Fiskars Oyj Abp

OMXH:FSKRS

Earnings Call Transcript 2019-Q2

[Kristian Tammela, Manager of Investor Relations]

Good morning, ladies and gentlemen, and welcome to the presentation for fiscal second quarter 2019. My name is Kristian Tammela. I'm the IR Manager here. And before we start, I'll just note the disclaimer here. We had an interesting quarter, quite a lot of actions, so I think we'll better just get started. Today, will be presenting by our CEO, Jaana Tuominen; and our CFO, Sari Pohjonen. So with that, Jaana, the floor is yours.

[Jaana Maija-Liisa Tuominen]

Thanks, Kristian. Welcome, everybody, those of you here in Helsinki and those online. So we have released our half year report this morning, but in the presentation here, it's more focused on the Q2, obviously. And I guess before going into the details that most of you have already seen and read, I could say that Q2 was like life in general, there's things that make you smile and things you maybe not enjoy as much.So it was both kind of things in the quarter. So tough one in many ways actually. And if we start with the kind of the fact that, that was a disappointment, clearly, I'm sure for you and me as well, is that the comparable EBITA and comparable net sales decreased from the previous year.If we look at the reasons why, there are external factors that affected us, and most notably, I would like to mention the record rainfall in U.S. So especially the Midwest -- and well, let's say, not the coast, but kind of the middle part of the U.S.A. was the heaviest rainfall in 125 years. So very unusual weather pattern. And obviously, when the rainfall is that heavy, there's not much need for watering equipment. So the hoses and related products were not really in season, even though the season was entirely in there.So that's a one big kind of external factor that did affect us in Q2. The other one is the U.S.-China tariff. And because of that, we already issued a change in our guidance in May. So I'm sure you all remember that, so that also was an external event in Q2. There are some things internally as well. If you look at the ECL, it's been a familiar story that we're working on, on transforming that business to this day, working heavily with the brand's sales, all the operations. And we continue with the ECL transformation and actually accelerating those effects or those efforts and actions as the Q2 was not good in the ECL sales.On the positive side, there's a couple of things I would especially like to mention. One is the functional business in Europe, clear improvement year-over-year, partly because also the weather has been favorable for this kind of sales, but even more so all the actions that were taken in 2017, '18 are now actually giving the result.You may remember when we have worked -- talked about the distributor network that we have in Europe and how we do changes in there, so now we have the results of those actions. So that was a good thing in Q2 and the first half total because that was also visible in the first quarter of the year as well. In Q2, we continue to increase our e-commerce sales. And that's also definitely something that we enjoy. China has also been on the growth path, and both of them, the e-commerce and China are something that we will get back to you later on. So that's kind of the summary of the operational part of the business. And then I would obviously like to mention the extra dividend that was distributed in June in form of the Wärtsilä shares. So now we are not any major shareholder in that publicly listed company anymore.If we then go a little bit into details on the sales side. So in this picture, you can see that the comparable change and the reported change, they are both starting with a minus. There's a difference in those. And if you look at the right-hand side of the picture, you can really see that this year, the foreign exchange rate is actually increasing our numbers, the comparable is that -- there. It's also very visible here that the Functional business is pretty much flat. So what we missed in the watering in U.S., we pretty much covered in the sales in EMEA or Europe. And also then it's very clear that the decrease in the Living sales, which is mainly then the -- which is the ECL side of that. And Sari is going to show you even more details on that. So the comparable change, it's really the foreign exchange being the positive side here. And then also I could mention the divestments, that's the Leborgne, the business that we announced already late last year, and then it closed now here in this year so it's also that sales is affecting the comparable number.Here is the comparable EBITA, where the decrease was significant, and the comparable is not that big difference compared to the last year compared to the reported one, and those items that are affecting comparable are mainly coming from the ECL transformation. And as you can see, on this graph as well, it's good to remind everybody that the second half is always a very important one for the Living business. And in that respect, also showing the total group numbers.A few highlights, as always, what we've happening in the market, what are consumers seeing. And I'd like to highlight basically 3 categories here. So we are really exploring new alternatives. This time, we're working with kind of a workwear line on the Fiskars brand, how to make a difference in the garden workwear. So new alternatives for business. We also launched a new products. And this time, it's the Gerber. And the third one is also important obviously for us, we are increasing distribution. This time, it's new products in Australia.And so new ideas, new products to existing lines and new distribution. All 3 of them are important for our future growth and actions in all 3 of them are happening. This is now on the Functional side and similar type in Finland. For example, we have opened ECL store in Fiskars Village so new distribution. Waterford, Wedgwood, Royal Doulton brands have not been available in Finland before. So now they have a store in Fiskars Village.We're working with the product and consumer insight. Sustainability is important part of us, and we've done it different ways. You heard about the vintage that we do buy back and then sell reused, Arabia and Iittala. That is expanding. That's after Q2, but now in July, we have 10 stores. We used to have 3 and by the end of the year, it's all Iittala stores in Finland. And then we continue the expansion of that. And also then, we launched Raami glass that's made of recycled glass all the way. So things that are highly appreciated by the consumer. And then the e-commerce and China are both important ones for us, and we have had some successes on that side as well.We said in the Capital Market Day in November that we are going to focus on these priorities. We need to excite our consumers, and we do things with the consumer insight. We work with the sustainability, the category management, what are the things that will actually excite the consumers.Clearly, to be able to do that, we need to have to inspiring people, so we have lot of actions on that side as well. One of them is that in Q2, in June, we launched the really -- kind of rediscovered Fiskars Group values, so now we have 3 values covering the total company. We are creating change. We are celebrating the everyday, and we are growing with compassion. So that is internally a huge step and really a energy booster in the company.And then growing business, it mentioned 3 things here. Two of them I already mentioned earlier is the China and e-commerce, definitely focus areas for us. And we have small steps over -- let's say that the percentages look pretty good. The level is still low, but we can keep increasing and happy with the first steps in there.Services is a big thing for us, vintage is one of them. We have quite a few other ideas that we will be launching the coming quarters and years. And then we can't forget the core of the business. So that's the one that we've been talking about earlier as well. We need to grow with the brands that we have in the categories and the countries we have. But all of our brands have opportunities in new countries, new categories. And that's where the kind of the growing the core comes in, doing better and wider what we already do today.The last kind of before giving to Sari for details, I'd like to say a few words about the improving performance. The Living transformation program is obviously a big part of that. There are other things we are doing, we have a project of looking out on net working capital and generating cash for the future growth. And the third important one is kind of my favorite in many ways, maybe because of my background in sales. So we're also looking at our commercial capability and the ways to improve how to turn the consumer insight to something that excite our customers and gets then turned into sales.So those kind of things, we're working with all these 4 priorities. There's plenty of things behind them, but everybody really making the difference here, how to make the everyday extraordinary, which is the purpose of the company. But I'm sure you want to hear more about the details of the Q2 as well and not only my talk about the future. Sari?

[Sari Pohjonen, CFO & Deputy to the CEO]

Thank you. So let's indeed go and take a look at more of the details for the Q2, and we will start from Functional here.On a comparable basis, our net sales were actually fairly flattish with the previous year. We continue to increase our sales in Europe for the Functional products, which was already mentioned here earlier, that was mainly related to the Northern and Central European parts. We did have challenges in some countries like U.K. and Norway mentioned here. But other than that, I think we can be fairly pleased with the overall development there.Last year, in some of the quarterly reports, we were talking about that we were rationalizing our distribution network in the Central European markets. That has now been completed and partly, those results also explain the good development in the beginning of the year. For the Outdoor business, we also increased our sales, mainly coming from Europe. On a comparable basis, the U.S. development was fairly flattish for this quarter. In the Americas, as we have already mentioned, and you saw that in the materials we disclosed earlier this morning, the watering development remained low in the U.S. due to the weather. And it's obvious that if there's a major rainfall, you don't need the watering products. However, at the same time, it's good to know that our sales for the gardening products did increase even in the Americas.And as a result of all of these developments in the top line, our comparable EBITA decreased during the second quarter. The key reasons for that were the volumes in the U.S., and on the other hand, the tariff development is already starting to impact our results.Then if we take a look at Living. If I first start about Scandinavian Living, we continued to increase both the sales for that business and also the comparable EBITA for Scandinavian Living continued to increase. In terms of ECL, our sales were declining, and we can actually divide those into several buckets. Partly, there are still our own actions, which are impacting the situation. We have been talking about earlier, rationalizing the customer base. We continue, for instance, looking into the retail network optimization in the U.S. and Australia. Those are part of the Living transformation program. And we have been, as an example, closing outlets in the Americas. And that is clearly then impacting also the top line development.At the same time, on some of the markets, which are important for the ECL, mainly, I would refer to U.K. and Australia. In this case, the market conditions in general, have been pretty challenging, and we are not immune to those either. So those were some of the key areas.Also hospitality is mentioned here, that's more like a seasonal type of a business. The sales for hospitality can vary a lot from one quarter to the other. And just as a reminder, our customer base in the hospitality business is mainly airlines, restaurants, hotels, to some extent, Travel retail. So depending on the development on those customers, whether they are expanding their fleet or building new hotels or restaurants, it can heavily impact the seasonality of the business.I already mentioned that the comparable EBITA for Scandinavian Living increased during the quarter. But as the result for the ECL declined, as an overall, the comparable EBITA for the Living as a total decreased from the previous year. But good to remember, as was already mentioned before, and it's very well illustrated in the graphs here also the second half of the year is always the more, more important one for these businesses.This is a short reminder of the Living transformation program, which was launched in October last year. There are plenty of actions ongoing on that front. We have earlier on informed about some changes in Indonesia, Japan, Australia and in March, now in the U.K. Supply chain for ECL is part of the program, as we have talked about. More recently, we have, for instance, renewed our Living sales organization in the U.S. So there are plenty of things happening on many fronts. And as said, we will keep on accelerating this even. It doesn't, however, mean that the general time line nor the estimated total costs would be changing. We are still talking about a program that will continue for several years. And the estimates prevail on kind of the total cost level for the project.This is illustrating the comparable and also reported sales development for the geographic areas. In Europe, our comparable sales remained close to the last year's level, however, for the 6 months, we have been able to grow in Europe. That's good to know. At the same time, in the U.S. or the Americas, we were suffering from the watering volumes and the ECL development. Asia Pacific, as most of you remember, is mostly Living for us, and there, we also saw a decrease on the comparable sales. This is illustrating the EPS development. It -- for the quarter, it decreased a bit from the previous year's level. At the beginning of this year, as many other companies, we have implemented the IFRS 16, that is to some extent, changing some of the figures. And we have tried in this material to illustrate some of the changes, which are not coming from the operational actions but related to this more technical change.On the left-hand side, you can see the cash flow development. I tend to more pay attention to the year-to-date development. We have been able to improve operationally from the previous year if we exclude the IFRS 16 impact for the cash flow for operating activities for this quarter. For the second quarter, the operational development was pretty much in line with the previous year. Working capital development is here as well. The standard change has some impact on that one as well. At the same time, also the currency development is one explaining factor between the changes compared to the previous year.Here, you can see our net debt development as well as equity ratio and gearing and some additional explanations related, first of all, to the IFRS 16 changes as well as then the Wärtsilä dividend. So if those are kind of excluded from the figures, our net debt actually decreased from the previous year. But obviously, the IFRS 16 impact is illustrated there as well. If we are excluding IFRS 16 and the Wärtsilä dividend, our equity ratio increased from the previous year, and the net gearing decreased from the previous year if those 2 are excluded. But on this one, you can see both the reported and the comparable ones.Our outlook was updated in May as the U.S. tariffs will have an impact on the business and the result for this year. At the same time, I would also like to remind that what we have said earlier in the year, we are focusing on growth initiatives. And those will have an impact on this year as well. As an example, we definitely continue to investing in e-commerce. It's an important increasing channel for us now and even more so going forward and certainly, a focus area for us today, tomorrow and going forward. Our long-term financial targets are unchanged. So this is more a reminder for you all.And this is illustrating then the dividend trend. One reminder here, as we will no longer will be receiving the dividends from Wärtsilä, our base dividend has been accommodated to this already this year. And the final value of the Wärtsilä share dividend was EUR 5.31, as you can see from here.

[Kristian Tammela, Manager of Investor Relations]

Thank you, Jaana, Sari. And then we have time for some questions. We can start with the public here present. Just a moment.

[Petri Kajaani, Analyst]

It's Petri Kajaani from Inderes. Could you tell me what is the situation with U.S.-China tariffs at the moment? How did it affect your Q2 numbers? And what's the visibility for rest of the year?

[Jaana Maija-Liisa Tuominen]

[Foreign Language]

[Sari Pohjonen, CFO & Deputy to the CEO]

[Foreign Language]

[Jaana Maija-Liisa Tuominen]

So as you may remember, it was May 10 when it was announced and it went into effect immediately. So whatever left China after that had the higher tariff, which means that about half of Q2, we have been paying higher tariff. Our goal is to get that extra cost into our pricing. And that's what we said earlier as well, however, that doesn't happen overnight. So the discussion negotiations with the customers are ongoing, and our goal is to get there. It will take few months. So in Q2, we have cost but we don't have the income. That's the Q2 effect.

[Petri Kajaani, Analyst]

And the rest of the year?

[Jaana Maija-Liisa Tuominen]

The rest of the year, we expect that we will get at least some of the price increases in place. We may not be able to fully compensate for that. And that's why we also issued the guidance change as we don't really believe that there's enough time this year to get it done.

[Petri Kajaani, Analyst]

Okay. Could you describe the factors behind your 2 percentage point gross margin decrease?

[Jaana Maija-Liisa Tuominen]

And I leave it to Sari, who knows better.

[Sari Pohjonen, CFO & Deputy to the CEO]

Yes. That's mainly related to customer mix and product mix for the quarter. So those are the decisive factors behind it.

[Petri Kajaani, Analyst]

Okay. And what exactly is behind your 10% sales drop in Living segment? You mentioned these different factors, but how much is, sort of, your own retail restructuring or closing up shop? And how much is the other external factors?

[Sari Pohjonen, CFO & Deputy to the CEO]

Well, we haven't mentioned those details, but as I said, there are kind of several reasons. Obviously, Australia is a big retail market for us, but we have continued to optimize the retail network there at the same time, doing the same in the U.S. So clearly, those have had an impact on the development, especially during Q2 because the number of locations has been decreasing.At the same time, as I already mentioned earlier, the U.K. market generally is fairly soft. And everyone is, of course, trying to assess now what the potential impact of Brexit could be going forward. The consumer confidence is very, very low in the U.K. at the moment.So there are kind of reasons or actions that we have taken ourselves, then there are some market development changes, but also like Jaana mentioned, the kind of the commercial capabilities is becoming more and more important, even for us in all of the businesses where we operate.

[Petri Kajaani, Analyst]

Okay. And last question on your full year revenue guidance. You are now 3.3% behind on the comparable period. And what I remember, your Q4 last year was excellent. You're citing now tough market conditions, etc. How are you going to catch up the revenue guidance in H2?

[Sari Pohjonen, CFO & Deputy to the CEO]

The second half of the year is always so so important for us. So that is our view on the guidance that we expect to land at the same level as in the previous year.

[Petri Kajaani, Analyst]

Even though the tariffs will weigh you down a bit?

[Sari Pohjonen, CFO & Deputy to the CEO]

Even though.

[Jaana Maija-Liisa Tuominen]

It's got to be some more visible on the profitability...

[Sari Pohjonen, CFO & Deputy to the CEO]

Exactly.

[Jaana Maija-Liisa Tuominen]

Obviously, than the net sales so...

[Kristian Tammela, Manager of Investor Relations]

Any other questions from here? If not, then all the questions we have online are ones that we already have covered here. So thank you all for joining us, and have a great day.

[Jaana Maija-Liisa Tuominen]

Thank you.

[Sari Pohjonen, CFO & Deputy to the CEO]

Thank you.