Fiskars Oyj Abp

OMXH:FSKRS

Earnings Call Analysis

Solid Q1 Performance Amid Challenges

Facing a tough market, Fiskars delivered a solid Q1 2024 performance. Despite a 5.8% organic sales drop, gross margin rose 185 basis points to 48.3%. Notable growth came from e-commerce, up 12%, and China's 15% organic increase. Investment highlights include a €15 million upgrade to the Rogaska glass factory, moving the product portfolio towards premium luxury. The acquisition of Georg Jensen added positively. Fiskars anticipates a slightly higher comparable EBIT for 2024 compared to 2023. Continued focus on transformation and ESG initiatives positions the company well for future growth.

Navigating a Challenging Market

Fiskars Group reported solid performance in Q1 2024 despite operating in a challenging consumer environment. The company faced a decline in volumes, largely due to weak consumer sentiment, which affected sales across key markets. However, management emphasized its ongoing dedication to strengthening the foundations through improved gross margins and e-commerce growth.

Impressive Gross Margin Expansion

A standout achievement for Fiskars this quarter was the increase in gross margin by 185 basis points to 48.3%. This steady growth from 40.6% over the past three years—almost 800 basis points—demonstrates the company's effective cost management and efficiency strategies, which have become crucial in offsetting volume declines.

Acquisitions and Their Impact

The acquisition of Georg Jensen, completed on October 1, 2023, has positively impacted the Vita segment and contributed to inorganic growth. While volumes within the segment have been affected by weak consumer sentiment, management highlighted that integration efforts are progressing well, positioning the company for future growth.

E-Commerce Strength

Despite overall sales declines, Fiskars noted a 12% increase in e-commerce sales, indicating that consumer interest in the company's storytelling and lifestyle branding remains strong. This performance reflects Fiskars' strategic shift toward direct-to-consumer models, enhancing brand engagement.

Major Investments to Upgrade Facilities

Fiskars announced a significant EUR 15 million investment in its Rogaska factory in Slovenia. This investment aims to optimize production processes and improve competitiveness while accelerating the company's journey towards net zero emissions. This reflects Fiskars' shift toward premium and luxury products, aligning with overall strategic goals.

Financial Guidance and Performance Outlook

Looking ahead, Fiskars maintained its financial guidance for 2024, expecting comparable EBIT to be slightly above 2023 levels despite the challenging economic landscape. This includes anticipated savings from initiatives launched in the prior year, which are starting to materialize. Analysts should note the expected seasonality in profit recognition, with stronger results anticipated in the latter half of the year.

Cash Flow and Capital Management

In Q1 of 2024, the company reported negative free cash flow of EUR 20 million, consistent with historical patterns for the first quarter. The primary factors contributing to this were working capital adjustments, although the company effectively reduced inventories by EUR 31 million. Management underscored that cash flows were supported by existing cash reserves and reaffirmed the strength of the balance sheet.

Focus on Sustainability and Employee Ownership

Fiskars continues to prioritize sustainability, with a long-term goal of achieving net zero emissions by 2049. Additionally, the company has reinforced its ownership culture through the MyFiskars program, which allows employees to invest in the company. As of now, 50% of Fiskars employees in Finland are shareholders, demonstrating high employee engagement and commitment.

Earnings Call Transcript 2024-Q1

[Essi Lipponen, executive]

Hello, and welcome to Fiskars Group's Q1 2024 Results Webcast. My name is Essi Lipponen, I'm the Director of Investor Relations. I'm here with our President and CEO, Nathalie Ahlstrom; and our CFO, Jussi Siitonen. Nathalie and Jussi will first go through the presentation and the highlights from Q1 and after that, we will be ready to take your questions. You can type in your questions in the chat already during the presentation. Go ahead, Nathalie.

[Nathalie Ahlström, executive]

Thank you, Essi and also welcome from my part. It's a privilege to be here to talk about Q1 report that we just published. Let me go first to the highlights. Q1 now in 2024, it's a solid performance in a very challenging market. What we are proud of is that despite the challenging market, we are able to continue to strengthen our foundation. So it's really about the foundation that our transformation is strengthening, and we continue to deliver on gross margin, e-com and China. I'll come to the details later. At the same time, we have also today announced that we are investing and making change in our plans -- in our factories -- in our glass factories that we are taking the portfolio upwards towards more premium and luxury products. So significant investment and at the same time, actively managing our portfolio. And for 2024, our guidance remains intact. Our comparable EBIT will be significantly above No, slightly, -- sorry for that, slightly above 2023 levels. But let me take you to the key facts about Q1. We start with the key figures for the quarter. Despite the volumes coming down in Q1, driven by the weak consumer sentiment, yet again, we were able to increase our gross margin by 185 basis points. Now if you look in the last 3 years, a bit more than 3 years, we increased gross margin from 40.6% to today where we are at 48.3%. So it's nearly 800 basis points that we've increased the gross margin, talking about how we are working to strengthen the foundation of the company, transforming it. Another thing just to highlight is, last year, we had the all-time high cash flow of the company's history and now in Q1, free cash flow continues at historical normal levels. Then looking at Vita. In Vita, we see that the consumer sentiment that is weaker has impacted our volumes. On the positive side, of course, we are growing via acquisitions. So the acquisition of Georg Jensen that we did in 1st of October is now part of our figures, and that is the inorganic growth that we show in Vita. The integration of Georg Jensen continues really well. And when we come out with Q4 -- sorry, Q2 in July, we will then also report on how Georg Jensen integration is progressing and today is progressing really well. Despite the challenge on volumes in Vita, the highlight is our e-com continues to grow. E-com continued to grow at 12%, which again shows that the consumers are driven to our web pages. They come -- they want to read the stories, it's about storytelling, it's about the lifestyle experience they get from our brands, so e-commerce growing. So we're moving our portfolio, actively managing it and therefore, as I mentioned in the beginning, we are continuing to invest, and we are making significant investment now into our factory in Rogaska, that's in Slovenia, where we today announced that we're investing EUR 15 million to both optimize production, increased competitiveness and modernize the factory. This will also much more accelerate our journey towards net zero in the factory in Rogaska. So we are investing. At the same time, what we are doing these changes is yet again a move of moving our portfolio of the company towards more premium and luxury with the setup. And then, as I said, also the journey towards net zero. So as a summarize, what we have communicated today with the changes, not only Rogaska also in the Littala factory, it's really in line with the portfolio roles that we spoke about in November during Capital Markets Day, where we say that we are moving more up towards luxury and we also have brands Littala Waterford that we need to optimize to future-proof the competitiveness of these brands. So we are actively managing that. Then the highlight of Q1 is truly Fiskars. Despite net sales coming down, it's extraordinary profitability for Fiskars in Q1. We reached 18.9% of EBIT margin in Q1, so it really talks about the commercial excellence we are looking at, which are the channels, which are the places we want to be present in, what does good look like in stores? And as a consequence, despite the volumes coming down, we were also able to increase gross margin and that offset the decline in volumes, and we were able to deliver solid EBIT for Fiskars. Another highlight in the Fiskars BA is the outdoor brand Gerber. Gerber has truly been one of the growth building blocks in Q1, where Gerber introduced a new category in [Camp Cook] and at the same time won more listings that were now opened up and filled in Q1. So fantastic work, also there to drive growth for the future, so building the foundations for the future. Then coming to the strategy. Like we always say, we are here and we have sharpened the logic. The sharpened logic of what we are doing, and it's really that we're actively managing the portfolio, like the examples I've just given, for example, the investments we are making into the glass factories. We have transformation levers that deliver. We're making the foundation to make it even more solid future proof of Fiskars and when the volumes come back, we'll really see a uptick in our performance. And also, we have a simplified way of working. It's with very clear accountability and decision-making in the BAs in BA Fiskars, BA Vita, so that makes us agile and much faster as we go forward. So speed is of essence. Then looking at how do we deliver on the transformation levers? So 3 out of 4 transformation levers are delivering. I mentioned already gross margin in commercial excellence, and it's very much about the channel mix that we're working on as well as our assortment. And we saw that in Q1, our gross margin grew 185 basis points so yet again, a quarter when the gross margin goes up. Direct-to-consumer e-comm, fantastic growth of 12%. It's about the storytelling, the power of the brands, consumers want to take part of this. Retail declined but when we look at like-for-like and the pop-ups that we've closed after Christmas, the like-for-like of retail is flat. And now when we look at the importance of omnichannel, especially in the luxury segment of it, it's fantastic to see that Vita direct-to-consumer is already more than 50% of all of it. So we are truly moving the portfolio up and executing on the portfolio roles. U.S. continues to be challenging and our big retailer's Big Box consumer -- customers continue be cautious with inventories, and we saw a slight decline in the U.S. Then China, again, the local Chinese team doing a fantastic job growing, which would Royal Copenhagen. So 15% growth in China. If we include our newly acquired Georg Jensen into the figures, so including the inorganic growth, China growth is 20%. So 15% organic growth in China with Georg Jensen 20%. So China continues to be strong for us. And despite China overall on a macroeconomic level being a bit subdued for us, it's about the scalable model we have where we started with Weslow we are doing Royal Copenhagen and Georg Jensen then on top of it. So it's a scalable model that we can continue to deliver the growth building blocks in China. It's not only on the business itself, we are transforming, of course, sustainability, ESG is the heart of what we are doing, it's the heart of our DNA. And on biodiversity, our recycled content, it's fantastic to see that yet again, we increased a little bit to 15% of all the content is circular products and services. So we are also from an ESG point of view, transforming Fiskars Group. And therefore, it's natural as we in March came out with our net zero target, we are going to become net zero by 2049. If you wonder why do we have such a strange year of 2049? That's when we turn 400 years as a company, while we are this year turning 375 years. To reach the net zero, the current targets that we're having, we have a lot of plans in place, and we're going to continue to execute on them and reporting back to you where we are with this. Other highlights from Q1 and also from now where we are. I'll start with this. I spoke about the growth building blocks. It's really in our brands, it's about the lifestyle, that the brands are creating for consumers. And this Gerber has taken to its heart and they are surrounding the consumers with new categories. An example, as I mentioned earlier, is [Camp Cook] that Gerber launched now in Q1. Then Fiskars brand won yet again, Best of the Best for Red Dot. This is the fifth consecutive time we win Red Dot Design Award for products and this year, we want to best all the best. We're also innovating to enhance our ESG journey sustainability. And one important fact is that today, already 2/3 of our cookware products are PFAS-free. This is important for the consumers and also for sustainability for the whole planet going forward. And by the end of this year, all our cooking products will be PFAS-free. So a lot of growth building blocks innovations. But it's also about our culture, our culture at Fiskars, and I'm very happy that we could in March announced that we are going to continue to reinforce our ownership culture in the company with MyFiskars where employees through employee share savings plan can invest into the company and own shares. So in this way, we can also welcome our Georg Jensen employees into the program. And from the first launch we had already in 2023, we see a fantastic uptick in import anticipation from our employees. Today, as an example, in Finland, in offices, 50% of our employees are Fiskars shareholders. So it's truly about the ownership culture we are creating in Fiskars. And then our guidance for 2024. Our guidance remains intact. It's a challenging environment with the macro economics and also wage inflation is against that. At the same time, and Jussi will talk about that soon, we see the savings from what we initiated last year is starting to come in. We the Georg Jensen acquisition also, we see that our profit will be much more heavy at the end of the year -- heavy loaded at the end of the year. So the typical quarterly variations is going to change towards the end of the year. But with that, I'll hand over to Jussi. Thank you.

[Jussi Siitonen, executive]

Thank you, Nathalie, and hello, everyone. Let's start first with the net sales. So as Nathalie mentioned, we were down 5.8% organically. Out of that Fiskars was 6.2% negative and then Vita 5.7%. When it comes to Fiskars BA there, the good thing is that we started to see growth there in Sweden, which is a big country for Fiskars. Then the biggest countries, U.S., Finland, we had low single-digit negative in those countries, taking the whole Fiskars BA down with this minus 6.2%. On Vita, as already mentioned, China, which is 100% Vita country, Denmark, Sweden, U.K., Norway, they were all up. So we have now more and more countries which are growing. However, the 2 biggest ones now in Q1, Finland and Japan, they were down, so that's why we were down also in Vita's total. Nathalie already mentioned that Gerber was nicely up. We were up roughly mid-teens there, thanks to these new categories and footprint expansion when it comes to distribution. So these were the main drivers there for this like-for-like net sales, minus 5.8% and then total net sales up 2.9%. Then on EBIT, EBIT came down. EBIT came down EUR 3.7 million there when we have a like-for-like basis, which means that excluding Georg Jensen's impact here. It was mostly because of low volumes. That was the biggest single reason what we had there taking EBIT down. We succeeded partially mitigating this with better gross margins, especially in Fiskars BA and in the savings and we are very pleased with the fact that now after those announcement, what we had last year, one announcement in January and then another one in September, we start now seeing that savings are flowing in. If you go through this bridge what we have here, you can see that the low volumes impacting, of course, gross profit due to the net sales drop, but then also negative production variance is what we had there. Those were the biggest single reason. Then top line driven negative, mainly coming from bad debts marginally down and then depreciation and marketing. These were all to items which are not under those saving programs that we initiated last year. Then you can see that both cost of goods and SG&A, they are nicely contributing our EBIT growth. And that's important also to understand that whilst the EBIT as such is coming down, the underlying good momentum there, what we have the saving plans seems now to work. When it comes to a big part of the SG&A people -- employee cost of salaries, there still, we see that inflation is partially offset the benefits that we are getting from lower headcount base, but let's see how now it's continued during the year. On cash flow. Q1 cash flow minus EUR 23 million free cash flow minus EUR 20 million there. That follows the historical pattern what we typically have in Q1. Of course, we are not happy with this kind of negative cash flow, especially last year, we succeeded to make positive free cash flow in Q1. Out of this minus EUR 20 million, roughly EUR 8 million is Georg Jensen impact and then 12 million old Fiskars. The main reason for this negative is the net working capital. However, within this net working capital, we succeeded to continue inventory reductions so that now they were EUR 31 million down in Q1, nicely equally down in both BAs, both in Vita and Fiskars BA. On balance sheet net debt to EBITDA, a target being this 2.5x. We were now 2.9x. That's a seasonal impact what we have. Capital employed remained pretty flat, and that's important for us that we need to continue improving our asset efficiency. So now it's temporarily down due to the fact that we still have some fair valuations therein from Georg Jensen, but we're gradually start improving also that one. Q1 negative cash flow and then dividends, they all funded through cash reserves that we had at year-end. And return on capital employed, 9%, so we still are in value-creation mode in that sense. Taking all our financial targets, 4 financial targets here, net sales growth, organic EBIT, EBIT margin, cash flow and balance sheet. If you take a rolling 12 months at the end of Q1, cash flow conversion is still very positive there. And then taking a longer perspective, the mitigating this kind of short-term volatility there. The balance sheet remains strong, and we are also catching up on cash flow. EBIT and net sales are the ones which are impacted by this challenging environment that we currently have. That's very shortly about financing and giving it back to you, Nathalie.

[Nathalie Ahlström, executive]

Thank you, Jussi. And then -- just summarizing with the highlights. So a solid performance in a very challenging market. We continue to transform the company and make it more future-proof and building the foundation so that when the volumes are back, we are really in a good position with gross margins, e-com and China continue to deliver. Today, also, we've announced we're investing in our glass factories and we're making changes in the production to ensure that we are moving the portfolio up more towards premium and luxury products. And finally, our guidance for 2024 remains intact. Our comparable EBIT is expected to be slightly above 2023 level. Thank you.

[Essi Lipponen, executive]

Thank you, Nathalie and Jussi, and we do have questions here already, and you can continue sending your questions to us via the chat. Okay, if we start maybe with a question related to the U.S. and Nathalie if you take this one, in the U.S., retailers are still cautious. How have the first weeks of April started in terms of sellout and do normalizing inventories within retailers caused restocking at some point?

[Nathalie Ahlström, executive]

Yes. Yes, it's true. The Big Box players in the U.S. continue to be cautious with inventory. We think it's a new normal as long as interest rates are going to be this high, the inventory management will be very tight. Then about the first weeks of April, it's horrible to say, but it's a bit weather dependent that we've had a few very warm fantastic weekends in April in the U.S., So that always helps. But it depends on how the weather a bit how it goes. And then, of course, following closely the POS data, how it evolves. As we go forward, then about restocking, it's very case-by-case dependent on the Big Box players.

[Essi Lipponen, executive]

Okay. And maybe another one for you Nathalie related to Asia Pacific. Comparable sales in APAC was down despite clear growth in China. Can you talk a bit about the other main markets in that area?

[Nathalie Ahlström, executive]

Yes. The biggest besides China that grew 15% or if you want to say, 20% with Georg Jensen. Japan had a challenging start to the year, so it's a very much a Japan question.

[Essi Lipponen, executive]

Yes. And maybe one for Jussi. What was the organic change in gross margin? Are you excluding impact from Georg Jensen?

[Jussi Siitonen, executive]

As Natalie mentioned, total gross margin improvement for this 185 basis points there. Without Georg Jensen it was still improving a bit more than 100 basis points. So more than half of this improvement is organic and less the remaining part is Georg Jensen.