Fiskars Oyj Abp

OMXH:FSKRS

Earnings Call Transcript 2022-Q1

[Kati Kaskeala, executive]

Hello and welcome to the Q1 report from Fiskars Group.

My name is Kati Kaskeala. And I'm the VP for Communications, and I will be hosting today's event.

I'm here with our CEO, Nathalie Ahlstrom; and our CFO, Jussi Siitonen.

[Operator Instructions] And we will have plenty of time at the end of the call to take your questions, so please don't hesitate to type them in as we go through the slides.

Without any further ado, I'd like to hand over to Nathalie.

[Nathalie Ahlström, executive]

Thank you, Kati. And welcome also from my side, from everybody. It's a pleasure to be here to talk about our Q1 2022.

Looking at the highlights of the quarter. This was the eighth consecutive growth quarter for us as a company, which is a testament to our execution power. When we look at the profitability, we see it's driven by higher volumes, so we have been able to supply throughout the quarter. We came out last year with our growth strategy. And we will also here go through how we are performing on the transformation lever, and we will see that we have been able to deliver results on all the transformation levers in Q1. And finally, it's a dynamic world we are living in and we continue to have unchanged outlook. And our comparable EBIT for the year will increase from last year, 2021, but let me go into the details about the solid quarter Q1.

When we look at the net sales, we can see that we have a solid momentum in the company. We were able to grow the net sales, so comparable net sales, by 13.5%, so quite a good comparable growth here. And we see that that's delivered by volume growth. So we are able to supply our consumers, our customers globally despite the multiple challenges globally. Also we see that the well-balanced portfolio that we are having is delivering. We see all the BAs performing, and also all the regions are performing. Jussi will come back to the regional figures later, especially of course Terra being the highlight of Q1. When looking at profitability: The growth in Q1 is profitable growth. In this quarter, we achieved EBIT margin of 15.6%, which is very good. At the same time, we continued to invest like we have done already the whole second half last year. We continued to invest significantly behind digital and direct to consumer, direct to consumer being both our e-com and our physical retail.

During the quarter and especially during the end of the quarter, we saw significant cost inflation driven by the war in Ukraine, also by the COVID situation in China. And that, we have also been tackling, and we'll come back to that also later in the discussion. So solid performance to the start of the year with profitable growth.

In the dynamic world where we are, it's important for us that we have a clear growth strategy. We have clear strategic focus areas. We are focusing on our winning brands, our winning channels, our winning countries. This is the logic. And then we are focusing on our transformation levers that will pivot the growth trajectory for the company in the long term, thanks to commercial excellence, direct to consumer, U.S. and China. So this growth strategy keeps us well grounded in this quite dynamic world that we have around us. It helps us to focus, prioritize and deliver on the levers. And when talking about delivering on the levers, let me go through how it was in Q1.

In Q1, when we look at commercial excellence, we continued to see that the power of the brands, the big portfolio of well-known, loved brands, is delivering and also enables us to mitigate the cost inflation that we are seeing and already saw last year. And we will also see that we have an improved gross margin in Q1, and Jussi will talk about the structure of the gross margin improvement. On direct to consumer, we continued to grow. And direct to consumer, we grew 16% net sales in Q1 and especially happy with our own retail growing 17% in Q1.

Then U.S., very strong growth in U.S. with 16% up in Q1. And when we look at U.S., it continues to be the global growth engine for consumer demand, so we continue to see growth there. And one example of the driver as we also go forward is, for example, a big wedding season that we are seeing coming now post COVID. Then our fantastic local team in China continues to perform strongly despite the challenges in Shanghai with COVID lockdowns. So despite the challenges there, the China net sales continued to grow and delivered 1.5x of growth in Q1. We have a lot of disruptions in our China business, but with the attitude and the can-do mentality of the team, they continued to deliver. And of course, it's quite changing from week to week, the situation there, but good performance in Q1.

When we look at significant events in Q1. There was a lot of activity to continue to deliver the growth strategy. We had changes in the management team. Charlene joined us to lead Terra business. Anna, our new HR Officer, joined us. We also wanted to become more lean, more closer to the business; and therefore dismantle the global function of consumer experience and communication, to have that inside the businesses to be able to drive the business impact faster, so making the business more lean. We also completed the divestment of our North American watering business, so taking the portfolio upwards in value terms. And of course, we withdrew from Russia, due to Russia's war against Ukraine, quite soon after the whole war started.

So a lot has happened during the quarter. And of course, what keeps us grounded, it's our values and also our purpose. Why are we here? Why are we growing? It's, of course, to have the pioneering design to make the everyday extraordinary within us in the company, for our talent, for consumers, for our customers, for all of you.

So a lot happening in Q1, the same on sustainability also. We are progressing our sustainability journey. When we look at the scope 1 and 2, we reduced our greenhouse gas emission in Q1 by 5%. When we look at the whole period when we started in 2017, we've already reduced greenhouse gases by 43%. So good steps forward. Looking then at our commitment to have half of our net sales made out of circular products and recycled products by 2030: Today, the figure in Q1 is 5%. So small steps going forward but small and focused and determined steps to deliver on sustainability.

We are moving forward and -- with sustainability. And maybe one important thing is we are also recognized for the sustainability work we are doing. As an example, in Q1, we were listed on the CDP's 2021 Supplier Engagement Leaderboard. We also achieved the platinum level on sustainability rating by EcoVadis. And in Finland, Fiskars brand was recognized among consumers as a fourth most sustainable brand in Finland. So we are progressing on the sustainability journey.

Then looking forward, looking forward then at the outlook for the full year. Our outlook continues to be unchanged. We are going to deliver profit, EBIT increase from last year's, from 2021. This is a dynamic world and we will see volatility between the quarters, and our outlook remains unchanged for the full year. And the reason for the volatility between the quarters is that the cost inflation, the significant cost inflation that has come in the last 2 months following war in Ukraine and also the China COVID situation -- there is a lag from that till we have mitigated it, so our outlook for the year remains unchanged.

But with that, I hand over to Jussi.

[Jussi Siitonen, executive]

Thank you, Nathalie. And good morning, everyone.

Before diving any deeper into our Q1 financials, let's take a look at financial targets tracking. So where we are now. And what we are using here is our last 12 months numbers end of March to avoid volatility of the numbers.

So when it comes to net sales target, i.e., growth being that mid-single digit organically, the last 12 months, we are running at over 10% growth. So tick the box there. We are well on track with our target. On EBIT, the target being that our EBIT margin should be at mid-teen level by end of 2025, now for the last 12 months end of March, we were at 12.4%, which is 30 basis point up versus same period last year. So also progress there, still to be proven that it's sustainable but looks good.

On cash flow. Using the last-12-month cash flow there, we are now currently below the target. Main reason for that is that, if we take our last 12 months there, we have invested in inventories worth of EUR 80 million. That's now to secure availability for the next -- for the rest of the year. That's the main reason why we have now currently that red [ tack ] there. And then on balance sheet, the target being net sales (sic) [ net debt ]/last 12 months EBITDA at or below 2.5x, we were at 1.0x, so we are well on track also with that one.

Then more about Q1. So first of all, gross margin there. So we reported strong improvement there on gross margin. So gross margin up 190 basis point. However, due to the fact that we don't have U.S. [ ordering ] anymore in our numbers from 1st of February onwards, that makes 150 basis point, i.e., 3/4, of this improvement; the remaining 40 basis point being then organic. The Q1 cost -- input cost inflations what we had is roughly 10% of the cost base what we had a year before. And we have succeeded to mainly mitigate it now in Q1. The plans what we had placed also for the rest of year give us a confidence to keep the guidance unchanged.

Operational expenses up EUR 14 million versus the last year. Out of this EUR 14 million, EUR 5 million is considered being investment for the future, mainly in digital and in D2C. And then the comparable EBIT, up EUR 5 million versus last year.

We also recorded some items affecting comparability in Q1, the biggest being the asset write-downs what we had due to the Russia. [ That wrote off ] EUR 10 million there and is reported under items affecting comparability.

Let's then take a closer look about the businesses. So in Vita, strong top line growth there. We were high single-digit, almost double-digit growth. And then also, profitability, we were at last-year level. The improvement what we had there coming from volumes, coming from gross margin, yes, improvement, were invested back mainly in D2C growth. The growth what we had came mainly from Royal Copenhagen, Wedgwood and Waterford brands there. And then it was very much supported on Americas and Central Europe; China, of course, being the big contributor with Vita business.

Terra. As Nathalie showed, main part -- or main contributor to our Q1 both growth and EBIT improvement was Terra. So Terra top line up almost 20% in currency-neutral basis there, supported by double-digit growth what we had in gardening and landscaping categories. Both North America and Central Europe were the biggest reasons where this improvement came. The improvement on EBIT was very much driven by volumes.

In Crea, top line growth on currency-neutral basis 2%, driven by scissors category both in Americas and continental Europe. And then on EBIT, we were flat versus last year, so the improved gross margin what we had in Crea was invested back in marketing and selling.

Then let's take a look about net sales growth by geography, a couple of callouts here. So when Europe was up 8% there, we had a strong performance there in the U.K. and continental Europe. And the Nordics, mainly driven by Finland and Sweden, they came down, diluting a bit the growth what we had in Europe. Strong growth in Americas. U.S., which is a bit shy of 30 -- 40% of our sales, was the main driver of the growth. And then as already Nathalie mentioned, strong growth in China took up our Asia Pacific over 22% growth.

On Q cash flow -- Q1 cash flow. So typically Q1 is seasonally low cash flow for us. This time, it was a bit even more lower level than in the previous quarters mainly due to the fact that there was some phasing when it comes to trade payables and due to the fact that we had a strong growth in Q1. And that's now can be seen in growth in trade receivables.

On balance sheet and already mentioned, you can see a big difference here in inventories. So inventories [ from reported to reported ] up EUR 50 million but bearing in mind that end-of-March '22 numbers do not include any more U.S. [ ordering ]. And that will have an impact of roughly EUR 30 million, so organic inventory growth EUR 80 million there. Despite the strong growth there, yes, in our trade working capital, we continued improving our asset efficiency. You can see that our capital turnover rate improved from 1.21 to 1.4. And therefore, also our return on capital employed improved significantly.

With that, I think it's time to call for Q&A.

[Kati Kaskeala, executive]

Yes. Thank you very much, Nathalie and Jussi. So the first question I have is for Jussi. Are you expecting any further onetime charges related to the withdrawal from Russia in Q2?

[Jussi Siitonen, executive]

So all the gross assets, fixed asset, inventories, receivables, we have now written-down. And of course, there are still some tiny items left. And once we get fully out of Russian business, there might be some tiny items coming, but the main items are now written-down.

[Kati Kaskeala, executive]

Great. Thank you. We have another question concerning Russia, this time for Nathalie. Have you seen any significant changes in customer behavior in any of your current markets since Russia's invasion of Ukraine?

[Nathalie Ahlström, executive]

Thank you. I would say that it's a dynamic world. And we see very different consumer behaviors from market to market and also from customer segment and channel to channel, so there's not a general answer. And therefore, I think we are very well placed as Fiskars Group where we have such a well-balanced portfolio of categories, brands, channels and regions and countries. So it's very different from one country to another and channel to another. And we also see dynamics where we see customers who are really winning and going [ full in ], but of course, it's a dynamic world. The consumer sentiment is changing.

[Kati Kaskeala, executive]

Great. We also have a follow-up question that's slightly related. "How did the divestment of your North American watering business and the cessation of your Russian operations affect sales? Although these are mainly attributable to Terra, Terra showed the highest growth among your BAs. How come?"

[Nathalie Ahlström, executive]

Yes. We have strong fundamentals. And we are focusing, like we are saying, on the growth strategy. We are focusing what we are doing, prioritizing the work. And then this sale of the U.S. watering, that's actually helping us to even focus more on the businesses that are driving our -- total value of the portfolio up. So that was a well-planned, long-planned execution. Then of course, the withdrawal from Russia came quite suddenly, honestly, of course. And that's just how life is. And what we then need to do is just, with -- between us and the company, divide that loss of net sales and go forward and focus on the transformation levers we can impact.

[Kati Kaskeala, executive]

Great. And then we have a question more on consumer confidence and behavior. "So some companies in your sector have seen a decreased interest for home interior. Moreover, consumer confidence is at the bottom level as it was in April 2020. How have you experienced the demand now 1 month into Q2? And how good is your visibility on this ahead?"

[Nathalie Ahlström, executive]

One advantage we have in Fiskars Group is that we have our own stores. We have roughly 370 stores globally. And that gives us the finger on the pulse in our own stores, what's happening. So we are there feeling the pulse, but then on the consumer sentiment and how it's -- as I was saying, it's very different from category to category and market to market.

[Kati Kaskeala, executive]

Next question is for Jussi. Could you perhaps break down the components of the gross margin and what the main drivers behind it have been in the quarter? For instance, how well have the price hikes offset cost inflation?

[Jussi Siitonen, executive]

When we started the year -- and also what we said in the Capital Markets Day in November last year, we said that, last year, it was roughly 40 million what we had cost inflation in our cost of goods. And we also said that this year is pretty much following the last-year pattern. Of course, what has happened during the past few months, it's a bit on top of that what we have. So the actions we put in place late last year, very early this year, they are already mitigating the assumed inflations what we had. And the actions we are now putting in place are then benefiting our second half. That's the background of confidence of keeping guidance unchanged. The components which -- what we have there, they are mainly pricing related, but of course, all the commercial excellence type of topics, how do we see in the store how much we are investing in in-store excellence and the likes, are the ones which are further contributing to our gross margin there.

[Kati Kaskeala, executive]

Great. Thank you. And how much visibility do you have on Q2, Q3 and Q4 in order to know how much orders we have in for the year?

[Nathalie Ahlström, executive]

Thank you. We -- it's different from different customer channels also how the ordering pattern goes. Of course, now we are heading in, in Q2. And that, we already saw in Q1 figures: It's a huge gardening season this next season that we are having. And what has impacted us now is, of course, the very cold weather in Northern Europe and the U.S. at the start of the business. So those are the kind of things that are impacting on a weekly basis. On the other hand, we see from the traffic figures at -- in certain places there are still a lot of demand and interest. And as I mentioned, for example, the wedding season in U.S. is foreseen to be very interesting in a positive way.

[Kati Kaskeala, executive]

Great. Then we have a question on China for you, Nathalie. Have you noticed any softening in the demand in China now that the government is implementing tight measures to contain the spread of the coronavirus?

[Nathalie Ahlström, executive]

Yes. So until January, February, extremely strong growth in China; and despite them being more or less locked down the whole of March, that our China team delivered the 1.5x in Q1. So even though there were 1 month where there was more or less the lockdown. What we are doing is -- our China team is doing is rapidly moving over all the efforts on e-com when they are in their lockdown. And at the same time, we also know that the prime focus of everybody in China today is to get the daily food deliveries, as they are in the lockdown situation. However, on the positive side, it's changing from day to day, when they open more and when they're closed more, in the warehouse and how they can deliver products. So all focus on continuing to have a strong Chinese business.

[Kati Kaskeala, executive]

Great. Jussi, the next question is for you. What would you say contributed to the [ EBITDA ] margin expansion? Is it good cost control, product mix or pricing power or perhaps something completely different?

[Jussi Siitonen, executive]

Yes. When we are talking about Q1 especially there, it was pretty much driven by volumes. So volume growth what we have, especially in Terra, were the main contributor to our EBIT improvement in Q1. For the rest of the year, of course, it's combination of those 4 transformation levers what we have in the -- place. And then we are very mindful of our, yes, OpEx also to make sure that we can keep our targeted P&L structure.

[Kati Kaskeala, executive]

Great. That's it for today, no more questions from our listeners, so I would like to thank you for participating and wish you all a very nice weekend from all of us.

[Nathalie Ahlström, executive]

Thank you.

[Jussi Siitonen, executive]

Thank you.