Fiskars Oyj Abp

OMXH:FSKRS

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Fiskars' Quarter 4 2017 Webcast for Investors and Analysts. [Operator Instructions] I must advise you, the webcast is being recorded today, Wednesday, the 7th of February 2018. And I would now like to hand to your presenter, to Maija Taimi. Please go ahead, ma'am.

[Maija Taimi]

Thank you very much, and good day, ladies and gentlemen. Welcome to this Fiskars' analyst and investor call about our fourth quarter and full year 2017 financial results. My name is Maija Taimi. I'm Head of Corporate Communications at Fiskars. And with me here is our President and CEO, Jaana Tuominen; and CFO, Sari Pohjonen. We will start with an overview with Jaana and Sari and then continue with a Q&A session. We will be referring to the presentation on our website in the Investors section. And please note the disclaimer here on Slide 2, as we will be making forward-looking statements during the call. So now handing over to Jaana.

[Jaana Maija-Liisa Tuominen]

Thanks, Maija, and thank you for all of you for joining us. We have today, earlier in the morning, announced our financial statement for the fourth quarter and the full year of 2017. And here, you can see the key takeaways if you follow up on the slide. So we delivered on our guidance for the year and our net sales, excluding the net sales of business divested in 2016, and the comparable EBITA increase. The Functional business continued to improve, with financial performance both from the top line and in the profitability. Scandinavian Living exceeded our expectations throughout the year and was very consistently delivering and had a great year. The most notable challenges were related to the English & Crystal Living business, and that was also pretty consistent throughout the year. There were especially some trading challenges in the U.S. and Australia.Also, we started 2017 with the new structure as we shifted from a region-based organization to form 2 global strategic business units, Living and Functional. And that also included the change in forming a united or unified supply chain. I joined the company in October, and we also renewed the Fiskars Group leadership as well as the leadership structure in January this year after the reporting period ended. More about that in a while. And then if we go forward to the numbers. So the group performance during the year is visible on that slide. So the net sales decreased somewhat and amounted to EUR 1,185 million. However, the decrease is actually coming from divesting businesses and the exchanges in foreign exchange rates. If we look at the comparable net sales, it increased by 1.5%, which is really supported by the Functional business. Comparable EBITA, which means then excluding any items affecting comparability, increased clearly, I'm happy to say, 11% increase in the profitability of the company, so amounting to EUR 119 million during 2017. So I'm pleased with the improvement in the profitability, which is obviously a result of persistently executing the strategy, and we have been doing good work in growing our core brands and operating more efficiently. Also, if you look at the next number, cash flow from operating activities, both the financial items and taxes increased considerably and amounted to EUR 130 million. Earnings per share, the first number being EUR 2.04, which includes our net changes in the fair value of the investment portfolio, meaning pretty much our stake in Wärtsilä. And then if we look at only pure Fiskars business, that was EUR 0.81, which is a clear increase from a year ago. And then if I go further to Q4, so you can see here that comparable net sales stayed flat. So it doesn't really -- it didn't really quite live up to the comparison figures in 2016. However, as we said in the Q3 report already, that the performance in the fourth quarter of 2016 was where we troughed. The comparable net sales decreased a little bit, but the comparable EBITA decreased even more, so to say, 2%; and total EBITA, EUR 35 million. Cash flow, this increased. We had a good quarter, and it's mainly because of changes in working capital. We have been efficiently working with our working capital and gained some wins in there. Earnings per share, looking at the Fiskars only, it's EUR 0.21, which is kind of flattish compared to the year before, the strong year before the Q4. And then if I just go a little bit further over the numbers here, you can see the net sales and the comparable EBIT, which has developed during the last 5 quarters. And you can see the strong Q4 2016, and the year-over-year is pretty flat and a little bit decrease in the comparable EBITA.However, if we go to the next slide, we can see a little bit more of the net sales, what happened in the last quarter. And you can see that the real big difference came from the foreign exchange rate, and that is mainly the U.S. dollar which has a big impact on our top line. The Functional and Living, our core business was kind of flat in that Q4.And then going further again, forward again, was a little bit longer development, so you can see a longer perspective on our sales and gross profit. And that's definitely something positive that we want to share to all of you. And I'm sure you all know that we have changed quite significantly over the past year as we have both acquired and divested businesses and also developed as an integrated company. So we have been able to grow an average annual growth rate of 8% since 2009. Clearly, that includes also acquisitions. And you can see the major step between 2014 and '15.Maybe even more important, we have been able to improve the gross profit margin while growing, and that is obviously very important looking for the future as we need to invest in our brands and continue to have a good portfolio of iconic lifestyle brands.The increase in the profitability is coming from different areas, obviously. One big thing contributing to it is the reduction in the SKU number, which have been -- which we have been able to achieve by developing our core offering and focusing on the correct brands and products, what we have in the offering. So this is a slide that we have done before. You can see that the number of stock keeping units has decreased before. And then after a couple of bigger acquisitions in 2015, it increased again. And now, we've been able to continue the decreasing trend here. This is something that we will continue. It's not done yet. And the streamlining of the offering is continuing even in the future. And if I then move over, what do the consumers feel or what did they feel in Q4? Now specifically, in the Scandinavian Living business, we introduced the new series for tableware called Mainio that was introduced in the fourth quarter, and we started shipping early 2018 here in Finland. In Q4, we opened a new store, our own retail store, combining the brand Iittala and Rörstrand. This happened in Stockholm, very centrally located in the city, the new flagship store. So that's a new concept that's very important to us. And then we ended the year, as the tradition is for 19 years now, we have been part of the New Year's celebrations in Times Square, New York, and the Waterford brand is quite visible in the crystal ball counting down the year. So these were some of the highlights in Q4 in the Living.And then in the Functional, we were happy to be recognized for our products as we continue to receive awards. And for example, 11 of GOOD DESIGN awards came to Fiskars both in the garden and watering categories. In the Nordics, we also had a major marketing campaign in the cookware, Hard Face and Hard Face Steel portfolios. So that's kind of the Q4.And if I look at then what has happened since, we announced early this year that we renewed the Fiskars Group Leadership Team. We simplified the structure from 3 different forums to 1, and also changed some of the people that are participating now in the, what we call FGLT, the Fiskars Group Leadership Team. Additionally, today, we have announced that we have a new long-term incentive plan for the group leadership team and a few other key employees. So that will be a share-based incentive plan that's focused in the shareholder return, group EBITA and net sales. With this team, we are ready to build iconic lifestyle brands further and keep developing those to a degree that our consumers will find relevant and value-adding. So we are making progress in all of these areas. We need to have a clear assortment that has brand relevance, relevant for the consumers. We need to understand the consumer behavior and the shopping experience, and that way make sure that they turn to us when they need something in the Functional or Living categories. Internally, we need to make sure that we are inspiring and attractive workplace and also that we do things efficiently in a global common way. So it's really all about the consumers, how do we stay relevant and attract them to our offering. So I would now like to hand it to Sari, who takes you to more detail into the numbers of Q4 and 2017. Sari?

[Sari Pohjonen, CFO & Deputy to the CEO]

Thank you, Jaana. I'll go through the reporting segments, starting with the Living segment. As you can see from the figures here, net sales for the Living segment decreased year-on-year for the quarter. And also, the comparable net sales decreased by some 2%. Here, we need to remember that the comparative period Q4 in 2016 was exceptionally strong, as we have communicated earlier as an example in connection with the Q3 report.On a full year basis, the comparable net sales for Living remained flat, and this was partly related to discontinuing business with some customers, as we have communicated. [Audio Gap] were impacted by the decrease in English & Crystal Living as the trading challenges still continued in the U.S., especially related to the department stores. And also, the low consumer confidence affected generally holiday sales in the U.K. For Scandinavian Living, the net sales growth continued also during this quarter and were driven, as an example, by the Finland 100th year anniversary products, some successful Black Friday campaigns of several brands and generally by the growth of Iittala, Royal Copenhagen and Arabia brands. If we then take a look at the channel development, we increased sales in our own e-commerce channels for Living, which is a key strategic priority for us. And also, in terms of hospitality channel, we saw growth during that last quarter of the year. Hospitality customers are typically food and beverage type of customers, but we also have some airlines in our customer base. The comparable EBITA for the Living segment decreased from the previous year during the quarter. And as I already said, it's worth noting that the comparison period was very strong. The decrease was due to the English & Crystal Living business. On the other hand, the comparable EBITA for the Scandinavian Living continued to increase.On a full year basis for January-December, the comparable EBITA for the Living segment grew by 19%, which is also highlighted in the table here. Going forward and thinking about this year, our focus continues to be on revitalizing the positioning of the brand, especially for the ECL business, further rationalizing the product portfolio, as Jaana already described, the SKU, and efficiency is very important for us and one of our key KPIs. And also, we continue improving the operation of excellence and operational efficiency.The excellent performance of the Scandinavian Living has already been mentioned several times even during this call, and it's an example of the persistent improvement that we have made over the years. Now we are focusing our efforts on the ECL business, but driving results take some time. And then if we move on to SBU Functional. Generally, the fourth quarter, in terms of profitability, is a small one for the Functional business, however, we were able to improve the comparable EBITA also during this quarter. In terms of net sales, the segment, if you take a look at the reported figures, they decreased by nearly 3%, so the other had a comparable net sales increase by 2.4%. So here, we see impact of the exchange rate, which were described earlier. And also, we divested some businesses at the end -- around the end of 2016.The increase in the comparable sales, that was supported by some Black Friday campaigns, especially in EMEA area, as well as generally the growth for Functional Americas. And on an annual basis, the comparable sales for SBU Functional increased by more than 3%.Net sales were flat for the Outdoor business, mainly due to the challenges still prevailing in the sporting goods sector and a weak demand in the knife category, more or less the same message as we have also communicated during the previous quarters. And then if we move on to geographies. We report net sales in 3 geographical areas: Europe, Americas and Asia Pacific. Net sales in Europe continued to grow also during the fourth quarter and on a full year basis. But during this last quarter, we saw some decline in the Americas and also in the Asia Pacific.In Europe, the growth was mainly driven by Scandinavian Living and its success in many of the fee markets. In the Americas, net sales were impacted by the English & Crystal Living business and Outdoor businesses, as explained earlier. On the other hand, the Functional Americas business achieved growth also during the last quarter of the year. In Asia Pacific region, the comparable net sales were mainly impacted by the English & Crystal business. In Australia, we have also said, while it's driving the operating environment, in Australia, the consumer confidence has been low-ish towards the end of the year, and that impacted our business as well. However, if we look at the full year for January-December, we continued to grow also in the Asia Pacific region. And then moving on further to Other segment, which contains our investment portfolio, including the shares in Wärtsilä, our real estate operations, corporate headquarters and shared services. In a nutshell, no major events during this quarter in those businesses, but of course, the net change in the fair value of investment, namely Wärtsilä, is very visible in our profit and loss statement also for this quarter.Going forward, we will continue the reporting practice for the change in the fair value of the Wärtsilä holding. It will be recorded in other comprehensive income instead of income statement. And this is based on the new IFRS 9 standard, which will become effective starting beginning of this year. And therefore, going forward, the operational result of Fiskars will be more clearly visible in the P&L.Then a few words about the transformation processes and the 2 key programs that have been ongoing for quite some time. And in fact, from the older one, which is the supply chain 2017 program, which we announced towards the end of 2015, that program has now been completed, and the total cost remain below our initial estimate. However, we were able to reach the targeted cost savings and the majority of those already during 2017.And as for the alignment program, which was announced towards the end of 2016, for most part, this is now completed. Some minor tasks still remain and will be completed during this year, but the remaining costs are not expected to be material. Also, for this program, we have been able to achieve a targeted cost savings, and the majority of those are already included in the '17 numbers. And the overall cost of this program, like the other ones, they were somewhat below the initial estimate.I'm very pleased to note here that we have been able to reach the targeted cost savings of both programs and even at a somewhat faster pace than what's initially planned, at the same time, keeping the cost lower than initially estimated. And then on the next slide, we will have some of the key ratios for the quarter. Cash flow was already mentioned. That was very strong during the quarter, mainly related to good inventory management and the overall development of working capital, which is also visible on this slide. Net debt was more or less on the same level as the year earlier. And you can see that our CapEx development for the past 5 quarters, the CapEx spending has mainly been relating to facility expansion and also on efficiency investment. And then if we take a look at the key ratios. EPS, earnings per share, has already been mentioned. I would here rather focus on the operative earnings per share. Here, you can see the quarterly split. There was a slight decline in the last quarter compared to the previous year. But on a full year basis, we have been able to increase the earnings per share by 43%. And for equity ratio or net gearing, no major changes, as you can see from the slide. On the next page, or as a reminder, our long-term financial targets, which we announced approximately a year ago. And here, I would like to highlight or emphasize the fact that in terms of profitability, our target is to exceed the reported EBITA margin of 10%. In our interim report, we typically communicate about comparable EBITA, but this target is for the reported EBITA.And then in connection with the announcement today, we have also issued our outlook for 2018. We expect both the comparable net sales and comparable EBITA to increase from the previous year. And in terms of the sales figures, we are now guiding comparable net sales, which is excluding the impact of exchange rates and potential structural changes relating to acquisitions or divestments. And then a few words about the impact of U.S. tax reform, which has been, during the past weeks, discussed and even debated a little bit. The corporate income tax rate was reduced in the U.S. and will be effective this year. And we expect that the change will have a slightly positive impact on our net result from this year onwards. And related to the change, we have recorded a change in the deferred tax asset of EUR 4.4 million. That's visible in the financial statement for '17. However, there is no cash flow effect related to that. And then on this page, you can see our dividend proposal in line with the ambition to distribute a stable, over time increasing dividend. The Board of Directors proposed a dividend of total EUR 0.72 per share, so that it would be paid in 2 installments of EUR 0.36 each, one in March and then the second one in September.And on the next page, we can see that if the proposed dividend is accepted, it would continue the growth of our base dividend, which has been the case since 2009.

[Maija Taimi]

Thank you very much, Jaana and Sari. We are now ready for any questions you may have. So operator, please.

[Operator]

[Operator Instructions] Well, I have no telephone question request at the moment, ma'am.

[Maija Taimi]

We'll wait for a few seconds.

[Operator]

Yes, of course. [Operator Instructions]

[Maija Taimi]

If there are no questions from the audience, so handing back to Jaana for any final remarks.

[Operator]

Correct, ma'am, there are no questions from the telephone lines.

[Jaana Maija-Liisa Tuominen]

Okay, thank you. And obviously, that means that everything is crystal clear if there's no questions to be asked. If I may summarize, I'd just like -- oh, we do have a question, maybe? [indiscernible], I think there is something.

[Maija Taimi]

Yes, here is a question from [ indiscernible ], asking a comment on the outlook for geography going forward.

[Sari Pohjonen, CFO & Deputy to the CEO]

That is unfortunately something we have not commented on, so the outlook is for the total business of the group. And we don't unfortunately disclose any more detail on that one.

[Maija Taimi]

Thank you very much for the question and for Sari on the answer. There's no further questions at this time, so over to Jaana.

[Jaana Maija-Liisa Tuominen]

Sure. So Fiskars made -- has progressed in 2017, delivering on the guidance with comparable net sales and comparable EBITA growing, [ improved ] quite a lot in the business, even though nobody's perfect, that we still have some challenges. So we continue, even in 2018, to focus on driving the profitable growth. Gross margin will be an important KPI. And we will strengthen our capabilities to progress in all the markets where we operate. We do want to grow, and we are determined to grow our core businesses with the iconic lifestyle brands we have and by creating high-quality consumer experiences, staying relevant for the consumer with the brands and the way they want to get access to the brands.And with that, I think I just have to say thank you for your time and attention. Have a great day, and thanks for joining us.

[Operator]

Thank you very much indeed, ma'am, and with many thanks to all our speakers today. That does conclude the webcast. Thank you all for participating, and you may now disconnect. Speakers, please stay online for me.