Rapala VMC Corporation (RAP1V) Earnings Call Transcript & Summary

Hello, and welcome to the Rapala VMC Teleconference First Half of 2023. My name is Ben, and I will be the coordinator for today's call. [Operator Instructions] I will now hand you over to your host, Mr. Tuomo Leino to begin today's conference. Thank you.

Thank you, Ben. Good morning, everyone. This is Tuomo Leino, General Counsel and Head of Investor Relations of Rapala VMC Corporation speaking. I am here today with Rapala VMC Corporation's new management. First, we have Lars Ollberg, our new President and CEO.

Nice to meet you, everybody.

Then we have Cyrille Viellard, the new Deputy CEO.

Good morning, everyone. Nice to meet you all.

And. Then we have Jean-Philippe Nicolle, new CFO.

Good morning all.

And lastly, but not least, we have Miikka Tarna, the New Deputy CFO.

Good morning, everybody.

Now without further ado, I give the floor to Lars Ollberg. So Lars, go ahead.

Thank you. It's good to be here. It's my first investor call in this position. And I'm happy but also a little bit dissatisfied to report that like I'm coming after 40 years in the industry, I'm coming to lead the company in such a market environment that's been maybe the most difficult year that the industry has seen. We saw high ups on the aftermath of the COVID. We saw high downs in the retail base following the destocking, the high inventories and then destocking of the products all around the world. But still, I would say that with the team and with my experience and being in good weather and bad weather over the years, I know what it takes to take us through the challenge. And I feel quite confident that even though these obstacles are still in front of us, there are also good signs in place and taking us through the stormy waters. So one thing I'm also happy to say is that when reviewing the strategy Rapala has in place. I was 1 key member of making up the strategy together with the management team. And that -- and those cornerstones, they will continue in full force. I would say just a little bit more highlight on customer work and more highlight on the sales. And as maybe some of you have heard me saying a little bit exaggerating way that all on red, which means focus on to key brands. Focus on customers on key brands will help us to get next -- to the next levels. About the market, I would like to say that I just came back from a 10 days' trip to North America. There was a very lively ICAST show, where we introduced some new categories. And we have seen now the U.S. economy has really demonstrated resilience and consumer spending seems to be up. Our U.S. market is now showing good signs of recovery. Consumer spending seems to be getting back. And we also expect this positive sentiment to gradually transfer over to durables, rods, reels. And then also, we expect and hope that the U.S. will be the locomotive to pull the whole market in '24 back to better shape. So I don't go through the numbers, but it is my pleasure to give the word to Jean-Philippe Nicolle, who will walk through the numbers and achievements what we had over the past 6 months. So thank you for this introduction from my part. And Jean-Philippe, please go ahead.

Okay. Thanks, Lars. I will continue on Page 4 on our investor presentation to comment on first half 2023. So net sales were EUR 117.9 million, down 21% from previous year. During first half of the year, trading conditions remained challenging due to the global economic slowdown, high inflation, slow, lower consumer demand, inventory retail level. Reported operating profit decreased by EUR 9.2 million from the previous comparison period. This decrease was mostly driven by lower sales. The group started a saving program to reduce expenses by EUR 6 million on annual basis. Comparable profit decreased by EUR 10 million. Items affecting comparability had a negative of EUR 0.9 million and it's related to restructuring of Helsinki headquarter. Net profit for this period decreased by EUR 9.8 million, and now we have a net profit of minus EUR 1.1 million. Then I will move to Page 5, sales review by region. Sales in North America decreased by 16% from the comparison period. Majority of the decline come from sales of Third Party Products sold to DQC, DQC at 13 Fishing. And excluding these, sales were down only by 4%. Sales in Nordics. Market outlook continues to be challenging. Sales decreased by 33% from comparison period. Multiple reasons for this: high inventory, macroeconomic situation, low consumer demand and sales of Third Party Products decrease. Rest of Europe. Sales decreased by 23%, same story. High inventory at retail level and macroeconomic situation. Rest of the World. Sales decreased by 90%, but Australian and South America continued to grow. I will move to Page 6. Inventory ended June was EUR 98.5 million, down by 16% from comparison period. Target from the group obviously is to continue this positive momentum. Cash flow. Cash flow from operations increased by EUR 22.7 million (sic) [ EUR 27.2 million ] from the comparison period and landed at EUR 18.6 million. This change was driven by net working capital improvement. Page 7. At this time, liquidity position for the group was good. Gearing ratio increased and equity-to-assets ratio decreased from last year. And cash and cash equivalents at the end of June was EUR 24.5 million. So the group is currently compliant with all financial covenants at this time, and we expect to be compliant in the future.

All right. I think we are now ready for some questions from the callers.

[Operator Instructions] First caller, please go ahead.

Olli Vilppo from Inderes. Yes, I have a couple of questions. Can you tell me where do you intend to get this EUR 6 million savings? And how do you split it between different measures?

Jean-Philippe Nicolle. We will start -- we have already started the process, and we will have the full effect in 2024, but we still have effect in Q3 and Q4, and the huge effect and the full effect will be in 2024.

Okay. And is it like it comes from that reduction of the personnel and manufacturing less?

Yes. It comes from different things. So first of all, people, okay, personnel. And the second one is other expenses like headquarter expenses, fixed cost and factory efficiency also.

Okay. And you had the financial expenses [indiscernible] and you have this covenants realized with EBITDA. Can you talk a little bit how the interest rates go relation to these covenants? And do you expect to have lower interest rates when you go below the covenants, the normal covenants?

Yes, that's a good question, Miikka here. So yes, of course, our interest expenses were much higher than previous year, thanks to the rising interest rates. And of course, as usual, the financial covenants are tied to the margin ratchets as well. So that impacts the interest expense levels. And naturally, yes, now our working capital initiatives and driving down the inventory and the leverage will have an impact in the margin going forward.

Okay. Good. And you didn't mention any Okuma in the report. Did the sales decline? And was it like that the consumables sales are better than this durables?

Yes. So as we said in -- especially in the European markets, the destocking still continued, which impacts our sales and the majority of the Okuma sales is coming from Europe. And also, it's the consumables where the market is recovering faster, and we expect this to this also to reach the durables going forward.

Okay. Good. And 1 more question for Lars. The strategy remains the same, I guess, but you are planning to have more third-party again. So can you still explain more reasoning behind this?

Yes, Olli. The kind of the termination of some of the earlier third-party where some were out of our control, some were decided by us, and those decisions were that time done in those current circumstances. And of course, the market has been very volatile and up and down. And now we are looking into new opportunities in this changed environment. And during my -- also my trip now to North America, I had some interesting discussions that I will further then review with our EXCOM and to see the best -- which would be the best fit to kind of leverage our offering because the key thing, of course, of adding any third party or these brands that are not owned by Rapala, really have to depend on making us more attractive partner for our customers. So this is kind of the driving factor that it will not overlap but like an additional benefit to us in strengthening our partnership with our key customers. I'm not looking into a high number of new opportunities, but the selected few that will also help us to level our year. So this is a bit of a change, but it's not dramatic. It is helping us to, as said, to level the year and increase our interest within our key customer base.

Okay. Good. So you are looking at the synergistic third party?

Yes. Exactly, absolutely. Yes.

Next participant.

This is Quaero Capital, the 2 of us. I've got a first question and then my colleague, Sebastien has got a couple of other questions afterwards. But just really a big picture question because it's the first time we're hearing from Lars. And just trying to understand there's been fairly major management changes in Rapala. And we just wanted to hear what the Board has felt uncomfortable in terms of the past and what changes our plan for the future beyond the cost reduction of EUR 6 million, et cetera. But just big picture, what went wrong and what will be changed.

I can only tell you about the future. And I came back for joining a strong group. I think there was no material damage done, otherwise worse, I worked with old management, and I felt that a lot of good things were done during the past 2 years, and I have a good -- I have a really good start to continue. I would say the -- maybe the key focus that I've been saying to our staff is that what my first actions within the group has been -- is to make sure that we have the right team spirit, that we have a team unity. And with those 2 things in place, we can do the turnaround where it's needed. I would say that most of the things in the group are good, but then we need to get a little bit more focus where it comes. And these were the things I mentioned earlier, more focused on sales, more focused on brands and especially more focused on understanding the customers' needs. I think that these 3 things are the ones that will carry us through. And already in the North American market where -- which is the most dynamic, I saw all these 3 things already bearing fruit. And I feel pretty confident on -- already on the '24 and especially '25, that we will see us going through with the strong management, stronger than ever, more united than ever with the highest spirit than ever. So -- I hope this is something that you like to hear and are satisfied.

Yes. We're delighted to hear it, particularly an incoming CEO that says you're in a good situation from what's been done in the last 2 years. So very delighted to hear that. And then passing on to questions from Sebastien.

Yes. Sebastien speaking. First, could you please remind us your product pipeline that you plan to launch? What has been launched in 2023? I mean, first half, what would be launching in second half? And what should we expect for the coming years because we understood that you make effort to develop new braking product, and it would be great to really understand your pipeline.

Yes. Maybe I would say the key focus, of course, as I mentioned earlier, which is a little bit humoristically said that all on red. Rapala is red. So when we have a world-leading brand like Rapala, we need to utilize it even more. And 1 key example of this is that when you are talking about the fishing lures, it could be basically split in the 3 categories. You have the hard bait, where traditionally Rapala has built up a world-leading position. And you have -- you are talking about metal lures, where we are using mainly other brands than Rapala, Blue Fox and Legend and others. But the key category where we have been out or we have been in with our secondary brand Storm. We changed the strategy now in a big time. And we made a launch of a category called Crush City, which was the talk of the U.S. show and the Crush City consists of soft plastic lures. And we can see that already from the first time that this will be a very successful launch and a great inroad for a new category that's relatively large. We don't publish the kind of the in category numbers, but I would say that this is a step to a big opportunity for the future years. Along this, maybe you also noticed that Rapala took a controlling share now of 13 Fishing, where we are now a global owner of this brand. And then this will also enable us when the market normalizes to get a higher share from the durables market, which makes some 40% of the total fishing tackle demand.

And I have to say I haven't really understand what the -- you -- in terms of finance in your Third Party Products, when you mentioned sales decline follows a strategic decision to outsource the supply chain function of 13 Fishing products sold to DQC International. I really don't understand wise the related party transaction decreased by EUR 10 million. What happened? Could you please help us to understand it?

Yes. So as DQC International, 13 Fishing U.S.A. is an associated company of Rapala. The sales that we have to DQC International are considered as third-party product sales in our revenues. And now the strategic decision was to outsource the supply chain. So we have been handling the supply chain for DQC International. And now that supply chain was outsourced. And hence, we don't record the revenues anymore from the supply chain sales to the DQC International.

Good question.

Yes. But I can't understand. So you mentioned that before it was [indiscernible] DQC and now it's another supplier.

Sebastien, it was just the logistics services. DQC items were outsourced. And Rapala [indiscernible] buying from the [indiscernible] U.S.A. [indiscernible] was brought when the joint venture was set up, was not meaningful going forward. And so DQC just handled the logistics services. It just happens that it would boost sales volume, but it's not [ sales ]. It was just an intermediary logistics services. Going forward, this will change again following the recent announcements.

Okay. I understand that.

So it's just supply chain services. -- were -- so it has a significant impact on top line. But in the end, it was -- it's not -- it's just -- yes, we bundled and we thought that it did not make sense any way to bundle any more afterwards with our own products. Does that answer your question?

Yes. And so in your headquarters, the cuts you are doing is -- or are you done because it's already done, reducing the number of staff from 60 to 35. So basically, half of the staff left the HQ seems very drastic. So could you help us understand what you did and why this persons were not required anymore?

Cyrille speaking. We have many functions that we -- if we require support, we can outsource. So we had a lot of admin support functions that we now have decided in legal, in supply chain expertise, in projects that when necessary, we can outsource. Following our top line reduction, these are -- we're very competent people, but that we prefer -- we cannot afford, and we will have a variable. Some functions also will be moved to the Parnu logistics center. We've also -- we had centralized some of our marketing support, for example, that we will again bring closer to the market.

Okay. And 1 last question on my side is -- so you mentioned the move from Russia to Parnu, from Finland to Parnu. So should we expect other production or warehouse reorganization going forward?

No, it's Lars here. No, we don't expect any drastic changes in the future.

We currently have no questions coming through. [Operator Instructions] [indiscernible] There are no further questions, so I will hand it back to you to conclude this conference.

Thank you. Did you, Lars, want to say something at the end.

Well, I'm -- I just like to say that I'm really happy to be in this call, and I'm really happy to be back at Rapala where I spent most of my working career. And only to maybe repeat what I mentioned earlier in the call to -- my key job is to get back the team unity, the team spirit. And with this one, we will not only do the turnaround but get us back on the growth track and be the company and take the position that where Rapala deserves to be. So maybe that's my closing remark, and I feel confident about the future with this team.

Right. Thank you. So I'd like to remind everyone that the IR presentation that we were referring to is available at our website, and the recording of this call will also be available on our website later on. So on behalf of Rapala VMC Corporation, I wish everyone a very nice summer and [indiscernible] if you go fishing.

Thank you.

Thank you.

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