Harvia Oyj

OMXH:HARVIA

Earnings Call Transcript 2023-Q1

[Tapio Pajuharju, executive]

Hello, and welcome on board on Harvia Q1 reporting. My name is Tapio Pajuharju, I'm the CEO; and next to me, we have Ari Vesterinen, our CFO.

[Ari Vesterinen, executive]

Hello. Hello.

[Tapio Pajuharju, executive]

So first of all, I think like the headline says, strong profitability in a mixed and rather challenging environment. So it's a good performance and also figures are following that so. But I will have a bit of a deeper dive on the actions and numbers behind the reporting. .

First of all, I think it's good to remember that Q1 of '22 was the all-time high. So we are fighting against the very high figures from the prior year. And I think prevailing for this season was that the markets were not the same. And I think, all in all, the European softness continues, especially on the German marketplace, but also spreading to the DACH region in general.

Then the other pendulum is that on the North America, both on the U.S. and Canada, strong performance continues. And then new sauna markets and opening Asia has a good solid performance and solid growth in that respect.

Then going back to the Central European marketplace and even on the DACH region, even though our numbers are soft, still, we've been gaining share. And globally, Harvia has been gaining share in all of the markets and in all of the categories.

Sauna room sales supported by the North American performance. And then I think a bit unusual that the wood burning heaters continue to stay strong. I think underlying fact is that people like alternative energy sources and that's boosting the wood-burning heater sales.

On the other hand, wood burning heater sales is very good. It's also adding value and always when buying wood-burning heater, you need to buy all the accessories on top of that. So usually, the value of the sale is rather good on that one.

Russia exit completed last year for us on the November 7 and for Harvia already at the end of February, March last year, and those numbers are now fully out, and unfortunately, has a negative impact both on the top line as well as on the profitability.

All in all, profitability, strong and solid and only an inch below all-time high quarter of last year and exceeding our 20% benchmark quite, quite nicely. What has been done has been very good on the, what I call, actions from the pricing, tactical actions on the pricing, cost structure, rightsizing of the operations and then I think on top of that, good moves on the sourcing on top of that. So that's backing up a solid profitability altogether.

Cash flow, rather strong and good. We've been driving down the inventories. Now we are getting closer to normal. And I think one cannot expect to have more than 100% cash conversion going forward. On the other hand, historically, Harvia has been on the 80% to 90% level, and I think that's very sustainable in that respect.

On our CapEx, I think we continue on the moderate investment level. We've been estimating that this year would be between EUR 4 million and EUR 5 million. And I think that's a rather valid estimate going forward. Like we see that the Central Europe will continue being a bit soft for this year. We've been enhancing our actions and operations elsewhere.

One example is the Japan, where we just signed a letter of intent, and I will have a bit more to share on this one. Then on the newer markets, especially on the opening Asia and some of the new emerging sauna markets, we've been activating our game plan. And then on the premium and professional marketplace, we see solid development, and we've been increasing our bets on that.

Even though when Europe is a bit soft, the global sauna awareness continues to go up. And I think the healing with the heat is still very, very good and bang on, on the current trend. So we are benefiting from that one long time from now on. So it's a good choice in that respect.

Then to the actual numbers, and I think this most likely you have already seen earlier in the morning, soft compared to last year, but still exceeding EUR 40 million. And then on the operating profit, even though the absolute number is down, the relative is rather nice compared to the all-time high volume quarter of last year.

And then on the earnings per share, EUR 0.34 compared to the EUR 0.50 down, but like I said, on the relative terms, good performance. And then on the cash flow exceeding EUR 11 million compared to prior year, EUR 7 million is a good result.

Net debt, 45.8 and the leverage, 1.1x. And you may remember that our guidance is between 1.5x and 2.5x, so we're slightly below, which gives us room for maneuvering if and when needed in that respect.

Then now on our 3 paths for strategic profitable growth. We've been increasing the value in multiple ways. Sauna room sales has been growing quite nicely outside of Europe and especially North America and some of the Asian markets and newer markets.

And then I think the higher end, especially on the emerging sauna markets is performing better than anywhere else. And then when we look at our actions on the new product development and launches on the Q1 for Harvia as well as for EOS and including our almost saunas in the U.S., we have a good handful of novelty launches attracting customers in the premium segment as well as on the professional segment.

Geographical expansion, I think we've been improving our foothold and print on the markets in general, but especially in North America, we've been beefing up the game on the national game and then spreading to Canada to Japan, where I think a long time ago, we didn't have any approvals below 10 kilowatts.

Now we have 4 units where we can sell those on the Japanese market. And the incumbent market leader only has 2. So actually, our portfolio is already exceeded. On the productivity improvement, and I think we've been doing very good tactical work on the pricing. Cost base has been reduced and optimized capacity has been adjusted to the current market conditions.

Then you may remember that we invested quite a bit on the '21 exceeding almost EUR 11 million, that's not going in wane. We get all the benefits on the productivity. Now streamlining and the layouts on the factories are bringing in incremental profitability going forward.

Net working capital, I think we'll be working on the raw materials and componentry, lately also a bit on the ready-made goods and that's becoming now visible in the cash flow or net working capital development. So it's a good job done from the team.

And then on top of the good operations in our Lewisburg factory, the whole Northern American team has done a good job both on the sauna sales as well as on the equipment sales and now we see the first signs of the EOS equipment on the American marketplace and I think we remain optimistic on the development in the North Americas.

Then a bit more on the Japan. Like you have heard, we signed a letter of intent. And I think during this spring, we will finalize the contracts and then start the operation during the summer in Japan. We already have a very good network of showrooms exceeding 20 and I think we are ahead of the plan in that respect.

And I think it's a very realistic target to have over 40 showrooms in given timeframe. On top of that, our offering is more versatile. Currently, we have good offering on the entry level to the premium level for the consumer marketplace as well as a good offering for the professional market. And then we've been teaming up with a [ TT&E ] in a way, the household name for the professional spa's and saunas in Japan. And I think the ambition longer-term ambition is to find a solid, good growing business, which potentially could replace the volumes and the magnitude of our Russian business in the past.

So that's our aim on the Japanese marketplace. Then on the geographical split, and I think first have a look on the pie on the left, domestic share continues to be high. And the ones should be longer on board may remember but the domestic marketplace should be on the global sauna market, roughly 10%. So we are overrepresented in Finland.

On the other hand, we have a very dominant market share here. Then the Americas continued growing the Germany is really impacted by the Russian innovation to Ukraine, inflation, energy prices and all of that, that's now extremely visible.

And then on the other countries, now we've been combining everything on that one, even Russia is now included on that one. And it's good to remember that the Russian impact is roughly EUR 2.3 million on the first quarter. And the full year impact last year was about EUR 7.5 million and on '21, a bit more than EUR 10 million, so that type of a hit we have taken.

Then on the pie on the right-hand side, now we've been combining on the pie chart with the red figure that's now combining the heaters, heating elements, including infrared as well as the control units. So they are now all in the same bundle and it's rather logical because especially outside of Finland, usually people buy the heaters with the control units. So they now belong into the same category.

And then all the rest is rather self-evident. Then having a look on the market areas and starting first from our domestic marketplace Finland, 17% looks really tough. It's been really tough for the Kirami Scandinavian hot tubs, they'd be really heard badly.

Heather sales and sauna sales clearly more modest, and I think we've been gaining share on the domestic marketplace on the heater and sauna sales. Scandinavia, a bit about the same phenomenon, Kirami hot tubs, not well performing. And I think that's rather logical where people have a bit of a challenge how to have the financing for the mortgage and maybe still have decided to travel, then they need to cut on something and apparently, they've been cutting on this type of things.

But all in all, Sweden Hariva has been gaining share or Norway good performance, Denmark, the same and Iceland, we've been entering the professional channel quite nicely.

Then we'll end on the Germanic marketplace. And unfortunately, the market continues to be soft. We've been experiencing softness in the entry level and on the web store channel that has been unfortunately continuing. And on top of that, it's been spreading bit on the sauna builders and even initial things on the premium and professional marketplace. And I think we foresee for some time Germany to be a bit soft.

But I think it's a big sauna market. And I think during the time, it will start recovering the question. When that's something we keep eye on, and we are ready to act when the indicators of softness are disappearing. Other European markets, mixed bag. We have some of the southern hemisphere doing rather well.

The closer to the Alpine region we are, the softer the market tend to be. North America continues being solid growth and solid performance, both on the sauna category as well as on the heaters. And then on the other countries looks a bit odd and that's the Russian impact of EUR 2.3 million.

And on top of that, a bit of a timing of our -- some of our projects in the Arabian marketplace. But all in all, other countries doing rather solid and good performance. Then having a look on the product groups and categories, heating equipment, taking a quite strong hit mainly because of Germany and DACH.

And now when we have the control units, control units part of this group and when the Germany and DACH is taking down the control in [indiscernible], would tend to be rather good, but really a big hit on the Scandinavia hot tubs and European sauna business for Germany taking a hit.

Steam generators following the trend in Central Europe, accessories, even though it's a mixed picture rather solid in some markets, but some markets really soft, heat the stones, and I think that tells a bit about the sentiment of the marketplace. They've been doing rather well.

So I think people have been postponing a bit about the replacement and maybe replacing but I think it will come back and bounce back quite nicely.

Then on the quarters, and I think this is something which I will not spend a long time, but it's good to remember that the quarters are not the same. During the time before pandemic, it was always so that Q1 was a strong one, and the Q4 was a strong one. And in between summer time was a bit softer.

During the pandemic and after the pandemic was disappear, we're still pushing a fairly high order stock in front of us, and that made the quarters rather steady in that respect. And I think going forward, we anticipate to have a bit more seasonality into the game.

Even though we are more global in our operation, the seasonality will remain roughly at this as it used to be, in that respect. And the same applies on the profitability on the right-hand side. So we expect to have a big seasonality on both on the top line as well as on the bottom line.

Then I think just a reminder that we are in all of the 3 sauna types. Harvia has a very strong good game in the Scandinavian sauna emerging inroads into the inferred, but I think when we know what is happening in the inferred marketplace, we have a lot of appetite to make it grow faster and even looking for opportunities for acquisition on that respect.

And then on the steam sauna market, this is the first time Harvia has also a self-standing unit for the consumer marketplace. But I think going forward, as also potentially appetite for professional steam generators on the global perspective.

So we continue focusing on all of the 3 sauna types and understanding that there is a lot of opportunity on the inferred and on the steam saunas.

Then on the path of profitable growth and our strategy, I think we stay very loyal for our chosen path, increasing the value of the average purchase. And even though we've been doing a good job on that one, we still have a lot of leeway to improve our game on that one.

Geographical expansion. I think newer sauna markets are opening basically on a monthly or quarterly basis, and Harvia has decided to participate strongly on opening the new markets. And I think our offering has proven to be extremely successful also on the emerging newer markets.

And then on the productivity improvement, the game plan is rather solid. And we also have the means to continue that on a very sustainable way going forward. Then I will pass the word for Ari, and Ari will have a deeper dive on the financials, please.

[Ari Vesterinen, executive]

Yes. Thanks. Okay. This presentation side compares the quarter 1, with quarter 1 year ago. And as Tapio already mentioned, quarter 1 in 2022 was really, really record high -- the historically highest quarter what we have had. So the comparison shows that we were now behind the sales volumes, 18.6% and the adjusted operating profit a little more.

But where we are actually quite proud of is the relative profitability what we were able to improve actually compared to Q4.

For instance, if you compare these Q1 figures with the last Q4 figures, we have been improving there the margins and the general overall EBIT level of profitability. The operating free cash flow has been really very good, and we will maintain also in future strong cash flow and also it leads to a strong cash position and lower net debt.

Our leverage was now 1.1. And end of last year, it was 1.3. So there is really room to maneuver. Net working capital has been going down slightly, especially the inventories, but also the other components and this trend is planned to continue. Those 2 percentages, adjusted return on capital employed and equity ratio, they happen to be exactly the same, but they are totally different matters I just checked it and -- the contents of this.

And actually, this adjusted return of capital employed is capital without the historical goodwill what we have invested and that changes quite much based on the balance sheet and equity situation, what the company has but anyhow, the profitability in terms of return on capital and in absolute terms has been very good also during Q1.

As you may notice, the number of employees is actually quite much lower than a year ago, over 200 employees less than a year ago. And in fact, we have also reduced the headcount slightly compared to Q4 last year, but we haven't had so much restructuring costs related to that in Q1. So it actually helped also the normal accounting EBIT profitability level of the company, which was actually increased almost 5 percentage points compared to Q4.

The operating cash free -- operating free cash flow and cash conversion, okay, they follow each other. This shows that our cash conversion has been really 2 quarters or 100% of the EBITDA. This can continue, but it will be on a high level also in future.

The net debt has peaked in Q3 of '22, then we acquired the remaining minority of EOS in Germany. And now we have been reducing the net debt based on the strong cash flow what the company has. And the net financial items, the cash-based financing costs are the dotted line. They have been, of course, increasing due to the increased market interest rate increases, but we have covered the interest cost quite well with fixed swaps.

So half of our bank loans have been actually covered to fixed cost, and that reduces the level of the cash-based interest costs. And the net financial items as they are calculating in IFRS changed based on the valuation of the swap contracts. So it's better actually in the spreadsheets and forecast to follow the dotted line.

The investments we had quite on a quite low level during Q1, they were just more like replacing the tools and improving the automatization and similar things. We will increase the level of investments slightly towards the end of the year, but this was a quite peaceful quarter in this respect. The structure of the shareholders, we have actually now got more international shareholders again compared to Q4 or compared to last year.

We had 41.7% nominal registered outside Finland shareholders, and households have also invested more in Harvia than a year ago. The only part of the investors or segment, which has reduced its commitment of the banks and insurance companies. And as we see from the right side of the slide, we had end of March, about 45,000 shareholders, that is less than end of last year, but that's about 2,000 shareholders more than what we had end of March '22.

And the management and the Board are major shareholders also in the company. And nicely, the value of the company has increased compared to the end of the last year. We haven't changed in the long-term financial targets, anything the growth we -- our target is to exceed 5% and the profitability to exceed the 20% adjusted operating profit, and we succeeded in that also during Q1 quite well.

It might happen in some quarters that we will get slightly under that. But on the annual level, we internally consider that as a floor, we want to be always over 20% in the operating profit margin. And the leverage is -- the target is between 1.5x to 2.5x, and now we were at 1.1x.

And the dividend policy is the same as almost now 2 years, we have regularly increasing dividends and twice payout in the year. And now the Annual General Meeting was held on the 20 April, and it approved the Board of Directors proposal that EUR 0.64 per share will be paid as dividends during this year. And the first EUR 0.32 per share were already paid on last Tuesday. So -- and the rest will be paid out in -- at the end of October. By the way, this dividend is EUR 0.04 more than a year ago.

Okay. Harvia will get the new CEO, probably you could comment on this part?

[Tapio Pajuharju, executive]

Yes. I think that's already in the news, and I had the pleasure to have a good interaction with Matias, and I'm very happy that he's joining the team and was able to join a month earlier than initially planned. And I think he's already onboarding and will be a very, very good asset and an excellent leader for the company. So very happy for Matias joining the team.

[Ari Vesterinen, executive]

Okay. Now it's time for questions. We have also incoming line, telephone line, are there any people to ask any questions there?

[Operator]

There are no questions from the teleconference lines.

[Ari Vesterinen, executive]

Okay. Then we will take the questions from the chat line. Okay. Business-related question regarding the demand slump in the DACH region, do you view this is a temporary thing, which is just taking a longer time to resolve or do you think something has fundamentally changed in the DACH sauna market?

[Tapio Pajuharju, executive]

I think it's a temporary issue, first of all, and it's been ignited by the Russian invasion, having an impact on the energy prices. And now the energy price is already normalizing, but the inflation is still there and people are rather conservative in spending apparently we are on the discretionary category as well.

But I anticipate sauna market to be strong in Germany. Historically, it's been a big sauna market, also very high value and high end market. So I think it will come back. The question is when, and that we will monitor very closely when it's bouncing back.

[Ari Vesterinen, executive]

Very good quarter again in Northern America. Have EOS products given the material impact in North America's performance or are you still ramping up EOS sales there?

[Tapio Pajuharju, executive]

Defining material, I would say, no. We have had the initial shipments, and they are now visible for the southern part of California and maybe even as we now speak, there is a team in the North America was last week, I don't know, but we are expanding the distribution over there, but not materially yet, very small inroads.

And it's good to remember that in our line of business, the new launches don't come in with the big volume, but they are gradually and systematically growing up. And I think that's what we are going to see with the EOS in the North America as well.

[Ari Vesterinen, executive]

Did the uncertainty related to the banking crisis in March influenced the demand in Q1?

[Tapio Pajuharju, executive]

Directly, maybe not. Indirectly, I would say, maybe a bit in all of the markets as the banking crisis has hit the housing market, maybe the renovation and when you see the numbers from the do-it-yourself building retailers. Yes, it's been impacting. Has it been impacting a lot? I think sauna category has been not the strongest one on that one.

[Ari Vesterinen, executive]

Did you see Q1 orders being postponed in Q2 because of the March uncertainty?

[Tapio Pajuharju, executive]

Not really. No.

[Ari Vesterinen, executive]

Now that the demand decline in -- sauna and spa market has lasted more than more or less than a year. Other sellers in the M&A market becoming more willing to sell?

[Tapio Pajuharju, executive]

I think it's a psychological issue. And when they see that the markets are becoming softer and has been a valuation of the company has gone down. But I think on our short list of the strategic potential candidates time will tell how it will continue.

But I think logic will tell that that's roughly what is going to happen and when they're going to meet, that's something that we were for Ari, Matias decide when the timing is right.

[Ari Vesterinen, executive]

Your gross margin has been around 61.5% in Q1 and Q4, which is quite high when comparing to the history, that's after the material costs, neglecting the labor costs why just that. Do you see that as a sustainable level going forward?

[Tapio Pajuharju, executive]

I think in general, the answer is yes. It's also a bit depending on the product mix and on the market mix as well. but I think in a bigger picture that's sustainable.

[Ari Vesterinen, executive]

How does outlook for Germany look this year? Is the Q1 sales level representative for the coming quarters as well?

[Tapio Pajuharju, executive]

I think what we now see from Germany, it's not been a short temporary hiccup, it's a bit of a longer term thing. I think it will continue roughly on the level it has been. The question is when it's starting to bounce back? And then I think when it's bouncing back, the inventory levels are low, everyone is ready for that respect, that we are ready as well. So in that respect, let's see when it's coming back.

[Ari Vesterinen, executive]

Historically, the German sauna market improves always in October/November when you think of the seasonality. But okay, this is now a special situation due to the war in Ukraine and inflation and so forth. Raw material cost development. Did you already benefited from the lower raw material costs in Q1?

[Tapio Pajuharju, executive]

Not in big way. I think still steel is roughly flat, somewhat down some of the grades. Electronics still a bit up. Wooden material, timber, they tend to be going down. Longer term, I think there is some small opportunity for improvement on the profitability based on the materials.

[Ari Vesterinen, executive]

Okay. Then a question for Tapio. This is coming from the chat.

[Tapio Pajuharju, executive]

So it's not from you [indiscernible]. Ari will make a prank on me.

[Ari Vesterinen, executive]

This is your last webcast as Harvia CEO. Can you compare the Harvia you started the journey with to the Harvia you are leaving? What kind of company are you now leaving behind you? And last, thank you for the work you have done and all the best for the future.

[Tapio Pajuharju, executive]

Thank you. Thank you for the kind words. First of all, it's a team effort, and we started a hit the company becoming a sauna company, becoming a spa company, extending to the healing with the heat. So it's a rather different company, and I started on the Board on the 2014 it's more global, more versatile in the offering has 2 global brands and a couple of regional brands and became a market leader in the small sauna and spa market, so leaving a good company.

[Ari Vesterinen, executive]

Okay. My personal question. What will you miss the most when you have left Harvia?

[Tapio Pajuharju, executive]

Apart from Ari, I will miss everyone at Harvia.

[Ari Vesterinen, executive]

Thank you very much. Thank you everybody.

[Tapio Pajuharju, executive]

Thank you.