Harvia Oyj

OMXH:HARVIA

Earnings Call Analysis

Harvia Sees Growth and Strengthened Profitability in Q4 2023

Harvia resumed growth in Q4 2023 with a revenue increase of 3.4%, reaching EUR 39.4 million, despite a previous six-quarter decline. North America's robust performance contributed to this growth, covering over 60% of overall revenue, alongside a strong showing in North Europe, despite tough market conditions. Harvia focused on cost-efficient operations, reflected by a 24.2% adjusted operating profit of the revenue and ongoing optimization to remain productive and innovative. The company unveiled a strategic new organization model to spur future M&A activity and is excited about Jennifer Thayer's appointment to lead the North American region, leveraging her expertise from Lowe's Home Improvement. Harvia's financial health is evident with an impressive equity ratio of 51% and reduced net debt, signaling readiness for industry consolidation. Despite global uncertainties like geopolitical tensions, which might affect input costs and transportation, Harvia's stable operations and adaptations in response to channel shifts and market conditions highlight its resilience and proactive strategy.

Back to Growth with North American and APAC Momentum

After a challenging period with six consecutive quarters of declining sales, the company has seen a reversal of fortunes, particularly in the fourth quarter, with a revenue increase of 3.4% year-over-year, aided by a notable performance in North America and growth in the Asia Pacific region. While the Central European market exhibited renewed strength, Northern Europe, including Finland and Scandinavia, continue to face tough market conditions.

Strengthened Profitability and Solid Financial Position

Despite a full-year revenue decrease of approximately 13%, the fourth quarter showed robust signs of recovery and profitability, with adjusted operating profits soaring to 24.2% of revenue. The company ended the year with strong operating free cash flow and a low net debt to equity ratio, positioning them well for future industry consolidation and investments.

A Focus on Premiumization and Geographical Diversification

The strategy is to extract more value from each sauna sold worldwide, which has been successful in North America, a region that favors complete sauna solutions over individual components. Central Europe has seen an uptick in demand for higher-priced products, with innovations providing consumers compelling reasons to invest in premium equipment. Geographical expansion, particularly in North America and key Asia Pacific markets, remains a cornerstone of the growth strategy, as evidenced by the joint venture in Japan and plans to introduce new models faster.

Dividend Policy and Financial Targets Maintained

The company continues to adhere to its long-standing financial goals, including a growth target of over 5% annually, an adjusted operating margin exceeding 20%, and leverage between 1.5 to 2.5. Regarding shareholder returns, the company's dividend policy remains consistent, with the board proposing a dividend of EUR 0.68 per share, reaffirming their commitment to regular and increasing dividends.

Investment in North America and R&D for Future Growth

A key highlight is the considerable growth in North America, which now demands a capacity expansion to support this momentum. The commitment to innovation, especially in digital solutions, aligns with their ambition to remain at the forefront of the market and to develop cost-effective advancements in sauna technology.

Navigating Market Shifts and Leveraging Demographic Trends

Changes in retail strategies by partners like Kesko in Sweden have resulted in short-term sales impacts. However, the company is well-prepared to harness the potential in different demographic segments. Notably, there has been an emergence of younger sauna enthusiasts in overseas markets such as the U.S. and Japan, which bodes well for cultivating a sustainable sauna culture in these regions.

Optimism from New Leadership

The CEO, eight months into the role, expresses a strong belief in the company's bright future and significant opportunities for innovation within the health and wellness sector. There is also an emphasis on improving operational efficiency to strengthen Harvia's solid business foundation further.

Earnings Call Transcript 2023-Q4

[Matias Jarnefelt, executive]

Hello, everyone, and welcome to Harvia's January to December 2023 earnings webcast. My name is Matias Jarnefelt, I'm the CEO of Harvia. And with me, I have Ari Vesterinen. He is the Chief Financial Officer of Harvia.

[Ari Vesterinen, executive]

Hello.

[Matias Jarnefelt, executive]

I will first cover the key developments during the year, focusing mostly on quarter 4, then Ari will be covering the numbers in more detail. And after the presentation, we would be happy to take your questions.

Let me first summarize the developments, especially during the quarter 4. In quarter 4, we returned back to growth after 6 consecutive quarters of sales decline. Our revenue increased by 3.4%. We still had some impact from our exit from the Russian market during 2023 -- 2022, and organic growth was 5.2%.

This return to growth was driven very much by excellent performance in North America that has continued and also strong growth in Asia Pacific. In terms of Europe, we also saw some change in the dynamics as Central Europe was stronger than it has been in the past. In Finland and Scandinavia, so Northern Europe, we felt very tough market conditions still during the quarter 4.

Profitability and cash flow remained on a very strong level. Quarter 4 adjusted operating profit was strong at 24.2% of our revenue, and this profitability was supported by many means. One is the revenue growth. The other was our success in managing pricing. Also, we have been working on our supply chain and sourcing as well as overall cost competitiveness of our operations.

Cash flow continued to be on a very good level. This was supported by further reduction of inventory levels. We have also worked very much on our future growth potential. We continue to see biggest growth opportunities in the coming years outside Europe, especially in North America and Asia Pacific. Of course, we also see opportunities in Europe, that being an important market for us. Still roughly 60% of our revenue comes from Europe. We're also focused on utilizing all opportunities we see in our home continent.

We are also raising the ambition level for delivering exciting innovation to the market, and we have implemented a new organization model, which has become effective since the beginning of the year, which we believe will support customer orientation. Strong organic growth provides a good platform for further M&A activity and helps us drive more productivity out of the organization.

Quarter 4. As discussed, revenue turned back to growth, increased by 3.4% to EUR 39.4 million compared to the last quarter of 2022. At comparable exchange rates, revenue increase would have been 5.2%. This was impacted by mainly U.S. dollar and euro exchange rate developments, and organic revenue growth in the quarter was 5.2%. Here, we still had roughly EUR 900,000 impact from our exit from Russia.

Operating profit was EUR 9.2 million, rather significantly more than the year before, making up 23.4% of our revenue. Adjusted operating profit was EUR 9.5 million, which is 24.2% of our revenue. Earnings per share at EUR 0.39, up from EUR 0.22 a year ago. Strong operating free cash flow at EUR 15.5 million. Net debt at EUR 37.6 million, which means that our leverage was 0.9. This obviously is below our long-term targets of 1.5 to 2.5. Here, we are preparing for further consolidation in our industry. Equity ratio was 51%.

Looking then at the full year. While in quarter 4, our revenue increased, for the full year, revenues still decreased. It decreased by roughly 13% to EUR 150 million compared to the last year. When we look at the dynamics within the year, we can see that our first half of the year was still tough, and we had quarters of roughly minus 20% sales decline. Quarter 3 started to ease, and then quarter 4 as discussed, has turned to growth.

Adjusted operating profit at EUR 33.7 million, which is 22.4% of the revenue. At comparable exchange rates, the adjusted operating profit was EUR 34.4 million, which is 22.6% of the revenue. Full year earnings per share, EUR 1.25, down from EUR 1.45 last year. Operating free cash flow increased from last year at EUR 44.6 million. Net debt, we discussed, and equity ratio as well.

We have been focusing on executing the key pillars of our strategy throughout the year. One of the key pillars is increasing the value of the average purchase. We want to get more money out of each sauna built in the world. And overall, our strong performance in North America supported this, since in North America, majority of our business is selling full solutions, sauna cabin, sauna rooms as opposed to selling just equipment like the heater.

In Central Europe, we have been successful in driving demand to higher price point products, and here, a key focus area for us continues to be innovation. We want to give good reasons for consumers and professional customers to invest in better equipment. Also, the geographical expansion that continued, especially outside Europe, continued to support the value of average purchase as in many emerging markets where sauna penetration is still lower than, for example, in North Europe, typically, the consumers and customers invest in higher-priced products.

Geographical expansion is a cornerstone of our strategy. While Europe continues to be a very strong -- a very important part of our business, we are investing heavily in driving growth in what we call the overseas markets, which means markets outside Europe. In particular, we are investing in North America and key countries in Asia Pacific.

As part of this strategy, we have been further taking forward our Harvia Japan Limited joint venture with our partner, and the legal company is existing, and we are ramping up its operations. We are also improving and shortening the lead times to introduce new models to key overseas markets. In particular, North America is very much in the heart of our future R&D work, where we hope to bring even quicker, exciting innovation to that market.

Productivity improvement. We work on the overall profitability through actions in sourcing, in pricing, and operations as a whole. As you could see in the numbers, also very prudent management of inventory levels, while of course, balancing this against good service levels towards customers and availability. Part of our productivity improvement is that we have been optimizing our structure, and I will be covering that a little bit more in detail in the coming slides.

Looking at the revenue split by reported area. First of all, as you can see, Europe still is the biggest continent in our business, roughly 60% of our revenue, and roughly 40% is coming from outside Europe. The biggest reported region is North America at 31%, and that's up from 25% a year ago. The rest of the overseas markets were at 7%, and here, we could see overall growth in many important markets for us, for example, in Asia, but this has been flat due to our exit from Russia, which is still in the base figures here.

In terms of revenue by product group, equipment business, which is the red one, 55%, continued to be largest product group segment, but we are seeing gradual increase in the solution sales, which is represented by the blue part of the pie, and that's the sauna solutions sales.

Looking at the full year, the picture is largely the same. U.S. and North America, the biggest reported area, as discussed. Here, we could see a slightly more decline in the overseas markets outside the U.S. that was 7% versus 10% last year, and this is really driven by our exit from Russia, which was in the base figures from 2023.

Here, you can see the changes in terms of absolute euros and also percentages. You can see that quarter 4, we had a very strong momentum in North America with 28% growth. We could also see better dynamics in other European countries and Germany. So Germany had seen very significant drops in the past quarters, was now close to flat at minus 1.5%, and then the rest of the Continental Europe grew by nearly 7%.

In Finland and Scandinavia, we clearly felt the headwind in the market. That is mainly driven by, in Finland, consumer confidence, inflation, construction market. And while roughly 80% of our sales in Finland is replacement sales, the 20% is still coming from new build, and new build has been very much challenged in Finland.

In Scandinavia, mainly Sweden, we also faced challenges. Also there the construction market is soft, and in addition to that, we saw changes in the channel. Some key partners of ours have changed their retail strategy and those changes in the retail network have had a short-term impact in our numbers there.

And here is a full year picture. We can see that the only blue region that is North America, which grew by 20%, and everywhere else, we still had decline, and full year result at EUR 150 million. This is the split by product group for quarter 4. Here, we can see quite a lot of blue. So heating equipment, the core business grew. Also the solutions business, which is saunas and Scandinavian hot tubs grew. Steam generators declined. Accessories and heater stones increased, and then spare parts and services declined. Here, mainly the decline was driven by our exit from Russia, because in Russia, we had actually meaningful-sized service business before we exited the market.

And this is then the picture for the full year. Of course, because of the top line decline, we could see that impacting broadly our product groups as well. But where we can see impact of North America, in particular, is that the solutions business, which is saunas and Scandinavian hot tubs, decreased less than the traditional equipment business. Again, spare parts and services is heavily impacted by our exit from Russia.

Now here you can see our revenue and operating profit development over past few years. Essentially, if you look at the revenue on the gray bars, you can see that during 2020, the sales grew towards the end part of the year. This was very much driven by kind of the home improvement boom that was driven by the COVID pandemic. Sales remained on a very high level during 2021. So that's the light blue. And then in 2022, the dark blue, you can see that the chart start to head downwards.

And then for this year, you can see that in the early part of the year, still the comparison to the previous year is quite significant decline, then quarter 3 less decline. And then quarter 4, as you can see, we are growing. Also, I would draw your attention to the shaping of the past year, so 2023, where you can see actually a very traditional pattern in our business where quarter 1 and quarter 4 are typically our highest quarters, whereas what we would call the summer quarters, quarter 2 and quarter 3, are somewhat lower.

In terms of adjusted operating profit, I would like to draw your attention to quarter 4. At EUR 9.5 million, we were actually not so far away from our even '22 and 2021 figures. In terms of our strategy, our ambition is to be the global leader for sauna and spa markets. This means that we want to lead all key sauna categories, which is traditional sauna, steam sauna, and infrared. And key part of this is also our geographical investments. As we can see that in Europe, traditional sauna still is the dominant technology or sauna type, where especially when we go to North America and Asia, then infrared and steam are now growing in importance.

And we are focused on driving our strategy. I discussed already kind of what we've done during the past year. But the key thing for us in terms of increasing the average purchase value is innovation so that there's better reasons to invest in better equipment, driving system sales.

So for example, for our wood burning heater does not only sell the heater, but also the chimney connection kits, the wall and floor protection panels, safety rails, et cetera. And the most important part of our strategy here is driving solutions sales. So ready solutions, easy to buy solutions for consumers and also commercial customers. Geographical expansion will continue to be very much in our focus as well productivity improvement. Next, Ari will be covering the financials in more detail.

[Ari Vesterinen, executive]

Yes. Okay. That's our main spreadsheet of the financials. You have seen already the revenue growth. What is probably most important here is the improvement of the adjusted operating profit. It's actually quite good in money, 20% compared to only 3% net sales increase in Q4. And if you compare the real accounting EBIT or adjusted operating profit from last year, it's even much more clearer.

Last year, in '22, we had some restructuring costs still in Q4, laying off people and having some other restructuring projects. Now we didn't have that additional cost so much. So we've been also able to improve the profitability in accounting terms, not only in adjusted levels. And the basic earnings per share, they have been increasing even nicer. We have been able to optimize a little our cost structure in taxes in '23, and that helps also to increase the earnings per share after the good EBIT level.

Operating free cash flow has stayed very good, actually improved about EUR 10 million compared to EUR 22 million for the whole year. The fact is that we adjust our costs and net working capital quite much, actually, according to the seasonality and also the business situation. And currently -- or in 2023, in Q4 and during the whole year, we didn't need as much inventories as during the COVID year. So we were able to reduce the inventories, and that was the biggest factor to reduce also the networking capital. And thus, we had also very strong operating free cash flow.

Our level of investments was also rather low. Net debt has been reduced very heavily, about EUR 17 million during the year, and the leverage is, again, quite low. So we have actually plenty of [indiscernible], so to say, or money to invest, make acquisitions or pay dividends. The equity ratio is actually already rather high for the listed company, 51%. And we have had quite stable situation in the number -- full time equivalent number of employees during the year. We haven't had so quick and big changes in '23 in the head count as we had in '22.

Here, we see how the operating free cash flow and cash conversion developed over the year. Usually, we have a very strong cash conversion during Q4 seasonal reasons. But generally speaking, of course, the cash conversion can't be over 100% over a long time. It means that we have been reducing the net working capital and getting more money in than what we actually earn through EBITDA. So we have been also adjusting the cash situation in relation to the business situation quite heavily.

On the left side of this slide, you see how the net debt has been going down quite rapidly and also the leverage slightly. We had, end of '23, about EUR 40.6 million on our accounts. A year ago, it was EUR 25 million. The net financial items, the cash effect of interests paid and other financial costs is in the dotted line. It has been quite steady during the whole year '23 after the EOS acquisition in '22. But what changes is the accounting financial result. It's dependent on the fair valuation of our swap contracts, but the real money, what we pay out, is in the dotted line.

2023 was a year during which we made more investments just to replace or improve our effectiveness in different companies. We had also small ESG-related investments. And we will continue on this way, and we have plenty of capacity in our heater factories in U.S. We have been also planning probably something new there.

The Harvia shareholder structure in -- at the end of '23, we had actually about 5% of the shares more in international hands than year ago. And at the same time, the Finnish households reduced about 5% of the shares. And thus, we see on the right side of this picture, how the amount of the shareholders declined slightly, but we have a really, really big number of shareholders, over 41,000 still. The management and personnel as well as Board members are also active shareholders.

Our long-term financial targets are the same already quite a long time. We have a growth target over 5% annually. The profitability, the adjusted operating profit margin exceeding 20%, which we did again quite clearly, and the leverage between 1.5 to 2.5. We've been quite a long time actually under that leverage level, but if we make a substantial acquisition also, we are quite easily between that range. Harvia's dividend policy stays the same as already quite a while. We pay regularly increasing dividends, and we pay the dividends twice a year. Probably you say something about it.

[Matias Jarnefelt, executive]

So I discussed on first of January this year, our new organizational structure became effective. And essentially, what it is, we have essentially integrated the company somewhat more compared to the past. We have made several acquisitions since the IPO of Harvia in 2018, also, kind of the size of the business has grown and we thought it was a good time now to optimize the way we are organized to support our future growth.

We have 4 so-called market regions, North Europe, Continental Europe, North America and Asia Pacific, Middle East and Africa. And here, the idea is that each of these market regions are responsible for the whole customer base that is in that geographical region and are responsible for driving the full portfolio of Harvia's product and solutions offering in that market. They also will represent the voice of the customers more strongly in our research and development and portfolio decisions.

We also have 5 so-called group functions: marketing and brands, products and solutions, innovation technology, operations and support functions. Here, the idea is that we -- at the same time as we want to be very much customer-focused, we also want to deliver synergies and efficiencies, deploy best practices across the company. Also, for example, if we take digital as a key area of innovation and for the future, we want to make sure that all of our market regions and product areas can benefit from the investments that we are making and will be making in the area.

Now as part of our brand strategy, EOS will play an important role as our superior brand, kind of really targeting kind of the most luxurious saunas, both in private and commercial use. And to support the building of that brand, we also have the brand director directly in the management team of the group. As said, this organizational structure has now been effective since first of January.

We were also very happy to announce some few days ago a key recruitment. We have appointed Jennifer Thayer to lead very much strategically important North Americas region. She brings great experience for us. She was nearly 20 years working for Lowe's Home Improvement. It's one of the world's largest home improvement retailers.

And Jennifer was, for example, responsible for Lowe's Florida business, and also, she was responsible for Lowe's North Carolina business. And North Carolina is the state where Lowe's corporate headquarters is. And essentially, she was responsible for multibillion businesses with over 20,000 employees. And we are very happy that she chose to join us, and we are looking forward to working together with Jennifer and the management team to continue to drive strategic growth in North America.

[Ari Vesterinen, executive]

Okay. And since Harvia is a successful company, and having its dividend policy to increase the dividends regularly, so the Board of Directors proposed this to the Annual General Meeting that the company distributed a dividend of EUR 0.68 per share, EUR 12.7 million in total dividends for the financial period of '23. And the proposal will be also that the dividends will be paid in 2 installments, EUR 0.34 beginning of May and EUR 0.34 second half of October. Last year, we had this dividend payout, EUR 0.64 per share.

[Matias Jarnefelt, executive]

Very good. So that was the presentation, and now we will be very glad to take your questions. And you can submit your questions through the text box that you can see in front of your screen.

[Ari Vesterinen, executive]

We have already here some questions. So probably you answer, I ask and I can add if there's an area for me.

How do you see the M&A market at the moment? Are you still evaluating different options? What kind of process do you have when you look at the different options?

[Matias Jarnefelt, executive]

Yes. Overall, we see the M&A market very interesting and something we really need to pay close attention to. It is clear that the kind of sauna and spa market is an attractive market because of the fundamental growth drivers for the long term.

Market is also fairly fragmented still, so our assumption is that in the coming years, there will be significant kind of number of acquisitions taking place. And of course, from our point of view, we want to be part of that action and be active consolidators, essentially, to make sure that over time, we are, for sure, one of the winners in the long term also in this business.

We are looking at a number of different types of opportunities. One, of course, supporting our growth in the overseas markets, that is outside Europe. So looking at, for example, what are the opportunities for us to strengthen our footprint in North America as well as Asia.

Our business generally is still delivered very much towards the so-called traditional saunas, Scandinavian or Finnish sauna, and we are relatively weaker in infrared and steam in terms of our market presence, so those are, of course, also areas where we are looking at opportunities to accelerate our plans through acquisitions.

On the other hand, we also see that in our home markets, many of our traditional competitors have had, I would say, a fairly rough time to the past few years when the European market has been, I would say, under the weather. And that also provides us some opportunities, mainly, I would say, from a tactical point of view, where when the price is right, we are interested in discussing.

We have a very systematic process. Essentially, we have identified a number of strategic segments that we follow, as I explained, and we have long lists, short lists and I would say, active dialogues all the time with various companies and stakeholders in the industry to make sure that we know what's going on and can take action when it's appropriate.

[Ari Vesterinen, executive]

There is more precise question also about that. Do you expect to come back to the M&A market during '24? So will there happen something during '24? Probably we can't answer that.

[Matias Jarnefelt, executive]

Yes. Of course, it depends on many, many things. There's -- one, of course, is the fit of a potential target company to our strategy and our business. Another one is, of course, kind of the willingness of the current owners to sell.

There's, of course, always discussions about kind of matching the price for appropriate win-win for both seller and buyer. It's hard to say exactly when these moves would happen, but rest assured that we are actively in discussions on a continuous basis.

[Ari Vesterinen, executive]

How do you see property market in Germany and Austria this year?

[Matias Jarnefelt, executive]

I'm not sure whether I'm the best person to comment on that, but overall, what we see is kind of -- when we look at our business, what we see as the key driver for the stabilization that you can also see in the numbers is that actually our general partners in Central Europe have actually seen over quarters, I would say, even reasonably okay sellout. Their problem mainly was that they had too high inventories from the peak periods of the COVID times.

Now that they have seen 2 things, one is that sellout seems to be going reasonably well, and they have been able to turn the previously too-high inventories into cash, now they have the money and they have the willingness to return their purchases towards us. So that has been mainly the driver for our performance in quarter 4 in that region.

[Ari Vesterinen, executive]

Yes. We are actually not so much dependent on the property market in our main areas. The biggest driver or indicator for the sales success is more consumer confidence and people staying at home and preparing their houses and so forth. About -- we have, at least in the past, estimated that about 80%, for instance, of our heater sales on the more mature markets are replacement sales, so that's not including the new building and property. But of course, when people are moving, then they repair also the house and sauna.

Sales development was better than expected, especially in Germany. Can you please describe the trend you see in Germany and whether you believe this is now a turning point of demand?

[Matias Jarnefelt, executive]

I think I answered this largely in the previous question. So essentially, what we saw in Germany is the combination of sellout and also healthier levels of inventory. And kind of when we look at, for example, German figures from the past quarters, we could see really drastic drops there.

And much of it really was driven by this inventory reduction activity in response to lower sellout, but what we see now is -- and also is coming through from the discussions when we discuss with our channel partners that they have been actually reasonably pleased with the sellout and again, have the cash as inventory has been sold.

[Ari Vesterinen, executive]

Germany will certainly bounce back one day, but we never know when.

How much of the growth in EBIT margin was due to the mix or higher share of sales in North America? Can you also more in deep talk about sales across brands in North America, brands like Almost Heaven Saunas, Harvia and EOS?

[Matias Jarnefelt, executive]

Well, roughly speaking, when we look at our Northern American market, the solutions sales, the brand is Almost Heaven Saunas, and equipment sales, the brand is Harvia. Very little sales in EOS in North America at the moment. Of course, we want to turn that also and see a lot of opportunities for the higher-end offering for EOS, but that's the status quo.

There has been certainly effect on the geographical and margin mix or product mix in North America. Now we are performing very well. The general rule that we have is that the kind of Finnish and kind of Scandinavian markets is more price-driven. Here, the market is every man's market where there's a lot of DIY. Also families with lower income levels want to have sauna and enjoy it, but that also means the typical customers on average are more price-conscious here.

And when we go then to the further away in markets like the U.S. or for example, Asia, where we can see that the customer profile typically tends to have a higher income level and there's willingness to invest in, I would say, better solutions, premium equipment and that's, of course, something that supports our business and margin structure.

[Ari Vesterinen, executive]

How much do you have production capacity left on your production plans? Will you still cut workforce?

[Matias Jarnefelt, executive]

Well, actually, as you can see, that the employee number has remained largely stable during past year. And it has been more like a fine-tuning to optimize the structure to the current business and the trends.

In the pandemic's time during 2021, there was significant investment in capacity, and we see largely that from the machinery and a facility point of view, we do have the capacity to grow even quite significantly. And then we adjust more with kind of the working hours and amount of working staff in the factory floors. Now maybe the only exception is that given our very strong performance in North America, we do see investment needs to expand our capacity there.

[Ari Vesterinen, executive]

Will the new organization, with the increased efforts to drive growth, have a meaningful impact on your fixed costs?

[Matias Jarnefelt, executive]

Essentially kind of what we are focused on is productivity. And there's -- of course, one is that we want to make sure that we always stay cost-competitive. One of the competitive advantages of Harvia has been that we can offer good value for money for our customers while still making money ourselves. And it is, of course, clear that we want to maintain this.

And partly, this new organizational structure, with the elements that I described where we can drive group synergies, for example, global supply chain and manufacturing network provides us opportunities to optimize, and so we can stay productive and even -- hopefully become even more productive.

At the same time, it will give us an opportunity to get more productivity, for example, from our future related investments such as R&D. We have an ambition to have -- excite the market, bring novelties to the market, give good reasons to the market to buy better solutions. Digital, we see as clearly an area which will be important in the future, and with this new structure, we can make those investments in the most cost-efficient way.

[Ari Vesterinen, executive]

How do you expect input costs to develop in 2024?

[Matias Jarnefelt, executive]

We don't expect that there is going to be that big swings as there has been in the past few years. Of course, during the pandemic times, there was quite a lot of bottlenecks and limitations in the global supply network, then the materials price situation eased during the past year. This year, our base scenario is that there's not going to be so much volatility as during the past years.

Of course, we are following closely developments, for example, in the geopolitical front and security front. So for example, the recent attacks on the Red Sea are hampering transportation through Suez Canal, and for example, part of our shipments now actually go around Africa again. So there's longer lead times and some more expense. But in the bigger scheme of things, that's not decisive as we see it currently.

[Ari Vesterinen, executive]

One question related to profitability in North America. Probably we commented it, but I repeat, is it lower, same, higher versus group average? In other words, is North America business dilutive for the group in terms of EBIT margin or not?

[Matias Jarnefelt, executive]

We have not yet reported to the profitability on region level. So we report just the top line. But of course, one can make some conclusions that the U.S. has become more important in terms of the size of it, in terms of its share of top line, and at the same time, you have seen a positive development in our overall profitability. And maybe as I mentioned earlier, what we see is that further away you go from the Scandinavian markets, the more we see willingness in the customers to invest in a good sauna experience.

[Ari Vesterinen, executive]

Can you talk about the changes in Sweden you mentioned that impacted sales in Q4?

[Matias Jarnefelt, executive]

It's no secret. Kesko has been public. So they have announced that they are changing their strategy in Sweden. And they have been an important partner. They are important partner, of course, also in the future, but for them, year of '23 is a transition year where they are closing their K-Rauta brand in Sweden and moving that to K-Bygg. As part of this change, there will be also a reduction of kind of retail points that they have. And given the importance for us in the Swedish market, it is also having an impact on our sales performance.

[Ari Vesterinen, executive]

Quite interesting digitalization-related question. How do you utilize artificial intelligence in your operations to bring productivity? I don't know if there is a consultant now in the background, but...

[Matias Jarnefelt, executive]

Yes. I would say probably there is not real profit impact yet. But of course, we have started to explore. I think there's a few ways to think about AI and kind of how to absorb that in an organization.

One is test, try out and learn, and in particular in the office, office workers are now -- quite a few of them use ChatGPT-type of tools to help them in some of their daily tasks. When it comes to e-mails, when it comes to document creation, PowerPoint creation, et cetera. So there we are in, I would say, exploration phase. And that is something that I would call the bottom-up approach.

On the other hand, we are also thinking of what is the strategic implication for us. So what are the key areas of our business where we could really leverage AI. And this is, of course, something that we are vigilant and follow developments, and we do also have good partners that also help us navigate in this area. Hopefully, there will be more to report in the coming quarters.

[Ari Vesterinen, executive]

What is the typical age of a sauna user? Are there differences between North America and historical markets such as Finland and Sweden? I would even add to this question Japan.

[Matias Jarnefelt, executive]

Yes. The way I see it is that we could say that Europe is a mature market. That's also visible in the, I would say, typical customer profile or demographics. So in Northern Europe, it's every person's product. So for example, in our home country, Finland, typically, the babies, even when they are a few months old, get their first sauna experience and it's throughout your life journey.

Maybe I would say that when I'm looking at the Continental Europe there, it's more common that the kind of sauna users are kind of more mature in age. A typical use case is that there's couple whose children have moved out, they have extra space in their house, and they decide to invest in an enjoyable and health supporting kind of sauna experience and buy a sauna.

And actually, it's very interesting when we go then to overseas markets, U.S. and Japan, as an example that Ari mentioned. There we see a clearly younger profile. You might actually go to Harvia's Instagram page to check what happened in Japan in roughly a week ago. We opened Harvia Sauna Studio in Tokyo, actually in a really nice area, and go and have a look at the people who were there. Young adults, both male and female, typically in their 20s to 30s. So kind of young adults are really driving kind of the sauna boom in Japan.

Also, when we look at the growth in the U.S., we see actually women in very important role. Women typically tend to invest more in health and wellness-related products. They're also investing in kind of pleasant experience with their friends and also the kind of the age profile there is what I would say roughly 30 to 40. So somewhat of maybe younger than in Central Europe that I mentioned.

So hopefully, this brings you -- paints a bit of the picture of the different dynamics in terms of age and demographics in different parts of the world. Maybe one thing that I could say there is that I take this as a very positive sign for North America and Asia because basically, the young adults create a culture. Then they get married, they get kids, they teach also their children the sauna, and that is the way sauna culture really sustainably grows. And we are very happy to see the dynamics that we see in both America and Asia.

[Ari Vesterinen, executive]

Then one bonus question from the CFO. So you have been now the CEO of Harvia about to 8 months. How have you found this time? How was it?

[Matias Jarnefelt, executive]

I'm very pleased to have this job. It's a great company. It's a great business. I see a lot of opportunities. Already when I started in this role, I could, of course, see this health and wellness key trends, more affluent and kind of in terms of size, the middle class people who can invest in these solutions and lots of opportunities for innovation.

I must say that during these months that I've been with Harvia, my view on the opportunities that lie ahead for Harvia have even strengthened. Also, as you know, business, it's well run. It's a solid foundation, but also it's good that we also see opportunities for improving our own operations, as we discussed.

And one of the key things for us in the current market situation where we expect consolidation, it's excellent that the profitability level of Harvia is on a good level, and also we are good at generating cash that provides us opportunities to finance also strategic moves in the coming years, which I believe will be an important part of Harvia's long-term success.

[Ari Vesterinen, executive]

So great to have you here.

[Matias Jarnefelt, executive]

Thank you.

[Ari Vesterinen, executive]

So thank you very much. These are all the questions this time. Thank you for following, and in social media and on our IR web pages, there will be more information available soon. Thank you.

[Matias Jarnefelt, executive]

Thank you very much. Have a good day.