even further. So, maybe as you pointed out this, I would say, small reduction of workforce in Finland, Muurame that we announced. Essentially it is related to what Ari said earlier that we do have quite significant performance differences between units across Harvia Group. And there are some units that are significantly higher than our average, and there are units that are significantly below the average. And this was to essentially kind of do a correction kind of in a unit that was underperforming in terms of financial results. The team had been doing, of course, good work. It's not about that, but we saw the financial, there was a need to make some adjustments. In particular, it's related to a business what is -- what we call, a project business. So, actually not really industrial activity, but going and building sauna projects on project sites. And ultimately, Harvia, we are an industrial player, and essentially this is the core of what we do. This is the core where we see the margin opportunity. This is the core where we see the biggest opportunity for scaling profitably. And this was more like pruning our offering portfolio as that particular activity related to streaming line this project business in Finland.

By the way this chat is showing great interest for Harvia. We have still plenty of questions here. We will continue as long as, [ Flick ], our operator allows. So let's go forward. Can you split out volume versus price versus Q2 in 2023? We have lost some volumes. We have increased prices. In Q2, we said that we have increased prices on annual level almost 20% -- now the comparison -- year-to-year. And now the comparison figure is going down since the material price and costs in general. They have been quite favorable, so we don't push unnecessarily high the prices. So, we have been now increasing prices for sure, but not in the same pace what we had in '22.

Exactly. Majority of the price increase happened last year. There's been some also during this year, but majority did take place last year.

Do you still see working capital -- net working capital coming down in the coming quarters slightly? Yes, provided that we stay on this level. But when the growth starts again, we may need also more net working capital. How do you see raw material prices to develop going forward?

Well, of course, any insight that you have I would be more than happy to hear. But essentially, if I'm looking at what has happened is that, overall material price cost pressure has certainly eased quite a lot. It does vary between regions, and it does vary between sort of product, kind of materials classes. For example, imported wood material in North America, there we've seen quite significant decline in material prices. At the same time, for our global equipment business, electronics is an important part of the product. And in electronics area, we have not seen similar materials kind of price reduction as we have seen. For example, with lumber and timber in North America. What will happen going forward? Let's see, but we will be sure to be very professional and diligent in the purchase discussions with our suppliers to make sure that we get the best price.

What is your view of the distributor inventory levels in Europe and in the U.S.?

I think, the understanding I have when I've been discussing with our customers and also with our internal sales people dealing with the customers is that, now the channel has had actually quite a long time to digest the inventory levels that they built during the COVID years. And of course, during COVID years, they actually invested a lot in inventory for a few reasons. One is that there was a lot of demand so the sellout levels were high and they wanted to ensure good availability. On the other hand, at that time, there was a lot of supply bottlenecks in the supply chain also on Harvia's side and our suppliers. So, the lead times to get products to them was longer. So that meant that they had to keep significant sized inventories. And third, the interest rates were very low, so there was less cost of carrying inventory. Now, the situation, of course, changed quite dramatically as the sellout declined, the bottlenecks in supply chain short, and so our lead times delivered to our customers is now short. So there's less need to carry a large inventory and, of course, interest rates have increased the cost of carrying inventory. So what we have seen is significant destocking already taking place. In some areas, we actually do have discussions with our customers, whether their stock levels are already too low, but at least I don't see a significant inventory issue.

Phoenix El-Mec acquisition, what would be the impact on Harvia consolidated accounts on pro forma 12-month basis in terms of sales and operating profit? Well, we haven't announced them since actually the impact will be minor. The whole acquisition was made to assure that we will have those important components for our products also in future. We are selling also those components to some other industries, even some competitors, as we do with heater stones, but the impact on financial is not essential. Do you see the North American health benefit-related sauna trend still accelerating?

I'm not sure whether it's accelerating, but there is a very strong wellness and health trend in the U.S., and that I do see continue for years to come. It's clear that this sort of health and wellness consciousness awareness that saunas actually have a great positive impact on your physical, mental and also social wellbeing helps this. The growth rates are good, and we hope that the growth rates will stay good for a long period of time.

Then let's discuss the USD market a little. Competitive landscape, is it a fragmented market? What size of company would you like to buy?

Well, I will not go to too much specifics, but there are, I would say, a handful of significant-sized players in that market. And at the moment, we are kind of very small in the steam business in America. And of course, we do see that there is a certain conservativeness in the sales channel. And of course, this is 1 natural area where we look at various sized opportunities. It could be almost like a string of pearls, it could be a combination of acquisition plus enhancing our own organic plans, and of course we are even having a plan where we would further accelerate with our own steam products. We have actually good steam products that we have not yet really brought to the Northern American market, so that's also an opportunity. So it's not just 1 single, 1 trick pony that we know we have at our disposal when we think about the steam market, and the same goes for infrared market. If you look at the Northern American market, actually there are significant portions of infrared, and also steam plays an important role there. And kind of the most significant business we are now generating there still comes from this also important segment of the market, traditional saunas. But certainly, we are eyeing on opportunities to make sure that we get a bigger share of infrared and steam market going forward.

One quite specific question obviously from our customer from North America. Our current Harvia North American representative is leaving for the Asian market. Who have you appointed to take this place or are you still actively looking? Generally, what is happening now?

For that particular individual, I'm unable to give a comment. But ultimately, kind of what we have seen in Northern America as part of, I would say, me coming into the business and we've done due diligence -- internal due diligence of the opportunities we have in terms of pushing top-line growth, being more customer-oriented, driving more efficiencies. And part of this has been, of course, to focus on what to do in North America as it is such an important market for us. And we have had quite, I would say, fragmented kind of roles and responsibilities in the market. And for example, customer who was wanting to buy ready-made saunas have needed to contact one contact point in Harvia, somebody buying the heaters, another contact point buying EOS, premium heaters, another -- et cetera. And we really wanted to not consolidate and make sure we have very much customer-centric organization where there can be kind of 1 point in contact that can serve all customers' needs in Northern American market. And this goes also to the other regions that we are now establishing. So really cleaning up our commercial front end, make sure that it's customer-oriented, it's simple to navigate for customers. They know exactly who to contact to get answers to all of their needs. So this is something we're going through at the moment. And of course, it means that there might be some discontinuations or like differences in the sort of customer representatives to our existing customers. But certainly, we expect that this is going to be a very welcome change, and this is also the message we are getting from our customers that this is exactly what they wanted, have a really coherent organization and a simple way of dealing with Harvia.

And our current contact persons will certainly continue serving the customers in their old areas. And when we are so far, there will be a smooth handover, and we take care of all the customers in their responsible areas. So, thank you very much. There seems to be quite an interest for Harvia. Just, let's say, a small advertisement. We will have a Finnish-speaking interview of Mathias talking with the Inderes analyst later today, and that will be sent also later today. And what else would we like to add?

We would like to add a big thank you for following this webcast. I hope you found it valuable. And we are looking forward to seeing you next time. Thank you very much and have a good day.

Thank you. Bye.