Rapala VMC Corporation (RAP1V) Earnings Call Transcript & Summary

Good day, and welcome to the Rapala VMC Corporation's H1 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Olli Aho. Please go ahead, sir.

Welcome, everybody, to Rapala VMC's 6 months telephone conference. I'm here together with Chief Executive Officer, Nicolas Cederström Warchalowski; and Chief Financial Officer, Jan-Elof Cavander. Nicolas, please go ahead.

Thank you, Olli. Good morning, everyone, and welcome to this conference call. My name is Nicolas Cederström Warchalowski, I'm the President and CEO of Rapala VMC. I'm also joined by Olli Aho, Head of Investor Relations; and our CFO, Jan-Elof Cavander. The first 6 months of 2022 have been challenging. The sport fishing market sentiment change from the market which was gradually resetting as consumers were returning to more normal pre-pandemic activities into that of a market sharper market reset. The most noticeable and fastest market sentiment shift was in the United States. In this market dampen consumer demand was coupled by retailer destocking effects. Here I want to specify a bit what was written in the first half year financial statement issued yesterday. Several sport fishing retailers have implemented purchase caps to deal with the market reset. Our American retailers are enforcing this the hardest. In U.S., overstock in the rod and reel combo category and also the accessory category is affecting the purchases also for the lure category. However, we do feel that there is a general overstock in the lure category on a retail level. Lure seems to be selling out well in retail supporting the thinking that the consumers that joined the category over the pandemic stay in the category and enjoy their sport fishing passion. This is especially true for the sport fishermen having rediscovered their interest in the category and also having purchased a new boat or in other ways, invested into a more outdoor and sports fishing centric lifestyle. In this disrupted sport fishing market environment, Rapala VMC in the first half year of '22 generated EUR 148.4 million of net sales, which was 7% below previous year. Comparable operating profit for the first 6 months of the year was EUR 15.5 million, which was down by EUR 11 million from prior record year. Given the circumstances, I feel that this was a good achievement that we feel happy about. A big thank you go out to all Rapala VMC team members who delivered these solid business numbers. Also, I want to give credit to the team for quickly hooking arms to navigate through these difficult circumstances. And importantly, for also not slowing down the pace in our ongoing on ONE RAPALA VMC strategic turnaround plan. Instead and importantly, several strategic executional plans were accelerated to meet the new more challenging market conditions. I'll come back to strategy execution a bit later. One large disappointment for us was the growing inventory levels. End of June, inventory grew up to EUR 117.7 million, which is EUR 31.5 million higher than in our December 2021. This is an area where we simply must do better as a group. And I can reassure everyone listening to this call that this is a key focus for our Rapala VMC team members, given that it has also been an issue for us over the years. As a result of the high inventory level, several of the operations and S&OP, sales and operation plans, that were part of the original ONE RAPALA VMC plan have been moved earlier. One of them being the implementation of the new global S&OP system, which is called Anaplan, which will be implemented before year-end of 2022. We will use this new system and implementation to implement more rigorous S&OP processes and order governance in our group and believe that this can unlock some of the stumbling blocks that have prevented us historically to address this important issue. We have also implemented an inventory reduction reinforcement plan with short-term, mid-term and long-term actions. We really want to step up our forecasting accuracy and ensure optimal inventory levels moving forward. Looking at the strategy execution of the ONE RAPALA VMC plan. Going into 2022, there were 2 must-win battles for Rapala VMC. These were the SKU and brand reduction plan, together with the launch of Okuma in Europe. If we start with SKU and brand reduction, it is the largest in company history, and it will be completed in December -- by December 2022. I have previously talked about the synergistic effects on the ONE RAPALA VMC plan element, and we can really feel it for these projects, which is running smoother and delivering ahead of targets. The SKU target reduction of 25%, I think we communicated earlier, will be surpassed and probably land somewhere between 30% to 35%, if not higher. The brand and sub-brand reduction targets communicated earlier was 50%, and it will be surpassed significantly. Going through this exercise has been really helpful as we picked future anchor brands in each category. This will benefit our largest brands in the group and our flagship brand, Rapala in particular. Switching to the Okuma launch in Europe, it is progressing really well and ahead of internal business case target for first half year of 2022 despite the market slowdown. Half year down the road with Okuma, we definitely feel that we picked the winning brand and also long-term success for our group. Here, I have to stress again how important this plan element is for the group, being a key building block in the new ONE RAPALA VMC business plan. Okuma is appealing to a wider consumer group, with broad product range being especially strong in the [indiscernible] and spinning reel category. With Shimano, a nonstrategic third-party brands having left the group, Okuma is now building up much needed incremental sales for us. Hitting the ground running in 2022 with the brand awareness for Okuma, which was high already from day 1. And also having an extensive improvement product range means that it's moving the needle for the entire group being really a transformational growth element. I'm also astonished by how well Okuma is complementing 13 Fishing. It's almost a perfect match. In product categories where 1 brand is a bit stronger, the other 1 is a bit weaker, they're perfectly complementing each other. And this makes me very confident in our new rod and reel portfolio and our new growth category. 13 Fishing on the other hand, has a young modern vibe appealing to the millennials. It's strong in baitcaster reels and in ice fishing. And over the last 6 months, we have gotten closer and closer to the 13 Fishing team, and the integration between our 2 teams has moved to a new higher level. I hope that we now will be able to accelerate 13 Fishing growth as it's ticking all the boxes to become a global mega brand in sports fishing. When it comes to the other parts of the ONE RAPALA VMC strategy, I want to highlight that I feel that the wheels are spinning again in the product development and innovation team in our ambitions to start delivering long-term sustainable growth for important categories such as the lure category, in particular. If you remember, we implemented several larger changes at 12 to 18 months ago, which now are starting to deliver results in that the new -- that the important new product pipeline is starting to fill up nicely, both for the 2023 and the 2024 fishing season. Our flagship brand Rapala expanded into the lure box category in 2022. There was an excellent market study by the product development and innovation team, launching in the right market spot just below the market leader, but well below the mid-priced brands in the category. Rapala is a flagship brand, which enjoys great brand awareness. It should be present in all subcategories in the lure category. And as we now are growing our confidence in category extensions for our flagship brand, we will accelerate and fill up more adjacent fishing categories like in accessories. For our largest global brand, we are aiming for some global home runs, allowing us to start reaping more benefits of having such a strong brand portfolio and also having the largest global sales force in the sports fishing industry. Some final words about sustainability. Here, we made significant progress both in 2021 and accelerating now also in 2022. I feel that we have moved forward in making sustainability an integral part of our business management for all of our units over the last year. Our key sustainability focus right now is to bring more sustainable products to the market faster, and also make it easier for consumers to choose products in the Rapala VMC range that are more sustainable than others in a more transparent way. We have just launched a new corporate home page. It's the same rapalavmc.com address, but it has totally new content. So all listeners to this call, make sure that you take some time to check it out. We feel extra proud of the sustainability section and also feel that our new -- more united and progressive culture, a new way of working much closer together is coming across nicely. You will see a lot of content on our amazing team members all around the world in this new homepage. To finish off, regardless of market conditions, we will keep a very high pace for the execution of our new ONE RAPALA VMC strategy and ongoing turnaround. Our team is growing stronger, more united and more capable by the day, and it's showing great passion to take Rapala VMC to the next higher level. With hard work and by this approach, Rapala VMC will be able to capture market shares from fierce competition and also more challenging market conditions. That is all from me. Thank you for your attention, and I look forward to questions later. Over to our CFO, Jan-Elof.

Thanks, Nicolas. So good morning from my part as well. I'm happy to present you the first half results for Rapala VMC Corporation. And this first half, as you all know, proved to be full of surprises. As usual, we have uploaded to our corporate web page the first half investor presentation. I hope you all have that in front of you. So let's start with Page #2. First of all, I would like to say that despite the headwinds that we have faced in the market and the trading conditions, our strategy execution has been progressing very well. Top line was EUR 148.4 million, as shown on the left part of the page. Sales is down from prior year and is driven primarily by a couple of reasons that I'll go through. First of all, in the Northern Hemisphere, we had a cold and a late spring which impacted us. Secondly, we are all familiar with the macroeconomic environment, high inflation, high gas prices, consumer -- lapses in consumer or question marks in consumer confidence and also retail confidence has also been going down. What's important to see in the net sales graph, which is actually a symbol of our strategy execution is to compare the group product sales in 2022 to the pre-pandemic pre-COVID level of 2019. And here, we can see that our group product is now on the level of EUR 120.8 million. Comparable EBIT was EUR 15.5 million, driven by the same factors that just were discussed that affected the first 6 months of our environment. Inventory value was disappointing for the end of June. Our inventory was at EUR 117.7 million and here, we have a strong package of different types of actions in place, both short term, medium term and long-term actions to tackle this issue. Then I move to Page #3. So as you have all seen, we updated our full year outlook on April 28 of this year. Our outlook is that we expect 2022 full year comparable operating profit to be below the prior year. And for the latter part of this year, we have higher than normal uncertainties and high risks around the sales and profitability on the second half of this year due to our environment. The general macroeconomic environment, coupled with the high inflation and high gas prices impacts both consumers and retailers, and this puts a strong pressure on our profitability. The general destocking and overall cautiousness at retail level impact the purchases made by retail in all categories. And they're open-to-buy dollars are on a low level. And in some cases and even to some extent, the categories where there would be demand on consumer level, the fact that there are low amount of open-to-buy dollars will impact their purchases in these categories. Generally, of course, in the fishing tackle business where boats are used for fishing, the high gas prices in addition to high inflation increases the challenges for the current trading conditions. And this can also be amplified now in the post-COVID normalized market conditions, where consumers are shifting their consumer -- their patterns of consuming money and cash more from goods to services in the post-COVID era, which all affect our view and our risks and the market conditions now going forward. Then I move to Page #4. As said, trading conditions slowed from the comparison year, and this resulted in decline in sales. Sales in North America was EUR 69.2 million and using the -- comparing this reducing FX adjusted rates, the top line decrease was 10%, driven by the retailer destocking, the late and cold spring weather and of course, the accelerated normalization of the market conditions. Here, it's noteworthy to say that even though sales were minus 1% using the reported FX rates, we actually had a big part of third-party -- in the third-party category, sales in North America from the fact that 13 Fishing products were sold to 13 Fishing U.S.A. in the first 6 months of the year. And these are classified as third-party products as the group holds a 49% share in this associated company. So if we exclude the sale of these 13 Fishing products in North America, our sales would have been down by 8% using reported FX rates and 16% using the comparable translation exchange rates. So this 16% decline, excluding this 13 Fishing sales in the U.S.A. gives maybe a better picture of the trading conditions that we saw in the first 6 months of the year, especially in the U.S.A., where the market conditions started to normalize in an accelerated pace. Sales in the Nordic region equaled EUR 20.1 million, here the FX adjusted change is minus 20%. And based on the ONE RAPALA VMC strategy and our strategic decisions to cut down third-party distribution, this had an impact on the sales. Other businesses, excluding the exiting third-party businesses, were actually close to last year's level despite the delayed start of the spring also in this region. Rest of the Europe sales equaled EUR 42.6 million, which is a 11% decrease using comparable FX rates. But one highlight from this region is the very successful launch of the Okuma business. And Okuma here really helped us in the region despite that we also here made a strategic decisions to exit certain third-party businesses. Rest of the World region had EUR 16.5 million of top line and here, we actually saw a smaller FX comparable change than in the other regions, which was minus 9%. And here, the market demand was fairly solid compared to the general macroeconomic situation. And here also, the increased focus based on our strategy on group products supported us in this region. Then I move to Page #5. Here, we have our inventory, which was EUR 117.7 million for the end of June. And as said in the opening words by Nicolas, we have strong actions in place to adjust the inventory long term to a sustainable level, which is the right level for our business and to do it on a permanent basis. A couple of reasons behind the high inventory level. Of course, the cold and late spring in the Northern hemisphere as well as the accelerated market normalization affect the level of inventory negatively. And secondly, the increase in inventory was further amplified by the fact that the worldwide supply chain analytical disruptions increased lead times, increased freight times and also increased logistical risks, why we made decisions last year to take goods early in to make sure that we have goods in place as the lead times were extremely long, and also Chinese ports had increased COVID-related risks. So these are a couple of reasons behind the inventory level. And then, of course, as a consequence of higher amount of working capital tied into inventory and that coupled with the slow trading conditions, our cash flow from operations was negative for this 6-month period at minus EUR 8.6 million. Then I move on to our funding and financing of the group. Our net interest-bearing debt was EUR 99.4 million at the end of June, and this is obviously driven, to a large extent, by the increased amount of working capital tied in the inventory, which increases the amount of net debt. The financial covenants that we have limits on the amount of indebtedness and EBITDA and gearing ratio. So leverage ratio is the key covenant that we have. And the group fulfills all financial covenants and the requirements of the lenders, despite the higher net debt level that we see today. As a result of higher indebtedness, gearing ratio increased to 66.7% and equity ratio decreased to 42.3%. And I'm happy to report that the liquidity position of the group was good, and our undrawn committed long-term credit facilities amounted to around EUR 40 million at the end of the period. Thank you for your attention so far. And next, we are happy to take us to all this remarks, question, I'm happy to answer any further questions that you may have on the first 6 months of the year.

Thank you, Jan-Elof. I'll give a comment concerning Russia. So Rapala VMC is restructuring its Russian production and distribution setup as a result of the Ukrainian crisis and is now accelerating its plans to increase production capacity at the Estonian factory located in Pärnu. The restructuring is being implemented, taking into account the safety of our Russian team members and the local Russian legislation. So we are now ready for your questions.

[Operator Instructions] We will now take our first question. Please go ahead, caller.

This is Jonas Iov from OP Financial Group. I just have a couple of questions. Firstly, regarding the retailer inventories. You talked about this a little already, but could you perhaps recap a little bit how do you see the levels at the moment? Are they still high in most of the geographies? Or how should we think about it as most of the destocking taking place already? Or should we expect more to happen in H2? How would you characterize this?

Yes, Jonas, Elof here. Thanks for your question. So the destocking, this is actually twofold question. One is the actual stock level at the retail level. And then the second question is the risk for the second half of the year that what is the level of destocking for the retailers. And secondly, what will be their purchases allocations or purchase quotas for the second half of the year from our point of view. So that will kind of -- these 2 things will impact our business for the second half.

Right. And how would you characterize the levels? Are they high still?

Depends a lot by market. So it's difficult to give kind of a general comment that would apply worldwide globally because it differs by market, by country and also by retailers as the retailers have different strategies also.

Yes. Okay. Then moving on to sales prices and price increases. Could you talk about a little -- to what extent have you increased prices in H1? And what are your plans for H2 to offset the cost inflation that is quite widespread at the moment?

Yes. Good question. So we are, of course, monitoring the cost inflation and the cost increases in all categories affecting us, both labor -- both labor wise, of course, for on-production, raw material for on-production and then for the finished goods purchases on the vendor level. We are monitoring this very thoroughly. And we are -- we have been doing centralized pricing decisions already last year, taking into account this, of course, with the aim of passing on the higher cost in general to the market.

Right. Okay. Then finally, about the guidance. Could you open up the wording a little what you mean by -- when you say adjusted EBIT will be below. Are we talking about single digit or double-digit decline? What's the magnitude that you're trying to indicate with the guidance?

Yes. So the guidance is to be below previous year. We have not -- we don't have kind of an open up clear definition of how much that would be percentage-wise. And maybe I refer to the comments that there are a lot of uncertainties and high amount of risks for the second half of the year as has been stated. So in this environment, it would be difficult to give a very exact guidance, let's say, even more kind of detailed guidance.

[Operator Instructions] We will now take our next question. Please go ahead, caller.

Sebastien Hoyez from Quaero Capital. Thank you for this presentation. A couple of questions, and I will do it one by one, if I may. The first, I would like to come back on the profitability of your group products. In your communication, you mentioned that the drop of profitability is linked to volume, but when we look closer, it seems that the volume sales in H1 this year was equivalent to H1 last year, but profits are much lower. So could you give us more color on that?

Yes. Thanks for your question. Yes, the comparable amount of group products is obviously in decline from the first 6 months of the year. But the one thing that affects the segment profitability, of course, is the allocation of total fixed costs that we have. And when the volume of third-party products have been declining, this means that more of cost base needs to be -- of course, needs to be allocated to the group product business, which then also affects the profitability of the Group Product segment when all costs are taken into account, both direct and indirect costs.

Okay. Understood. But I had in mind that you are pushing 13 Fishing in the Okuma, maybe it will be linked to your marketing efforts to push these brands? And could you please help us to understand what kind of marketing efforts are you doing and also give us a bit more color about current revenue of these brands and your targeted revenue in midterm?

We have not disclosed -- we are not disclosing the details within these segments, but maybe some kind of a level can be interpreted from the prior amount of Okuma sales in Europe, which was disclosed in the stock exchange release when we acquired Okuma. And secondly, on the marketing efforts. So yes, for Okuma, there's, of course, marketing expenses also recorded in the first 6 months of the year as we invested heavily in the launch to be successful in the first year of the Okuma introduction in Europe.

Okay. Great. And also this marketing efforts, so it's the first year that you launched it with your own distribution as pre-offset for another player. But could we expect this marketing effort to continue to increase or to stabilize or even decrease after the first year that needs to be revitalized?

Yes. Year 1 of the launch is typically higher than year 2 or 3. So I would say that it would stabilize on a somewhat lower level, but it would still be a significant investment in our ambitions to turn Okuma into our flagship brand in our portfolio. I hope that answers your question.

Yes. Great. That's perfect. Also in third-party products, so we understand that you cut some products that you consider as non-core. But could you help us to understand in your revenue, so EUR [ 27.6 ] million in H1? How much is still non-core and could be exited and how much is now fully core and will continue going forward?

Yes, it's difficult to give you the exact number, but we indeed still have some Shimano sales there, which obviously does not continue. And our long-term strategy indeed is to concentrate on our Group Products.

Okay. And then...

Maybe to add here in the winter ski category, we have a very strategic important core products that will remain in the third party for the business on the other hand, to give some more flavor on the topic.

Very useful. And even if you don't give precise figures, the remaining part of your Shimano sales, is it low single-digit million? Or is it double digit?

Yes, low single. Okay. Thank you.

Hello.

Yes. You still have?

Yes. Sorry, your line was cut. I didn't hear your reply about your sales level of Shimano.

Okay. So our reply was that it was low single digit.

Okay. Great. And last question. On your inventory of EUR 117 million. So I know that the visibility is quite low, but should we expect a potential risk of write-downs? It is excluded because this kind of products could be -- sell later in the year or even last year -- next year.

Thanks for the question. So maybe I'll comment generally on this topic in our business. So in our business, in contrary to some other businesses in the fast-moving consumer business area. Our products usually don't have an obsolete date. Of course, the new models come and so on. But I would like to highlight here that the inventory buildup has been done, as you can see from the figures in the past quarters, which means that the goods as such are relatively fresh.

Okay. That's perfect. Thank you very much.

Thank you so much for your good questions.

[Operator Instructions] we will now take our next question. Please go ahead, caller. Your line is open.

Olli Vilppo from Inderes. Can you still talk about the inventories, what short-term measures do you have to take risks in?

Short-term measures include -- well, stock healthiness inventory, we're checking through item by item, business by -- business unit by business unit now over the coming couple of weeks to see where we should focus any potential sell-out activities that we will do in the coming quarters. We also review implementation of purchase caps for certain categories. We will be setting these levels here over the coming weeks. So it's clear for everyone. And will also be taking some concrete next steps with the implementation of Anaplan here. So we were doing the kind of the prestudies and accelerating that. So the implementation can start here late quarter 3, early quarter 4, so we can finalize that by December 2022. I would say these are the key actions. Jan-Elof , do you want to add. Perhaps 1 or 2?

Yes. Maybe a couple of more things is to -- what we do in really frontline with our sales teams in all countries, so we are investigating the possibilities to do extra campaigns to lower the amount of inventories for example. So that's one example of concrete short-term thing that we are doing on the sales side. So we are doing sort of sales -- changes in sales and change in purchases with effect in short and midterm.

There appears to be no further questions. [Operator Instructions]. There appears to be no further questions. I would like to turn the conference back to the host for any additional or closing remarks.

Okay. Thank you very much, everybody, for active participation in our telephone conference. So we could be back with our full year results then in February. Thank you very much.

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