Rapala VMC Corporation (RAP1V) Earnings Call Transcript & Summary

Welcome to this Investor Relations call of Rapala VMC Corporation covering the full year results of 2024 published yesterday. My name is Tuomo Leino, Head of Investor Relations, and I am here with President and CEO, Lars Ollberg.

Good morning, everybody.

Deputy CEO, Cyrille Viellard, who will, as of tomorrow, be the new CEO of the company.

Good morning, everyone.

And CFO, Miikka Tarna.

Good morning.

We will first hear a few words from Lars. And after that Miikka will go through the presentation, covering the key figures. And after the presentation, we are open to questions. So, without further ado, Lars, if you may.

Absolutely, yes. So, first of all, I'm happy to be here on my basically last working day, and it's been a very, very interesting 2 years since I started in early 2023. And first and foremost, I'd like to say my sincere thanks to our global worldwide staff. I have been meeting our staff during this tenure, and I've been seeing old faces, new faces, but a common denominator is that I've been seeing happy faces, smiling faces. And then, also, I think that the team spirit and the team unity that I was looking for to get done during my time, it really has happened. And in addition to meeting our staff, I have met many of our key customers in different continents. And I can just say that the Rapala company and the Rapala brand is as strong as ever. We are well positioned in the world. Our hobby, fishing is healthy. It's good. There is a lot of newcomers in our sports. So, overall, I say the demographics and the wind is in our favor. But, looking into 2024, I can say that I'm not entirely happy. We had quite many headwinds. And if I'd be giving ourselves and myself a kind of a school number, I would say 7.5 maybe on this year; 7 plus, 7.5, not 8 minus, but like a little bit lukewarm. Still, there was a lot of good things. So, where I'm very happy is the stabilization of the company. We have a great foundation now. The running rate, what we have now running our operations is definitely lower than it was in 2023 and '24. The organization that we made some efforts to get more goal and KPI oriented has now been set in place and put in place. And, to repeat, I'd say the unity and the spirit is really on a good level. So, thank you to all the staff worldwide making this happen. The second thing on the numbers, I'd just say that the key focus for '24 was to be sure that we have a good cash flow. And indeed, we improved our cash flow from '23 and '23 indeed also was a quite healthy cash flow. So, I'm happy about this. The question about the COVID bubble or the COVID burst or COVID hangover inventories, I'd say that we -- mostly, we cleaned and the industry as a whole cleaned the excess inventories during '24. And also as a result, our -- like Rapala VMC inventory healthiness is on a much better level than going into '24. So, now when we are running our stocks and filling those, like it's -- our inventory is on a good level and also the write-offs will be much, much less than we used to have. The third point I'd say, which is a little bit forward-looking, but I'd like to say the January, February has started quite nicely. The Q4 that was extremely weak, especially for high-ticket items such as electric ice augers in North America and then for the ski business in the Nordic has eased out in North America where they are enjoying a very, very, very nice solid ice market and the inventories are -- have been now cleaning very well. So, looking ahead, we have a solid good start for the year. The last thing before the last, about the guidance, what we have written and what you have read in our report is indeed cautious. We have given a cautious guidance, but I'd like to say that if I compare our confidence going forward, we are on a different level than going to '24. Our confidence is good. We are solid. We have a -- I'd like to say, shoulder to shoulder. The market is back, I'd like to say, and the strategy that the team here led by Cyrille, the strategy is now, I would say, much clearer going forward. And we have -- everybody knows what they are supposed to do, what are the key brands, what are the key actions we have to take. And the last thing is, of course, that I want to thank the investing community, analysts, our lenders, all stakeholders on my last day. And this is now my retirement 2.0 and even though this 7.5 number I gave to myself too, I'm still head high. I'm pretty happy what, together with the team, we have achieved, and I'm proud to look Rapala from outside in now after being looking inside out. And I wish everybody good luck. And then remembering that the harder we work, the luckier we get. So, with these words, Tuomo, you pass the word to the next.

So, Miikka, the slides?

Okay, let's go through the slides and on the numbers, how the year 2024 was for us. So, we managed to improve our profitability in a challenging year. Net sales landed a bit shy from EUR 221 million. The reported sales were at last year level in comparable currencies, though we increased the sales by 1%. Overall sales, we saw that eased inflation improving the consumer sentiment, which resulted in improved retail activity. Majority of our products are consumables, and for these sort of products, we saw the consumer appetite improving. At the same time, the higher value items, rods and reels as an example, continued the path to recovery. Also, we had a little bit of headwind from the weathers and the open water fishing season lasted longer, which counteracted against the political and economical uncertainties. In the comparable operating profit level, so we improved profitability by 11% to EUR 6.2 million from the prior year EUR 5.6 million. The profitability was pressured by -- little bit from the lower sales and also from lower sales margin. The lower sales margin is a result of the strong actions that we did, especially for example, integration of 13 Fishing DQC into our operations. So, inventory cleaning was taking place and we were improving our inventory composition. Even though the margin ended up a bit lower, this margin -- sales margin decline was fully offset by savings in the operating expenses. We concluded the savings program, and we are now seeing the lower run rate of our operational expenses. In the inventory, we landed -- at year-end, inventory landed at EUR 84.2 million, so a decrease of 4%, EUR 3.3 million. Comparable change in the inventory was minus 5% year-on-year. A bit more on the outlook, what Lars also mentioned. So, we expect 2025 to increase our comparable operating profit from 2024. 2024 was a bit of a stabilization year for us with the savings and reorganization. And now we believe, in 2025, we will be seeing lower fixed cost run rates, which will then be shown in our profitability. In the market side, the U.S. consumer demand has remained robust despite these uncertainties in the global trade environment. And of course, the tariff situation continues to create challenges and we are actively monitoring all these changes and implementing actions to mitigate the challenges coming from the tariffs and the trade disputes. Foot traffic in the stores in the U.S. have remained robust. In European markets, we see stable and we expect stable consumer spending despite the recent economic and political developments. And in Europe, as we have discussed also in the previous calls, our operational efficiency has improved substantially, and we expect that trend to continue and yield results in the open water fishing categories. In North America, the ice conditions have been favorable now in this season, and that is expected to yield results in next season, so year 2025 to '26 preorders. In the Nordic countries, the ice and snow conditions have been a bit suboptimal, and this we see as will continue challenging in the winter season 2025 to '26. And our guidance now reflects the current situation and market conditions. But of course, if there are substantial changes in the tariff and trade environment, that will impact us. But as said earlier, we will -- the management, we are actively monitoring and we can discuss about the mitigation actions later on. Once more, the key figures here, some key figures to mention here. The reported operating profit here landed at EUR 8.6 million, which increased by EUR 4.6 million from last year. Compared to the comparable operating profit, we had the gain from the Canadian real estate sale, which increased the reported operating profit. Our net profit for the period landed at positive EUR 0.7 million. Major improvement from prior year. Earnings per share is negative EUR 0.07 per share. Let's move on to the geographical sales. So, in North America, we grew our sales by 1% in reported and also in comparable currencies. Here, the CrushCity newly launched soft plastic lures contributed significantly to the increase in sales. And also with CrushCity, that boosted the VMC jigging hook sales. The sales grew in almost all summer fishing categories. In hard baits, we managed to keep the sales at last year level, even though we saw the trend shift in fishing technique, which favored soft plastics over hard baits. And this hard bait sales will be a major sales focus in 2025 as well. The autumn favorable weather conditions also prolonged the replenishment sales and big box retailers were dominating the market and gaining market share. High retailer carryover inventory in the ice fishing categories resulted in lower presales, as we have indicated in the previous calls as well. And our preorders for Q4 were actually resulted in even lower than we expected. And this is the reason that the whole region is not showing growth. So the ice fishing is taking back kind of the benefit that we got from the summer fishing items. 13 Fishing was integrated into our operations in U.S., but that was still a little bit held back with retailer inventories and us cleaning the -- improving the inventory composition by cleaning some categories out from the stock. Let's move to the Nordic market, where we saw a 7% decline in sales. So here, if we start from the summer fishing business, the retailer inventories, we see that they are on a healthy level, so there's no major destocking happening anymore. And the demand for consumables improved. And also CrushCity here had a positive impact on the sales, not as big as in North America, but still a significant impact. And we focused here on our core brands, Rapala, Sufix and Okuma and Dynamite baits. And we had better availability this year, which improved our sales, especially in the second half of the year. As well as in North America, in Nordics as well, the winter fishing sales -- pardon me, the winter fishing sales actually in Nordics were at the prior year level. But where we suffered was the ski business, which was down due to the retailer carryover inventory from the prior season. And it's a very weather-sensitive industry. And at least the people who live in Finland have seen that we have not had optimal winter snow conditions here. So that hurt us in the Nordic business. And that was the main reason for the Nordic segment's declined sales. In rest of the Europe, we saw growth in comparable currencies, 3%, EUR 1.3 million. Market remained challenging. Here also, CrushCity played a good part in increasing the sales and also on our push with the core brands, Okuma, Rapala VMC and Dynamite baits. In France, which is the biggest market in the area, the sales were supported by novelties and early seasonal order deliveries, and that compensated for somewhat poor weather conditions at the end of the summer fishing season. And the operational efficiency we have been focusing now, especially in U.K. and Germany. In these markets, we saw very nice growth and we expect that growth to continue going forward. This is probably the last time that I will mention this term, third-party distributorships. We still had some termination of third-party distributorships that hit in our sales, but that impact is now expected to be out. In rest of the world, that was very challenging for us. The currencies were against us, and we are importing goods to the rest of the world countries. And then basically, consumer discretionary spending were lower and the consumers favored locally produced products over imported goods. A positive side in rest of the world area was the successful Okuma launch in South Korea which provided incremental growth. CrushCity was a perfect fit for the Australian market that brought additional sales. And also in the Latin American countries, we had very good momentum as we focused on Okuma, bringing Okuma to the market and gaining market share. So, little bit more on the cash flow and inventories. So inventories landed lower than prior year, and translation exchange rate increased the inventory value by EUR 1.3 million and organic drop in inventories was thus EUR 4.6 million. So, we saw a drop in the inventories. But what we -- what can't be seen here, but what we are seeing is that the inventory composition is much, much better compared to last year. So, we are much better equipped for the next sales and summer fishing season. So, what we did is that to secure the preseason deliveries in early 2025, we took shipments from our manufacturing partners. We took those in earlier than we did in prior year. And also, we kept our own manufacturing capacity leveled to allow better efficiency in the production. Cash flow from operations stayed on a very strong level, EUR 23.4 million, so even improved from prior year by 14%. This second strong cash flow year is -- result from focusing on cash flow and working capital management. So, we are looking at payables turn, both on the sales side and also on the purchase side to find efficiencies to finance our working capital. So, actually, all the components in the working capital developed into a favorable direction. So, as a result, our gearing decreased and our equity ratio improved. And our net interest-bearing also decreased by EUR 19 million, thanks to the strong cash flow. Of course, here, worth mentioning that the sale of the Canadian real estate brought some EUR 9 million cash flow that we can see in the decrease in net debt. And we also are in good relationship with our lenders and are preparing to -- preparing for the refinance of our loan packages in '25 and '26. We are compliant with all of our financial covenants, and we expect to comply with future bank requirements as well. And we have sufficient credit facilities available, EUR 41 million unused facilities at year-end. So that's the year in short. I will hand back to Tuomo.

Yes, so at this point, we are open for questions, and that concluded the presentation part of this call. So, first, the questions online, and then we'll take a look at, yes, if there's additional questions on chat.

The next question comes from Joonas Hayha from OP.

It's Joonas Hayha from OP. So, a few questions. Firstly, regarding the tariffs, there's been tariffs on the Chinese imports to the U.S. So, can you comment on what kind of impact are you expecting this to have? And given that there's the threat of tariffs being imposed also on the EU, how do you expect overall to protect your profitability in this game?

So, maybe, Joonas, you have a very famous last name, if I may, intervene. Then -- so, Cyrille Viellard speaking. I will take your question. We are very closely monitoring the tariff, as you well know, very closely monitoring the tariff situation. So one thing that you know as well is, we have a very varied supplier base and manufacturing base that is in China, in Vietnam, in Taiwan and in Europe. So, we are already hedged on -- with our manufacturing base and our manufacturing partners. And we are looking at hedging that risk. We can move items from one area to the other if -- and we are considering this already, and then we've already -- we are already discussing with our partners and our customers very deeply on the pain sharing, what is possible and with our suppliers. So, there is a, I would say, good -- there's good points in every of these various solutions. So customer side, supplier side, and then our possibility also to move things around. And our exposure is also less, probably than others through our diverse sourcing base.

And maybe a related question, how do you expect the industry to act pricing-wise in this environment?

The ones that are highly China exposed, I believe they will have to increase the prices. That's what we're seeing is passing the pain. I think that's the -- that would be with all industries. If the supplier is not ready to take the pain, then they will pass on the pain. As we've seen with material, it's like material increase or raw material increase, they will act and pass. That's my assumption as of today. What we see is, it's not black and white that the customers were ready -- are ready and suppliers also are ready to make some efforts.

And then you have these savings measures. You've been executing those and apparently, they are done as of today. But there's still some inflation in your operating countries. So how do you expect the operating cost level to evolve in 2025 versus 2024? Do you expect the OpEx level to decrease due to the savings not fully impacting 2024? Or how should we think about it?

Yes, maybe if I start, of course, the eased inflation. So we expect the cost base then to start stabilizing. We are witnessing lower run rates. In 2024, as you know, we had many changes implemented, and we had some quite substantial one-off expenses also in 2024. But our cost base, we have done the biggest things now. Of course, in 2025, we continue to monitor, and we are ready to do more actions if we see that those are needed. But now still in the 2024 figures, we don't see the full impact of the cost savings, even though we have booked some one-off expenses, but still the comparable operating expenses don't show the full benefit that we are getting. We have contractual relationships that take time to run out before we start seeing the savings. So, currently, we are happy with the cost base that we have achieved, but also very mindful going to 2025, seeing how the season starts and evolves to adjust the cost base if needed.

And with the low inflation, our salary inflation will be pretty low. Our negotiations are in the countries where there are individual negotiations or collective negotiations, the salary increases will be quite moderate, and that's the major part of our fixed cost base.

And then moving on to the -- well, I guess these are more related to your guidance. But if we start with the earnings guidance that you published today, can you give a little bit more color? Are you expecting earnings to improve due to increasing sales? Or how should we look at that guidance?

Yes, you are right. So coming, I would say, sales, yes, definitely, we expect the volumes to improve operational efficiencies. And also, like I said, this 2024 included some items that will not reappear in 2025. So that will also benefit 2025.

We are prudently optimistic in the sense that you know our balance sheet situation. So, we have highly improved, everything is going all in the right direction. We are well set up. We -- you know our strength with our global distribution, leveraging market ups and downs regionally, the strengths of our brands. So everything is all set. But we are, again, prudent as our freedom of movement is constrained by our balance sheet situation, and we are cash focused. It's cash, cash, cash. That's why optimistic, prudently, and we will -- that's our guidance. Were we in a different balance sheet situation, I would have a different position. Does that answer?

Yes, that does.

And we want to keep our word. We will keep our word. That's very important, and that's a statement for me as a new CEO. That's why we -- that's our word.

Okay. And then related to the retailer inventories, you touched upon this already, but did I get it right that they are apparently still high in the North American ice fishing business as well as in the Nordics ski business?

So, yes, to clarify that, so our Q4 sales to the retail were lower because there was carryover from the 2023 to '24 season. So, our presales was low. But then now the ice conditions in North America proved out to be very good. So, actually, the retail chain is -- the retail inventories have been sold. So the sales have been good. So there's no more carryover inventory. So that problem has been solved. And of course, as we are importer for the retailers, so then what reflects also in our guidance that for next season, 2025 to '26, we expect better pre sales, preorders for the upcoming Q4.

What about the higher-priced items such as rods and reels? What's the inventory situation there?

The market has recovered. It remains investment items. So they are much more sensitive to market cooldowns. But the inventory situation, I can speak for Europe and for North America, is much, much better than previous year. Consumables remains much more reliable and constant product in terms of sales.

And then finally, one, maybe more of a technical question. I see your depreciation increased somewhat in H2. Is there some specific reason for that increase?

Yes, that relates to the Canadian sale and leaseback transaction.

It's IFRS, IFRS 16.

So, the depreciation is IFRS 16. Yes.

Okay, that's good to clarify. And finally, thank you Lars, and all the best to the future.

Thank you very much.

Thank you. Now my understanding is that we do not have more questions over the phone, so we take a couple of questions from the chat. First question is that how are you currently positioning yourselves with third-party sales? And should distribution agreements be expected to deliver growth in the upcoming years?

So, here, continuing the strategy that Lars has reinitiated their -- if third-party sales complementary to our existing portfolio, and they're synergetic, yes, we will -- and cover our fixed cost and will leverage our unique global distribution network, we will continue to increase partnerships. And we have, as you see, with Okuma, with the signature of Chile. So now we have all of our 3 Latin American distribution companies; Mexico, Brazil and Chile have the Okuma distribution. And we have ongoing discussions to continue this partnership because the more integrated we are, the more synergies in terms of global marketing and resources we can allocate in product development. So, that's going pretty well and we have started a partnership with Mepps in Canada that's very fruitful. Mepps is a long-time partner. So yes, if it's synergetic and we can really leverage our unique distribution network, we will distribute third-party products.

Then another question. Are you expecting to refinance part of your financing mix already during 2025?

Maybe I'll take this question. So our facilities are currently due in spring 2026, and we still have an extension of 12 months pending for that. So we can still extend those by 1 year. So yes, we will do -- to answer your question, the planning will happen in 2025 and the refinancing will happen there at latter part of '25 or might go to 2026. Yes, so, during this latter part of this year, that's where the major part of the work will be done.

Okay. I think this concludes our call. And I would like to remind that a recording will be available on our website shortly. We thank everyone and wish everyone a nice day and remaining of the week. Thank you.