Rapala VMC Corporation (RAP1V) Earnings Call Transcript & Summary

Welcome to the conference call. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead.

Hello, everyone, and welcome to Rapala VMC Corporation's Full Year 2023 Conference Call. My name is Tuomo Leino, Head of Investor Relations, and I am here with President and CEO, Lars Ollberg.

Nice to meet you all.

And CFO, Miikka Tarna.

Hello. Good morning, everybody.

Lars and Miikka will first go through the results. And after that, we will welcome questions. So Lars, please go ahead.

Hello, everybody. And regards from our snowy and this foggy, Finland, but the weather is not great, but I'm very, very proud and happy to be in this conference call, informing you about the 2023 and some short-term outlook also then for 2024. I'd like to say that the overall 2023 since I started in May last year proved to be more difficult than initially thought. But then we managed to do a successful change of direction. And the focus for me since the arrival was to focus on getting the Rapala spirit back, Rapala spirit and the Rapala unity. And I used a lot of time to travel, see the key staff and the team spirit and the team unity then proved to be improving, aiming for turnaround, which was then evidenced by the profitability that improved on the second half. I was very relieved to see the results that we have been able to turn the tide slowly but surely to make the situation now more transparent and solid and getting ahead now with a good confidence about the coming months and coming 2024. One of the key success factors for making this happen is the establishment of the Restore success teams. And that we put up together in January, and it consists of our key managers, key directors around the world. And we have 6 key focus areas that are the ones that are the fundamental enablers for Rapala to come back to the, I would say, the previous glory, if you want. One of the key success factors certainly will be the increased customer and brand focus. Customers are everything. I am making a lot of noise about the importance of the customers and the -- our aim is to be the best partner for our customers, whether they are e-com or whether they are brick-and-mortar, whether they are chain stores, supermarkets, Rapala has to be sold anywhere where fishing tackles are sold. Rapala is the best-known fishing tackle brand in the world, and we will make noise. We will tell everybody about this. The brand focus is the other one that we'll be focusing a lot. And of course, the Rapala is the leading brand. So it is a certain door opener from Chile to North America to Japan to Australia. And as a Fin, I'm proud to say that the Rapala is also the best known fishing tackle brand of best known Finnish brand around the world. On some market estimations, it's estimated that there are about 250 million fishermen -- sports fishermen around the world. And I dare to say that Rapala is the best known brand around the world. And couldn't be I'm more proud to say this one to be a Fin. So that's a great platform for us to go ahead. There's a few things that are also giving me cautious optimism and cautious, like, outlook for the coming year. If the consumer demand that is growing, now especially for the consumables in the U.S. and also in the European market, which is the second largest in our territory, the dealer destocking is normalizing. The 2023, a lot of things happened, but I would raise a couple of points from the past year. One is the launch of the CrushCity. The CrushCity is a major step for Rapala to the largest lure category in the world, which is the soft plastics. The soft plastic lures are considered -- combined to be a larger market segment than the hard baits. And we are going in with the Rapala brand. And in the hard baits, the Rapala we can claim that Rapala is the market leader. So it's making 2 things evident is that the market we are entering is a virgin market for Rapala. And then secondly, it is not cannibalizing the Rapala hard bait market because these are 2 incremental, 2 different fishing style, 2 -- I would say, also a bit like 2 more -- 2 different consumer segment markets. And also when Rapala is entering into soft plastics market, it's not taking our shelf space at all from the hard baits. Now when you are a market leader in hard baits, we are sometimes facing a situation that when our market share is quite dominant, dealers are inclining to ask, okay, what shall we take off when you are bringing this new stuff in with CrushCity, it's not happening. Of course, like some of you have been following some of my interviews I've been talking about luck. And whether it's luck or skill, I'll leave it to you to consider. But in the U.S., the most followed people in the fishing tackle business or the sport are the Pros. And the Pros who are winning the most money, they are the kings. And that's -- they are the Michael Jacksons of the fishing. And now our Jacob Wheeler became the best earning fishing professional in the U.S. using and promoting openly CrushCity [indiscernible] in many evidence cases, he showed that I was using this lure, and then we had an other guy who joined in as a leading Pro and coming in with the CrushCity, he won his first tournament, cashing $100,000, making a lot of noise about it. So I think that this wave, this CrushCity wave is not going to stop anytime soon. And we have seen also a lot of good consumer demand, a lot of refills from the customers. And as we all know from the lot of yours, especially that only now the market is opening here in the Nordic area. So this is just coming in. But evidence say by the Finland Boat Show where there was our dealers selling the product, everybody was saying CrushCity is the hottest item around. So we have a great belief on this category. The second big happening on another segment in the fishing portfolio, it was our entry in North America into the rods and reels -- rod, reel and combo market, which market segment per se is considered to be half -- 40% to 50% of the total market. And Rapala has not been present in this market segment, basically at all in North America and the acquisition of 13 Fishing is giving us a cool lifestyle American brand, which is now going through a transition, stabilizing momentum. The 2024 is a year where we will integrate the 13 Fishing into the Rapala U.S.A. sales network, which is the same network that selling the Rapala the Sufix, the VMC with our professional reps throughout the country. So 13 Fishing is on the way to become a nationwide brand in North America. And we are very, very happy to have the key staff from 13 Fishing, Tampa to be together with us for the future and helping with the integration. The other rod and reel segment, noteworthy moment happening in Europe, where we are entering the third full season with the Okuma partnership, where we are maximizing the opportunities with Okuma catering because it's offering the product at the right price to each -- to every fishing category in today's market environment. So -- coming to the end of my first or my opening here, I would like to say that the Rapala team, the Rapala spirit is getting as good as ever. We've been having a management by walking around type of transition here. I also launched a bit a twinkle in the eye slogans to make everybody better understand the direction. One was like one more turn, which is reflecting the need for better return on capital, higher stock turns. So one more turn, we have marks on this and everybody now knows that one more turn for the inventory is essential. The other one is like follow the money, follow the money, follow the big money out, follow the big money in and the focus -- that means focus on the essentials. The third one was this All On Red. All On Red is like the Rapala follow Rapala. Everybody wants Rapala. So Rapala the door opener. And then I would say last but not least is the together because as we know, it's alone, we can do nothing. And I think that the spirit is getting back, and we are also -- very important. We're also having fun together. Because this is a sport, this is kind of a dream sport. We are thinking and living about buying our products when we are going out of the office and having our own time. And I feel good about the short-term outlook. And the short-term outlook, if I want to say, like all combined, I say that our short-term outlook will be focused on the customers. Customer is taking. We will be focusing understanding what we can do better for the customer, how can we improve this partnership. We want to be the best partner for our customers throughout the world. And to lead from the front. And as I am a salesman, and I'm proud to be a salesman. I will be now -- for the next weeks, I will be traveling in North America, in Canada, in U.S.A., meeting all the key customers having dinners with them, trying to understand what can we do better? What is important for you? How can we get more shelf space. And I would like to leave it here and say that Rapala is going forward with the full customer brand focus with dedicated personnel who is strongly now believing in a good future where Rapala is making the -- I would say, making the money as we used to do. So with these words, I would like to pass on the word to Miikka, my CFO, since this spring or this change of the year. But I have been working with Miikka already in Asia when we made the Asian turnaround, which was successful, and we are now duplicating the success. Right, Miikka?

Correct. Thank you, Lars. So next, I will walk you through the key points in our financial statement release. So I will follow the slides that are available on our website, the investor presentation slides. So if we jump to Page 2 of the slide set, we had -- we experienced a strong cash flow, but our sales and profitability were down from last year in a tough market environment. Our net sales landed at EUR 221.6 million, down EUR 52.8 million or 19.2% from prior year of EUR 274.4 million. Our comparable operating profit landed at EUR 5.6 million compared to prior year EUR 15.3 million. Our inventory value came down to EUR 87.5 million, which is EUR 12.4 million below prior year of EUR 99.9 million. On the sales side, the comparable change in the sales was a bit less. It was 17% and happy to report that Group product sales decreased 7% from prior year using comparable FX rates and Group products account for 94% of our total sales. Slow sales in H1 in most categories were a result of the macroeconomic headwinds. But as the destocking started easing halfway of last year, most of our open water categories evidenced growing demand in the latter part of the year. On the profitability side, the profitability is mainly driven by the lower sales, both in the open water fishing market and also in the winter businesses. On the cost side, production transfers increased our costs temporarily, but this is expected to normalize in 2024. We focused strongly on the second half of the year on our EUR 6 million savings program, and we expect to receive the full benefits during 2024. Partially, the benefit will, of course, be offset by inflationary increases in costs. On the inventory side, our FX comparable change in inventory was minus 10%. And resolving retail level destocking and manufacturing capacity adjustments started to show results, especially in the second half of the year and happy to report that our inventory decreased by EUR 11 million from June to December. And just to note on the inventory that just 18 months ago, we had EUR 30 million higher inventory. So the impact is quite extensive. Next slide, the short-term outlook. So trading outlook, as Lars also mentioned for '24 is improving, and that was evidenced by our better operational performance in H2 of '23. We also evidence that the retail inventories are finally returning to regular levels, releasing flow of new products to the retailers and consumers. In 2024, we will also focus our European distribution operations, which are now engaged in improving profitability and efficiency. Also, it will be the first year of our centralized manufacturing operations in Parnu facility in Estonia. Also the full integration of 13 Fishing into our nationwide strong U.S. sales network is expected to release synergies. And overall, we expect our full year comparable operating profit to increase from 2023. Our outlook is cautious and prudent, and we will monitor and update the outlook when necessary. Moving on to Page 4 on the key figures. Some of them already mentioned before, our reported operating profit was EUR 4.0 million against EUR 12.3 million in the year before. Interest and financial expenses increased from prior year. Tax expenses decreased followed by the lower profit before tax and our net profit for the period went to negative EUR 6.9 million against EUR 3.7 million in the prior year. And our EPS landed at minus EUR 0.19 against plus EUR 0.10 in the year before. Moving on to Slide 5 on the operating environment by geographical segment. In North America, our sales in comparable terms dropped 14% from prior year. The majority of the decline relates to sales of third-party products following the strategic decision to outsource the supply chain function of 13 Fishing products sold to DQC International as it was still an associated company for the group. Consumer demand in core products such as lures, fishing lines and accessories was resilient, while Ice Fishing category suffered from core ice conditions. And as a positive sign, if I exclude the 13 Fishing import sales and also the Ice business, our comparable sales were up by 10% in the U.S. -- or in North America. In Nordics, our comparable sales came down 28%. The retail destocking continued for a good part of the year, longer than expected, but started normalizing towards the end of the year. Poor retail sell-through in ski business impacted significantly on replenishment sales in the early part of 2023 and also had a knock-on impact on preseason deliveries in the second half of 2023. In Rest of the Europe segment, our comparable sales came down 17% from prior year. Retail destocking also continued for a good part of the year in this geographical area normalizing towards the end of the year. Our Hook and Okuma sales came down slightly but majority of the sales decline is contributed to discontinued third-party distributorships, which explain EUR 4 million of the drop in sales. In Rest of the World segment, consumers remained cautious throughout the year and discretionary spending remained low. Sales decline came evenly across all product categories. However, in Australia and Brazil, we managed to maintain and grow our sales. And in Australia, also the CrushCity explain a big part of the increase as it was launched in Southern Hemisphere, it was launched earlier than in the Northern Hemisphere. Moving on to Slide #6. We focused relentlessly on cash generation and driving down our inventory levels, and this resulted in a positive outcome. Our inventory landed to EUR 87.5 million, which is 12% or EUR 12.4 million below prior year. The resolving retail level destocking and manufacturing capacity adjustments started to show results in the second half year. Consequently, our inventories decreased EUR 11 million from June to December. The change in stock provisions decreased inventory value by EUR 0.7 million. And also FX rates brought inventory down by EUR 2.2 million. Acquisition of DQC International as it was consolidated in our IFRS figures, increased our inventory by some EUR 3 million. Cash flow was very strong and ended up EUR 33.5 million better than last year. While profitability was lower than prior year, and our financial expenses increased from prior year, our focus on cash generation and driving down inventory levels resulted in this positive outcome. We managed to release EUR 9.9 million from our working capital, while last year, EUR 28.7 million was tied in working capital. On the balance sheet side on Slide 7. Our gearing ratio dropped by 25.5 percentage points, and our equity ratio improved to 52.5%. And these are all mainly following the issuance of the EUR 30 million hybrid capital bond. Our cash position remains good and also our undrawn committed long-term credit facilities amounted EUR 35.0 million at the end of the year. Our net interest-bearing debt came down to EUR 80.9 million, down EUR 26.1 million. We signed our new syndicated refinancing facilities agreement on November 29 and also issued the hybrid capital bond of EUR 30 million on November 22. We fulfill all the requirements of the lenders and expect to do this also in the future. And in the facilities agreements, we have agreed with our main lending banks with decreasing covenant steps. This concludes the financial part of the presentation.

Okay. And now we are ready for any questions.

[Operator Instructions] The next question comes from Jari Raisanen from OP.

Yes. This is [indiscernible] from OP Financial Group. I have a couple of questions. Firstly, regarding dealer behavior. Just wondering, have you seen any kind of change in how dealers put in their orders? Are they for example, putting in orders closer to when sellout takes place instead of preordering and keeping stock or is the behavior normal at the moment?

I can take this one. It's Lars here. Certainly, yes, that's a question to the point. That is one thing that certainly happen and the dealers are ordering later, we are getting less pre-orders. So at the same time, when it's putting a bit more pressure for us for better forecasting, it's also now evidencing the increased consumer demand because when the dealers are opening now, ordering now, more frequently, it means the consumer traffic on the stores is improving. So it's kind of 2 things that are giving us the cautious optimism and this is one of the reasons.

Okay. So what is your capability to respond if orders are coming in later than before and you need to deliver fast?

Well, I can also take this one. And I would say that the categorizing of the products to A, A1 -- A, B and C is helping us quite a lot. For most part, the fishing tackles are quite traditional products and the life cycles are quite long. With the exception of these hot new items like CrushCity where I think that we will beat the record on our stock turns . And when the product is hot, everything sells but overall, I think that this new Anaplan system that we have in place in U.S.A., how long now? Is it 2 years, 3 years?

Coming to 2 years.

Coming 2 years. That's now improving our fill rates and our fill rate in the U.S. for the A1 category, that's the big change of our items is now -- we are aiming to 95% and the A category to 90%; B category, 80%. And we are on track on this. But you are right, it is challenging and we have tens of thousands of SKUs but we are evidenced also by the inventory we are getting on top of things.

Okay. And then regarding the guidance, you say EBIT will increase. At least to me, that seems a little bit cautious as we -- the comparison level is quite low and only EUR 1 million -- for example of EUR 1 million improvement would be double-digit in percentages. So could you please describe a little bit -- how should we read the guidance and what is management's ambition level in terms of improving earnings in 2024?

Yes. Good question. I can answer that one. So our short-term outlook and the guidance is cautious and prudent, and we are continuously monitoring and we will definitely update the guidance actively and in real time. The guidance. So the spring and summer fishing season will give us more information on how the full year results will go. And in this early part, we keep our cautious optimism in place.

Okay. Is the kind of cautiousness because of the changed order cycle by the dealers? Is that affecting your kind of thinking behind the guidance?

That is, of course, one factor that when they -- as Lars mentioned, the pre-orders versus the in-season orders when the market is a little bit shifting, we will keep a cautious approach to this until we have more information to share.

Okay. And then moving on to cost -- or you have the savings -- EUR 6 million savings ongoing. Just wondering how much of that realized in H2 and what is still to come in 2024?

So it's an ongoing process as well to bring in the whole EUR 6 million savings program, and we were happy with the results. And now when I say happy, it's in the H2 profitability, what sort of profitability improvement we saw in H2. We are happy with what we saw, and we will continue to strive down the costs and fight against the inflation, of course, the inflation will be impacting some of the costs, but we will fight against it, and we will bring the whole EUR 6 million. We are confident to bring in the EUR 6 million savings in.

Yes, Okay. And since inflation and cost inflation have been decreasing previously. Just wondering what kind of pricing behavior have you seen in the marketplace in -- especially in H2 of last year, have sales prices been kind of flat or still increasing in the market against the inflation that took place early.

It depends somewhere, some market areas, we've been able to boost price increases through, say, Australia, like when the CrushCity is lined out, we increased the prices quite nicely. But then when we are talking with the largest companies in the world in North America, it's a tough game with them. The in-season price increases are really a tough nut to crack. So the key price increases will be put in place during the summer going into the full season preordering for '25. Then also the one big factor for all the import goods is the freight expenses where the container cost went in the COVID time that skyrocketed 140 [indiscernible] container from Asia to U.S. or to Europe, price went up to about $20,000 from a level of $3,000, and an average container can hold $200,000 or $300,000 of items. COVID hangover put the demand down. Container prices went to $1,500 to $2,000, and now they are back to about $5,000. So there is many, many cost factors that also help us to explain to the customers that we are not forced to decrease the prices, and they understand also that like when the fall comes, we will be talking of, I would say, cautious single-digit, low single-digit price increase opportunities.

Okay. And then finally, CrushCity, you highlighted the good start. Can you share a little bit more color on the sales expectations, are we talking about single digit millions, for example, in 2024? Or what is the kind of ballpark that we're speaking about here?

We don't disclose the numbers as such. I think we have mentioned earlier that it will be not that significant in the group figures on the first year.

Yes, there's one thing that at the moment, we are shipping everything that we can get. .

Yes.

So, that's also holding it back a little bit. There's still quite some hand work and stuff. So it's not -- these are not digital baits. These are actual products. And we are ramping it up cautiously, prudently, but I would say that for the long-term success, one recipe for success is not to overflow the market either. .

The next question comes from Thomas Westerholm from Inderes Oyj.

Just to piggyback on the questions regarding CrushCity. So quite a customers here. Are they usually Rapala loyalists or are you able to attract new customers as well?

Yes. I would like to say that this actually is the third success factor. Now what's giving us a more boost in the opportunities. Like this, follow the money, follow the money issue, especially now in the North America, which is evidenced by this iconic Jacob Wheeler has a lot of followers. And I would say that like predominantly they are other guys than those, what I say, traditional Rapala hard bait buyers. There's a lot of stories where hard bait buyer can say that, oh, my grandfather used this 11 Floater. But now these are new younger people who are coming in. And as you know or if you don't know, the soft plastics are easier to use. And I would say also the increased female participation in North America, we are looking into more than 30% of the fishing participation is females. It's easy. You tie it in, you cast it out and you reel it in and it's catching fish. It's attracting younger, more versatile category of consumers where the hard bait can be seen more as an expert type of item. So Thomas, I would say, we are attracting not only more space from the stores, but also more to consumers. We -- also one more thing in the -- especially in the U.S. and why not in the European marketplace is that the product has to prove itself in the stores. If it sells well, it gets more wall space. The factor that the retail chains are following, how much -- how successful a product is -- it's many times followed by GMROI -- gross margin return on investment. And if it's selling well on one feet of wall and it expanded half a foot more and it gets more. So success is breeding success. And I think really this is an upside pyramid at the moment, standing on its top. But I don't want to overpromise. I want to underpromise like Miikka was being prudent on the guidance. I also want to see that, okay, let's wait and see, but all the ingredients are there for a long-term success.

Got you there. What's your hunch does the success of CrushCity increased Rapala's appeal in hard baits as well with like customers or retail.

Yes, certainly. And definitely, it's not cannibalizing. And certainly, when we are getting these teenagers and [indiscernible] Jacob Wheeler. And Jacob is huge in all stories winning tournaments also the hard baits. So there's a lot of space is that how you need to use hard bait. And I say that this can be a new morning from us.

Got it. Could you give us a brief rundown around your strategy with the third-party products? Like what was the rationale behind discontinuing some of the partnerships you have? And have you changed your approach going forward here?

Yes. Well, that's a kind of a high-level strategic question. And then we are looking cautiously. We are looking for synergistic opportunities that if and when entering into these categories, we need to get to the high stock turn. We need to get a good GMROI. We need to get the cost synergies meaning that the sales force has to be the same. The customers have to be the same so that we engage in the third party. At the moment we are not certain -- is looking into entering any such third-party category that would need incremental investment into new market segment or into new customer segment or so forth. Only if it sells the financial criteria. And I mind you, Miikka is [ watching ] me hard. So...

That's what I like to hear. That's all for me.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

I'd just like to thank everyone for participating in this call and remind you all that a recording of this call will be available shortly on our corporate website. And have a nice weekend, everyone. Goodbye.

Thank you.

Thank you. Bye-bye.