Fiskars Oyj Abp

OMXH:FSKRS

Earnings Call Analysis

Fiskars Q2 2023: Resilience and Strategic Shifts

Fiskars faced a challenging Q2 2023, with global market headwinds, save for a robust performance in China with 50% growth. Consumer sentiment impacted volumes leading to a shift in the annual EBIT guidance to EUR 120-130 million. A strategic pivot towards direct-to-consumer channels is yielding results, with e-commerce climbing by 31% overall, and 15% excluding China. The company achieved an all-time high gross margin and a significant EUR 128 million improvement in free cash flow. Despite volume struggles, consistent investment in digital transformation and direct-to-consumer channels is positioning Fiskars for future strength. The commitment to Environmental, Social, and Governance (ESG) remains firm, exemplified by the introduction of an Inclusion Experience metric targeting top 10% global inclusion at 80%.

Guidance for 2023 EBIT Expectations

The company has projected an EBIT for 2023 in the range of EUR 120 million to EUR 130 million. This forward-looking statement is critical as it sets an expectation for profitability and will be a significant focus for investors tracking the company's performance throughout the year.

Significant Growth in China Amid Global Uncertainties

A standout achievement for the company in the second quarter was a 50% increase in sales from China, indicating a robust recovery and growth in this market. However, the global consumer sentiment remains weak, with China being the outlier. The assessment of market conditions, especially in regions where performance is strong, provides investors with insights into growth opportunities and potential risks.

Impact of Credit Losses

During the second quarter, the company experienced credit losses, contributing to a downturn in EBIT from EUR 14 million to EUR 3 million, a reduction of EUR 11 million. Although specific future expectations regarding credit losses have not been detailed, such financial setbacks highlight the importance of risk management and could influence investor confidence.

Gross Margin Levels and Sustainability

The company's gross margin has improved, targeting a sustainable level between 47-48%. Continuous improvements in this metric show operational efficiency and product pricing power, which are important factors for long-term investment considerations.

Inventory Management and Production Adjustments

There's an emphasis on normalizing inventories and careful ramping up of production to manage cash flow effectively. Recognizing the balance between inventory levels and production rates is vital as it impacts cash reserves and the company's ability to respond to market demands.

Earnings Call Transcript 2023-Q2

[Essi Lipponen, executive]

Hello, and welcome to Fiskars Q2 2023 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 after that, we will be happy to take any questions that you might have. You can type in your questions in the chat already during the presentation. Nathalie, please go ahead.

[Nathalie Ahlström, executive]

Thank you, Essi, and hi and welcome also from my side. It's a privilege to be here to talk about our first half and Q2.Going into the highlights of Q2, it's a challenging market we are operating in. We see that globally in all the markets we are operating in, except China. At the same time, we also now want to bring forward a few of our highlights that we have in Q2 that despite us being challenged on the volumes due to the consumer sentiment, we see that we are future-proofing the company, we are making the company stronger, so that when the economy comes back, when the macroeconomic sentiment comes back, we are stronger than ever.A few highlights. When we focus on something, we deliver, and that's truly true in Q2 for cash flow, not only for Q2, but for the first half. Also, gross margin improved, and that's such a strong profit engine when the volumes come back. Gross margin now in Q2 are the highest ever. It's all-time high gross margin for us as a company.And then direct to consumer. Our strategic focus on direct to consumer is paying off. We are seeing we are transforming the company, we are transforming the channels we are playing in, and that is supporting us.And then to the guidance. Due to the weaker outlook for the second half, due to the weaker macroeconomic, we lowered our guidance earlier in the month, in 5th of July, to be in the range of EUR 120 million to EUR 130 million EBIT.But let's go to the details. When we look at the top line and the net sales, as said, volumes are challenged. We see that across the globe, where we are operating in. The volumes came down, mainly due to Terra, and mainly in U.S., Europe.Gross margin, on the other hand, as said, was all-time high in Q2 now. And also when we look back, we've been increasing gross margin quarter-by-quarter, year-by-year. So this is really how we are driving and enhancing the performance of Fiskars Group. So gross margin all-time high.And then, as I said, our free cash flow in first half, EUR 128 million improvement, which is quite an achievement, and a lot of focused actions to deliver it, behind. At the same time, we can't be happy with the EBIT, where we are with the EBIT that is so related to the volume development.Looking then into the business areas, how did they look like? Vita, it's really the sales that came down. Vita sales came down, and what we have to be specific about Vita is that it's in the wholesale. It's in the wholesale where we see that traffic is down and the consumer sentiment.On the other hand, when we look at our own e-comm, our own stores, also our own stores, they are growing -- they are growing a lot. Our own e-comm as a group is growing 30%. Our own stores are also growing very well. So the challenge we're having with Vita is in the wholesale part. It's not only e-comm and our own stores that's growing, it's also our luxury brand Wedgwood that's growing significantly in Q2, and China continues to deliver.EBIT is not where we want to be for Vita. Vita is a strong business for us and has been delivering a lot in the last quarters. And now EBIT came down. It's a result of 3 things. One is the volume decline. In addition, there are 2 temporary things that are not going to roll over in the future. The temporary things are when we've adjusted capacity at our production facilities, the inefficiencies we've created in the production facilities. That's a trade-off we did to deliver cash.And secondly, we have credit losses in the U.S. that hit the gross margin. Going forward, with a laser focus on channel strategy, having the channel right assortment and also enhancing the brands will get the gross margin back on track in Vita, where it belongs.Then Terra, this is where clearly the top line drop came. And it's all about the lower shipments. Big box players, retailers, being mindful of their own inventories, being very careful in taking new inventories. And here we saw the 20% drop in top line.Our Terra team at the same time were very good at mitigating this impact. Our gross margin in Terra came up. And also, we were able to have OpEx efficiency. So despite volumes down, healthy gross margin, OpEx efficiency, we could maintain the EBIT margin at a good level.Then the star of the quarter, Crea. Crea, all-time high Q2. In addition, it's the second best quarter ever in the history of Crea. So fantastic work by our Crea team and the whole Fiskars brand. And despite the volume drop in Crea, what drew the success is, again, gross margin and OpEx efficiency. The team was very good on the gross margin and OpEx efficiency throughout the quarter.So you see, there's a common thread in all my narrative here. It's about focus on commercial excellence, focus on enhancing the gross margin to future-proof the company when the volumes are coming back.Looking at our strategy, and this is a strategy, we are so focused on, our growth strategy. It also helps us navigate in these challenging conditions. Also, where are we investing? And despite the challenges in macroeconomics, we continue to invest also in Q2. Continue to invest in digital, in the digital transformation, where we see the outcome in how e-comm is growing. And also continue to invest in direct-to-consumer, not only e-comm, but also owned stores.And this is so important when it's a challenging time that we are then seeing, are we transforming the company? Are we delivering on the things we are saying we are going to deliver on our strategy? That's bringing Fiskars Group to a new level.And looking at this, looking at the transformation levers, we see gross margin. This is about the power of the brand. This is about the power of the brand, what we are doing with the channel right assortments, and also ensuring we are in the right places. Also exiting a few places. And here we see the gross margin growing 340 basis points. As said, it's the best gross margin ever in Fiskars Group.Then direct-to-consumer growing in totality 8% and now being 22% of the whole company. So this transformation from wholesale to direct-to-consumer is working. Our e-commerce, as I said, is growing 31%. If we exclude China from this figure, still our e-commerce is growing 15%. So it's not only China. It's across the globe, across all our brands, we see e-comm growing. The challenge we are having, as we've said, many quarters already is in the U.S., especially due to Terra shipments.And then finally, China. China continues to deliver, thanks to our local, very strong team, 50% growth in Q2. And if we look at first half in totality, 30% growth. So very strong continued success in China driven by e-comm and Wedgwood, especially a few campaigns to enhance brand awareness in China.So we're focused on a growth strategy of our transformation levers, 3 out of 4 are delivering. But it's not only on the transformation levers we are focused on our strategy, also ESG. Sustainability is at the heart of what we are doing. And it's so important.And here also, we are happy to see that on all the metrics, we are going forward. All are improving. Our share of net sales coming from circular products, which is so important for biodiversity, yet again increased. The same with emissions and also what our suppliers look like.I'm very proud to show here that we've now added a new KPI Inclusion. Inclusion Experience. These talks about, how all our colleagues in Fiskars Group feel? Do they feel part of the company? Do they feel included? Do they feel they can be themselves? We're today at 72% in our metric. But we want to be the best. We want to be among the top companies in the world, in the top quartile, and top 10%, actually not quartile, top 10% in the world. And that means that our target is at 80%. So Inclusion Experience, very proud to have that now also as an ESG target.A few other highlights from the quarter. We're also changing how we operate as one team. We're creating an ownership culture. We want everybody to feel, this is my company. I'm doing my best, because I'm the owner of the company. We launched MyFiskars, our employee share savings plan, earlier in the year.We had the enrollment -- the first ever enrollment in our 374-year history in June. And I'm very happy to say that 13% of our employees globally signed up. The share in offices is much, much higher. And what is also good to see is that our big countries, Finland, U.S., U.K., and so on, they all had a very high sign-up. So we're creating an ownership culture in the company.In addition, we have some concrete building blocks, helping us as we go forward into the second half. Moomin Arabia entered home with bedroom and bathroom textiles. This is a clear building block for the future.Then, talking about our purpose, where we say, we're all about pioneering design. We're all about doing the -- going the extra mile, doing new daring things being creative. And we're happy to show here that with Wedgwood, we'll launch a new creative vision. We have -- as you see here on the picture, we have Web3 things on Wedgwood. And in addition, a collab with Charles Jeffrey LOVERBOY. This is the first of many collabs to come.And finally, Fiskars LAB. Fiskars LAB is coming soon. You'll see that on our fiskars.com. This is a place where we are going to show the latest innovation, the latest creativity by our fantastic team in R&D and design. These are going to be just to show the power of the brand, how far we can stretch Fiskars. And that's going to be available on the Fiskars LAB on our own e-comm page.That brings me to the guidance for the last -- for 2023, and also for the second half. As you know, we came out with a new guidance the 5th of July. And here, we are saying that we expect the EBIT to be in the range of EUR 120 million to EUR 130 million. This is to reflect the sentiment we see for second half, the consumer sentiment that we are seeing for second half that continues to be volatile.At the same time, we continue to invest in our key strategic building blocks, especially digital and direct-to-consumer.On the positive side, we see that the savings from the targeted organizational changes announced they are bringing value -- they are bringing benefits in the second half. For the second half, our focus remains and is focused on profit, getting top-line growth and cash. And of course, I've mentioned gross margins so many times, that's a huge driver for the future success in the second half and the quarters to come.Well, with that, I hand over to Jussi.

[Jussi Siitonen, executive]

Thank you, Nathalie, and hello, everyone. So a couple of slides about our financials. Let's start first with the top-line. So this is mainly a summary of what Nathalie already mentioned. So we came down 12.7% in currency neutral terms there. The biggest drop we had was in Terra, minus 20%. Then also Crea minus 6%, -- sorry, Vita minus 6%, and then Crea minus 8%.If we go through by regions there, it's very broad-based in Europe. So Europe down 12%. All our big countries in Europe, they were down either high single-digit or double-digit numbers. So only with the exception of a few smaller countries there, all the countries came down in Europe.In Americas, which is mainly USA, we were down 15%. And when the Terra business is 50% U.S. business, you can see a close a correlation there between Terra and Americas.Then APAC, including Asia here was flattish, small growth there. That growth came only from China. China was up this 50% in Q2, and practically all the other countries were offsetting this strong growth, what we had in China.Then more on EBIT, going through the EBIT bridge here. So like-for-like basis, our EBIT came down EUR 9.1 million versus last year's Q4. Out of this EUR 9.1 million, Vita made more than EUR 10 million. And then we have improvement there in Crea, whilst Terra, I would say, was quite flattish here.More interestingly, where the big changes came, so as already mentioned a couple of times, this is very much a volume game, what we had in Q2. So, drop in volumes, what we had, we were not able to fully mitigate with our gross margin improvement or OpEx savings, what we have in place.But still, you can see that when the sales volume took down our EBIT quite significantly, more than half of that volume drop impact, we were able to mitigate with gross margin improvement. Crea and Terra, they improved their gross margins. Vita came down due to those reasons already mentioned. But still, the good thing is that even in this kind of volume drop, when we are able to continue improving our gross margin, we have [ margin ] in place. So once we get the volumes back, we expect to see a very significant leverage there on EBIT.On sales expenses here, sales expenses increased, mid-single-digit million there. Half of this sales expense increase is the bad debts, what we had in the U.S. That's hitting in Vita business or Vita EBIT there. The savings programs we announced earlier this year in January, where we are expecting roughly EUR 15 million savings for full year this year, mainly in the second half. In the first half, in the second quarter, the plans are proceeding as planned. We had already a couple of millions of those savings in our Q2 results.Then on cash flow, you might remember that when we started the year, we were talking about cash and profit in that particular order. And then on cash flow, as Nathalie mentioned already, we had a strong Q2 cash flow here. So Q2 cash flow increased significantly driven by those actions we had put in place. We have adjusted our supply volumes, so that our own manufacturing volumes are down roughly 40%, sourcing volumes down roughly 60%. So as an average, we were 50% down with our volumes there. And of course, we can see that in our inventory levels.So Q2 cash flow EUR 42 million, EUR 45 million up versus last year. And the first half, EUR 55 million, EUR 128 million better than the same period last year.On trade working capital, which is the main driver for our cash flow improvement here, we succeeded to cut our trade working capital by EUR 23 million versus year-end. And that was driven by Terra inventories.Now we are back to the level where we used to be some 15 months ago before this current change in consumer sentiment and change in retail sentiment started. So we are gradually getting back to the levels where we should get to our trade working capital in future.Inventories were down EUR 53 million. And whilst we have succeeded to implement a lot of good actions there when it comes to trade payables, due to the fact that we have so low volumes, all those actions are not yet visible there in our trade payables improvement.On our net debt, net debt decreased in Q2, but we are still about a year-end level due to increased lease liabilities. We had some lease liabilities renewal in our distribution centers in the USA, and that explains the hike there in lease liabilities versus the year-end.Net debt EBITDA is 1 of our 4 key financial metrics. It's now slightly above 2x to 2.08 to be precise. And we are still well below our maximum target of 2.5.On balance sheet overall, so even though it's not our official metrics what we are following externally, we are very keen on our return on capital employed. Now due to the fact that volumes are coming so rapidly down, and even though actions we have put in place to reduce our capital employed here, we came down both in capital turnover and comparable EBIT margin here. So therefore our return on capital employed declined to 11.3%. The good thing, however, is that now, thanks to very strong first half cash flow here, we got our cash conversion back on black numbers. It's not yet at targeted level, but it's rapidly improving.As a summary of our financial targets here, the 4 targets we have set for the company. So organic growth there for the last 12 months, we are down 6.3%. On EBIT, the target being there at 15% level by end of 2025, we are at 10.3%. Cash flow, as I already mentioned, improving, not yet at the targeted level, but clearly improving. And then on balance sheet, we are well below our long-term EBITDA targets.That's very shortly about our financials. Giving back to you, Nathalie.

[Nathalie Ahlström, executive]

Thank you, Jussi. And then just recapping it and the highlights. Yes. Yes, it's a challenging environment, and we are navigating through this. At the same time, we are strategically focused, and we want to future-proof the company and transform the company.First half Q2, very much focused on cash flow. And we did 2 steps up in cash flow. What we are proud of is our gross margin, all-time high. This talks about the power of the brand. It talks about future-proofing the company, and also a positive profit engine when the volumes recover.So gross margin, in addition, our direct-to-consumer continues to outperform other channels, which again talks about the attraction and the passion consumers have for our brands. So we are transforming the company. Then to the medium-term, short-term, second half, with our guidance, we are targeting EUR 120 million to EUR 130 million EBIT for the whole year in the current market environment where we are today.That's the highlights of Fiskars Group now in Q2. Thank you.

[Essi Lipponen, executive]

Thank you, Nathalie and Jussi. And we already have questions here in the chat. Let's start with a positive one. A highlight in the second quarter was the China sales. So the question is, China sales were up 50%. Was there any fluctuations in growth during Q2? And what was the exit rate?

[Nathalie Ahlström, executive]

China, in Q1, we had a bit lower due to COVID that we had in Q1. Coming back then to Q2, it was high throughout Q2. And that's where we are seeing it. Then overall, I think this was also the comparison period to last year when they had COVID. So, overall, like last year and like Q1, that is a kind of level where we see our China business continuing.

[Essi Lipponen, executive]

Yes. Then Jussi, if you take this one, how big credit losses were in Q2? And are you expecting more in H2?

[Jussi Siitonen, executive]

Yes. As I mentioned, that was very Vita-specific, what we had from the U.S. market, when the total sales expenses were up roughly EUR 4 million. Out of this EUR 4 million, roughly half was relating to these bad debts that we had.

[Essi Lipponen, executive]

Yes. And then a follow-up on that. If Jussi, can you break down the magnitude of the impacts hitting Vita, EBIT, volume, credit losses, production downtime?

[Jussi Siitonen, executive]

Yes. So, what we saw there when EBIT came down from this EUR 14 million to EUR 3 million, i.e. roughly this EUR 11 million, EUR 2 million, give or take, was these credit losses that we had. Then the rest was very much gross margin driven. We had some savings there also on OpEx side, but they were offset by these negatives.

[Essi Lipponen, executive]

Maybe continuing on the Vita topic, just a moment, I'll read the question. If Nathalie, you take this one. Given your action to streamline production costs and higher share of Vita in H2, is it fair to assume further improvement in gross margin in H2 versus H1?

[Nathalie Ahlström, executive]

What we have done with our strategy, we were focusing on the winning brands, the winning channels, the winning countries. What we are doing a lot now, and that's already visible in the first half, is we are ensuring we are in the right channels. That means that we've also walked away from a few channels that are not the right for our brands going forward. So that's, of course, also impacting the volumes.Coming to the question about the gross margins, these actions to have the right channels, have the channel right assortment, have also moving to direct-to-consumer, that's all there to enhance going forward. So, yes, that's very much about our strategy.

[Essi Lipponen, executive]

And a similar question about the gross margin. Is the new higher gross margin level a new normal for the coming quarters and years, or was there something extraordinary in this quarter?

[Nathalie Ahlström, executive]

This quarter was actually just a result of consistent work since we launched the growth strategy, since 2 years. This is what we've been working for. And also you've seen that every quarter we are improving the gross margin. So this is our focus.

[Jussi Siitonen, executive]

On that one, I would refer our Capital Markets Day in 2021 March, -- sorry, November, when we set the targeted P&L structure for the company, saying that a sustainable gross margin level should be there, range of 47-48. And the building blocks are the ones that we have in place now. So yes, we believe that we are heading towards sustainable level of gross profit, or gross margin.

[Essi Lipponen, executive]

And Jussi, how big negative impact lower volumes had on gross margins?

[Jussi Siitonen, executive]

Yes. When we came down from volumes and then offset by gross margin, this volume -- negative impact from volumes was very much in Vita. So the factories, what we had down, how much we cut sourcing there, they were very much hitting Vita. And if we take the whole improvement what we had in gross margin there, mainly coming from price increases, partially offset by those negatives, but we are talking about, let's say, low-to-mid-single digit millions, which were negative volume impact on gross profit. And repeating, it was mainly in Vita.

[Essi Lipponen, executive]

Yes. Thanks. Maybe then looking towards H2 a bit more. Nathalie, inventories have been normalizing. When are you ramping up production?

[Nathalie Ahlström, executive]

We are very careful with production and also ensuring we manage cash going forward. Yes, we are focused on profit and top line, but cash will continue to be very important for us. So we're going to ensure that our inventories are right for the future demand.

[Essi Lipponen, executive]

Yes. And another inventory related question. Now that the Terra high season is over, will we still be talking about retail customer destocking in H2, or is that now over? What would you say, Nathalie?

[Nathalie Ahlström, executive]

When we look at the second half, as you said earlier, it's very much a Vita -- Vita Q4 that we are looking at. And then as we come closer to Christmas, it's about when do the Terra customers replenish ahead of the season. I think it's too early to say, but of course we see that all the big boxes have also taken their inventories down. But I have difficulties to say, what's the new normal for them, how low do they have the inventories. Now, with the different financial market also.

[Essi Lipponen, executive]

Then, Nathalie, a question related to the profit warning that we gave in the beginning of July. You said that in the recent full year guidance that the H2 outlook has weakened. Please tell more about the drivers for that.

[Nathalie Ahlström, executive]

Yes, exactly. So when we came out early in the year, we knew and we saw that first half was going to be challenged. At that time, we still thought, hoped, saw, also in customer discussions that second half would be a bit of recovery. Now, that we are not seeing anymore, we are seeing that consumer sentiment is weak across the globe, except China. So that's the reason behind the second half.

[Essi Lipponen, executive]

Yes. At the moment, we have one question left. So if you still have questions, please just send them through the chat. But for now, the final question is, Nathalie, how much visibility do you have on the H2 EBIT? Could you recap the key elements for the guidance to be achieved?

[Nathalie Ahlström, executive]

Yes. For the second half, of course, we have visibility at the best of our ability with the guidance of EUR 120 million to EUR 130 million. And that's best based on the forecast we are having from every brand, every country, every channel, with the current outlook we are having at the moment. When we look at it, there's all the transformation levers we are talking about. They continue to deliver. What is not in our own hands is the consumer sentiment, meaning Vita volumes.At the same time, a few highlights. I mentioned the Moomin Arabia textiles and bed linen earlier. They are true building blocks also that are going to drive top-line growth in the second half.

[Essi Lipponen, executive]

Yes. And yes, we have one extra question. Jussi, this one is for you. Financing costs increased clearly. Was there something unusual in Q2?

[Jussi Siitonen, executive]

No, nothing unusual. You need to remember last year, we delivered minus EUR 100 million free cash flow. And of course, we had to fund it now due to the fact that interest rates has increased. And then we have a bit more levered balance sheet versus what we had a year ago. These are the 2 reasons.

[Essi Lipponen, executive]

Yes. At the moment, we don't have any questions. Just waiting a couple of seconds, if anything pops up. Yes, one more. Jussi, what is a good tax rate to assume for H2?

[Jussi Siitonen, executive]

Yes. We are in the range of 22%-24% for our effective tax rate there for the full year. And that can be used also for the second half. So 22%-24% range.

[Essi Lipponen, executive]

Yes. It seems that, there are no more questions. But if you have any after the webcast, please just contact me. Thank you, and have a nice day.