Fiskars Oyj Abp

Hello and welcome to Fisgar's Q3 2022 results webcast. My name is Essi Lipponen. I'm the head of investor relations. As usual, I'm here with our president and CEO, Natali Ahlström, and our CFO, Jussi Siitonen. Natali and Jussi will first go through the Q3 highlights. And after that, we have plenty of time for your questions. You can type in your questions in the chat already during the presentation. Natali, please go ahead.

Thank you, Essi. And good morning, everybody, from my side as well. It's really a pleasure to be here today to talk about the Q3. And first, some highlights. When we look at the Q3, our sales development was flat. But we are proud of that because it was flat against the Q3 last year, which was the all-time high in the history of Fiskars Group. So in this turbulent environment, we are quite satisfied with that performance. Secondly, our multiple actions to mitigate the cost inflation are now paying off. So we were also able to maintain a flattish profitability EBIT in Q3. Thirdly, as we go forward, we continue to focus on our growth strategy. And this means that we continue to invest in our fundamentals in the direct-to-consumer and digital. This is so important to future-proof the company. And with all of that, we keep our full year outlook intact. That means that our comparable profit is going to increase from last year. But let's look at the details. On net sales, as said, we are in Q3 on par with the comparison period where we had the all time high Q3 last year. And year to date, we're still at 7.2% net sales growth. In this turbulent environment, I think that's okayish. And what I'm especially happy about is Asia-Pacific is booming. Asia-Pacific is really driving growth. And we also have multiple channels brands that are driving the growth, and you will see more about that in the presentations. So our well-balanced portfolio really is delivering as we go forward in this turbulent environment. You can also see on the left side, you see here Q3 2019, just as a comparison, where were we before COVID hit. And there you see it's truly a transformation we've done on the top line in Fiskars Group. Then look at profit. Here you can see that Q3 and year to date is flat compared to last year. It's been a bumpy road. For sure, it's been a bumpy road with the cost inflation that is there. And now we're happy to say that the gross margin improvements, they are paying off and we are seeing them coming through. Gross margin increase already now in Q3 of 100 basic points and then being flattish on year to date level. We are quite satisfied with that and gross margin development is also the one going to drive us as we go forward. Then looking at our strategy, as said, we have a very firm focus on our growth strategy so that we ensure that we continue to transform Fiskars Group. We focus on the brands, channels and countries where we are winning and where the opportunities is the biggest and allocate our investment money accordingly. Also, when it comes to marketing money, this is where we allocate it to have the biggest yield. On transformation levers, full focus, laser focus on commercial excellence, direct consumer, US and China. And I'll talk soon about also where are we going with this? How are we progressing as a company? And of course, Enablers being important here to support us with people, our digital journey, innovation and design and sustainability. But let's look at where we stand with the transformation levers. What is the progress in this time, in Q3? Starting with gross margin, as I said, in Q3, we started now to see the impact of the gross margin. So 100 basic pointed up. And if you look at reported, it's 290 basic points up in Q3, despite energy increase, inflations and so on. So this we feel very strongly about, that the focus on commercial excellence is paying off. Then direct-to-consumer continues again to grow, especially e-com. So e-com in Q3 grew 5%. And if you look at year to date, the growth in e-commerce 9%. So again, showing where we focus, we are truly transforming the company. On the direct-to-consumer, the share also of direct-to-consumer in the whole company is increasing. Now in Q3 it was 21% of the whole company, whereas last year direct-to-consumer was 18%. So we are increasing the share of direct-to-consumer, which we are very happy about, because it's relevant to the consumers and of course the earnings logic. is very good there. And thirdly, we get the data. We get the data all the time, supporting also what is the consumer sentiment. So this that we can in these times show 5% growth in e-com, 9% year to date, and also in own stores, 10%. We get an incredible amount of data that we then also can use for our wholesale to show these are the levers to pull to continue to grow. Then on U.S., U.S. was challenged in Q3. It's our big retailers who are worried about inventories, as we all know, and they are being very careful in taking in inventories. So U.S. went backwards in Q3. However, if we look at the whole year to date, we are still growing at plus 5% in U.S. And then finally, our strong transformation lever, China. As I always say, our China team continues to deliver. Whatever happens in China, they continue to deliver. And with a solid 35% net sales improvement In Q3, I just think it's an astonishing result of the team when taking into account the COVID restrictions that come and go, come and go. And in China, we see it's clearly the e-com and our investment in digital and our focus on digital, not only the capabilities, but marketing and so on, that is paying off and means that we can, in tough times, grow in China in e-com. So this is where we stand on transformation levers. However, this is not all. If we then look at sustainability, of course, sustainability is at the core of our strategy. Where are we? What are we doing there? And I'm very happy to share this news that we already announced in October. So it's after the reporting period. But this investment we are doing in the Italafactory, where we're doing step change, step change in our scope one and two, and really step change for the whole Fiskars Group. So with this investment, we're reducing our scope one emission by 26% in whole of Fiskars Group. So this shows that there are actions we can take to step change the future of the company and also, of course, towards our commitment to the climate change. So not only transformation levers delivering, but also the important enablers to future-proof the company. A lot of cool stuff going on. And then we come to the outlook. We keep our outlook intact. We have a flatish year to date at the moment, profit, and we have the Q4 ahead of us. Going into the holiday season, of course, we are not immune to what happens around the world. We are not immune to the consumer sentiment. However, we have a well-balanced portfolio, many geographies, many different kinds of brands and consumer behaviors. So we keep our outlook intact. Also with the holiday season, just a small note about that. It's not only... the traditional Christmas we see here in the Western world. Double 11 in China is huge. So we have multiple events, Christmas, double 11, Thanksgiving and so on. And of course, Q4 is a Vita quarter. And here, really, I want to say, how are we going to make this? It's with the resilience and grit that we delivered this year so far, and also the fantastic, talented team we have in Fiskars Group. So, outlook for the year unchanged, intact. And finally, a bit about... Where do we stand? What is the basis? I mean, the power of our brand. We can't just highlight the importance of the power of our brand. And of course, that's also behind driving commercial excellence, behind direct-to-consumer US and China growth. The power of the brand is strong in Fiskars. And here's an example. The Fiskars brand again ranked the top brand in Finland yet again this year. Arabia, a brand that turns 150 years next year, also rose up to the top 10. So we have a good, well-balanced portfolio of beloved brands that are relevant to the consumers also as we go forward. With that, thank you from my side and I hand over to Jossi.

Thank you, Natalia. And hello, everyone. On Q3, let's start first with our financial targets, how we are performing against the targets we have set for ourselves. So first, net sales target being at mid-single digit growth organically. So rolling 12 months, end of September, we are still there at 8% growth. So tick the box there. We are delivering the targets. On profitability, the target being at mid-teen EBIT margin by 2025, so next three years time. And the target what we have is that we are getting gradually there step by step. Now we are coming a bit backwards with 11.8 at the last 12 months end of September. So that's why it's blinking yellow here. Then I take first the balance sheet, so balance sheet target net EBDA, less than 2.5. We are still below that one with 1.8. However, as you can see the trend, we are now gradually getting closer to that target. On cash flow, and I'll get back to cash flow in more detail after a couple of slides there, but having negative cash flow now for the first nine months there, of course, we are out of the range when it comes to target. Then about Q3 and year-to-date more specifically. Natalie already mentioned the gross margin improvement, what we have. The actions we put in place in the first half this year, we also mentioned those in our earlier calls, what we have had after Q1 and Q2. Mainly the price increase driven, but the whole commercial toolbox has been in place there. They started to pay off in Q3. From August onwards, we have seen gross margin improving. And you can see here quite significant gross margin improvement, if we use reported numbers. But excluding the sale of US water, we were 100 basis points up in Q3. Still, year-to-date basis, we were 30 basis points down. But the trend is good, what we have now seen there. Importantly, all the three BAs improved their gross margin versus last year in Q3. When it comes to inflation, we saw some stabilisation there, or even declines when it comes to raw materials, inbound logistic, but these were the only ones. Outbound logistic, as well as especially energy price, there we still see being some increase, or we are at least much higher level than where we were in comparison period. Three OPEX drivers, so the OPEX overall, 11 million up in Q3, 38 million up year-to-date basis. For both period, 60% of this OPEX increase came mainly from those investments we have decided to do. Investment in D2C, investment in digital, and then also marketing. Marketing especially, digital marketing here, supporting our D2C growth. On EBIT for both period for Q3 and year to date, we were quite flattish. And I'll go through a bit more detailed how we ended up with this flattish EBIT. What you can see here on the left is our Q3. So admittedly, we got some help there from FX Translation, a bit less than 3 million, but the main driver for this improvement was improved gross margin. So that contributed most of our EBIT improvement. And then those investments worth of 11 million I already mentioned, they took us back to this last year's level. When it comes to year-to-date, the FX impact was a bit shy of six million positive, but still when it comes to nine months here, we got a lot of boost from the volumes. So that was the biggest driver of our EBIT improvement in the first nine months period. Then more about businesses, first Viitta. So Viitta, 2% like-for-like growth. And this was very much driven by combination of D2C, Wedgewood Brand and China. And Wedgewood Brand, just to give you an example, mid-teen growth in Q3. So that was a great profit contributor or top-line contributor for Viitta. Viitta's profit was quite flattish, gross margin improved, and that was invested back in those capabilities I just referred. Terra. Very good development with outdoor, i.e. Gerber brand in USA. We all know that US market was lukewarm at best, but Gerber succeeded to grow 14% in that market. Another growth driver what we had was gardening in continental Europe. So we succeeded to continue growing there also double digit number. That together brought us to a bit more than 3% organic growth versus previous year. Then when it comes to profitability, excluding this US water impact there, we were quite flattish. There also we saw volume improvement, slight gross margin improvement, and that was offset, especially with marketing expenses. On CREA, we saw some shift from Q3 to Q2 actually. So back to school season was more biased into Q2 this year. We were 15% up in Q2, now 12% down in Q3. So that's the main reason there. Also, we have seen some softness there in consumer demand in CREA's categories. On EBIT, volumes were down, but we improved the margin. And that was the factor there that we remained practically flattish also with this business. When it comes to regional sales, what you can see here is Europe minus a low single digit number. That was very much driven by Finland and Sweden. So both countries fell down both Q3 and the year to date basis. Same also applies to D2C in this region. So it was very much Finnish and Swedish D2C which went down. America is down quite significantly, both in the US and Canada. D2C, especially in e-com in USA, however, was up. Then APAC is only having 13% growth. It might even sound quite lukewarm, growth 13%, but it's hidden the fact that China was up over 30%. China was up over 30% in all channels, in D2C, in e-commerce, in retail. And what you can see here also is that China has not so dominant role in our global sales, but they are almost half of our D2C sales now for Q3. Then about cash flow, and as I mentioned that earlier in my presentation, let's take a more deeper dive here. So free cash flow down 63 million in Q3 and now a bit shy of 140 million for year to date basis. This is very much working capital, very much inventory driven. If we split this inventory growth, what we have there, more than half of year-to-date inventory growth is coming from Terra. Vita is roughly one third, and the rest is then in Crea. The silver line what we have here is that Q4, as Natalie mentioned, is very much Vita-driven. So we believe that we get, at least in Viitta, inventories back to a bit lower level where we are at the moment. We have funded this negative cash flow through short-term funding, but of course, at a certain point, we need to start converting that more long-term to be safe in our long-term funding process. On balance sheet, balance sheet is still solid. Its leverage ratios are up due to the working capital growth, but net EBITDA is still well in line with the target. One KPI we are following quite closely, even though it's not in our formal financial targets, it's our return on capital employed. Now we are at level of 15, and of course, the target is to get a much higher level. With that, I'll give it back to you, Natalie.

Thank you, Jussi. And just to summarize and recap, where do we stand? Q3, despite the turbulent environment we are in, we're happy with the flat sales in Q3 compared to the all-time high Q3 last year. Also, the actions we put in place to mitigate the cost increases, the inflation are delivering results and our gross margin is increasing comparable 100 basic points up. So that's working. We continue to focus on our growth strategy and investing behind direct to consumer and digital to continue to future proof the company and be relevant to consumers as we go forward. And with that, we keep our outlook for 2022 intact. But with that, let's go to the questions.

Thank you, Natalie and Jussi. And we do already have some questions. So let's start with what makes you confident that Fiskars can grow its earnings in Q4, considering that the consumer confidence is very weak in both Europe and the US? And maybe, Natalie, you can start.

Thank you, Essin. Thanks. Of course, this is top of mind of everybody, this question. Q4, when we look at it, it's very much focused on the bottom line. It's very much focused to continue with the gross margin development that we already saw now in Q3. We also have a well-balanced portfolio. Josse mentioned many areas where we are growing, China, Wedgewood, continental Europe in Terra and so on. So we have pockets of growth in the company. At the same time, of course, we are not immune to the surrounding world. It's a turbulent world out there, but with the focus on execution and the resilience of the team, we keep the outlook intact. Yes.

Then we have a question about the price increases. Maybe, Jussi, if you want to take this one. Could you give some more flavour on the magnitude of price increases during the quarter, please? Differences between segments would be helpful as well.

Yeah, the price increases we put in place actually early at this year in the first half, early Q2, they are the ones now impacting positively. As I mentioned about inflation, so also there we expect some little help. At the same time, we see outbound rates, we see energy prices being at very high level. So that's what we are using as a benchmark, how we can compensate it. The expectations with the price increases is that we can fully mitigate the inflation there, not going very specific into segment categories, what kind of price increases we have set there, but our main target is to mitigate cost inflation. Natalia, I don't know whether you'd like to continue with that.

Well, I could just come to the how. How do we do it? Of course, diligent execution and also the power of the brand. We have very strong brands in our portfolio that the consumers love.

Exactly. Then maybe another one for Jussi. Please remind us about the OPEX dynamic. Last year's H2 growth OPEX was extra high. How much lower will growth OPEX be in Q4 year on year?

That's a very good question. That's also part of the logic of our guidance for the full year. So last year, the OPEX growth was very much focused on the year end, Q4 there. This year, we expect OPEX growth to be much more stable between the quadras.

Yes. Then we have quite a few on inventories. That seems to be a hot topic. Can you describe in detail how you will reduce your inventory levels? So maybe we'll start with that one and then continue, if you just want to go ahead.

Okay, I can start with that one. The one thing is, of course, our S&OP process, how we plan our demand and then operations accordingly. Now we have taken down those, we have cut supplies, we have reduced orders, what we have for our sourcing partners. At the same time, when it comes to our older inventories there, we are trying to divest it through our own network, what we have in our own stores, our websites. So that's the way the action is put in place. It takes time. That needs to be remembered, that when we start adjusting supply accordingly, it's not coming overnight, but it takes some time.

And then maybe a follow-up on that. When do you think the US retailers are willing to take inventories again?

That's more than million dollar questions there. Overall, and Natalie, if you'd like to comment that, but our view is that we will see still tough times in the first half, at least next year in US, but then second half next year, we should start seeing some improvement there. That's the current view what we have for US market.

Does this impact Vita in Q4 or is it more a Crea or Terra topic?

Yeah. Vita, of course, is not immune. But what we need to remember that Vita business is more in Asia Pacific than any of our other business. So that's continued growing there. So there are more levers than only US market for behind Vita. But as I said, Vita is not immune to decline in the US.

And maybe one more on the inventories and let's see if they keep on coming. What kind of margin pressure do you see when you need to bring down your inventories? And maybe Jussi, if you want to continue with the inventory topic.

We have started, of course, with so-called excess and obsolete inventories, which we have somehow already written down on our balance sheet. the margin contribution is okay, due to the fact that the values of inventory is lower. We haven't yet seen, and you can see that in our cross margin. So, we have succeeded to continue increasing it. So, therefore, I don't see that kind of margin pressure as such.

Okay. Then going back to price increases in Q3, it did not show in the Q3 growth figures or were volumes down a lot? Do you want to take this, Natalie?

Yeah, I can take it. When we look at Q3, Q3 was done with a value increase. However, if we look at volumes, we also didn't come down in volumes. So what we did with the price increases, we mitigated the cost inflation. And that's why the volumes increased, but volumes, sorry, value increased, but volumes didn't come down.

Okay. Hmm. Jussi, for you, your other segment EBIT is down year to date. Any comment on the full year level 2022 versus 2021?

Historically, we have said that this other is the 1 to 1.5 million negative month after month. So that's our monthly burn rate there. However, we have certain projects going on, big investments. We have kept those still in these other segments, because they are still in development phase. Once they go live, of course, then we start charging the businesses. So, for the full-year guidance, I would say for the rest of the year, we are there in the ballpark of the old guidance, let's say 1.52 million per month.

OK, then maybe we'll switch to next year already. And this one's for you, Nathalie. What kind of drivers do you see going into 2023, for example, regarding retail inventories, cost inflation and so forth?

Well, overall, going into 2023, we are ready. 2023 will be tough. And that's why we are putting so much emphasis on delivering both the short term so that we have the long term. And then what kind of drivers we are seeing It will probably be very regional, very local, different differences. And therefore, we need to be agile and focused regionally and with the special brands that we can maximize the potential the brands have. So it's a very different picture. And as we said many times about China, Asia-Pacific continues to deliver. We have challenges in certain markets in Europe, but not in all. So the consumer sentiment in other places is stronger. So important to to keep this on a local level and ensure that the teams are empowered locally to maximize the potential and at the same time also having, I mean, we know it 2023 globally on a macroeconomic level will be tough and therefore we are ready for that.

Just a reminder, you can type in your question in the chat. We only have one question left, but I wanted to remind you before I go into that, because there's always a slight delay. Maybe continuing with what you just said, Natali, which of your brands do you think are most sensitive to economic swings and weaker macro environment?

I wouldn't single out a certain brand, because all the brands have a good, better, best dynamic where they are, and the whole consumer concept. In these macroeconomic times, I would say it's more country-specific. where we see it. And as we already said now about Q3, the consumer sentiment, we see the traffic is down in Finland and Sweden. US is very much inventory related and so on. So it's more a geographical dependence and then just continue to focus on the power of the brands.

It seems that we don't have any more questions. I'm just waiting for a couple of seconds, if anything pops up. Okay. Yes, we have one more. Let me see. Natalie, an update on your view on Asian consumer sentiment would be helpful. And do you think Viitta is susceptible to changes in this regard?

Yeah, and maybe, thanks, that's a good question. And maybe if I start with China. In China, we see the category we are in, Vita, it's an emerging category. And here with the brands we are represented in China with Wedgwood and Royal Copenhagen, they cater to a different kind of a consumer group who continues to to invest in the fantastic products. Then on the behaviors there, I said it's more going to e-comm instead of own retail. But what we are doing to be relevant to the consumers in Asia, not only China, same in Japan and so on, is that we have the local teams. We have the local teams empowered also to be able to react to the changes in the market and also be sensitive to the weak signals in the market. So it's very much empowering the local teams to fulfill the potential in the markets.

Yes, thanks. And we did get another one as well, if you would like to take this, Jussi. How much of your revenues came from China in Q3 and year to date?

China is roughly 4-5% of our sales. And of course, now it's growing so fast in Q3, take a bit bigger share there. What needs to be remembered is that China is practically 100% of Vita. So it's already a bit shy of 10% of Vita business.

Okay. It seems that this was the final question today. If you have any follow-up questions, just reach out to me. Thank you for active participation and have a nice day. Thank you.