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. I would now like to turn the conference over to Olli Aho. Please go ahead, sir.

Welcome, everybody. We are here together with Chief Executive Officer, Nicolas Warchalowski; and Chief Financial Officer, Jan-Elof Cavander. I now hand over to Nicolas. Please go ahead.

Thank you, Olli. Good morning, everyone, and welcome to this conference call. My name is Nicolas Warchalowski, and I have the privilege to be the CEO heading up Rapala VMC. The first half of 2021 was record strong. We came out of the starting blocks in an explosive way, fulfilling winter orders at an exceptional strong level following great winter weather conditions. In fact, we had cold temperatures, snow and ice across all of our winter markets around the world, which boosted our winter business to record levels. To satisfy high market demand in the middle of a distribution center remodeling in Europe is difficult, but our team did pull it off brilliantly. All winter orders in Europe shipped out of the old DC system in quarter 1 and spring/summer orders shipped out from our new DC system in quarter 2 with a smooth transitioning between the 2 distribution center systems. It was like watching a 4x100-meter relay in the track and field Olympics. It was beautiful to watch and even more fun to take part in. And here, I want to stop and say how proud I am of all team members that made this happen, especially at the same time as observing several very strict health and safety measures like working with face masks, doing temperature checks, having sealed off departments, closed canteens, closed changing rooms, et cetera, et cetera. Going in already to 2021, we did anticipate strong market demand, and we ramped up our production units and also increased our external purchases significantly to satisfy the high level of demand that faced us as we wanted to take full advantage of that in 2021. Spring/summer business was also very strong as can be seen in the great numbers that we accomplished in first half, with net sales increasing by plus 36% versus last year and comp EBIT hitting a new record at EUR 26.5 million for first half. Switching to the topic of strategy execution and the initiated turnaround. The first executional element of the ONE RAPALA VMC business plan was to deal with the underperforming production unit in Batam. As several of you or most of you know, this unit has been an eyesore in our group for a long time, and we ramped it down fast and furious at a record speed of 7 months with a project cost landing below internal cost budget. At the same time, the soft plastic category was cleaned up with a 25% SKU reduction, building up a more agile and flexible production system, combining internal production in Pärnu with the use of top-notch and industry-leading external suppliers. This new flexible production and sourcing model will allow us to be much faster to meet new interesting sport fishing trends. We already witnessed this happening as we now are beginning to fill up our innovation pipeline in this interesting category. Talking about the importance of speed for Rapala VMC when it comes to strategy execution. If we want to be more successful for this company, we have to become faster. With more executional elements of our new strategy now having materialized during the last 12 months, we are really happy to report that our executional elements are highly synergistic. Today in the group, we have fewer SKUs, fewer warehouses, fewer matrix issues, less management layers, less earning logic issues. This has resulted in things becoming much more simple in general. And simplicity does drive speed, and we will be continuing with this. To help us accelerating faster and also to improve our capital efficiency, we have now in 2021 initiated the largest SKU and brand cleanup in our entire company history. Soft plastics category and Nordic SKU range has already been reduced by 25% by end of June '21. We aim to reduce an additional 25% of SKUs globally and 50% of group brands and sub-brands within the coming 12 months versus June 2021 starting point in order to focus on future winners and to pave the way for future launches and product innovations that we want to bring to the market. Half of this reduction should be reduced already in 2021 and the remaining part in 2022. On the market demand, as this is an important topic, Jan-Elof will also be commenting on this later. With sport fishing having been a very suitable recreational activity during the pandemic, we now see consumers having started to resume back to pre-pandemic recreational activities. As a result, the sport fishing market is resetting sharply. Fishing retail store traffic is down, which is starting to influence replenishment orders and will also affect preorders for 2022. Several retailers will be destocking in the next couple of months. We believe in a somewhat softer landing for U.S.A. compared to Europe and Rest of World, driven by the fact that several fishing retailers in the U.S.A. are also selling other non-fish categories like food, hunting, et cetera. Internally, we refer to the new market conditions as normal-plus. From June 2021 onwards, we will be adjusting several -- we will be adjusting external purchases and other operational matrices to ensure that we manage inventory levels in the same strict way as we have been doing in the last 12 months. Jan-Elof will be commenting on this further a bit later. On the topic of product development and innovation, this is really center stage in our new business plan. Our 5 PD&I centers are fully operational, and this was 5 months ahead of plan already in January 2021. And they work together in a much better way than what we have seen before. Earlier, the teams pulled in different directions, and we really acted local to win local. We have now shifted to instead act global to win global. Acting together in a global and synchronized way mean that we can reap the full benefit of bringing new innovations out to all global markets at the same time. In the past, we have had some global home runs, but now we are consciously working to accomplish more global home runs in the future. This means that we can start reaping more benefits of having such a strong brand portfolio and also a global sales force. We will also be utilizing the Rapala flagship brand much stronger in the future, and we have a new fresh brand strategy for the Rapala flagship brand which was finalized in December 2020, which will help us accomplish this. Rapala is one of the most well-known and loved sport fishing brands in the world, and it still represents huge untapped potential. Saving the best for last, which is rod and reels. In rod and reels, I see great progress in 2021. For the 2022 fishing season, we have a dream portfolio lined up in the rod and reel category. We will be bringing no less than 5 global rod brands, that is Okuma, 13 Fishing, Rapala, Storm and Williamson; and also 2 global reel brands, Okuma and 13 Fishing to the market. Our flagship brand in the rod and reel category in Europe and Russia will be Okuma, and there is significant pent-up excitement in our team after the Shimano loss. Our knowledge and capabilities in rod and reels is impressive after having distributed Shimano for so many years. This means that we will be hitting the ground running in 2022 with a globally known brand. And owning the Okuma brand rights in Europe and Russia indefinitely means that the operating model will be quite different to that of Shimano. Together with Okuma and the Okuma team, we're off to a great start. Also, having one of our product and development and innovation centers in Taichung, Taiwan and also our global sourcing office with 35 team members working in the same city as where Okuma is headquartered is already bringing great benefits. Together with Okuma, we're building up a plan on how we can win together. Together with the Okuma team, we will scale up the Okuma assortment in rods and combos, that is reel and rod combos, significantly over the next coming couple of years. That is all from me. Thank you for your attention, and I look forward to questions later. Over to you Jan-Elof.

Thank you, Nicolas. Good morning from my behalf as well. The presentation on the financial numbers for the first half of the year, as always, can be found at the Reports and Presentations section at our corporate website. I hope you have that in front of you. Okay. So in that presentation, I move to Page #2. So strong growth in sales and profitability for the first 6 months of the year driven by a couple of factors: first of all, high market demand, strong winter season, as Nicolas also explained; as well as significantly faster-than-expected execution of our new ONE RAPALA VMC strategy. So sales ended at EUR 159.6 million, following our strategy. We have focused in Group Product sales, which grew very solidly 54% from prior year. I'm really happy to report that more than EUR 120 million of the total top line came from our Group Products. We witnessed high market demand in the first half of the year, which was further supported by great winter season as we experienced. We have generated a strong cultural shift in our team to really focus on Group Products and our own brands that we own, and these are then supported by certain synergistic Third Party Products. We initiated last year as part of the ONE RAPALA VMC strategy a total renewal on our internal earnings logic model. This means in practice how our managers are measured and how we reward our managers internally; and how do we make internal decisions on pricing, product assortment, SKUs, brands, et cetera. In the legacy model, we had less internal transparency as we didn't measure the total vertical profitability of our businesses. Now this has changed both in the financial measurement system as well as it has started to bite in our culture and the way we work with our teams, and this large financial change has been actually very elemental in changing how we measure and how we drive the Group Products business, which creates most value for shareholders obviously. But now we have finally cracked this complicated nut. This means that our team has completely internally stopped talking about left pocket, right pocket issues and focusing on what really matters, and that's to create value. Comparable EBIT was EUR 26.5 million in only 6 months' time. This is also driven by several factors: as said, significantly faster-than-expected strategy execution. Batam was a big burden for a very long time. That has now been solved. Consolidation of smaller distribution centers and warehouse in Europe, this has been executed and completed. And our new operations in Pärnu is up and running very well. Strong sales, improved margins and overall good cost control. Despite the strong increase in top line, we have had excellent control on our cost base. An important highlight is also that after the successful turnaround of the group, our items affecting comparability were close to 0. This means that the comparable EBIT and the IFRS official reported EBIT are very, very close to each other, EUR 26.5 million in comparable EBIT and EUR 26.3 million in the reported EBIT. This is a very important factor to take into account as well. On inventory value, very happy to report again a decrease in number here also. We put in place very strong measures some 15 months ago and still have these measures in place and tight control on our purchases and on our inventory management. This has yielded great results, and we continue to be around the EUR 70 million area in our inventories. We expect to have further support in inventory management from the largest SKU cleaning ever in the company history, coupled with the brand consolidation that we plan to do in the near future. This being said, we have already accomplished large SKU cleanup in the soft plastic business and also in the European area. Then I move to the next page, Page #3, on the short-term outlook. First, I touch on the short-term guidance for 2021. So for 2021, we expect our full year comparable EBIT to significantly increase from prior year, and the expectations for the second half is that solid order book and the current projected demand that we have in our projections are expected to generate good profitability for the second half. Then a second point that I want to touch upon and further elaborate that Nicolas also mentioned already is the current hot market sentiment in the overall industry that is sharply resetting as we speak. Now when societies have already started to open up and consumers are partly going back to pre-pandemic recreational activities, this is a topic of issue. In Europe, we are currently seeing decreasing retail store activity in the fishing segment, especially in the U.K. We expect the market sentiment to cool down also generally in North America but at a moderate -- a bit more moderate pace and with a short delay compared to Europe. When the current hot market cools down, we expect the industry going forward, in reference to pre-pandemic levels, to be somewhat higher in the future. In other words, we expect normal-plus market conditions in the future. The reason for the plus after the normal, a couple of reasons here. First of all, we see globally, especially North America, increase in private investments in fishing boats, which is supporting us. And secondly, we expect the global positive trend in outdoor activities and sport fishing to continue. Then I move to Page #4. All regions generated sales growth from prior year despite the fact that we exited third-party businesses in many countries that played quite a big proportional role in some of these regions. North America ended at EUR 69.9 million, with more than 70% growth from prior year. We experienced good market conditions both in the U.S. and Canada. The key drivers here were the strong demand of fishing products as a COVID-safe activity. I'm very happy to say that all Group Product categories in North American market witnessed double-digit growth. Fishing participation increased in the U.S., and as said, private investments into boats were strong, which both were very positive indicators in the market. Nordic sales equaled EUR 25.3 million with a 14% growth from prior year. Here, I want to highlight one important factor, which is that at the same time our team pulled off an extremely big restructuring and transformation of operations, consolidating several leases into one DC and at the same time when generating this strong operative change, exiting hunting and Shimano businesses, at the same time doing these 2 big restructurings. We actually, despite exiting the third-party business, managed to pull off a positive change on net sales. So we witnessed 14% growth from prior year despite these exits, which is an excellent result from the team. An additional positive highlight is the great reception of 13 Fishing in the markets and in the customers in this region. Rest of Europe market were -- sales equaled EUR 46.8 million. Here, we also have an impact from the exit of third-party businesses. But despite that, we have here also had a positive growth number of plus 13% growth from prior year. In the Rest of the World market, we posted EUR 17.6 million top line. Here, we had less impact of third-party exits, and the strong Group Product demand in the market generated 38% growth from the comparison period. Certain countries in Asia were slower to open up after the pandemic, but despite that, we achieved good results with our sales teams together with our customers. Moving to Page #5. Inventory ended at EUR 73.8 million, as already said. The improvement of the inventory value resulted from tight inventory control with new purchasing processes in place that we already started at the beginning of the pandemic in March last year. High market demand supported, of course, as well as the successfully executed restructuring. We have been cutting already the number of SKUs and decreasing the number of warehouse locations, and these restructurings are also visible in the total inventory number for the whole group. And I'm especially happy to share the cash flow graph on the right side of the picture, which shows that we generated EUR 23.1 million of cash flow from operations, which is a really strong number. We have put a large focus on cash management and overall in cash flow, and the good results in working capital management, coupled with good profitability, of course, drives this number up. Then moving to Page #6, where the effects from the cash flow are very visible. So the financial position of the group has improved significantly both on absolute terms and comparing to only 2 years back. Gearing ratio at the moment is 18.6% with a 25 percentage point drop from a year ago. Equity ratio has risen to [ 53.8%, a 7.8 ] percentage point increase from June 2020. Liquidity situation was very strong at the end of June with EUR 39 million of cash plus almost EUR 60 million of undrawn committed long-term funding in place. I conclude the financial part through a chart on the right-hand side, where all the strategy execution and good business performance are extremely nicely reflected, and that's net interest-bearing debt. Net debt has decreased to EUR 30.5 million and cut by half from 1 year ago and significantly lower than 2 years ago. I think the great performance is very nicely boiled down to this graph, both from profitability, strategy side and from the cash flow side. With that, thank you from my part and looking forward to waiting for your questions.

So we are ready for your questions.

[Operator Instructions] We'll now move to our first question over the phone.

Olli Vilppo from Inderes. How do you see the capital allocation going forward? Are you going to redeem the hybrid or pay the dividends? Or does the strategy execution require more investments like mergers and acquisitions?

Thanks, Olli, for your questions. Maybe as a general comment and answer to your question, the strategy -- the ONE RAPALA VMC strategy that we have in place does not require specifically very much capital expenditure. The investments that we are doing at our factories and distribution centers are on a quite moderate level. Also, the IT system investments that we have in the pipeline are of a moderate size.

And about the hybrid and dividend, how do you see them?

Olli, sorry to say, it's only half year, so I think you need to wait for further news concerning those 2 items.

[Operator Instructions] We'll now move to our next question over the phone.

Sebastien Hoyez from Quaero Capital. Just one small question. I was wondering, what is inventory levels that you see at the retailers? Do you think that they are at a low level, high level? Because you mentioned that you expect that they might destock.

Okay. Thank you for the question, Sebastien. It's Nicolas trying to answer this question. It's hard to generalize. We have many customers around the world in different categories. I would say I will put it on medium or medium -- low inventory levels, not excessive. Demand has been high. And I think we were quick to ramp up production and we've also upped our internal -- external purchases going into this year so we were able to satisfy the demand and ship it out to customers. Not everyone were as kind of prepared, so there has been -- and I think it's reflected in our statements here, some half-empty shelves in certain categories here. So I would say that inventory levels in general are medium to low. Several brands have struggled to ramp up and have not been able to offer full fulfillment that the customers have demanded.

Just to confirm, Mr. Aho, there are no further questions queued over the phone at this time, sir, so I would like to turn the conference back over to yourself for any additional closing remarks.

Okay. Thank you very much for everybody for your interest of Rapala VMC. So we would be back with our full year results around mid-February next year. Thank you again for everybody for participation. Thank you. Bye-bye.

Ladies and gentlemen, this does conclude today's call. Thank you very much for your participation. You may now disconnect.