Rapala VMC Corporation (RAP1V) Earnings Call Transcript & Summary

Good day and welcome to Rapala VMC Corporation's Full Year Results Announcement Teleconference. This conference is being recorded. At this time, I would like to turn the conference over to Olli Aho, Investor Relations.

Thank you. Welcome, everybody, to the Rapala VMC Full Year Results Announcement Teleconference. I'm here together with Nicolas Warchalowski. President and Chief Executive Officer; and Jan-Elof Cavander, Chief Financial Officer. I give now the word to Nicolas. Please go ahead, Nicolas.

Thank you, Olli. Hello, everyone, and welcome to this conference call. So 2020 was for sure a rollercoaster year. So despite the COVID-19 pandemic and Shimano exit during the year, we managed to grow our comparable EBIT to EUR 21.4 million versus EUR 17.8 million in previous year. Net sales decreased only 2% versus previous year using comparable FX rates. Key focus in 2020 was to protect the health and well-being of our team members worldwide. The pandemic tested us in many ways. And like other companies all around the world, we had to overcome many challenges in 2020. But I'm happy to report that our team members stood shoulder to shoulder and that we, after the initial lockdown since spring 2020, came out together as a more united team. Key focus in the year was placed on strong leadership, tight cash management, inventory control and also several watchtowers that were followed rigorously during the entire 2020. Personally, I'm really proud of the accomplishment that all of our team members all around the world overcame in 2020. On strategy execution, strategy execution greatly accelerated over the year. Batam factory, which was suffered -- which had suffered from large yearly losses over the years was successfully ramped down in 2020. The soft plastics product range and sport fishing baits has been cleaned up, 1/3 of the SKUs have been removed. The rest of the product soft plastics are now either produced in Pärnu or sourced via external suppliers from our highly competent sourcing office in Taichung in Taiwan. And I believe that our new setup would deliver improved results versus earlier setup. The consolidation of the warehouse footprint in the Nordics, initially scheduled to be carried out over the coming 2 to 3 years, was completed in record timing in 6 months, with 25% reduction in SKUs that were removed when moving from the Swedish distribution center to the Estonian distribution center in Pärnu. The new Pärnu DC was fully operational in November, and we see great synergies with our lower production units in that city. Strategy execution projects at large came in ahead of time and exceeding internal target set. And with the new ONE RAPALA VMC strategy now in place, strategy execution will be key for us to achieve accelerated results. So short on the ONE RAPALA VMC business plan, it's described further in the financial statement release. There are 5 key strategies: number one, team culture; number two, consumers and brands; number three, customers; number four, product development and innovation; and number five, finance and operations. They're all integrated. The new ONE RAPALA VMC business plan aims to improve the consumer and customer centricity across all our business units and get everyone working together as one team. We already see good progress in this. E-comm is a focus area. We already see accelerated double-digit growth in e-comm, with plenty of opportunities to accelerate it further. We have one of the strongest brand portfolios in sport fishing industry with large untapped potential, and the new ONE RAPALA VMC strategy aim to leverage our brand portfolio better in the future. A key enabling driver will be to get our product development innovation back to historical levels and to generate incremental business growth for our group brands with focus on sport fishing. Further work on our operations and finance platform is also needed to ensure that our business units can win in their local markets. Lastly, on Okuma. Our intention is to turn Okuma into a leading rod and reel brand in Europe and to fight for market share in the largest rod and reel categories, up against the big 3 global rod and reel brands. Those are Shimano, Daiwa and Abu Garcia. And as a proud new Okuma brand owner in Europe and Russia, we are preparing a pan-European launch for 2022. 14 countries are covered by exclusive Okuma distributor agreements, meaning that we cannot begin to sell Okuma in these countries until 2022. But in all the other remaining countries in Europe, we can start to sell Okuma products already now. Okuma brand will benefit greatly from applying one consistent sales and marketing strategy and significantly increased investments versus earlier across the entire Europe and Russia region. We are quite excited about this new opportunity in our group. And that is all from me. Thank you for your attention, and I look forward to questions later. So over to Jan-Elof Cavander, our CFO.

Thank you, Nicolas, and good morning also from my behalf. So as usual, the presentation for the full year results has been available since this morning on our corporate website. I believe you all have that in front of you already by now. So I'll start on Page #2. So also to reflect, as Nicolas, on 2020, so that really turned out to be a really exceptional year. We already entered the year as a transition year since we were entering the year, having big changes in our Third Party business. And then, of course, the pandemic accelerated the year. And we also accelerated several activities during the year under the leadership of the new CEO. But going to have a deep -- more deep dive in the financials. So in the first 5 months of the year, we achieved first a fast and rapid ramp down when the pandemic hit us beginning in March. And then we saw a change in the behavior from June onwards, and then we changed from a fast ramp down to a fast ramp-up mode. And now looking backward when we have finally ended the year, we have to say that we achieved great results here. Our total net sales for the financial year of 2020 decreased to EUR 261.3 million, but we need to look at this a bit more in detail. Group Products sales continued to grow in line with our strategic plan, and the decrease in the top line came from the Third Party segment. Here, the termination of the Shimano and hunting businesses decreased obviously Third Party sales. But the highlight is that the Group Products sales continued to grow still in 2020. Then moving to comparable EBIT. Comparable EBIT also continued to grow and ended at EUR 21.5 million for the full year. This is driven by a couple of reasons. Firstly, the improved gross profit was one of these facts. And this is as a consequence of the better product mix as Group Products represent a bigger proportional part of the business compared to Third Party business. Additionally, strong expense control and consequently expenses were on a lower level compared to the prior year. And the third part of this page, the inventory value here, I'm especially happy to report to you that we ended the year with EUR 68.8 million in inventory value. This is as a result of very tight control on supply chain management. And these new activities and ways of working really yielded results. And we ended up with considerable lower stocks than the year 2019. Then I move on to Page #3. I'll talk about our 4 regions in more detail. First, North America. In that region, sales grew by 8.1% from prior year using comparable FX rates, and the total sales ended at EUR 110.2 million. Here, we saw really solid growth by the strong and forceful ramp-up that we generated from June onwards. In Europe, our sales equaled -- sorry, in Nordic, our sales equaled EUR 41.6 million, and this was obviously strongly impacted by the exiting businesses. It's important to note that Group fishing product sales grew driven by our focus and increased focus on the core despite the total net sales decline. Then moving to Rest of Europe. Here, our sales were stable at EUR 79.8 million. And here as well, the Shimano exit obviously had a negative impact on the top line. But here also, happy to report that Group Products business grew from prior year. And then moving on to the Rest of the World region. Here, sales ended at EUR 29.7 million. Here also, the termination of the Shimano distribution in South Africa affected negatively for the region. And additionally, the recovery from the pandemic during the second half of the year was slower in this region compared to Europe and North America. Then I move to Page #4, on to cash flow and working capital. As Nicolas mentioned in the opening remarks already, we implemented several new measures and watchtowers to control our supply chain, our inventory levels and our account receivables throughout the year. As a result of the strong activities here, we achieved great results in working capital and inventory. Total working capital decreased by 24% to EUR 83.9 million, and inventories decreased to a low level of EUR 68.8 million, which is more than a quarter less than in the prior year. And as a consequence of strong working capital management, operative cash flow improved by close to EUR 17 million from prior year, and the end number that we achieved was EUR 42.5 million. Then I move to financial position. I'll give you some comments around this topic. So as a result of strong cash flow generation in 2020, these credit metrics displayed on this page all developed favorably. Especially, I want to highlight the improvement in net debt. We were at EUR 45.2 million at the end of the year, whereas prior year was EUR 74.6 million. Our liquidity position for the group was good, undrawn committed long-term beyond 1 year credit facilities amounted to EUR 10 million in addition to our cash balance at the end of the year. The financial covenants that we have there include limits on the amount of indebtedness, available liquidity, EBITDA as well as gearing ratio. And the group is fully compliant with all of these covenants at the end of the year. Then finally, I move to Page #6 on the short-term outlook and guidance that we published yesterday. So the general market outlook for fishing products in North America and Europe is positive, and we see the end-consumer demand for recreational fishing products to be currently on a good level in our key markets. And one comment on the COVID pandemic. So despite the pandemic and the increased uncertainties posed the pandemic, we still today see the group supply chain, including our own factories as well as our subcontractors, working robustly and fulfilling the customer orders. And as a consequence of the market outlook and the industry outlook for 2021, our guidance is the following. The group expects 2021 full year comparable operating profit to be in line or increase from the prior year. So we had a -- we will -- so just to repeat, so the guidance for '21 is that we -- the group expects 2021 full year comparable operating profit to be in line or to increase from the prior year. And then we are ready for questions.

[Operator Instructions] We'll now take our first question.

Sebastien Hoyez from Quaero Capital. The first question is about the market, fishing has been one of the few beneficiaries of the COVID with renewed interest in nature during the COVID-19 crisis. And we have seen some partial statistics about the number of fishing license sold across the world. For example, we saw that in Sweden, a sharp increase in May after the containment; in Finland, a sharp increase in March; in the Netherlands, 100,000 licenses sold in the first 5 months, which corresponds to a whole normal year; in the U.S., too. We have not complete statistics. So could you help us to -- have you got up-to-date statistic about the fishing licenses sold across the world? And so about your addressable market.

Yes. Thanks for the question. It's Olli Aho here. So we have indeed these similar figures from many markets, but we don't have an overall picture of all markets in the world. So -- but we do indeed see this same trend in our main markets, that the participation in fishing seems to be growing because of this COVID pandemic. And if you think about it, so when people are locked down here by their homes and there are very, very little they can do, so sport fishing obviously is one of the local activities which is easy to practice also alone and not with the big group. So indeed, we have seen the same trend.

But could you help us to understand the magnitude of this trend? Do we speak about plus 20% more fishing people? Or it's plus 50%? Have you got a range to give us?

Yes. It varies per market and difficult to give an overall range. So you really need to look at specific market. And as I said, we don't have a complete picture of that.

But -- so you share the opinion that the overall market is quite booming.

Well, you said that, but we indeed see some nice growth here.

Okay. Okay. And discussing with retailers and reading comments from your peers, we understand that the main challenge has been keeping pace with customer demand with a very strong rebrand starting from June, like you explained. And we understand that Rapala is vertically integrated and you should suffer less from a supply chain point of view than some of your peers, meaning it could help Rapala gaining market share due to competitors' procurement issues. So have you suffered from bottlenecking in your supply chain? And could you also give us a comment about the sector?

Yes. We indeed agree with your conclusion that it helps very much when you control the whole supply chain. So we see now that, that is a competitive advantage for us compared to such competitors who are 100% sourcing from third parties. So we think that this plays into our hands.

And have you seen some good surprise from some of your salesmen going to some retailer shops that order more from Rapala because they can't be supplied by one of your peers?

Well, of course, we have thousands of salesmen going around the shops, so we get very many positive reports. You're right. So salesmen are happy when they can supply product and the competitor cannot. So...

Okay. And other questions, starting from July 2020, as we see and discuss, so we see a lot of positive comments on the sector, and it was not just strong sales coming from fishing boats manufacturers and people who bought new fishing boats are very likely to continue fishing in the next couple of years. So with all these positive news about the sector, your guidance of a flat profitability for 2020 appear very cautious. Could you please help us to understand why we should not expect Rapala to benefit from this positive tailwind and do a very strong 2021 year?

Yes, Jan-Elof here. So if I may comment on that. So our guidance is to be in line or increase from the previous year. And the second comment is that we have also written in the financial statements that we are still undergoing a change in the Third Party Products portfolio and we are exiting businesses during 2021 compared to 2020, which also obviously impacts our year.

But the wording, flat or above, let us think that you expect just a slight increase and not a strong increase. Is it correct?

Well, to add on Jan-Elof's point, this is Nicolas here, I believe we gave a comment in our financial statements release that the exiting business is summing up to around EUR 30 million in 2020. That is the exiting part. So it's quite a considerable amount, which is exiting.

Okay. And this amount of EUR 30 million was much higher than what I had in mind. So -- and presumably, it's quite low-margin business that you will replace by higher-margin business going from 13 Fishing or Okuma brand or maybe sourcing other Third Party Products. So firstly, could you help us to understand what is in the EUR 30 million revenue that you will miss in 2021? And also give us some details about what you expect for this new agreement with 13 Fishing and Okuma.

Yes. So if I may comment on that. So the EUR 30 million is obviously consisting for -- the biggest part is coming from the Shimano rod and reel business. And then for the growth for 2021 in 13 Fishing and Okuma, we haven't disclosed those top line numbers, but those are obviously included, of course, in the guidance. And what comes to Okuma, the actual, let's say, bigger scale launch will take place in '22. We will have sales already in '21 for Okuma in the markets that Nicolas described in his opening remarks, but we will invest heavily in the Okuma business and prepare for the 2020 launch, which means that the bottom line impact -- 2022 launch, a 2022 launch, sorry. So the bottom line impact for the Okuma business for '21 will be moderate due to the reasons that we invest in marketing and other areas to prepare for a strong launch in '22. That's maybe all I can open up on this subject.

Okay. I understand that. Without giving us precise figures, could you give us some comments about 13 Fishing, how it develops in the U.S. even if it's not on your end in the U.S.? And how do you develop the brand outside the U.S.

Well, in the U.S. -- U.S. So as we have told before, so -- that this is a kind of start-up brand, so it has quite short history. And for 13 Fishing last year in the U.S., it was a little bit challenging because of these reasons. And -- but we have not disclosed the exact number.

We have not. So I think you commented -- this is Nicolas here. You commented earlier on some companies being more reliant on external suppliers, 13 Fishing is one of them, as actually most rod and reel manufacturers. I think with Okuma, we have a significant advantage since they sit on their own rod and reel factories. But 13 Fishing is, for the moment, at large, reliant on external suppliers. And you could see that in their numbers for 2020. Yes. Jan-Elof, anything to add for you?

On the international launch, international launch is progressing well for 13 Fishing, it can be said. It is a bit of a smaller brand compared to Okuma. Okuma brings a full -- complete rod and reel portfolio. 13 Fishing is more in kind of ramp-up mode or incubation mode, gearing up their rod and reel portfolio, in spinning reels mainly, and are being very positively received in the market. Okuma is a much, much bigger brand with a complete rod and reel portfolio. They are the #4 rod and reel brand worldwide. They bring 89 reel families proven in Europe for 20 years and bring significant ammunition to our sales force who have been kind of waiting or dying to get a big flagship rod and reel real brand. After the exit of Shimano, now we bring them Okuma and this is what they are now gearing up at the moment.

And could you remind us what was the Okuma revenue in your ratio in 2019 or maybe 2020, to have an idea of what we should expect from the incorporation of this new brand in Rapala in 2 or 3 years?

The number that we disclosed in our financial statement when we announced our Okuma brand acquisition was that they have been selling with their old distributors or current distributors across Europe. They have one main distributor servicing 14 markets, and they have other distributors servicing 19 individual countries. The total sales for that summed up to around 10 -- a little bit over EUR 10 million.

Slightly -- yes, slightly more than EUR 10 million.

Slightly more than EUR 10 million. That is in the old setup.

Okay. And maybe one last question after letting my colleagues also have the possibility to ask questions. But I don't understand what was your net debt at the end of 2020. And maybe you could give us some guidance about what you expect your net debt to be at the end of 2021?

Yes. Maybe I remind on the definition that we have the EUR 25 million hybrid bond in our balance sheet, which is not calculated as net debt but rather as an equity type of instrument. So excluding obviously the hybrid, our net debt was this EUR 45.2 million at the end of 2020; whereas end of 2019, it was EUR 74.6 million. And we also had the hybrid bond in our balance sheet at the end of '19. So the decrease in net debt was EUR 29.4 million in 2020.

And could we expect the same kind of decrease for next year?

Sorry, we haven't given any guidance on development on net debt in '21. Sorry about that.

[Operator Instructions] As there are no further questions on the phone, I'd like to hand the call back to your host. We do now -- we do have another question on the line. A question has just come through.

This is Marc Saint John Webb. Just a question on the Okuma deal, which is fantastic. Well done. It's great for you to get into rods and reels now with a big brand worldwide. Can you help us understand a little bit more what you're doing here? Because, of course, it would have been fantastic to hear Rapala teaming up with a Okuma worldwide or acquiring the company. Here, you've done something for Europe. Just to help us understand, is this sort of -- you own the brand in Europe, so what's the difference between owning the brand and distributing the brand? Can you help us understand that? And also help us to understand the future partnership that you are going to develop with Okuma, because you mentioned that there might be some sort of -- well, it's great to have a manufacturing base in Taiwan, which is a big producer of these types of sport equipment, but if you can understand how the partnership with Okuma is likely to evolve in the future.

Yes, it's Olli Aho here. So to repeat what the deal was. So we bought the Okuma brand rights for Europe and Russia, and we concluded a supply agreement with the factory. And as Nicolas said here already that we indeed now have basically direct supply from a third-party supplier, which we think that in the future will help us greatly compared to such competitors who are just sourcing from third-party suppliers. And indeed, now when we own the brand, so we own it and it cannot be taken away from us. So if you compare to a distributor agreement, for example, what we had with Shimano, so it is not possible that somebody will take us -- this business away from Europe. So that's why we bought the brand and did not conclude a distributor agreement. And this was the whole deal, what we concluded, and this was for Europe and Russia. So no, nothing else was agreed upon.

Okay. So that sounds great. But that means that you're going to make manufacturing margin, brand margin, et cetera, just out -- not just the distribution margins. So it's not going to be like the Third Party margins on this.

Yes. So this is -- this is indeed similar deal as we did with Sufix. So we bought the brand and concluded a supply agreement with the factory. So we buy the products from the factory and the factory makes manufacturing margin, and then we will then make the brand margin and the distribution margin.

Okay. Anyway, it sounds like a very good deal. Just another question in my mind. I was sort of equally surprised considering the positive trend in the fishing market, which we're hearing about. And also the sort of the new ONE RAPALA strategy and the acquisitions, et cetera, we imagine that sort of the trend might have been much more positive in 2021 and '22 than you're giving in your guidance. And just when looking at last year, I mean -- and looking at last year compared to all the previous year, you made a big profit in the second half of the year, which is seasonally low for you. You make a loss generally every year in the second half of the year or at least you've made a loss in the 2 previous years in the second half. So something transformational is happening in -- well, 2020, '21, '22 for Rapala. And it just sort of seems surprising that you're so prudent in your outlook statement.

Yes. Jan-Elof here. So of course, 2020 was exceptional also in the seasonality because there was a lot of sales that did not take place in April, May. So I would say that 2020 seasonality is probably not a good proxy of the seasonality under a normal year.

I understand that. I'm just trying to suggest that this year, you're going to end up with the first half of the year which is going to be very strong in volume because we know from old statistics that business is very strong in the angling market in Europe and in North America. And you're going to have a -- we imagine on top of all the initiatives that you've taken in your high-margin owned brands, the business is going to be very strong in the first half comparing to a very negative first half last year, pointing to a very strong year, 2021.

Well, I'll refer to the full text on our market outlook for '21, where we commented that we see that the general market outlook to be positive and end-consumer demand to be on a good level.

[Operator Instructions] We now move to the next question.

It's Davit Kantola from eQ calling.

Hello?

Hello?

Now we hear you. Go ahead. Go ahead.

Okay. It's Davit from eQ Asset Management calling. I have a question on your online strategy. How are you going to grow your own online sales? And what's your focus in that area?

Okay. Thank you for that question. So how will we do it? Well, I think we have taken some first initial careful steps already here. I think we -- just like many other companies. Fishing has been a little bit behind in terms of DTC development if I compare it to other sports segments and industry segments. And I think that's kind of been a little bit reflected in our past performance as well, where we had a quite ancient e-comm platform, which was quite difficult to upgrade and maintain and make sure it was kind of fulfilling the needs of modern-day kind of shoppers. So I think we already announced, correct me if I'm wrong, Jan-Elof, we already announced last year that we took the investment. I think it was the first investment I happily was able to propose to the Board back in April, in my very first board meeting. We were able to sign off an investment in the new e-comm platform that will come into place and will be implemented in September -- August, September this year. So I think that will be a key important stage. I think we sit with amazing capabilities when it comes to social media and in terms of the different -- the strong outreach that we have there. I think the key challenge will be for us to translate that kind of social media participation and coverage rates into traffic into our own e-comm site. So if you ask me, it will be the implementation of a new consumer platform. It will be to increase the amount of traffic, which is for a company our size and with our amazing brand portfolio, is still quite low. And it's also increasing the kind of the conversion rates and when they actually pop-up in our page. And I think that should overall lead to greatly accelerated e-comm growth. And also, I think as a kind of a culture change, start treating e-comm as a kind of a growth channel, a profitable channel. It's not just kind of a marketing activity. This is a sales channel which should contribute to greatly accelerated growth. Does that answer your question?

Yes. It does. And I would like to continue on that, about your brand. You have such high and growing brands, how are you going to develop those brands going forward?

Well, how will we do it, short reflection, like you said, we have an amazing brand portfolio in -- I think one of our strongest brand portfolios in the entire fishing industry. And I would say with the Rapala flagship brand, these strongest brand and perhaps the most valuable brand asset there is in sport fishing, which I believe has been greatly underutilized. So I think, here, it's starting from the bottom now. We have -- in our ONE RAPALA VMC strategy, we start from the beginning. We have done a marketing strategy, a brand strategy now for our flagship brand. We're going to roll that out now in Q1, Q2 for all the other remaining group brands -- sorry, the key group brands will be completing and get the brand strategy. And based on that -- and on top of that, we have also implemented brand guardians, each of the key group brands have received a brand guardian who will look after and make sure that the strategy gets developed, gets implemented and then also kind of adhered to. So kind of a proper strategy, a brand strategy, we'll put in place for each of the group brands. This is new in our group. We have never kind of gone about it. So rigorously, I think I bring some knowledge here from the consumer goods industry and fast-moving consumer goods where this is more kind of standard practice. I think in our company, we haven't really kind of viewed it as such. And I think we're now implementing this knowledge in our group. I think those will be the kind of the key drivers. Of course, together with proper marketing budgets and implementation of key KPIs and everything, like we have for many other things in our group, but not for brand management.

I'm looking forward to hearing more about this, and maybe you will be breaking that out for investors also in the future reports.

We'll keep everyone informed in the development of the brand strategies and how it's kind of progressing. And it should also become visible in the new kind of e-comm platform and the new pages, you will see the new brand strategies coming across. It's been a little bit blurred in our communication historically over the years. You will see much sharper communication. And each angler will recognize their favorite brand. And I think this is key strategy here to -- if we take our flagship brand Rapala here, to change it from a brand that has been used by our fathers and grandfathers to also can be used by our children and grandchildren here, really getting them ready for the new kind of digital age and for the future.

There are no further questions on the phone at this time.

All right. Thank you very much for all participants, of your interest in Rapala VMC. So we will be back with our first 6 months results on 15th of July. Thank you very much.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.