Harvia Oyj (HARVIA) Earnings Call Transcript & Summary

Hello, everyone, and welcome to Harvia's Third Quarter 2024 Earnings Webcast. My name is Matias Jarnefelt. I'm the CEO of the company. And with me, I have Ari Vesterinen, who is our Chief Financial Officer.

Hello.

So today, we have outlined for the presentation, as usual. So I will start by covering the highlights and key numbers from quarter 3. I will also talk about our strategy and how we are making progress in implementing it. After my part, Ari Vesterinen will cover the numbers in more detail. After which we will be happy to answer your questions which as usual you can submit via the chat box. So let's talk about the quarter 3. We grew both organically and through acquisition. Revenue increased by 14% to EUR 38.7 million. Organic revenue growth was around 8%. As in the past quarters, North America and Asia Pacific continued to perform strong. Also Continental Europe grow, but Northern European market remained challenging and our sales declined there. As we acquired ThermaSol during the summer and it has been part of our figures for August and September, that boosted our growth in particular in North America and in terms of product category in the steam business. We continue to deliver strong profitability, and the profitability came mainly through high gross margin. That high gross margin has been supported by, of course, successful actions in our operations, supply chain. Also, as we have been increasing our sales in high-margin countries like Northern America and Asia and of course, overall, we've been kind of growing our equipment business, which is usually a high-margin business for us. Adjusted operating profit for the quarter was EUR 8.9 million, and that's 22.9% of revenue. We also increased our inventory, especially for the finished goods in North America, as we are heading to high demand winter season, and we want to make sure that our ability to serve our customers in terms of product availability and quick lead times is good. As we've been driving daily business and current business, we're also driving systematic activities to drive growth for the future. We continue to strengthen our position and organization in growth markets like North America and APAC. And we're also implementing several activities to increase sales momentum in Europe. We are also improving our product portfolio, and we have been introducing recently very exciting new innovations to the market. And while we've just completed the acquisition of ThermaSol, we keep looking for further opportunities to strengthen our strategy and continue to be an active consolidator of the industry if the time and the opportunity is right. Before I cover the numbers, I'd just like to remind you of a key event during the summer. So we acquired ThermaSol, that's a manufacturer of high-end steam solutions based in Austin, Texas. And the deal was closed on 31st of July. In terms of products, you can see examples on the right. So products like steam generators, digital steam and water valves to control the steam and water flow, also high-end digital control units for high temperature and steam environments, as well as other fixtures for steam saunas. We believe that this is a very good move for us as it strengthens further our position in a strategically important region of North America and also supports our strategy to lead global sauna market, where steam sauna plays an important role. The purchase price was EUR 30.4 million -- sorry, USD 30.4 million. And that transaction was financed by EUR 20 million bullet loan and also from Harvia's cash funds. As discussed, the acquisition boosted our revenue in quarter 3 as we included ThermaSol in our figures for August and September. And to look at the history and comparables 2023, ThermaSol's full year net sales was USD 14.4 million and adjusted EBITDA margin was 17.3%. And if you compare that to our EBITDA margin from last year, it was 26.5%. So there is, in the short term, a small short-term negative impact on relative profitability. We see significant synergy opportunities, both in terms of top line, so driving growth as well as operational efficiency. And I'm happy to report that the integration with ThermaSol has started well. Then look at -- let's look at the quarter 3 key figures. Revenue was EUR 38.7 million, and that's up from EUR 34 million last year. In terms of year-on-year growth, that's 14% and organic revenue growth at 8%. There was a slight impact from exchange rates. And at comparable exchange rates, our total revenue growth would have been close to 15%. Adjusted operating profit was EUR 8.9 million, up from EUR 6.9 million last year. And that's operating profit growth of 28.8%. And in terms of relative profitability, it was at 22.9%. Operating free cash flow during the quarter was EUR 3.4 million and that is quite substantially less than in quarter 3 a year ago. This is mainly driven, as discussed by our strategic choice to increase the inventories of finished goods, particularly in North America. After we've analyzed our performance after the high winter season last year, we realized that we probably missed sales opportunities because our lead times for some of the high selling products was too long. We're in the business where gross margins are high, and we really want to maximize this opportunity as we again head for those higher month -- sales months. Cash conversion for the quarter was around 32%. Then let's look at the 9 months figures. So revenue at EUR 124 million, and that's around 12% growth. In terms of organic revenue growth, it's 9.6%, and at comparable exchange rates, 12.1%. Adjusted operating profit at EUR 28.4 million, and that's growth of nearly 18% from last year. In terms of relative profitability, we are at around 23%. Operating free cash flow at EUR 20 million and cash conversion at 60%. Then let's look at the geographic split and developments. You can, of course, here see North America played a really important part of our growth story also for this quarter, where we delivered roughly EUR 4 million more sales, and that's around 40% growth. Partly, as discussed, this has been driven by ThermaSol acquisition, but also organic growth remained strong. APAC was another strong growth area for us, delivering around EUR 1 million more to our top line, and that's around 25% growth in that region. The Northern Europe, you can see the different color here. So at red unfortunately, at minus 7% for the quarter. And if you look at the -- kind of the start of the year, quarter 2 was a slight growth month in North Europe. But when we combine quarter 1 and quarter 2, we were at around minus 7% after 6 months. So this minus 7% -- sorry, so this minus 7% is in line with that kind of first 6 months performance of this year. Continental Europe grew around 8% this year. And then if you would combine Northern European and Continental European figures, basically Europe, as you can see, would have remained practically flat during the quarter. Then let's go through regions one by one. Northern Europe clearly was the most challenging region for us, currently representing around 25% of our total revenue. Revenue decreased by 7% to EUR 9.6 million. Largely this decline is explained by Finland, which represents a large part of Northern European sales figures. And in Finland, sauna is a product for all income levels and all families. And then consequently, it's more impacted by overall consumer confidence. And in Finland, the consumer purchasing power has been under real stress during the past few years. Also new residential construction as well as overall property markets are at very low levels. We have been discussing earlier that there's also some channel landscape changes taking place in Sweden. We've been working on this, and there's some real good news in terms of finding new partners for us to fill in the gap that 1 partner with a changing strategy left to us during earlier part of this year. So that's a very positive thing. In Continental Europe, we have seen gradual recovery since end of last year. At the moment, this region represents around 30% of our total revenue. In quarter 3, we grew by 8% to EUR 11.5 million. And when I look at the continental Europe more in detail, it's interesting to see that especially Germany, there has been traditionally a strong sauna market contributed most to this positive growth figures here. In terms of segments, we had a particularly strong performance with our high-end EOS brand that focuses on high-end residential solutions as well as high-end professional solutions. North America clearly is the star region of Harvia, representing now 35% of our total revenue. And we grew by nearly 40% to EUR 13.4 million. And here, we can also see impact from the acquisition we executed in July, to buy ThermaSol. All product groups have grown in North America, in particular, of course, heaters, steam generators, but also sauna solutions grew, although you will see in the coming slides on the group level, saunas and Scandinavian hot tubs declined somewhat. Integration work with ThermaSol team has started well, and we see key opportunities both in terms of top line and cost synergies, as discussed. APAC, Asia Pacific and Middle East continued to grow double digit. At the moment, it represents 11% of our total revenue, and that was EUR 4.2 million. In terms of growth, 25%. We are driving most of this growth from three strategic markets, that's Japan, China and Australia, where we continue to systematically implement activities to fuel the market growth as well as strengthen Harvia's position. Now Harvia is the global leader of sauna solutions and products in the world. That means that we not only provide the traditional sauna products and solutions, but we also cater to the need of cold-related wellness products like cold tubs and cryotherapy. When we look at the product categories, you can see the split here. So most of our sales, over 50% from heating equipment, around 1/4 of our revenue from saunas and Scandinavian hot tubs. Steam products now representing 8% of our total revenue, accessories and heaters 7%; and spare parts and services, 6%. The biggest swings compared to a situation a year ago is in saunas and Scandinavian hot tubs, mainly this is explained by weakness of our Scandinavian hot tub sales in North Europe and steam products doubled from 4% to 8% and this is explained by acquisition of ThermaSol. Then let's look at the growth contributions of different product categories. We got EUR 3 million more to our top line from the heating equipment sales, and that's around 17% growth. Also, steam products grew strongly, adding EUR 3 million to our top line, and that's 150% growth fueled by ThermaSol acquisition. Also, accessories and heater stones performed well, adding roughly EUR 600,000 to our top line, that's 30% growth. Saunas and Scandinavian hot tubs declined by EUR 700,000 as explained, geographically, it's practically coming from North Europe and in terms of kind of subproduct category, the weakness in Scandinavian hot tubs explains largely that decline. Spare parts and services are rather small broad category and even rather small absolute numbers that impact the percentage. So roughly EUR 100,000 less sales, and that's minus 5% for that category. Now Harvia's strategic role is to shape the global sauna market so that everyone has a reason to experience sauna. And to do that we drive our 4 strategic focus areas. First relates to the what dimension or the product dimension of our strategy. So we want to deliver the full sauna experience. That means it's not just a traditional sauna, it's also the steam, it's infrared sauna and also bathing elements like cold tubs. It's also moving increasingly from component manufacturing to providing a fuller solution and fuller system to customers so that we can address even bigger share of their spending. And it also includes our activities, for example, in driving digital as part of future sauna experience. The second box is about where we play. So we want to be winning in the strategically important markets like the U.S., the big markets in Asia and also big markets in Europe. The third box relates to whom. So the customers and channel dimension for our strategy. And we want to be there where most of the business is created and be the leading player. And the kind of foundation element is really is kind of answering the question how and we need and want to have best-in-class operations and invest in people. Now in terms of some highlights from the quarter 3 for the strategy execution. In terms of the product dimension, we bought ThermaSol, and that is a big boost to our strategic capability to address even more strongly the global sauna market now through steam and also advanced digital solutions that ThermaSol had developed. Also we have been working on developing new products and strengthening our portfolio. And we've recently launched some pretty exciting new products such as a wood burning version of our most sold heater model, Cilindro. So the first time it's now available also as a wood burning version, not just an electric version. We also launched the world's first solar powered electric sauna which for a market leader like Harvia is an important testament of our investment in sustainability and providing solutions that are climate friendly. We also launched a new full touch control unit. In terms of winning in the strategically important markets, strong growth outside Europe continued. ThermaSol acquisition strengthens our position in North America. We also were able to drive strong organic growth there. And in terms of the key strategic markets in Asia, we've also seen solid progress. And in Europe, probably the biggest market is Germany. And in Germany, especially, we saw good momentum during the quarter. In terms of leading in the key channels, one part of it is that we have been filling some gaps that we've had in the distribution, one of them emerged end of last year in Sweden when our biggest sales partner there decided not to focus on consumers as customers and we had to find a solution to replace them. And there's been some really good progress there, as well as we have been working on sharpening the right product to the right channel strategy that is important part of our commercial success. In terms of investing in best-in-class operations and great people, we've also taken several steps such as investments to improve productivity. That's also visible in our gross margins, and also strengthening our capabilities to drive future growth, like investing in stronger sales teams in places like North America and Asia. And we have also been investing in modernizing Harvia's IT capabilities and then also driving synergies more across the group. So with that, I would hand over to Ari, who covers financials in more detail. Over to you.

Okay. Thanks. So here, we have first compared the quarters of a couple of years backwards just to show what are the normal fluctuations between the quarters. Normally, traditionally, we have had the strongest quarters in Q1 and Q4. But this year, we had a sudden shift of demand and sales from Q1 to Q2, and Q2 was actually exceptionally strong. Now we have had in Q3 also very nice growth momentum and also improvement in the profitability, which is good. Here, we have the table of the different profitability and cash flow figures. And as you noticed that the adjusted operating profit in Q3 has increased quite nicely. And as Matias mentioned, the main reason for that is the gross margin or material and service cost level of the revenues. And you saw earlier that the sales mix has shifted a little. We had a decline in the sales of saunas and Scandinavian hot tubs, but only in Europe, not in U.S. And typically, those product groups have slightly lower gross margins in Europe. And that has actually improved the percentage a little. But in all areas in purchasing, in logistics, operations, we have been doing quite good and also improving our pricing power. The basic earnings per share, EUR 0.29 for Q3, we have to bear in mind that we have also there has cost EUR 1.3 million acquisition-related costs for acquiring ThermaSol. It was -- a small part of that was already in Q2. But anyhow, these earnings per share is having some extra costs, which are not adjusted. They are just adjusted in the operating -- adjusted operating profit, but not in basic earnings per share. The cash flow has been actually on a quite low level this time. Traditionally, Harvia has a very strong cash conversion rate and high cash conversion as we have also seen in the past years. And now we have been really kind of investing money in our warehouses in inventory, especially in U.S., but also in Finland in our heater manufacturing and in Japan. And this has increased the level of inventory. On the balance sheet, the level of inventory has also increased due to the acquisition of ThermaSol, but that's eliminated from the operating free cash flow, this increase. The investments have also increased. We invest now a little more in the effectiveness and replacement investments in our group, but there are no major really big new investments. Net debt was increased about EUR 21 million compared to last year due to the acquisition of ThermaSol. Leverage is still on a very low level, 1.4, and net working capital has increased due to the inventory increases, also slight increases in the trade receivables. The headcount of the group was now end of September, 675. And we have got 38 new colleagues in Texas through the ThermaSol acquisition. That has also increased the labor cost for Q3 to some extent. We have been also investing in new good people overall in the group in order to be able to grow the business. The operating free cash flow really went down, as I told already earlier. And this is the time we are now -- have been now adding value in the inventories in order to cope with demand, what we are expecting during Q4 and Q1. As we told already after the Q2 release, we had some challenges last year, especially during Q1 to have enough goods to be sold in Northern America and also in Europe. Now we want to avoid that. So I personally feel that that's a very good investment and payback to have enough goods in front of the main sales season on the stock. The net debt increased, of course, due to the ThermaSol acquisition, but the leverage is still clearly below our long-term financial targets. And this target, 20.5, is, of course, the long-term target in case of a bigger acquisition or so, we know that we could also get more financing over that level, but that's the long-term target. And now we have been around a long time, now 1.4 after the ThermaSol acquisition. We used also some cash resources for the ThermaSol acquisition. We took only EUR 20 million of new interest-bearing debt for this acquisition, even if we are paying EUR 27 million, EUR 28 million. The net financial items. This is the EUR 1.5 million coming from -- directly from our profit and loss statement. And if you look at those rows more thoroughly, there is the last row, the change in fair value. And it's more or less like the change of the swap, interest swap agreement. It doesn't have any cash impact. It's varying quarter-to-quarter. And now we had EUR 470,000 costs there in that change of fair value. The dotted line is actually showing the cash effect of the interest paid out, financial cost in total. Investments, they have been now increased, as I told earlier, and we are also planning to have some additional investments for the capacity and logistics in U.S. So -- but on the long run, this business model, what Harvia has had and has still doesn't need very big investments in the long run. Until now, the normal level has been something between EUR 4 million to EUR 5 million a year. In '21, we invested almost EUR 12 million. We will increase slightly the investment levels, but not very much now from the current base. Harvia's long-term financial targets, they were updated during the Capital Markets Day end of May. And these are really long-term financial targets. And the growth target is 10% average annual revenue growth. We have been over that level quite a long time, including [ M&A ]. The profitability over 20% adjusted operating profit margin and leverage. That is net debt divided by adjusted 12 months EBITDA below 2.5. Harvia is paying regularly increasing dividends twice a year. We just paid end of October the half installment of -- the second installment of 2024 dividends. Okay. Now it's time for questions.

We have got quite many questions actually already here in the chat box. And as I see them, the biggest topic here is actually more or less like the outcome of the U.S. election yesterday. So all kind of details and less detailed questions. How do you -- how would you comment the impact of the U.S. presidential election in the long run? We all know that Trump would like to decrease the corporate taxes, increase the import tariffs, all kind of changes. So how will it impact our business?

So of course, super relevant question considering Harvia's largest region is North America. And of course, we've been closely watching the developments in the United States and also already before the elections, assessed the impact of potential outcomes. Now that the result is clear, our assessment is that it's clearly net positive impact on Harvia's business. And you can approach this from different angles. One is that for us, the growth of the economy and consumer confidence overall in the U.S. is important. And if you look at, for example, the stock market reaction yesterday in North America, clearly, the market estimates that the outcome of the election is positive for the economy. That then also supports Harvia. The second angle is import duties. And it's really important to understand that Harvia, with its global manufacturing footprint, already has significant manufacturing presence inside the borders of the United States. Our kind of traditional sauna manufacturing happens in West Virginia, and we just acquired ThermaSol, which has its own manufacturing in Austin, Texas. And of course, we will optimize our supply chain and manufacturing based on the current market situation, and we feel we have actually quite a lot of flexibility. And this provides on our assessment also competitive advantage relative to our competitors. For example, when we look at the sauna cabin manufacturing, many of our competitors import the products from Far East, mainly from China, whereas we produce them to a large degree in West Virginia. Now maybe the biggest question then for us is what about the heating equipment because we don't have a heating equipment factory at the moment in the U.S., majority are imported to the U.S. from our Finnish factories or Finland. And when we look at then kind of, I would say, the most reasonable expectations for the future, the biggest pressure for import duties from the U.S. point of view is directed towards Far East and in particular, China and not so much in our assessment towards European Union and Finland. And then you also pointed out corporate tax. A large portion of our profit is generated through our business in the U.S. So if there would be administration decision to lower corporate taxation, that, of course, will play into our advantage. But to summarize, our assessment is that the outcome is net positive to Harvia.

Okay. Let's stay in North America still. Could you please talk about outlook for sauna room sales in North America? Do you expect growth to continue? And any changes in competitive landscape?

In short, we -- our assessment is that there's huge potential that continues to exist in the U.S. So right now, we assess that's there's a bit more than 1 million saunas in the United States in the countries of 345 million people and about less than 100 million households. So kind of the penetration is in terms of household penetration, it's around 1%. And we feel that there's many percentage points it can go up, and that means potential for millions of more saunas. So in short, we feel that there is a real long-term significant upside for Harvia. Now of course, we are not the only company seeing the potential. And there is traditional competitors, ours that are focusing a lot in developing their business in the U.S. And during past year, last year, we saw also 2 acquisitions, 1 by Masco when they bought Sauna360, one of our traditional competitors and Masco, as you know, it is a large U.S. public listed company, so they kind of entered the game. And also Kohler, which is large, family-owned company entered the game in the U.S. So of course, the competition is also heating up. But we feel as we keep investing our capabilities operationally and we keep investing in our commercial and sales organization, and we keep investing in differentiation in our portfolio, we are really well positioned to continue to win also in the future.

Can you give us an update in APAC and EMEA? What country draw the most growth? What is the outlook? And should we expect actions to drive sauna rooms sales in the region?

As part of Harvia's strategy kind of we want to win where it matters the most. Now we are basically kind of a small- to medium-sized company in the global markets and our kind of muscles are limited. So that's why we need to also be very selective. For example, when we talk about areas such as Asia-Pacific, which is geographically vast, countries differ a lot. There's places like Australia, Japan, South Korea. They are very advanced and then clearly, countries with clearly less -- low income levels. So for Asia, we've chosen 3 countries where we focus the most. They are Japan, China and Australia. We are also increasingly looking at kind of what we can do in South Korea as it's a 50 million people country with high income levels and strong traditional spa culture. Now then if you link the growth figures that we reported in APAC and Middle East and Africa, they are actually very much coming from these 3 key countries. So China, Japan and Australia, which also is a very encouraging sign to us that we can steer our destiny and be kind of masters of our own destiny. When we execute our plans well, they also yield results.

Probably we don't have exact answers to this next question, but I ask it anyhow. How much did sauna rooms grew, excluding Scandinavian tubs? Did sauna rooms also grow in volume terms?

This is -- I don't have that data right now here. But essentially, majority of it was kind of, clearly, this category was heavily impacted by the Scandinavian hot tubs. And maybe I would give you some reference points. We acquired Kirami, so the kind of the manufacturer for Scandinavian hot tubs, in May '21. And at that time, we kind of reported also like where is the like geographically revenue coming from? And basically, Kirami's revenue was coming 60%, actually to be exact, 58% from Finland and 48% then from European countries close to Finland. So when we look at then also regional development as Harvia Group during this year, we can see it's North Europe that has been struggling clearly the most. And there is a strong correlation of North Europe and our Scandinavia hot tubs are closely connected. And then if you think about also of the dynamics of the product category. If you have sauna and you need to change a heater to keep going to sauna, you'll do it. But then Scandinavian hot tub is more like a real discretionary item that during times like we are living through right now in Finland, where the consumer spending power is really under pressure and the economy has not been developing well, that's of course, then logical that is impacting this product category. Then also to put that in kind of absolute terms into perspective. Now again, you can check the numbers exactly. But roughly speaking, Kirami sales in 2020 before we acquired them, top line was around EUR 8 million. Then during the pandemic, the rolling 12 months peaked at over EUR 20 million, so EUR 22 million or so. So it just shows that from EUR 8 million to EUR 22 million during the pandemic season. There was a lot of boost when the things were in our business going well and people wanted to invest in kind of the backyard paradise in North Europe. But there, of course, also then once that momentum eroded in terms of kind of essentially absolute impact to our business in North Europe, it has been significant.

Okay. First reminding that a bulk of our business in old sauna countries is actually replacement business. Many people know that and now there is followup question to that. U.S. market revenues most likely consists of mostly new saunas. But can you already see how long the replacement cycle in this relatively new market is? Or do we see the replacement cycle there?

Well, I would say we don't have like 1:1 kind of matching data that somebody bought sauna, when they buy a new sauna or when they bought a sauna. When they buy the next heater. But typically, when we look at the kind of the historical figures and kind of experience at Harvia, a private sauna might be replaced once in 7 years or so. So if you think about kind of our history in North America, if you think about 7 years ago we practically had almost nothing there. Our journey, North America was kickstarted end of 2018 when we acquired Almost Heaven Saunas. Kind of the traditional barrel sauna manufacturing, sauna cabin manufacturer in the U.S. So in fact, from a very tiny part of our business at that time, 2018, North America represents only EUR 3 million of our total revenue. And as you can see in the figures now, it's a very significant part of our revenue, typically would be replacing your heater every 7 years and then the kind of -- if you talk about the kind of outdoor cabin, probably kind of once in 15 years.

Then we have a long list of quite detailed analyst like questions, but let's go them through the general level. On ThermaSol, is there any significant seasonality? I would have expected adjusted EBITDA margin for the whole Harvia Group to be lower in Q3 because of ThermaSol being dilutive. Does this imply that ThermaSol's current run rate profitability is already apart the figures shared in August?

We don't is disclose ThermaSol's figures separately as part of this reporting. There is some seasonality also in ThermaSol's numbers. So also for steam saunas, it's basically the quarter 4 and quarter 1 that historically are the strongest. In terms of profitability, we've seen plenty of practical opportunities for driving improvement in ThermaSol's bottom line and we are actively seizing them. As an example, when we look at procurement, Harvia is very good at outsourcing. And that's, I would say, a low-hanging fruit with a rather short lead time to tangible financial benefits, when we basically compare the purchasing kind of prices of ThermaSol to the prices that we have. So we have been really actively driving that area to improve further the gross margin of ThermaSol's business.

Your gross margin was up significantly year-over-year from 61% in Q3 last year to 69% this year, despite higher freight costs year-over-year. I understand the favorable product mix of lower hot tub sales, strong U.S. performance, strong demand for EOS. But are there any other factors you would like to point out? Like your recent product innovations resulting in premium pricing, would you expect this gross margin to be equally strong in Q4 given that the last year's margin was close to 63.5% and above full 2023 numbers?

There are multiple drivers for the gross margin performance. And in the question, you already mentioned 2 most important drivers. And 1 is strong performance in North America and also in APAC. And those are regions where we do have a higher gross margin than in Europe. And the product mix where we were really successful in, I would say, in selling technical equipment and kind of more successful and selling more kind of wood driven products like the saunas and Scandinavian hot tubs. And that really drives also another significant portion of -- for that gross margin performance. Also, you see that we are investing in our operational performance and making Harvia a stronger player also for the future. So we are doing systematic work to streamline our production, investing more robotics, et cetera. And that also has a role to play. Now we don't, as you know, we don't have a forward guidance, but be assured that we -- gross margin for us is a critical item. Because basically, what it allows us to do is it allows us to make investments to drive sustainable future growth like stronger driving our future success while also maintaining current profitability because of the gross margin. So rest assured that keeping very strong gross margin continues to be 1 of our critical focus areas.

Coming back to Northern America. Was there an impact from the recent storms, Helen and Milton? Historically, flooding results, flooding results in more hardline retail sales, such as home improvement. Do you expect to see an impact from this?

It's a hard question, but actually something that we also have been, I would say, thinking of and are observing and you are absolutely right to point out that this unfortunate natural disaster when they cause havoc in for example, residential areas and city centers. Then with some delay, not immediately after, but with some delay also really boost sales, for example, hardware stores in those impacted areas. And there, of course, could be speculation that are there some, for example, backyard paralyzed barrels saunas that were kind of washed away because of the flooding waters and stormy winds. Let's see. But at least, it did not have a short-term negative impact to our business, and it could have a positive impact in our sales figures in the impacted areas in the midterm.

You increased your investments and working capital situation primarily in the U.S. Does this imply that your view on the market outlook has been more favorable than what you were expecting at the beginning of the year?

Well, you have to understand some key dynamics of the sauna business, and one of them is kind of demand fluctuation within a year. And as Ari explained, so-called winter quarters, quarter 4 and quarter 1 from the demand perspective, really important quarters for us. But then again, we want to drive really highly efficient operations. And of course, we've been calculating that. What does it -- what makes most sense for us? Is it that we ramp up production as the demand fluctuates, or do we rather try to keep production rates rather stable throughout the year to keep the steady flow, provide steady employment opportunities for our factory workers, et cetera. And it's more the latter. And that, of course, then takes some assessment of how much should we have in inventory as we head into the traditionally higher selling quarters of the year. And as I pointed out in my presentation, when we assess our performance, in the U.S. in particular during the high season a year ago, we feel that we missed sales opportunities because some of our big selling product models were not available with, I would say, short enough lead times and that led to customers, in some cases, choosing other vendors for their needs. And we are in high gross margin business, as we've discussed. And we feel that the best way for us to drive business and value creation for Harvia and Harvia's owners is we have good availability of those products as we head into these months.

The growth in other operating expenses resulted in the margin dilution this year, which is offset by the gross margin and the top line performance. Geographically, for example, in terms of sales and marketing expenses, like trade versus commercial expansion in APAC, what has been the breakdown of the growth investments. What growth rate do you foresee next year? Or put another way, will these expenses grow in line with the revenues?

Again, really, a great question, and of course, something that we and the Harvia's management team often discuss kind of what's the right balance between investing for future growth and making us stronger for the long term versus then delivering profitability right now. And it's not black and white. It's more like finding the right balance. And of course, for us, we want to keep also in the short term high profitability for us. But in a sense, we are kind of always seeking the boundaries that how much can we invest at this point of Harvia's journey to really make the big leap in the coming years. And we feel that there is kind of this growth that we are talking so much about, it doesn't come from nothing. It comes from active actions and prioritized actions by Harvia. And they relate to things like strengthening our commercial teams in the key markets, like in U.S. So in the U.S. the sales teams has clearly grown in headcount as an example. It also means that we are increasing and investing headcount and top talent in R&D., energy-efficient solutions, digital, best-in-class industrial designers, et cetera. And also, it means that we're investing increasing, also increasing our investments in, say, corporate infrastructure, like modernizing and simplifying an IT landscape. In some of the earlier earnings calls, I've discussed about the Harvia's history where we acquired a lot of companies. And they've come with the legacy IT systems that led into a situation where the landscape was quite fragmented, they were also old fashioned systems in place and as we gear for long-term growth. We also want to modernize and simplify IT. And these are investments that we have decided to do now to fuel growth in the long term. Our assessment is that when we take not just a short-term perspective, but a medium- to long-term perspective, we don't see that kind of the fixed cost would increase as much as they have increased right now in the short term when we are really kicking off kind of this next phase of Harvia's development.

Okay. Then a bit hypothetical question, but let's ask it. Still talking about Trump. There is a possibility that relationships with Russia will improve in the midterm, and that access to the market for Western companies will be restored. Maybe not the prewar level, of course. Would you be open to reenter in that market eventually?

Again, it's a tough question. Maybe there's no like entirely right or wrong or black and white answer to this question. But if you look at the history, let's start with the kind of role of Russia in global sauna market. We estimate that there is roughly 18 million, probably a bit more now saunas in the world and roughly 1/3 of them in Russia. So it's a huge market for -- in this industry. You can also look at, historically, we did report Russia separately as part of our kind of earnings releases. And it was peaking at around EUR 12 million sales per annum, that was '21. And then '22 after Russian -- cowardly attack on Russia, and we decided to exit the business in March '22. Of course, the numbers have rapidly declined and practically now are 0. Now we are not primarily concerned of what's the business potential of Russia for us. It's not a timely question right now. What comes to Russia, what comes to Ukraine, we are really focused on hopefully just peace on Ukrainian terms. And we're also focused on, say, sympathizing the human suffering in this tragic war. But of course, over time, as hopefully, this will also settle, there will also be a time to assess what's the position of Harvia when it comes to our presence in Russia.

Okay. Thank you very much. These were the questions, and thank you for following us and let's stay tuned.

Thank you very much. Have a good day.