Rapala VMC Corporation (RAP1V) Earnings Call Transcript & Summary

Good day and welcome to the Rapala VMC Corporation's Annual Results Teleconference. Today's conference is being recorded. At this time, I would like to turn the conference over to Olli Aho. Please go ahead.

Welcome, everybody. We are here with Chief Executive Officer, Louis D'Alançon; and Chief Financial Officer, Jan-Elof Cavander. I give now the word to Louis. Louis, please go ahead.

Yes, good morning, everyone. You would have seen the publication of our results for the full year 2019 yesterday. Let me say that we are satisfied with these financial results due to good growth in sales, increase in profitability, decrease in inventories as well as increase in operational cash flow and reduction in net debt, excluding IFRS 16. 2020 will be a year of transition and our guidance for this year will be a decrease in net sales and comparable operating profit. This is due to a number of factors: first, a decline in third-party sales due to the already announced exits or termination of our distribution agreement with Shimano as well as changing in our -- change in our hunting product distribution. Separately, you will all have experienced a very mild weather this winter. This will have a negative impact on our winter business, which will affect our top line. At the same time, there will be a continuation of several restructuring projects taking place at the moment whose financial benefits will materialize mostly in 2021. And furthermore, we will be launching 13 Fishing product this year in markets outside of the United States. And in practice, 2021 will be the first full year for our 13 Fishing sales outside of the U.S.A. So as a result of this, our guidance on profitability for 2020 is downward. As a consequence, the Board is proposing to the AGM that no dividend will be paid for 2020. Finally, let me say a few words about the other announcement that took place yesterday: the appointment of our new CEO, Nicolas Warchalowski. He has very strong and extensive experience as CEO of a number of companies, Haglöfs, Peak Performance and BabyBjörn, and we have no doubt that he was the best person to lead Rapala -- as Board, we have no doubt that we was the best person to lead Rapala VCM Group through this transition period and beyond towards our future growth. He will start on March 1, 2020, so very quickly. That's it for my part, I believe. I'll pass the mic to Jan-Elof Cavander.

Okay. Good morning from my behalf as well. So the investor presentation has been updated to our corporate website this morning. I hope you all have the presentation in front of you. So I will start on Slide #2. So accordingly, our sales and profitability grew from last year. Our net sales ended at EUR 275 million. We had stable growth from most of our regions and growth in both segments. Comparable operating profit ended at EUR 17.8 million, which equals a EUR 1.2 million improvement from the previous year. This was driven by, obviously, sales growth, and the second thing is that the turnaround projects at Indonesian manufacturing facility in Batam developed well, and that generated a profitability improvement for the full year 2019 financials. The -- what we did in the Batam facility in 2019, so we outsourced a product category from the factory to outside vendors. And the second key change we made was that certain production processes were outsourced to specialized companies in the same regions, and these were 2 biggest achievements in that business in 2019. We are also satisfied with the direction of our inventory value. At the end of 2018, our inventory value was EUR 99.1 million, and we took several measures in supply chain management during the course of the year, and these actions started to pay off and then yield certain results. And we generated, in total, a EUR 6.5 million decrease in our inventory value during the year. And as a consequence of the profitability -- the comparable operating profitability and the restructuring one-off expenses that we booked in 2019, our earnings per share was down from EUR 0.13 in 2018 and EUR 0.10 in 2019. And as said, this was mostly driven by the higher one-off expenses that we've incurred in 2019 due to the restructuring projects. Next, I will turn to Slide #3. So as said previously, we have sales growth. We report 3 segments. We had sales growth in 3 of these 4 segments and only one segment was down, and that was only 0.6% decline from the previous year in comparable FX rates. So North America continues to perform well. We are very well positioned with all the major customers in North America and in all retail channels. So both traditional brick-and-mortar retail as well as the e-tailers, and by e-tailers, we mean our customer companies who work only online in the B2C space. In the Nordic region, the sales growth was driven by good winter weather that we had -- sorry, good winter spot sales that we had in 2019 in Finland, especially. Sales in Denmark and Norway decreased somewhat from the comparison period. In Rest of Europe, our sales growth was supported by the successful ramp-up of our own sales operations in the countries that we -- in the countries where we took control back from Shimano in 2019 or the first half of the year. And these markets -- the biggest markets is Germany, Italy, U.K. and Benelux. So in these countries, we started to put our own sales force on the ground during 2019, and we had good results from that. Then as said, the Rest of the World declined slightly, 0.6% using comparable FX rates. Certain Asian countries were down, but South Africa and Latin American market was up compared to 2018. Then I move on to Slide #4. So both our segments that we report grew, both the Group Products segment as well as the Third Party Products. On profitability side, we are very happy to see profitability growth in Group Products, which is our core business and our key business. In the synergistic Third Party business, we continued to make a loss, and the comparable EBIT was minus EUR 1.6 million in that business. And this decrease was anticipating the future product portfolio changes and was driven by the -- or is driven by the changes in the Shimano business, the rod and reel business as well as certain hunting businesses. Then I move on to Slide #5, cash flow and working capital. Our total working capital at the end of the year was EUR 110.4 million and asset inventories decreased by some 7% from the previous year. And a result of the decline in working capital, our cash flow from operations was on a high level. The reported number is 21 -- EUR 25.9 million, but this includes the IFRS 16 accounting standard change. And if you use the comparable operating cash flow, excluding the impact from the IFRS 16 accounting standard change, the number would have been EUR 19.9 million, which is also number that we are satisfied at. In '17, we had EUR 19.1 million, which was a good year, but this was even higher than that. When we move on to Slide #6, our financial position. So the liquidity position of the group was good at the end of the year. Undrawn committed long-term credit facilities amounted to around EUR 30 million. And also, the application of IFRS 16 accounting standard had an impact on the interest-bearing debt. But if you exclude the IFRS 16 impact, our net debt actually reduced from EUR 70.3 million to EUR 61.1 million. And as said, the reported increase in interest-bearing net debt comes from the right-of-use -- or the IFRS 16 liabilities that relate to the right-of-use assets for lease contracts. Our leverage level was below covenant levels at the end of the year, and the group is compliant with all the financial covenants that we have in our financing agreements. Then I move on to Slide #7. As traditional in these calls, I will go through the -- how the execution of our group strategy is progressing. As written in the statement yesterday, the execution developed well during 2019, and it was intensified in October when we started a new cost saving and restructuring program. But before going there, I want to say that, really, the highlight -- one of the highlights of 2019 was partnering with 13 Fishing, the rod and reel company based in Florida, the U.S.A. And we are very excited about the potential of 13 Fishing business, both in the U.S.A. market as well as outside U.S.A., in all the other countries where we control the distribution, and we will do the sales and marketing for that business. Currently, we are working on launching 13 Fishing business in countries outside the United States. And really this partnering and acquisition of 49% of share capital of 13 Fishing will enable us -- will open the door for us to global rod -- on a global basis to rod and reel business. The second thing is, as I said, the restructuring program that was initiated in end of October, the target is to increase group-wide synergies and centralize European distribution operations to fewer number of locations and to also change the way of working to a more common way, and this will then increase our internal synergies. And of course, all these actions will lead to decreased operating expenses and also reduced net working capital. The savings under this restructuring program will mostly come from European businesses and European distribution as well as the Asian lure manufacturing operations located in Indonesia, Batam. We expect the cost savings to materialize gradually, starting from 2020 onwards, and then to have the majority -- the biggest part of the impact in 2021 financial statements. And these are really the biggest things that we are working on at the moment on the strategy side. Then I move on to Slide #8, the short-term outlook and guidance. So the market outlook for our Group Products business in North America is positive, and we see -- we continue to see very good demand on our products, as I said, via brick-and-mortar retail as well as the pure online players. We have very good relations and very good positions with the big -- the biggest retailers on the continent and that continues to yield results for us. In Europe, the execution of the restructuring program and also the changes in the Third Party Products business will affect the market visibility for 2020. And furthermore, the extraordinary mild winter weather, especially in -- or will impact especially in Northern Europe, our winter sport business, which is -- which consist mostly of ski business. And as a consequence of all this, we expect 2020 full year net sales and comparable operating profit to decline from the previous year. This comes through a decrease in top lines of Third Party business. Shimano separation will take place this year. And at the same time, this will be the launch year of 13 Fishing. And also, we have some changes in our hunting portfolio. And at the same time, the restructuring activities that are under place will have sure -- some impact in 2020, but the majority of the impact, the financial benefit will come in 2021. So that's, in a nutshell, our 2019, our outlook on 2020 and an update on the progress of our strategy execution.

We're ready for your questions.

[Operator Instructions] We will now take our first question.

This is Marc Saint John Webb from Quaero Capital in Geneva. I'm sorry, we seem to have problems to access the line at the beginning of the call, so you may have covered this right at the beginning. But we saw the results and outlooks communiqué, but we just wanted to get a little bit more information about the new CEO. We've, of course, seen the CV. But I just want to get a bit of an impression on to what extent he is on board with the new strategy, has participated with the new strategy. And we do understand he is arriving on the 1st of March, but if you could say a little bit more about the integration of -- operationally, of the new CEO and into the current plan.

Yes. This is Louis D'Alançon, Chairman and CEO for the moment of Rapala. We -- I have to say I have been very impressed by Nicolas Warchalowski's presence and leadership qualities that were very obvious in our conversation with him. He was our top candidate for a very long time when we completed our extensive search for a suitable CEO for Rapala VMC. You will have seen from his CV that he had some -- he had a very successful tenure as CEO of, in particular, Haglöfs and Peak Performance with, under his leadership, strong development in top and bottom line results for both companies. He has in his experience extensive marketing and branding experience, having started at Procter & Gamble. And then having developed these functions as well in his subsequent appointments, he has extensive international experience, so will be perfectly suited to lead an international company such as ours. And basically, we believe he is the right person to lead the company through the transition period that we are -- that we will know this year and guide us towards the future growth in sales and profitability.

And can you help us understand. You said he was your top candidate for quite a while, so can you help us understand as well, therefore, how long has he been pretty much on board and in agreement or not with the strategy that you've taken? And to what extent he might have participated in the elaboration of this strategy?

He has not participated in the elaboration of the strategy because, quite simply, he was not employed by Rapala VMC Group. But we've had discussion about the strategy that the Board is implementing and he is fully onboard on that.

[Operator Instructions] We will now take our next question.

It's Henry Hillgarth from Quaero Capital. Just a quick question on your restructuring plan and the development of Batam. Again, I mean, I'm afraid I logged in a little late because I think there was a -- we have some technical problems logging in. But could you give us a little bit more detail of what you've done and what you're planning to do? And I see that -- when you talk about the benefits coming through in 2021, are those really benefits from the distribution changes in Europe or a mixture of that and Batam? And if you could also maybe give us an idea of the exceptional costs you expect for the coming year, that would be very useful.

Okay. Jan-Elof Cavander here. So first of all, on Batam, so the key changes we did implemented in 2019 was the, first of all, to outsource a product category. There's 3 product categories we outsourced. One of them -- and the second thing is that certain noncore production processes were outsourced to local specialized companies. So those were the key actions taken in 2019. And then what comes to the financial benefits in 2020 and 2021 from the restructuring activities? So these benefits will come from a long list of different projects from a broad, broad area. And on the exceptional costs, the one-off costs, so we haven't opened up the magnitude of those for the coming years.

Okay. But I mean, just maybe to expand a little bit on that, while I have you on the line. To understand exactly what sort of product lines you've externalized, could you maybe give us a bit more detail on how much further you want to go and which product lines you've decided to externalize?

Yes. So the metal lure production is the category that we have outsourced completely from the factory in 2019.

[Operator Instructions] There are currently no further questions in the queue.

Okay. Thank you very much for -- everybody, for your interest in Rapala VMC Corporation. So we will be coming back with our 6 months results on July 20. So everybody, have tight lines. Thank you.

Thank you.

Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.