Fiskars Oyj Abp

OMXH:FSKRS

Earnings Call Transcript 2023-Q1

[Essi Lipponen, executive]

Hello, and welcome to Fiskars Group's Q1 2023 Results Webcast. My name is Essi Lipponen, and I'm the Director of Investor Relations. I'm here with our President and CEO, Nathalie Ahlstrom; and our CFO, Jussi Siitonen. As usual, Nathalie and Jussi will first go through the presentation, and after that, we will have plenty of time for your questions. You can type in your questions in the chat already during the presentation. Nathalie, please go ahead.

[Nathalie Ahlström, executive]

[ Thank you ], Essi. And from my side also, welcome -- hear -- to hear about Q1 and Fiscal 2023. When we headed into Q1, we said that our focus is on cash and profit protection. And I'm here proud and happy to say this is exactly what we have delivered in Q1, fantastic improvement in cash and at the same time, protecting the profit.When looking at the quarter, the -- what we already saw in Q4, the decline in consumer sentiment and retailers' high inventories, that trend continued in Q1, which especially hit our net sales hard in the U.S. Despite that, our strategic focus is paying off. Our direct-to-consumer continue to outperform significantly -- actually outperform the growth in other channels, especially wholesale. And then for 2023, we keep our guidance for 2023 that our EBIT will be slightly below last year 2022.But let's look into Q1 -- what were the facts in Q1. Starting with the top line, and here, you really see what we talk about with the macroeconomic and the consumer sentiment, and this hit us as well where we see that the top line dropped. But despite that, we were able to keep EBIT protection, and that worked.Also, what we are very pleased and happy about is that we were able to keep our gross margin despite the soft top line. And the gross margin really is the engine for profit growth as the consumer sentiment comes back eventually, that then the gross margin will keep us driving profits up. So keeping the gross margin at 46.4% was good in this quarter.Looking at free cash flow, and Jussi will talk about that more. This was a quarter where we had positive cash flow. And also then looking at the delta from last year's Q1 to now, it's quite a significant step-up in cash flow of EUR 83 million in cash flow improvement. And then earnings per share, of course, with this a bit down, but still at EUR 0.25.On Vita. Vita -- I think the important here with Vita is also where here we see the sales decline in net sales, but we see that the profit level of total EBIT still is a very high level. So we have been able to turn around it from the past to a total new level of EBIT, and we are able to -- despite the soft top line, to maintain this EBIT level.The real drivers also in Vita continues to be the e-comm, the good growth of e-comm across all the brands. And this also shows the power of the brands. Consumers are loyal to our brands. Consumers are attracted to our brands, and this fantastic e-comm growth is a proof of the power of our brands, and also the content and the lifestyle they get from the e-comm. And one good example of this is Moomin by Arabia that was clearly growing significantly in Q1.Then in Terra, the same we discussed about in Q4, continued in Q1, where the U.S. big box customer retail has focus on cash and focus on reducing inventories continued. That was one fact. The other fact was that the -- in the Northern Hemisphere, the spring has started in a very cold manner, and that has kept the consumers from coming in and starting the gardening season, and at the same time, also retailers hesitant to take replenishment orders before the season starts in.On the good side, we can see that despite the drop in the top line, we -- of roughly 20%, we can see that the EBIT margin, we anyway were able to keep at quite okay level, thanks to the profit protection focus we had in Q1.Then on Crea. That was a very stable development for Crea and supported by the timing of shipments in the U.S. These shipments are often moving a bit from one quarter to another quarter, but very stable development in Crea as we have seen in the previous quarters.Then our strategy. So in Q1, focus is and continues to be on profit protection and cash. And what also helps us in this focus is our very focused growth strategy. And we'll continue also in these times of the macroeconomic challenging environment to invest behind the growth drivers, behind the transformation levers. So this has been very important to us despite profit protection that we continue to invest behind direct-to-consumer, behind digital and all the transformation levers seen here.Then take a look at how did it go in Q1 with our transformation levers that we are so focused on. Of all transformation levers, we're happy to say that 3 out of 4 are delivering and they are delivering significant step change. And this is future-proofing our company. This is future-proofing our brands as we go forward. And also -- as I said earlier also, when the top line comes back, we are even in a stronger place.Starting with commercial excellence. Commercial excellence, of course, is a very broad area where we're looking at in-store excellence, online excellence, how are we working with our big wholesalers. And this we are measuring by the gross margin, and the proof that we were able to maintain the same gross margin level. That's why I'm very happy about that because despite the soft top line. So we had successful actions to mitigate the cost inflation and we're able to keep gross margin.Of course, also then the structural change we did already last year with selling U.S. watering has helped on reported figures, but also the organic gross margin we were able to keep at the same level. Then direct-to-consumer continue to deliver. Our e-comm grew 12% in Q1, and that's quite massive when thinking that the whole Fiskars Group, driven by wholesale, the top line dropped. And despite that, we were able to grow e-comm by 12%. Also physical retail, although at only 1%, but still physical retail, our own stores also growing in Q1. So this talks about the power of the brands in our portfolio.The challenge, of course, is U.S. In U.S., like in Q4, the trend continued in Q1, and top line came down. Net sales came down minus 21%. This is especially in Terra where the shipments for the gardening season have been delayed because of the cold spring, but also from big box retailers' less risk-taking appetite to take in inventories and also focusing on cash flow.And then lastly, always our joy to talk about China. And of course, China being the second largest consumer market in the world, continue to deliver, growing 14% in Q1. Last year, in 2022, in China, we grew over 30%. And now looking at 14%, that might sound a bit low. However, what we had in China was the first -- in January, we have the serious COVID. Then February, March, the growth trajectory was back to last year's level. So fantastic performance yet again in China by our local team in China.On ESG, of course, also, we are transforming the company on the sustainability level and taking steps forward there. And here, you see the progress on this. And these are slides we will be showing in every quarterly report, so that you see how are we progressing.And from this slide, you see that the clear area where we have opportunity to further improve is on circular products. Today, it's -- 9% of our total products are made out of circular recycled products. Here, we have more to do. However, with our focus on pioneering design, our purpose to be pioneers, to dare to do new things. I have no doubt we will soon see also step changes in this area.Other highlights from the quarter is, of course, MyFiskars. We launched in March, MyFiskars. MyFiskars is our employee share savings plan. With MyFiskars, we want to have the ownership culture in Fiskars among all the employees. MyFiskars is really for every employee in the whole company. And it's not only the ownership culture we are creating, it's also the entrepreneurial mindset to be there curious, drive the business forward, take accountability and feel this is my company, this is my shop, this is my warehouse, wherever our employees are working. And we've seen a fantastic response throughout the globe for MyFiskars and a good excitement to enroll into the program.Then in line with our purpose, pioneering design, we're also proud to share that we won in Q1 2 Red Dot Design Awards. We have, over the years, won a lot of Red Design Awards. This year, we won 2. So it's a good step up. And this year, we won it for the Fiskars All Steel cookware and also for the fifth generation axes, fantastic axes. So proud of the teams in innovation and the cross-functional teams behind this talking about the innovation and again, future-proofing the company.And also continue to strengthen talent in the company where we have Aamir joining us mid-July as Chief Supply Chain Officer and driving the transformation in supply chain.We also came out in end of January talking about organizational changes that we are doing. These are progressing really well. What we are doing is that we are making our business areas and the brand teams end-to-end accountable to simplify, to make them more agile and really be empowering the teams to drive their own brands and be relevant for the consumers.As said, this is going well forward. We said at the time, we would be reducing roughly 100 roles globally. All of this has been executed already. So it's already executed. And the total annual cost savings that we reported then in end of January is EUR 30 million, of which half we are expecting to already materialize in the second half in 2023.The total one-off costs expense already recorded is EUR 2.2 million in Q1. So organizational changes have been executed. The rules have been reduced. And then in second half, we will see the benefits coming in. So very targeted project executed and moving forward.And then finally, the guidance for 2023. As said, we're expecting our comparable EBIT to be slightly below 2022 level that is slightly below EUR 151 million. And the assumptions behind the guidance is expected continued volatility of the market. And of course, here, the consumer sentiment is a key. We also continue to invest in the strategic building blocks, like I was saying, digital and direct-to-consumer, to ensure that we have the resilience and we are strong when we come out with higher macroeconomic environment.At the same time, to our advantages, of course, the savings from the organizational changes from second half onwards and also very prudent cost management. As you can imagine, when we are talking about protecting EBIT, it's very much about cost management quarter-by-quarter.But with that, I hand over to Jussi.

[Jussi Siitonen, executive]

Thank you, Nathalie, and hello, everyone. Before entering into the presentation, Nathalie talk about Red Dot winners. And here, you can see the axes -- the axes areas there. Truly piece of art, very functional.Then moving to presentation. First, starting with net sales. Nathalie mentioned that we were down 13.4% in Q1. Breaking into the pieces, you can see that Vita was down 9% there. It was down in all its key market share in Nordics, except Finland. So Finland -- in Finland, we succeeded to deliver positive growth now in Q1.And in Terra, and also Vita, we need to remember that roughly 10% of Vita business is in U.S., and it's very much exposed to similar decline there, what we have also in other BUs.On Terra, we were down 19%. And Terra in Q1 is 50% of the total group sales. So it will have a significant impact on our total development here. And also, just to describe how different market U.S.A. is for us. Terra top 5 customers in the U.S., each of one are bigger than many of our countries. They made half of this decline of EUR 30 million, what we had in Terra.Crea, thanks to those phasing of the shipments, we will succeed to be flat in the U.S. and then also in Nordic. So there, we were only down 2.8%.If you take it by regions, so broad-based negative in Europe, except Finland and export, they were ones growing in Europe area. U.S.A., we talked already about, and APAC was down to 6% there so that -- China was the only one growing of those big countries what we have [ there ], partially mitigating this negative trend.Then moving to EBIT. In Q1, what we need to remember first that last year, 2022, Q1 was all-time high EBIT what we have delivered at Fiskars Group. So we came down there on a like-for-like basis roughly EUR 19 million, out of which Terra made EUR 11 million.And if we move the components there, how this all happened, you can see that volumes was the one taking down our EBIT there. We succeeded to partially mitigate that with some OpEx savings, all in all, roughly at EUR 3 million what we had in Q1, but you can't compensate this kind of volume drop, what we faced in Q1.Gross margin, which is the driving force of our sustainable profitability, we had improvement there in Vita. So Vita succeeded to improve gross margin, even in this critical market situation. Crea was flat and Terra was then down on gross margin perspective. A word about this gross margin there also, the cost inflation what we faced in Q1 was approximately 6%. And that's also our full year expectations that there at mid-single-digit inflation rate is built to our forecast.Then on cash flow, and as mentioned, cash protection works. This was one of the key theme when we started the year that we need to get cash flow back on black numbers there. And Q1 cash flow was positive of EUR 13 million. And taking our historical seasonal pattern what we have typically Q1 cash flow -- free cash flow is negative due to the fact that net working capital is growing in Q1.Now net working capital was slightly down. We got EUR 18 million more cash flow from inventories, especially from Terra and Crea. And that based on the actions what we have taken. So when it comes to supply, practically all our operational factories, if I leave out those showcase factories there. So all 8 factories were [ heated ] down or at limited capacity. And of course, the impacts are already partially there in Q1 and then more even in Q2. So 25%, 35% less own manufacturing, 50% less sourcing there. So these are the decisive actions we put in place or at late last year when we saw the trend.On working capital, I said, typically, Q1 is always going slightly up versus the year-end. Now it came slightly down, EUR 10 million down versus last year, mainly driven by Terra inventories there. Admittedly, we still have work to do. So however you define for this sustainable, efficient net working capital level, we still have a lot of potential to continue improving our working capital with those plans we have put in place.On balance sheet, net debt increased but remains still well below [ 2.5x ] threshold. Main reason for increase was the first part of the dividend we paid in March. So that's roughly EUR 32 million there, partially offset by positive free cash flow, still took up our net debt. And then also, when it comes to lease liabilities here, we finalized some long-term warehouse lease contracts in U.S., which took it up. One thing where the focus continues being is to improve our capital turnover and asset efficiency further.Then as a summary, this challenging operating environment what we have is very visible in our long-term financial targets. So net sales, if you take last 12 months at the end of March, we were down 4.7%. EBIT were at 11% level, was -- target is to be there at roughly mid-15%.Last 12 month cash flow still slightly negative. We are getting towards the breakeven and then hopefully, towards the target, but it's still negative there at the end of March. And then balance sheet, well below our 2.5x.That was about all financials, giving back to you, Nathalie.

[Nathalie Ahlström, executive]

Thank you. So Jussi used the word decisive. And I would say that's how we are and how we are operating. So the focus is paying off. We are focusing on cash flow and profit protection in Q1 that delivered results. The macroeconomic and consumer sentiment around us was tough, continue to be tough like in Q4, especially in the U.S. Despite that, our focus on strategic investment behind direct-to-consumer, that will -- is growing. And as I said, e-comm growing 12%, so massive shift from wholesale decline. And finally, we keep our guidance of 2023 and say that comparable EBIT will be slightly below last year.With that, over to you, Essi, with questions.

[Essi Lipponen, executive]

Thank you, Nathalie and Jussi. And we already have quite a lot of questions. Maybe we can start with inventories. There is a question, Nathalie, is there a retail inventory problem also at your European retail customers?

[Nathalie Ahlström, executive]

Yes, that's a good question. The inventory problem is global. However, what we are facing the most is in U.S. with the big box players who take very quick decisions like they did in -- after the Black Week in Q4. In Europe, our customers are much smaller, so it's not that drastic. But yes, we see elevated inventories here in Europe as well.

[Essi Lipponen, executive]

And maybe a follow-up on that. How about Asia?

[Nathalie Ahlström, executive]

In Asia, our net sales is mostly in owned stores. If we look at Japan, China, that's mostly owned stores. So that's in our own hands, the inventories. Australia, the same problem with inventories as the retailer we have there as in U.S.

[Essi Lipponen, executive]

How long do you see retailers continuing to drive down inventory levels? Do you have a view on that?

[Nathalie Ahlström, executive]

We -- thanks to our data and analytics team, we have quite a fact-based view on this. And we see that especially with Terra, as soon as the cold spring stops, we will see a ease of that. But inventory levels are quite inflated still.

[Essi Lipponen, executive]

Let's continue with the same topic. In the U.S., Nathalie is the retail inventory problem only in the garden products or also something we should worry about for H2?

[Nathalie Ahlström, executive]

In inventory, when we look at the U.S., it's in the big box. So that's Terra gardening where we are having it and therefore, very weather dependent. In Vita, we've also seen bigger inventories at our department store, customers at their retail and they are depleting them at the moment. So all going well. This should be -- have cleared out and before second half and also when we come to the very important Q4.

[Essi Lipponen, executive]

Then a question about our own inventories. What kind of products is in that inventory at the end of Q1?

[Nathalie Ahlström, executive]

When -- and Jussi was addressing it saying that with our focus on cash, and we've really been focused on cash, we have reduced our own sourcing by roughly 50%. Then in addition with the furloughs at our factories, we're reducing own production by 25% to 35%. So that's already impacting also that we are not building more inventories.Then the question, what kind of products do we have in the inventory. In Europe, it's quite Vita heavy. Thanks to our decision ourselves after Ukraine war started, where we wanted to make sure that we had products we -- when the energy situation still last year -- in March last year was uncertain. So we ourselves built up the Vita inventories ahead of Christmas season last year, 2022. So those inventories in Vita we are now depleting. And then in the U.S., it's the Terra inventories.

[Jussi Siitonen, executive]

On that topic, still -- so roughly 10% of our gross inventory is so-called excess and obsolete. So the clear focus what we have had in Q1 is to get these excess and obsolete inventories also down, because then it's not only a cash flow impact, but it has also profit impact for us.

[Essi Lipponen, executive]

Maybe then moving on to Terra, and Nathalie, if you take this one. Have you seen any pickup in gardening sales in the U.S. after Q1 or are retailers' inventory still at high level? Well, that we already discussed. So yes, if you can discuss what's been happening after Q1?

[Nathalie Ahlström, executive]

Q1 -- now we are in April. Actually, last week we saw a certain -- big box Retailers in U.S. pickup at certain of the big ones. And like we said many times, our customers in U.S. are bigger than European countries. However, some still didn't see the pickup. And we also know that still this week even in U.S. the weather was very cold. So -- but some good signs.

[Essi Lipponen, executive]

Then continuing on Terra and a question for you, Jussi. In Terra, Q1 net sales were roughly in line with 2020 and 2021 levels, while profitability was clearly higher. How large part of the improvement is due to the divestment of U.S. watering business?

[Jussi Siitonen, executive]

Yes. U.S. watering, when we divested it has -- it had a top line impact of roughly EUR 70 million. It was very dilutive to our gross margin. And then on EBIT, actually, not a big impact in the slides what we saw those EBIT bridges, these structural changes, which is now -- in Q1 when we compare last year, it was only less than EUR 2 million.

[Essi Lipponen, executive]

Then a question about Crea and Nathalie, if you take this one. How large top line effect from the timing of shipments in Crea where these advanced shipments from Q2?

[Nathalie Ahlström, executive]

These Crea shipments -- and we will see it also in Q2, Q3, Crea shipments in U.S. are sometimes quite big and depending on which day they fall on, then they come. But in terms of growth, it's a few percentages. They were not advanced shipments. They were how they happened. And usually also then in Q2, Q3, we see with the back-to-school timing of where they come. But Crea is a very stable business.

[Essi Lipponen, executive]

Then a question on China. Nathalie, in China, there was a pickup towards the end of the Q1. Can you comment of growth rate in March, and have you seen similar development after Q1?

[Nathalie Ahlström, executive]

Yes. In China, January was negative growth figures for us. The hard COVID in China, consumers didn't move around, everybody were a bit on locked down. Then in February, it came up. And in March, it was at the same levels at the whole last year. So roughly 30%, 40% growth in March, and we see that trend continuing. Thanks to the power of the Chinese market being the second largest consumer market in the world. And secondly, China team is doing a fantastic focused work.

[Essi Lipponen, executive]

Yes, indeed. And Jussi, if you take this one. Organically, gross margin was down 20 basis points. Have you estimated how large impact lower volumes had on gross margins in Q1?

[Jussi Siitonen, executive]

Yes. The way we have made those furloughs and downtime in the factory, they have been quite an effective way how our supply chain have succeeded to do those. So the impact is very marginal what we have there due to the fact that actually -- the additional fixed cost, what we have to upsell there, we have succeeded but very minimum. So not any significant there.

[Essi Lipponen, executive]

Maybe continuing on this topic, Nathalie, what kind of production plans do you have for the coming quarters? Are they down as much as in Q1? And when are you expecting get -- to get your production overheads to better match the lower production volumes?

[Nathalie Ahlström, executive]

When we talk about the furloughs in our production units, they're actually more in Q2 than in Q1. For example, Iittala is going on quite a long furlough, which coincides with the big investment we are doing in the Iittala factory where we are stepping up the sustainability CO2 footprint of the factory. So we are timing them like that. So that's on the production itself and the plans for Q2. Then when it comes to the overheads in supply chain, with a focus on EBIT protection, of course, we are looking at that all the time.

[Essi Lipponen, executive]

Then Jussi, a couple of questions on costs for you. How have raw material prices and logistics costs evolved during Q1? And what kind of impact should we expect during the rest of the year?

[Jussi Siitonen, executive]

I think I partially answered that already. So in Q1, we faced a roughly 6% cost inflation there for the full year. We see that we will stay there at roughly mid-single-digit type of inflation. We see raw material price decreases at the same time. However, when the volumes are lower than what they were last year, of course, the impact is somewhat smaller. At the same time, what we need to remember that the total wages and salaries, what we have in fiscal of EUR 250 million, there we have roughly 3% to 5% salary inflation. So that's coming on top of that.

[Essi Lipponen, executive]

And so there is also a question. Is the 6% cost inflation mentioned cost of goods sold only or COGS and OpEx?

[Jussi Siitonen, executive]

This 6% what I referred, that's cost of goods.

[Essi Lipponen, executive]

Then Nathalie, are you able to raise prices in 2023? And if yes, in which categories?

[Nathalie Ahlström, executive]

With commercial excellence, it's a big toolbox that we are working on. We're working on the right channels and what are the right products and mix for those channels. And then looking there what is rise pricing. In the past years, we worked a lot on this, and we will for sure continue to do this in 2023. So it's more a mix and channel optimization, of course, because we are in a low consumer sentiment environment.

[Essi Lipponen, executive]

I just wanted to let you know that now we have only 1 question left. If you still have more questions, keep them coming. But in the meantime, I will ask the final question that I have for now.Nathalie, you start the year with Q1 EBIT clearly behind last year. Where do you expect to catch up in Q2, Q3, Q4? Is it volumes, pricing, cost savings, something else?

[Nathalie Ahlström, executive]

This is a good question. It's in the second half where we are. So first half is still tough. Second half, that's where the measures from, for example, the organizational changes are going to impact and then also how to make the year focused on the gross margin enhancement and OpEx efficiency.

[Essi Lipponen, executive]

Let's see if that was the final one. Yes, there are no further questions. Thank you for active participation, and have a nice day.

[Jussi Siitonen, executive]

Thank you.

[Nathalie Ahlström, executive]

Thank you.