Rapala VMC Corporation (RAP1V) Earnings Call Transcript & Summary

Welcome to this Investor Relations call of Rapala VMC Corporation covering the first half of 2025. My name is Tuomo Leino, and I am here with President and CEO, Cyrille Viellard.

Good afternoon, everyone.

And CFO, Miikka Tarna.

Hello, everybody.

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

First and foremost, thank you, everyone, for attending this call. I'm happy to report that we are confirming our guidance that we originally submitted to you with improvement in our profitability. And this was our most important target that we have set ourselves. We have also improved our cash flow in the period and in a period of high disruptions. I will hand over.

Okay. Thank you, Cyrille. So I will walk you through the first half of 2025 profitability and what happened during the period. So first, starting from the headline, sales and profitability improved. So net sales for the first half of the year were up 4%; in comparable currencies, up 5%, roughly EUR 5 million from prior year. The benefit came mainly from North America. The North American market remains resilient, supported by stable consumer demand and steady retail activity. Operating environment elsewhere, namely in Europe and Asia, was a little bit challenging. European and Asian markets, we saw more impact from the increased uncertainty and limited economic visibility, which primarily were driven by the ongoing global trade disputes. And the effects of this market turbulence and the tariff-related impacts became more pronounced during the second quarter of the year. On profitability side, our profitability improved from EUR 6.2 million to EUR 8.6 million, up EUR 2.4 million. And this was mainly primarily driven by the increased sales, both in the winter fishing segment and also in the open water segment. Of course, the tariffs had a negative impact on our cost base. But overall, our profitability strengthened, thanks to a structurally lower operating expense level. On the inventory, we reached a value of EUR 82 million compared to EUR 84.7 million in the prior year. So as mentioned, we confirm our outlook and our guidance to increase our comparable EBIT in 2025 compared to 2024. What underlines this outlook is the North American consumer demand, which has remained robust despite the rising uncertainties in the trade environment. So far, we have been quite successful in mitigating the tariff impact both on sales and profitability. Nevertheless, the situation does reduce our visibility, our long-term visibility, over the market. And thus, it also continues to create challenges in driving sales and maintaining our profitability. In Europe, as mentioned, we are seeing slower consumer spending following the economic and political developments. And this is expected to result in lower replenishment sales in the second half of the year. Of course, our improved operational efficiency and structurally lower operating expense level are expected to partially offset the impact of the potential sales decline. On the winter fishing side, the preorders, presales for the upcoming 2025 to '26 winter fishing season have progressed according to our expectations in the North American market, which is a positive development. In Nordics, the winter fishing market, we expect to remain at prior year level. And as mentioned, we have very short visibility with ever-changing trade environment, mainly related to the tariffs, and this brings uncertainty to our visibility on future performance. Moving on to the next page, key figures. To highlight a few figures from here, our reported operating profit landed at EUR 9.1 million, so one-off items were not significant in this period. In prior year, our operating profit reported one was EUR 11.2 million, which, of course, included the one-off gain on sale of a real estate in Canada, which was a sale and leaseback transaction. Our net profit was EUR 2.2 million, down from prior year EUR 4.7 million, and our earnings per share landed at EUR 0.02 per share. Then let's look a little bit more on the sales on the geographical regions. So environment varied significantly across the regions. So the success factors in North America, where the sales grew 12% or in comparable currencies 14%, what are the success factors there? We had a very favorable fishing conditions in last year 2024 autumn. And also, we had exceptionally strong winter fishing season 2024 and '25, which enabled retailers to reduce their inventories by year-end. And this supported our replenishment sales of winter fishing products in the early part of the year and also facilitated a healthy level of spring loading orders in the first half of the year. And the sales growth was further driven by successful relaunch of the new 13 Fishing branded product range, continued performance of CrushCity soft plastic lure range, and also solid momentum of all key brands. In the Nordics, our sales declined by 4% with comparable and reported currencies. The main reason for this is that the year began with poor snow conditions, and this led to exceptionally low replenishment sales of our winter sport equipment, which had a significant impact on the sales of this region. And the winter sports equipment are mainly cross-country skis and related equipment. On a positive note, in the Nordic region, we have now new organization in place, and this organization changes that we have done in the last couple of years are yielding positive results, which enable this stronger operational performance. Our product availability remained very good, and we were able to capture the sales in spring, and we achieved growth in majority of the key categories in the summer fishing section of the business. However, having said that, summer fishing season started somewhat later than usual, which then impacted our replenishment sales towards the end of the reporting period. In Rest of the Europe, our sales declined by 6%, both in reported and comparable currencies, and this was impacted by retailer carryover stock from the previous season. The year began on a positive note, but the momentum slowed significantly through the reporting period. The consumer activity is and has been subdued. There is extreme caution from the retailers for carrying inventory. So replenishment orders are tough to get. We still remain on our core brands, generating cash flow. And as a highlight, our focus on Okuma brand, expanding Okuma brand in Europe, was successful. And we managed to grow Okuma brand sales in this region. In Rest of the World, our reported sales were at last year level. In comparable currencies, we were up by 5%. In Asia, the market was very challenging. So these trade disputes continue to weigh on consumer sentiment and also the foreign exchange volatility caused trouble for us to make our sales budgets. Also, the landscape is evolving in Asia, where many of the fishing equipment manufacturers are placed. They're increasing their investment in domestic markets, and hence, they are emerging as stronger local competitors. And this is, of course, again, a result of the tariff environment. In Latin American markets, we performed well, supported by economic recovery and, I would say, surprising currency stability and GDP growth in key countries, which, of course, then fuel consumer confidence and support sales of import goods. So moving on to next slide. Cash flow remains our #1 priority. Inventories landed at EUR 82 million level. Organically, our inventories were EUR 0.5 million higher than in the previous year. The decline in the inventory -- the decrease in the inventory value comes mainly from U.S. dollar foreign exchange rate. Our inventory composition is again healthier than last year, and it also includes, as we are preparing for the upcoming winter season where the orders are higher compared to prior year, so proportion of winter fishing equipment in our inventories are higher. So inventory turns improved from last year. And cash flow from operations on the right side of the slide, you see the development over the last 3 years. We are down to EUR 6.2 million in cash flow from operations, so down from prior year by EUR 12 million. And here, the prior year includes -- the prior 2 years actually include a working capital reduction. So after COVID and resulting in high inventory levels for us, we were digesting our inventories and reducing our working capital tied to inventories, and that resulted in very strong cash flows in the comparison periods. And now this year, the inventory is more on a normal level, naturally not where we would like it to be, where it continues. But as such, we didn't release as much capital tied in the inventories this year. If we exclude the working capital impact from the cash flow from operations, our cash flow was actually EUR 11 million compared to EUR 5.7 million last year. Our gearing ratio increased and equity-to-asset ratio decreased from last year. Minor changes here and mainly these are coming from USD devaluation, which impacts our equity through translation differences. Liquidity remains good; cash, EUR 25.4 million at the end of the period; committed undrawn long-term credit facilities, EUR 38 million at the end of the period. And commercial paper sold under our commercial paper program amounted to EUR 14 million at the end of the period. Net interest-bearing debt decreased EUR 1.3 million from prior year. Cash flow used in investment activities were EUR 0.7 million. Last year, we had one-off gain from the sale and leaseback transaction of the Canadian real estate, which resulted in a positive investing cash flow of EUR 5.7 million. Now our capital expenditure this year was EUR 1.8 million, and it consisted mainly investments in new products and also maintaining our manufacturing capacity. On the disposal side, we had one-off gain from a real estate sale in Finland. We also agreed with our lending banks on an amendment and an extension of 6 months to our facilities. And the facilities mature in the second half of 2026 and still contain one extension option of 6 months. And we are preparing to refinance the facilities and the hybrid capital bond during the next 12 months' time frame. We are compliant with all the covenants, and we expect to comply with those also in the future. So that's it, the H1 results. So I hand over back to you, Tuomo.

All right. Thank you. That concludes the presentation part of this call, and we are now open to questions. And we'll first take the call-in questions and then pick 2 from the chat. So can we please have the first caller on the line if there are any questions on the phone lines.

[Operator Instructions] There are no questions on the lines for the moment.

Okay. Thank you. We'll take a look if there's some questions on the chat that we'll include now.

So reading the question on the chat, how does Rapala view the need for local manufacturing in the U.S.? So also other question is related to tariffs, so how do we see manufacturing in the U.S.? And do we see competitors manufacturing in the U.S.? Today, we do not see an increase, for our trade, a shift of production to U.S. production. We do not consider it yet. It's still quite uncertain. Our business is very labor intensive, we make rods and lures, and we have -- for what we manufacture, we have quite big operations. So we have economies of scale. So we do not foresee that, and we do not see competition doing it. And what we hear with competitors, the ones that are today -- today, what is made in the U.S., it's a little bit of soft baits, lines, very few rods, no reels. Hard baits, very little, and it's mostly China made. 60% to 80% of tackle products are coming from China. And in that also configuration, our European manufacturing base is a bit better off than some competitors. So that's to answer the first question. Can you name one major risk that could prevent you from meeting your guidance this year? Well, as you've seen, we had a nice first half. We don't boast about our first half, but our first half is where we want to be, improving constantly. On the second half, we have opportunities, on the one hand, with winter fishing in North America and still some good dynamics in the North American market. We also have opportunities as we see our run rate fixed costs are in good shape, and we were expecting that. So that will also continue in the second half. The risk, on the balance, what we see as risks, again, these opportunities, there are high uncertainties on the tariff developments. So we have passed on price increases that have been well accepted. Also, our customers in North America have appreciated the fact that we have done -- we haven't done constant price increases, but we have done them all at once and not on all products. But what we don't know is what will be -- right now, these price increases also from all competitors have not been reflected in the retail prices. So how will the market really react when all these prices are pulled through. So that's the big uncertainty. Financing renewal, no share issue. Well, our share price is on the upside, but it's still very low, and a share price issue would have major dilution on existing shareholders. The value is very low if we look at our historical average. So this is the main reason why this has not been followed. As you have not fully transferred the tariff impact on customers, is there plans to do that in the future? And have you noticed competitors doing this? Well, everyone looks at the other one and tries not to be the first one to move. Right now, impacts will more be in 2026. So we are really monitoring very closely what is happening on the market, and we have passed on significant price increase. Now they are also depending on the final agreements. As you know, Europe is still under negotiation. For us, it's significant for our lures and hooks. Here, it's difficult to have a final say. We have to stay a bit in the vague. We have passed on significant increases, but the tariffs themselves are uncertain. But overall, we think we are in pretty good shape in that. We're doing pretty well. Have you been able to hike prices to offset the tariff impact? Yes. We had previously answered. Where did the cost reduction come from? And are you able to continue with cost efficiency measures if needed in H2? Cost reductions are reorganizations. Consider in Europe, we've had head count reductions. We've had also our excom reduction. So we have a much more stable supply chain in this first half, and that's also why we have had a good first half, is we have procured early. We had less airfreight, much more efficient supply chain. So that also has had a significant cost impact. So it's a mix of variable and fixed cost, and the fixed cost will pull through in the second half. Has the tariffs impacted the competitive environment in the North American market? Yes, yes, highly. During the time when China prices were up 145%, well, the exports from China were on hold. And so that has impacted competitors that were only China dependent because nothing could move. You were completely outpriced. And we had good inventory levels. We've had excellent fill rates. We've been at ICAST. At ICAST last week, we were congratulated by all our big-box customers for our service level. So competitors that have not the right levels of inventory for the core spring delivery time must have been impacted. Is your target to continue to utilize hybrid bond as part of your capital structure? Or is the plan to redeem the hybrid by utilizing bank loans? That's a very good and accurate question. And I'll pass it on to Miikka.

Yes. Thank you. So of course, we now assess our position and we do projections and we look at our capital structure as a whole. I also see some of the subsequent questions there, so I'll try to cover most of them with this answer. So we currently have term loans. We have revolving credit facility. We have our commercial paper program that we use for our long-term and short-term financing. And on top of that, we have now that EUR 30 million hybrid bond, which was launched in 2023 and will mature at the end of 2026. And now we are preparing for the refinancing. So looking at our projections, how are our financial leverage, how do we expect that to develop in the years to come, looking at our capital structure and capital requirements. And also not only our internal projections, but also looking at the capital market situation with the interest rates and with the different options that we have to finance our operations. And so to give exact answer at this stage, I'm not ready to disclose that. So those discussions, in the next 12 months' time frame, we'll have those discussions and we'll, of course, build scenarios. And of course, then our Board of Directors will decide on this, what is the most beneficial from the shareholder perspective. But we remain confident, of course, we are still not where we want to be in terms of our profitability. But we show improvement, and this is a good starting point to have refinancing negotiations and look at the future of the hybrid capital bond as well. Moving on to the next question. Your H1 tax rate was surprisingly high. Was there some special items affecting it? So there are no special items here, not that sort of one-off things here. This is something that will even out and it's kind of timing of profit in different countries and different parts of the world. We might have some, let's say, losses in one country, gains in another country, which result in higher effective tax rate, but nothing special there. Was there another question on taxes? Could you provide some color into how big of an impact the U.S. taxes had on your profitability in the latter part of the first half? And I suppose U.S. taxes here are referred to the tariffs. So I think Cyrille partially answered that question. So we have passed on some of the tariff increases in our pricing. We do see -- it does, of course, impact. We can't say that it wouldn't impact us. But the strategy is that we try to work with our retail partners to make the best possible solution for them and for us to cope in this very volatile market situation.

There are many streams to it. We were able to have our supply partners or raw materials or products we source with better conditions. We are considering also relocating. We had price increases. So we brought in earlier goods with the July 9 date, which was then postponed to August 1 for the finalization of the negotiation. So we try to do this and have a maximum number of products shipped before the July 9 deadline. So that has allowed us also to minimize the impact. So there are many, many actions that have allowed us as of today to minimize the impact.

Then on capital expenditure, which were lower this year compared to last H1. How do you view the CapEx level going forward, considering you now appear to be returning to growth? We have been very happy with our capital expenditure level. We have been putting a lot of attention to capital expenditure and spending the money where we can get return for that money. We have made sure that our product pipeline remains strong. So we have not borrowed from the future. We have also made sure that our manufacturing base remains healthy, and we don't have risks in our manufacturing. So of course, yes, now we are driving cash flow and aiming for healthier balance sheet. So naturally, once our balance sheet improves, for sure, we will invest more in new ventures. But now currently, we keep a tight leash on capital expenditure and look for the best possible ROIs.

Last question. What is on EBIT/EBITDA deduction on net base considering the tariffs in H2?

Yes. And there's an additional question if I'm not able to say what would it be on level of the 15% tariffs. So it is not possible to give a simple answer to this question. The visibility, there's so many different factors, what Cyrille also mentioned, working with our vendors, working with our retail partners. That's how this will impact us. And of course, price adjustments with our retail partners is a big part of the answer to this question. We are setting the right prices with our retail partners to make sure that part of the cost -- that we don't carry all the cost. And this can shadow in our H2, of course. And like I mentioned on the guidance, that visibility is really short in this respect.

What I can say is that our U.S. customer base has been very comprehensive -- very understanding, sorry, very understanding, that's the right English word, in the discussions. And if we play fair and with open cards, we've had as our customer base in the U.S. are very large big box retailers that also source a lot of items they are they are faced with the same challenges and they value the pushback even from the ones that are normally very demanding. On this subject, there's little option than to pass on the pain.

Okay. I think that was the last question that we have. So we will now conclude this call. And I would like to remind that a recording of this call will be available shortly on our website. And thank you, everyone, and have a nice evening and rest of the summer.

Thank you.

Thank you, everyone.