Rapala VMC Corporation (RAP1V) Earnings Call Transcript & Summary

Good day, and welcome to Rapala VMC Teleconference Full Year 2022 Conference Call. Today's call is being recorded. At this time, I will now turn the call over to Tuomo Leino. Please go ahead, sir.

Thank you. So good afternoon, everyone, and welcome to Rapala VMC Corporation's Full Year 2020 Conference Call. My name is Tuomo Leino, freshly appointed General Counsel and Head of Investor Relationships of Rapala VMC Corporation. I am here with President and CEO, Chairman of the Board; Mr. Louis D’Alançon; Chief Financial Officer, Mr. Jan-Elof Cavander; and Former Head of Investor Relations, Mr. Olli Aho. Without further ado, I'd like to welcome Louis D’Alançon to go ahead.

Hello, everyone. This is Louis D’Alançon. I'm going to give you just some highlights of the year. And after that, Jan-Elof Cavander, our CFO, will go into some details for your benefit. The net sales for the year decreased as compared to the previous year. But it should be noted that the trend continues for several -- since several years of a reduction in Third Party Products, and that was the case again in 2002 as compared to 2001 -- sorry, 2022 as compared to 2021. And in fact, the Group Products, on which we had better margins or far better margins, occasionally, in fact, increased. The comparable operating profit was substantially lower than last year at EUR 15.3 million versus EUR 32.7 million, a number of reasons for that. First of all, obviously, lower sales, but in particular, in open water fishing market. And as many people have experienced, high inflation and high volatility of freight costs did put pressure on the margin, but we managed to offset some of that by price increases. And of course, we kept a very close eye on the operating expenses to offset the decrease in sales. The inventory value increased in the first half of the year, that was essentially due to what I've just described as, that is to say, supply chain disruption, combined with the sharp market reset after the record COVID year -- and that, as a consequence, extensive destocking by retailers, which lowered the sale. However, we're able to improve considerably that situation in the second half of the year. And as compared to the inventory at the end of June, we improved it by EUR 17.8 million in December. As to the short-term outlook, we expect a 2023 comparable operating profit, which -- to decrease from 2022. However, we expect the cash flow from operations to be improved and to be on a good level altogether. Of course, the market outlook continues to be challenging in all our key markets. The inventories in the overall fishing segments continue to be high. I'm talking about retailers here. And due to poor winter sales, sale of winter business will be affected both in the Nordics and in North America. And of course, the global macroeconomic situation also affects the purchase behavior at retail and consumer level. On this, I let Jan-Elof Cavander develop these numbers.

Good afternoon, all. It's Jan-Elof here. First, thanks for joining the call. It's good to walk you through today, the numbers and the key financials for 2022. So now I go to -- Louis talked already on the investor presentation that is available on our corporate website. Louis covered Pages 2 and 3 in the customary way, and I will now continue on Page #4 on the investor presentation, as said, which is available on the corporate website. Net sales for 2022 was EUR 274.4 million, which is down by 7% from the prior year. Operating profit ended at EUR 12.3 million using the IFRS operating profit, which translates into a 4.5% margin. Comparable operating profit was EUR 15.3 million and the items affecting comparability that -- which make the differentiation between operating profit and comparable operating profit consisted mainly of organizational and management changes in the group as well as write-down of some assets in Russia. One other thing to mention that affects comparable operating profit is the EUR 2.3 million negative impact of share of results in associated companies. Last year, we had a positive impact here, and now we have a negative impact. And this comes, of course, from the 13 Fishing U.S.A. investment. So this had a couple of millions of negative impact on the comparable operating profit in 2022. Net profit for the period amounted to EUR 3.7 million, down from prior year, and this is now all attributable to the parent company holders as there are no noncontrolling interests anymore in the group's -- group subsidiaries. Net interest-bearing debt increased to EUR 107.1 million. This, obviously, means a higher gearing percentage, which rose from 50.7% to 77%. And of course, lower profitability generation also has some big impact on the return on capital employed, which was 5.4% in the fiscal year '22. Then I move to Page #5, on the sales review for 2022 by region. So our biggest region, North America ended sales in EUR 132.2 million. The FX comparable change was minus 12% from prior year. So the FX supported the top line number here. The decrease in sales was caused by a couple of reasons. First of all, the cold and delayed spring in '22 that had an effect. And the second effect came from the sharp post-COVID market normalization after COVID kind of got into an easier situation in the region, and this was heavily amplified by the strong retailer destocking that started in 2022. High inflation and especially high gas prices also affected the consumer demand and the overall consumer sentiment. Sales in the Nordic region was EUR 38.9 million. Here, the FX comparable change compared to prior year was minus 14%. The strategic focus on group products and the successful launch of the Okuma rod and reel business in the region helped to maintain the sales of the continuing business close to prior year. And as our strategy has been the decline in the sales come from the most part from the Third Party business where we have been ending distribution agreements. Rest of the Europe area generated EUR 70.6 million of sales, and this represents a 15% reduction to prior year using comparable FX rates. In this region, Group Products sales was above prior year, driven by the start of the Okuma business in the region. And same story as in the Nordic area that the decline comes from the Third Party business from those contracts that were ended during the year or the prior year. Rest of the World region, net sales was EUR 32.7 million. And here, the FX comparable change from prior year is smaller, minus 5%. And Group Product sales in this region was fairly solid throughout the year and landed close to the same level as last year. And here also, we have some exit of Third Party distribution agreements, which obviously took sales down in the Third Party businesses. Then I move on to Page #6, our inventory and cash flow from operations. So end of December '22 inventory was EUR 99.9 million. And in the first half of the year, first 6 months in 2022, inventory increased sharply due to mainly 3 reasons. First of all, the supply chain disruptions worldwide end '21 and early '22 had a big impact on factory lead times, and that meant inventory coming in earlier when the lead times went shorter again, that increased inventory. Obviously, on top of that, the sharp market normalization as well as the strong destocking that we saw at the retail level meant that inventory increased significantly during the first half of the year. Then during the second half of the year, we managed to decrease the inventory by EUR 17.8 million from June to December. And this means that the year ended at EUR 99.9 million, as said, which represents a 16% increase from the prior year. Cash flow from operations was negative in financial year 2022, minus EUR 12.9 million. And this is driven by two things. First of all, decreased profitability plays a role. And more significantly, the change in working capital had a big negative impact on the cash flow from operations. Change in working capital had minus EUR 28.7 million impact on the operative cash flow, which means that in total, the reduction from prior year was more than EUR 37 million. Then I move on to Page #7 on the financing of the group and the financial situation. First of all, as said in the beginning, net interest-bearing debt increased from EUR 70.6 million to EUR 107.1 million, which represents a EUR 36.5 million increase from the prior year. This consequently means that gearing rose by 26.4 percentage points and equity ratio declined slightly from the end of prior year. Liquidity position of the group was good at the end of December, the undrawn committed long-term credit facilities were more than EUR 20 million at the end of the period. And on top of that, we had cash and cash equivalents of EUR 29 million in the balance sheet. And as the final remark, due to increased net debt and decreased EBITDA, our leverage has been on the high side. And the group has agreed with its lenders to temporarily change financial covenants used in the loan agreements from the periods from Q3 '22 until the end of Q1 '23. So that has been agreed with the banks during the 2022 year.

So we are now ready for questions. So if the operator could give the instructions how the callers can make the questions. Thank you.

[Operator Instructions] We'll take our first question today. Please state your name and company before posing your question. Your line is open. Please go ahead.

It's Jari Räisänen from OP Markets. I have a couple of questions regarding the guidance. Firstly, you mentioned the high dealer inventory levels, which had a big impact on your sales already in H2. So I'm just wondering how high are they in the industry? And when do you think they will normalize? That will be the first.

It's Olli Aho here. So we indeed have seen these high inventory levels, and that has been reflected in our preorders also. And we are very cautious with this also come into '22. So we believe that it will certainly have an effect still '23. Does that answer your question?

Okay. At least partially, yes. Have the dealer inventories decreased at all in H2 as they were high already at the end of June? Are the goods moving to end consumers or what is -- how should I think about this?

Well, you know that it is -- our business is heavily seasonal. So -- and the main season in the Northern Hemisphere starts in, let's say, March and then ends roughly June. So we expect that during this time, the dealers, they will be able to sell their stocks.

Yes. Okay. And then you also mentioned the weather component. Could you please elaborate a little which products are being impacted by these unfavorable weather conditions?

Well, the first impact was the winter season, which was poor, both in North America as well as in the Nordics, which are important markets for us. There was a late spring also, as a result, for example, the summer season in the north of the United States was probably late by 6 to 8 weeks, which is highly unusual, and we see an impact on sales, especially what is called the [ replenishment ] sales, i.e. when retailers come for the second lot of products, having sold their first lot, that barely happened last year. And towards the end of the year, as a result of that as well, there was actually a little reduction in the sales for the next season as a result of that. That's also had happened. However, we did manage to reduce our inventories, which is, in fact, [indiscernible] condition.

Yes. Okay. Then a couple of questions more. What kind of inflationary pressures are you expecting in 2023? What kind of cost inflation...

You mean In 2022?

'23.

'23. Well, I think like everybody else in the world, in fact, we're experiencing big increase in inflation. As I think I mentioned earlier, we did manage in 2022 to pass on a fair amount of price increases to the -- to our customers. In fact, a number of our competitors have done the same. And by and large, this had been well accepted, and that did indeed say through the [ EBITDA ] numbers. In [ practice ] for 2023, I'm going to have to look at the macroeconomic conditions. And I would point out to you guys the fact that there is a sharp decrease in [indiscernible] supply at the moment. At the same time, there's a tightening of interest rate, some say have been actually too strong and too quick. So we think that the inflation will peak and actually has already peaked. And the question is, how far and how fast that [indiscernible] segmentation as well by [indiscernible] products. It's clear that energy prices are still high for all the reason of the Russia-Ukraine situation. But at the same time, we've seen a very sharp reduction in 2022 -- in the second half 2022 of the freight cost, where the cost of containers from Shanghai had been multiplied by 10 at the beginning of the year and [indiscernible] come back to the normal level and that trend seems to continue. This is actually quite positive.

Yes. Okay. Are you planning to do further price increases to offset last year's inflationary pressures?

We, certainly, will try what we can, but we're now already seeing resistance to that.

Okay. And then on the cost side, are you planning to do further measures in that respect? And what would be the impact in 2022?

This is a continuous exercise. We look at our costs very strongly and very thoroughly. And we have done a number of rationalization of our production, for example, which will produce results. Just as a matter of an example, we have consolidated -- finished to consolidate all our warehouses in Europe into 2 sites. That consolidation is gone and will bear benefit very quickly from now on. So these are one example of many initiatives that we have, the effect is to reduce the cost base.

We will take our next question. Your line is open.

Olli Vilppo, from Inderes. In the guidance, you say that the cash flow from operations is expected to be a good level. Does it mean that you are going to get it from the decreasing inventories? And are you going to pause any productions? Or how do you react?

Jan-Elof here. Thanks, Olli, for the question. Yes, I think it costs for many issues, of course, but 2 things to highlight is that, yes, we adjust the production capacity taking into account both the retail demand and our current inventory levels. And as the current inventory levels are still high, they decrease during the second half as I explained, but they are still on a high level. So the target for the group is obviously to continue the reduction in the inventories. And if that takes place, that will, of course, then support the operative cash flow. That's one of the biggest or the biggest driver.

Okay. And does this good level means that it will be more than the [ EBIT ] guidance?

We are not commenting it in a more precise way than this.

[Operator Instructions] There are no further questions on the line, sir. Please proceed.

All right. If there is no more questions, I'd like to remind at this point that the investor presentation and the recording of this conference call will be available on our corporate website, rapalavmc.com. And we thank everyone for participating in this call and enjoy your weekend. Thank you.

Thank you.

Thank you for joining today's call. You may now disconnect.