Rapala VMC Corporation (RAP1V) Earnings Call Transcript & Summary

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

Welcome, everybody, to Rapala VMC First Half Year Results Teleconference. My name is Olli Aho, in charge of investor relations. I'm here together with our new CEO, Chief Executive Officer, Mr. Nicolas Warchalowski; and our Chief Financial Officer, Jan-Elof Cavander. I give now the word to Nicolas. Go ahead, Nicolas.

Thank you, Olli. Good morning, everyone, and thank you for joining our meeting today. I would like to start by giving a short personal introduction of myself. So as Olli said, my name is Nicolas Warchalowski, and I'm the newly appointed President and CEO for Rapala VMC. I moved to Helsinki end of February, and I took up my new position as of March 1. I'm a Swedish national and 49 years old. I'm married, with 2 children aged 19 and 20. And I'm also a passionate sports fisherman since childhood. I bring with me 25 years of experience working in international consumer goods companies. I started my career in an American Company, Procter & Gamble, when I worked in different marketing, sales and also business team leader positions. After this, I worked in Red Bull, around the world, focusing on new product development, brand building and also international expansion. After that, I changed to the sports and outdoor industry, where I have been the CEO for Haglöfs and Peak Performance and also BabyBjörn. My speciality is working on brand-led turnarounds and helping international companies unleash their full potential and also establish profitable growth. I have to say I'm very proud to have joined the Rapala VMC company, the company full of legacy brands and plenty of potential. So turning our attention to our first half year results and accomplishments. The first half year of 2020 was truly exceptional, as the COVID-19 pandemic had a profound impact on the group. Net sales and profitability decreased, but successful COVID-19 mitigation resulted in improved operating cash flow and a significant reduction in inventories and net debt. I have to say taking office at the same time as the COVID-19 pandemic broke out was, for sure, an extraordinary event not only for the company but also for me personally, but it also allowed me to quickly establish rapport with my new team members and get all senior managers focused on overcoming this great obstacle ahead of ourselves. And I have to say I'm very pleased of how the team handled the COVID-19 mitigation. Our COVID-19 ramp-down was rapid and forceful. Our highest priorities were safeguarding the health and safety of our team members worldwide and also protecting the financial position of the group. As a result of the fast and forceful ramp-down, we saw a fast reduction in purchases and operating expenses. We implemented watchtowers to monitor the cash flow, account receivables; and new payment routines were established. As a result of the ramp-down, our net debt reduced from 2019 year-end by EUR 11.1 million to EUR 63.5 million. Also, we quickly implemented an established central purchase quota allocations and very strict sales and operation planning routines. As a result of these, inventories decreased by EUR 25.1 million from June 2019 to EUR 83.5 million. This is the lowest recorded inventory value in over 10 years’ time. Furthermore, cash flow from our operations increased from previous year and was EUR 13.4 million. Also encouragingly, I can report that fishing as a recreational sport has gained in popularity during the pandemic, and fishing participation has increased in many of our countries during the coming -- the current summer fishing season. After a significant initial negative impact on our sales, sales decreased 17% in the first half year versus previous year, we did witness an increased demand from end May and onwards, and we recorded strong double-digit growth in sales for the month of June. Commenting a bit on the business strategy and execution. It was very much centered around the ended distribution agreement with Shimano. And following that, a restructuring program was initiated in October 2019, and I am very happy to report that this program has progressed fully as planned and also partly accelerated during the first half of the year. Warehouses in Europe are now being consolidated to fewer locations, and our warehouse consolidations are progressing really well. A significant cost saving will be accomplished by now ramping down our Asian lure manufacturing unit. And this Asian lure manufacturing unit have lost significant amount of money for a long period of time. We initiated this move by cleaning up the product range. We took around -- away around 1,000 SKUs or 25% of the SKUs that were previously produced in Batam. And out of the remaining SKUs, we will be moving 2/3 of them to our production unit in Pärnu in Estonia. And the remaining 1/3 of SKUs will be transferred to our top external suppliers. And I have to say I'm very happy how fast and how this project is proceeding overall and the centralization that we're now commencing in our production unit in our Estonian units. On the very same topic, we also in the first 6 months of 2020, moved the assembly of our ice augers. We centralized these also to the manufacturing hub in Estonia. We also transferred knife manufacturing from the Rovaniemi facility in Finland to Vääksy, our existing manufacturing location. That was started already in the spring. And I have to say, after visiting these locations and having a few meetings with the team there, I'm very impressed with our capabilities both in Vääksy and Pärnu in Estonia. And this consolidation of our production units will continue and will allow us to further enhance our R&D capabilities and make sure that we're even more innovative in the future. This will be a very important part of the new business plan that is now in the making. In 2019, we also took important steps to advance in the global rods and reel category. This is EUR 3.5 billion category worldwide. And of our acquisition of the 49% -- sorry. After acquiring a 49% ownership of the 13 Fishing brand in U.S., we are making further advances in these rods and reel categories. In relation to the 13 Fishing brand, I have to say I'm very impressed with their capabilities and product innovation, mainly in baitcasting reels and ice fishing segments; and they also have a -- very creative marketing capabilities. And at the moment, we are progressing with international expansion of their entire product range. This is also proceeding very well. We are also taking steps at the moment to expand with our own group brands in the rods and reel category. As a final point. On the digitalization, we will be increasing our focus on our group's own e-commerce channel. We have already commenced this. This will also be very important. For the first half year of this year, our European e-commerce sales for the first 6 months doubled from private -- prior year. And in the U.S., we recorded double-digit growth in the e-com channel despite the temporary warehouse closure. We will be stepping up our investment in this area to become even stronger in the future. Thank you for listening to me. Over to Jan-Elof Cavander.

Thanks, Nicolas. And also good morning from my side as well. We have available on our website, as we always have in the investor calls, the presentation for the first half numbers. I hope you already have it in front of you. I will start on the Page 2. So first of all, happy to have you all on the line to listen in to our first half numbers. So as Nicolas said, the COVID-19 pandemic really affected all the aspects of our business worldwide, business operations and, of course, our human resources and our team members as well. Early on in the crisis, we implemented a financial mitigation plan to focus really on the cash flow and to protect our financial position. This was done in addition, of course, to several health and safety measures around the world to really to protect our people. So going into the top line. Net sales ended at EUR 117.1 million for the first 6 months of the year, which translates into a 17% reduction from 2019 numbers. And really the key driver here is the COVID-19 pandemic, which had a big impact on our numbers, but secondly I would like to highlight the impact coming from the, I would say, extraordinary mild winter weathers that we witnessed or that we saw in -- both in Europe and North America. This impacted both the winter sports business that we mainly engage in Europe, which affects the ski business and several accessories related to cross-country ski, but secondly, of course, also the ice fishing business. In addition to Europe, also North America was impacted by the mild winter weathers. Then moving on to our comparable operating profit. That equaled a positive plus EUR 4.2 million for this period. And this is, of course, following the pandemic, and the impact is a reduction from previous year. The key driver, I would really say, behind this is, of course, the slowdown in sales, but on the positive side I will say that, due to the rapid COVID-19 mitigation that we really early on implemented, we were really successful actually in decreasing our operating expenses in the first half of the year, which supported the profitability. Overall, I will say our ramp-down and the COVID mitigation where, as I said, focus was on cash flow, was successful. Despite slowdown in sales, our cash flow from operations exceeded the level of previous year and ended at EUR 13.4 million, which equals a EUR 1.9 million improvement for the first half from 2019. We implemented several, we call them, watchtowers. Basically it means that we follow these in the Executive Committee and involve team members around the world to monitor, for example, inventories, purchases, cash flow as well as account receivables. Furthermore, despite lower sales, we actually succeeded in generating a significant reduction in our inventory levels. Only 12 months ago, we were at EUR 108.6 million, but now we ended at EUR 83.5 million, which was the level now at the end of June. This is more than EUR 25 million reduction in just 12 months. And this is supported, of course, by the successful COVID-19 mitigation as well as introduction of strict purchase quota allocation to our different business units and business entities as well as introduction of robust sales and operations planning processes and routines to control the matter. Then I move on to Page #3 to go through in a bit more detail sales for the first half by geographical areas. So in North America our sales was EUR 40 million and decreased by EUR 8 million from prior year. Our distribution centers in Minnesota, U.S.A. and Ontario, Canada, were closed for a period of over 1 month during the first half of the year due to governmental, both federal and state level, lockdown measures that were implemented to all nonessential businesses in the areas where we operate. This, of course, had a very big impact on operations for that period of time, but despite these lockdown measures, our direct-to-consumer sales, online sales actually grew strongly from previous year. And I will say that this really showed that our strategy in investing in this venture is working greatly, and then we are going into the right direction there. In the Nordic area our sales equaled EUR 22 million and was, of course, also impacted by the COVID-19. Furthermore, the mild winter weathers, as I explained, and also some changes in third-party distribution business in Sweden, in the hunting business, impacted the sales in this territory. Rest of Europe sales equaled EUR 42 million, where also the governmental lockdown measures impacted strongly retailers' demand in the midst of the crisis, especially in France and Spain which are big markets in this region. The same comment of COVID-19 obviously applies to Rest of the World market, where our sales decreased by 12.8% from previous year, using comparable FX rates, and ended up at 13 -- around EUR 13 million. Then I move to Page #4 to do a segment review. Net sales decreased in both segments, where Group Products was harder hit than third-party distribution. And the reason here is that the lockdown measures were stronger in North America, as I mentioned. And secondly, the winter sports business in our own branded skis, Peltonen skis, reduced due to the winter conditions, which also affects the Group Products here. And of course, as a consequence and as a function of lower sales, the operating profit, comparable operating profit, for both segments reduced from the previous year. Then I move on to Page #5. As said, our comparable operating profit for the first 6 months was plus EUR 4.2 million, which equals a 3.6% margin. The reported EBIT is lower at a negative EUR 800,000 level. And here really the biggest impact is coming from the other items affecting comparability, which comes from the ramp-down of the Indonesian lure manufacturing operations, as Nicolas explained earlier. And we booked in total around EUR 4 million expenses related to this ramp-down. And these were now fully booked in the first 6 months of the year; and this really takes down now the reported operating profit, if you compare that to the comparable operating profit. This time, mark-to-market valuations of our operative currency derivatives had only a minor impact on the reported figure. Then I move to Page #6 to go through the cash flow and working capital. And I have to say that I am really proud and pleased of the efforts of our team members worldwide in implementing the COVID-19 financial mitigation really to protect our cash flow and to optimize our level of working capital. And as a result of this, our working capital level decreased from previous year to EUR 98.2 million, which equals a 15% reduction from prior year. And also as explained, inventory level decreased even more by 23% from the prior year. And I'm especially happy to show the graph on the right side of the page, Page #6, cash flow from operations. This increased from previous year by some 16.3% and ended at EUR 13.4 million. And really we have -- as said, we have several measures in place to control our purchases and to control the outgoing cash flow as well as to control our inventories and account receivables and to -- really to focus on collecting cash in. And this work generated good results, and consequently we have a good number to report here on the cash flow from operations. Then I move to Page #7 to go through our financial position. Our liquidity position was actually very good at the end of the period. Our undrawn committed credit facilities amounted to EUR 49.9 million. And in addition to that, our cash balance was actually really high, and we even had some excess cash in due to the good liquidity situation. Due to the mitigation actions we did, our net debt dropped to EUR 63.5 million from the previous year. This equals more than EUR 40 million drop from the first half numbers in 2018, but of course, it's good to bear in mind that EUR 25 million impact is coming from the issuance of a hybrid bond at the end of 2019. But despite that, excluding the impact of the hybrid bond, we generated a good reduction of net interest-bearing debt in the last 12 months. And as a result of this, our gearing ratio and equity ratio improved from the previous year. Then I move to Page #8 to talk about the short-term outlook. So the group withdrew its guidance for this year in the end of March due to lack of visibility caused by this COVID-19 pandemic. Currently, as of today, the end consumer demand for recreational fishing products is on a good level in our key markets. And our supply chain -- if we talk from an operational point of view, our supply chain -- including our own factories as well as our key subcontractors, the supply chain is currently working robustly, and we are fulfilling customer orders. However, we are not yet in a position to issue a financial guidance for year 2020. And the reason is that there is still significant lack of visibility for the remainder of the year, and it's coming both from the direct and indirect impacts of the COVID-19 pandemic in our group's key markets. And furthermore, several risks have arisen from the pandemic now for the last 6 months of the year. As we all have seen, daily new infections of COVID-19 have lately increased in the United States and Latin America, and risks for a second wave in Europe and Asia have increased. And potential lockdown measures could have a significant impact either on our own operations of our operative facilities or our customers' retail shops. And due to these reasons, it's still impossible to issue a financial guidance for 2020. So that was all from the financial review.

Okay, thanks, Jan-Elof. So we are now ready for your questions.

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

This is Henry Hillgarth from Quaero Capital. Congratulations on the good results. I mean it's really quite impressive to see such a decline in inventories. I had 3 questions really. The first one is on the top line figure on sales. I was wondering if you could help us understand what the effect of the Shimano termination is and if you could remind us which countries are affected by that and when. And also, if you could help us understand the size of 13 Fishing now in terms of top line. The other questions are really on the balance sheet. So on inventories, you mentioned the EUR 25 million. Could you just take us through exactly what you did to reduce your inventories by so much? And then the last question is really on Batam, just to try and understand. Should we expect any further exceptional costs now that you're winding Batam down from that?

Okay, I can -- it's Olli Aho here. So I can take the Shimano termination question. So we have agreed with Shimano that the distribution agreement with Spain, Portugal and France will terminate end of June. And then the distribution agreements with South Africa and Nordic and Balkan countries will terminate end of September. So during first half of the year, we did distribute Shimano in all countries as last year. So the Shimano termination had during first half of the year a minor effect, and -- but of course, this effect is more visible during second half of the year, which is off season, so also there the effect is not that significant. So I give the word to Jan-Elof to answer the other questions.

Yes, Jan-Elof here again. 13 Fishing, the introduction of 13 Fishing is currently taking place. And we engaged in the preparations to prepare and plan for the products and do innovative work to introduce products that suits the European market for 13 Fishing, but this wasn't yet what I'll say a main 13 Fishing sales season for us. Then going into the Batam one-offs: So I will say that the bulk or all of the one-off related to the Batam ramp-down was now recorded in the first 6 months of the year. And I turn over to Nicolas to walk you through on the several actions behind the inventory reduction.

Thank you, Jan-Elof. In terms of inventory reduction, I believe the key drivers that we implemented was responding very, very fast. I believe we put the management team in crisis mode very fast as we saw the COVID-19 pandemic breaking out. And I believe that, within half a week, we started taking down initial purchases. External purchases were cut, I believe, in the matter of a few days. We took them down significantly. We did set up for the first time a new operations COVID meeting, which has progressed really well, and we have continued doing that. Some of these measures, by the way, we will continue to have in place, also as we see the greater effects of the pandemic now easing on our different business units. We implemented very strict inventory targets by product segment for all of our business units. And of course, we halted production in our own production units immediately as we saw the increasing demand as several of our customers initially closed down for operation. And I believe it was the combined effect of all these measures that led to the EUR 25 million reduction in inventory value over this period.

[Operator Instructions] It appears that there are no further questions at this time, so I would like to turn the conference back to you, Olli, for any additional or closing remarks. Thank you.

Okay, thank you very much for everybody participation in -- participating in this conference, for your interest in Rapala VMC. So we will be back with our full year numbers in around middle of February. The date will be announced later. Thank you very much.

Thank you.

Thank you. [indiscernible].

Thank you.

Thank you for your participation in today's conference. You may now disconnect. Thank you.