Fiskars Oyj Abp

Hello and welcome to Fiskars Q4 and full year 2022 results webcast. My name is Essi Lipponen and I'm the investor relations director. I'm here with our president and CEO, Natalie Ahlström, and our CFO, Jussi Siitonen. Nathalie and Jussi will first go through the presentation and Q4 highlights. And after that, we will have plenty of time for your questions. You can type in your questions in the chat already during the presentation. Nathalie, please go ahead.

Thank you, Jesse. And it's really a privilege for me to be here today to talk about 2022 and what a year it was. It was really a bumpy road. A lot happened in the world. And therefore, I must say, I'm pretty satisfied with where we ended up. When we look at Q4, we saw that our profitability improved, despite the very challenging environment externally, and also despite the sales decline. Also, we can see that our growth strategy and our focus on the transformation lever continues to transform the company. I'll come to some concrete examples soon. Then 2023 outlook. Despite the uncertain environment outside, we are saying that we are going to deliver EBIT slightly below 2022. So we are pretty confident going into the year despite the quite tough environment around us. And finally, the board proposes to increase the dividend to 80 cents per share for 2022. But let's look into the details of an exciting year that we had in 2022. First, looking at the net sales decline. Of course, this net sales decline in Q4 was driven by the lower consumer confidence. that we saw, especially after the Black Week. Black Week was a huge success for us globally, but then the eroding consumer confidence after that changed the picture. In addition, the inventories, the high inventories that our customers at the retailers declined the sales. We saw many of the big box players in the US more or less stopping any new orders. In a sense, we can say that two thirds of the whole decline in the US came from only three customers who were tightly managing their cash and their inventories. Well, despite the challenging top line situation, as said, we were able to improve profitability. Our EBIT margin grew 70 basic points in Q4. that I can say we're pretty proud of, which shows that we are focused on enhancing the gross margin and we're focused on OPEX efficiency so that we can adapt when the situation is changing. And then looking at the full year, despite the challenging 2022, 2022 was the second best all time high year in profit for Fiskars Group. That's quite the achievement, thinking what all happened during the year with the war in Ukraine, extreme cost inflation, low consumer confidence and so on. And therefore, the board proposes to increase the dividend to 80 percent per share, which is a very good outcome of 2022. Our key is that we are focused. We are focused on our growth strategy. And all the time, especially when it gets tough, we even more double down on our growth strategy, how we prioritize, how we allocate capital. And you will see later in slides, you'll see showing that this focus, we are allocating investment into direct-to-consumer and digital, and that's paying off. also the focus on the big brands, channels, countries and the transformation levers. That's paying off and we are transforming the company. I look a bit into the transformation levers. How are we doing that? And as we said, we will every quarter come back and talk. Where are we with transforming these levers in the company? Starting with commercial excellence, where we look at what is the power of our brands, how is the work that we put in marketing, in innovation design, how is this appreciated by consumers, and that we measure by gross margin, how we can increase the gross margin throughout the year. and we're very happy to report that in q4 our gross margin increased 90 basic points and a full year 60 and then reported is on 160. we did in january sell our us watering business last year in january And that also, of course, helped to enhance the profile of the company with more higher gross margin products. So commercial excellence taking steps forward despite the high cost inflation in the whole 2022. Then direct-to-consumer, we invest a lot into direct-to-consumer and that focus is paying off. It also shows that we are relevant to consumers because despite challenging consumer demand, consumer sentiment globally, we see that our e-commerce is growing. Ecom in Q4 grew 30%, which is quite an achievement. And it already starts to be quite a sizeable business for us. Overall, the whole 2022 e-com grew 17%. So also their focus pays off and we are changing according to how consumers are thinking. What is the impact? What matters? And again, shows the power of our brands as consumers are coming to our e-com sites, despite not going shopping that much in wholesale. Our areas of improvement, our areas that were really challenging last year, and especially Q4, was the US. As said already, when we came out in mid-December, and also with the pre-figures earlier, the US was challenged, and not only the high inventories at our top retailers, but also already starting in the spring, with the cold spring for the gardening season, and a cold summer as well. So there were multiple things, not only macroeconomics, but also the weather that impacted the US sales. Despite a very strong start to the 2022 for US in the first half. And then finally, our other area of extreme pride is China. China grew 40% in Q4. In totality, nearly 40% in the whole year. This just shows the commitment, the drive of our local China team, despite, as we all know, quite extreme COVID situation in December in China. So China continues to deliver, Econ continues to deliver we can get the benefit of the power of the branding, commercial excellence. And now we need to continue working on US. Then I want to take also a step back and talk about how we are transforming the company, not only the transformation levers that we are quarterly reporting to you, but also how are we transforming the company, what we look like in totality. And when we look at 2022, where we say that one of our winning logics of the growth strategy is that we want to make the big brands bigger. Really focus, focus on the scale where it matters. And today we're happy to report that we have five brands that crossed the 100 million euros threshold. It was Gerber and Wedgwood who joined the club of the big brands, which shows that scale matters, focus matters. The same thing when we are looking what's relevant for the consumers. We already today have two brands, Wedgwood and Royal Copenhagen, where the share of direct-to-consumer sales is already more than half. More than 50% of all the sales comes from direct-to-consumer, which again shows how relevant they are for consumers and also how we are changing the profile of the company. The same we see also when looking at premium luxury brands. Already today, 25% of our net sales comes from the more luxury brands, Royal Copenhagen, Wedgwood and Waterford. And then another one, when we had the capital markets day in November 2021, we allocated our brands, which are the must-win brands, which are turnaround brands, which are tactical brands. At that time, Wedgwood was a turnaround brand. The team has worked fantastically on getting the profitability up on Wedgwood where it belongs, of course. Big exposure to direct-to-consumer supports that. And now we're happy to say Wedgwood is out of the turnaround bucket. It's a winning brand that's healthy and contributing to the whole company. So those are a few examples of how we're transforming the company and how it shows in what we look like as a totality. It's not only here we are transforming the company, it's also on the sustainability side and really our ambitions towards sustainability. And we have new ESG targets and We are also in the quarterly reports going to report on how we are progressing on these targets. I want to highlight two ones. One is the green transition. And here as a branded consumer goods company, The most important thing we can do for the planet and the people is recycled content in our products. Today, we are only 5% of all our net sales is recycled content, circular economy. But we want that to be 50% in quite a short time. And we have a lot of exciting products in the pipeline towards that. The other one is our commitment towards emissions and lowering them. If we look at emissions from our own operations, scope one and scope two, we already see that we've reduced 43% of the emissions. So good advancement there and more to come with the big investments we are doing, for example, in the Italo factory now this summer. Then in highlight from Q4, Fiskars Group was credited with an A-list in the CDB annual climate list that we are very proud of being on this challenging list on the A-list. We're also transforming how we're working. We want to ensure that we can accelerate our strategy and that we are focused on quickly executing and being accountable and aligned. And here, I just wanted to update, I mean, we have the businesses are fully P&L accountable, like it's been for a while. But the change we have done since 1st of January is that, again, the focus on consumers, the focus on customers, We've split sales into three areas now. It's areas of Americas, areas of Europe and Asia Pacific, and then direct to consumer. And this is again to be relevant to the different consumer dynamics, customer dynamics in the different regions, and then with direct-to-consumer, where the demands are very different compared to the wholesale area. Demands in direct-to-consumer, it's about what are the next drops next week, what are the new things to excite the consumer with the whole consumer concepts we are offering. So those changes we have done. And then in addition, in January, we notified that we are doing planned organisational changes within the business areas, again, to simplify, align, drive end-to-end accountability and really get the focus on the brands and ensure that we are empowering the frontline so that we can execute faster. And then outlook for this year. It's a tough world outside there. It's a lot of uncertainty. And what we're doing with this outlook is we're building resilience. We are building agility. We continue to invest in direct-to-consumer and digital. And our first focus on first half is on profit protection and cash. Laser focus on profit protection and cash. And therefore we say that our outlook for 2023 is to be slightly below 2022. And there are multiple drivers then on the positive side and the negative side. Of course, on the negative side, it's a volatile environment around us, the macroeconomic environment, lower consumer sentiment, and also that we continue to invest into the future of the company. At the same time, of course, like we did in 2022, we focus on gross margin. We focus on OPEX efficiency and also the savings from the planned organizational changes that will impact in second half. But with that, I hand over to Jussi.

Thank you, Natalie. And hello, everyone. As you said in the beginning, what a year and especially what a Q4. So starting first with our financial targets. So this challenging operational environment is reflecting also in the progress of our financial targets. When we finished 2021, all four targets were green. And now we are in a situation that three out of four are red. However, the situation is not so black and white, or in this case, I would say red or green, because there are a lot of good things underneath of these numbers. On top line, the full year growth 1.7%. It hides the fact that we continued growing in e-commerce, we continued growing in China and the like. So a lot of good green shots there underneath. On EBIT margin, the target is to be there at roughly 15% by 2025. which means that we should improve sustainably our EBIT margin towards this target. Now we came down 20 basis point. However, in Q4, we already succeeded to improve our EBIT margin. And I'm getting back to that with a bit more detailed way. The cash flow target having free cash flow net profit over 80%. Now, the free cash flow of a full year was negative of 100 million. However, Q4 cash flow was already positive of 36 million, which is the best quarterly cash flows in Q3 2021. The balance sheet remains strong. The target what we have for net EBITDA is to stay below 2.5 and now we were 1.7. So balance sheet remains strong and we can continue investing in those acceleration items what we have. And then a bit more detail. So what's the most sustainable way to improve our profitability is to keep our gross margin on the improvement track. As Natalie mentioned, Q4 reported gross margin was up 120 basis point, out of which 90 basis point is organic, i.e. excluding structural changes as well as translation difference. On full year basis, these 160 basis points includes, of course, the full year impact of US water sales, as well as translation difference. But the fact is that we succeeded to improve our organic gross margin by 60 basis points. However, this was very much both Q4 and full-year gross margin for so much Vita-driven. As you can see, the business where we continue growing, we continue growing in China, we continue growing in own direct to consumers. They are nicely supporting our gross margin improvement, even at the group level. Then on OPEX, we started to talk about this cash and profit already late Q3, early Q4. And in Q4, OPEX was down 15 million versus last year. These savings, they were very broad-based. Of course, we need to remember also that we had relatively high comparables there from last year or previous year. On a full year basis, this is much more balanced. So the OPEX growth that we have is coming from three sources, D2C, digital, and then marketing, the ones where we have continually invested. So it's quite equally split by three, the whole OPEX growth, what we had for the full year. And as an outcome, Q4 EBIT was down 2.5 million, but as I mentioned already, our EBIT margin improved, and then the full year was down 3.2. Going a bit more deeper with this EBIT bridge, how it looks. And if you start first on the left, where we have Q4 EBIT bridge, you can see the impact of the volume drop there. These are the volume drop impact on EBIT, what we had. So we were partially able to mitigate a big part of this drop, what we had from volumes through OPEC savings and then slightly also margin improvement. But the outcome is that we were 2.5 down versus previous year and excluding structural changes, 1.3 down. On a full year basis, this is much more balanced. So volume growth and organic gross margin improvement, they were pretty much 50-50. And combined with admittedly support from FX, what we had also for full year basis, we were able to fund those investments, what we had in digital, in D2C and marketing organically. So we were slightly down first last year, but the totality is very much in line with what we planned. So we didn't stop those big investments when we started to see the top line is going down. Then more detailed, business by business. So Vita, Vita topline down a bit more than 6% on Q4. This was very much the holiday season, what we expected for Q4 was not so. the demand for holiday season was not the level what we expected. We had also some 15% of Vita businesses in the US, and that was affecting negatively. Also at the same time, almost 40% of Vita Q4 business is here in Nordics. And when overall Nordics came down, Vita was exposed to that one. Then only commerce, China, were the ones which were further mitigating the negative top line from other regions. On profitability, Vita continued improving EBIT, 4 million now in Q4. And now Vita, first time ever, reached 20% EBIT margin in Q4. Then two businesses, Terra and Crea also, which are mostly exposed to US market. They were the ones which were taking the biggest hit for this 26% decline from that market. Terra was down roughly 20% there and 50% of Terra's Q4 business is in the US. It was partially mitigated by good volume driven here in Nordics, especially when it comes to snow tools. but overall a big volume drop. And the volume drop was the one which was taking down also EBIT from minus 3.3 to minus 7.3. Gross margins were pretty stable on full year basis, but volume drop was the one which took it down. And as I said, pretty similar picture and pattern with CREA also, the business which has 40% of US in its portfolio in Q4. So it was very much volume driven drop what we had also in CREA. Then when it comes to regions overall, You can see in Europe, when the Europe as a total came down a bit shy of 4%, we succeeded to continue increasing our D2C both online and offline there almost 10%. And quite interesting when it comes to Americas. So we have repeated this minus 26% overall quite many times already, but underneath our own D2C business, admittedly being a bit low base at the moment, but the growth continued. So 24% growth at the same time when the whole market came down 26% for us. APAC pretty flat and then D2C there down mainly due to retail in Japan. Then on cash flow, as I said, Q4 cash flow was positive of €36 million, the best quarter since Q3 2021. It was mainly driven by working capital reductions, which we succeeded now to implement. And then at the same time, when it comes to our funding, we balanced the loan portfolio so that it's not much better balanced between long and short term. We finished the year with a strong cash position of 116 million, and that helps us now to continue with those investments in Axial Race. On balance sheet, as I said, it remains strong, but efficiency declined, and efficiency measured by return of capital employed. So whilst the EBIT came down this 20 basis point, also capital turnover declined a bit to 1.22. So we are now a bit shy of 15% with our return of capital employed. That's very briefly about financials and back to you.

Thank you. Thank you, Jussi. So summarizing the highlights of 2022 and Q4, but if I start with 2022 again, it was the second best year ever in the history of fiskars in terms of EBIT, in terms of profit. And then when looking at Q4, The fact that we were able to increase our profit margin by 70 basic points, despite a very tough environment, tough top line, I think we can be pretty proud of. We continue to deliver on our growth strategy and the transformation levers. And when you combine all this, that's then the outlook for 2023, where we say that our EBIT will be slightly below last year. Focus on cash and profit now in first half. And then board proposes increased dividend in totality to 80 cents per share. Well, thank you.

Thank you.

Thank you, Natali and Jussi. We already have some questions here on the line. Let's start with demand last year, and this is for you, Natali. What led you to mis-evaluate the demand last year so that you ended up with high inventories?

Yeah, I mean, last year was extremely, we said in the first half, it was a bumpy road. At that time, we spoke about the cost inflation that was triggered not only by the demand in the world, but also the war in Ukraine. then when so we started the year strongly with a strong growth top line growth but then as we came to the second half following the war in ukraine following the lower consumer confidence and most importantly i would say our big box retailers focus on cash last year that led to that the inventory remained in our warehouses for this year. So a lot of multiple things that change throughout the year in quite a turbulent year. Yes.

Thank you. Then maybe one for you, Jussi. Can you please confirm the amount you spent on share buybacks in 2022? And will they continue in 2023? If yes, what kind of magnitude should we expect?

Overall, we acquired our own sales worth of 18 million, one eighth last year. And as we announced, if I'm right, in October, we still have a port approval to continue sale buybacks. And then we decided separately when we are going to buy them back. But as I said, we do have an approval in place.

Yes. Then Natalie, if you can take this one. With Wedgewood included as a winning brand, how much of total sales were the winning brands accounting of the total group sales?

Wow. That was a good question that I don't have at the top of my head. Of course, the share of the winning brands start to be quite significant. We have six winning brands, Fiskars being the biggest one, and then the other five. We have to come back to that.

Yes, we'll come back to that. Then we have announced the planned organisational changes. We have a question. Can you provide some more details on how you expect to achieve the 30 million cost savings from this programme?

Very good. This 30 million, of which we say half will come in the second half this year, so half of the 30 million will come in 2023. It's an extremely detailed Excel where we know exactly what needs to be done, by who and by when. And that's the Excel we are monitoring weekly and ensuring we are executing. And again, it's a 30 million savings, but the key driver behind this is to ensure we are much faster, we are much more agile with the P&L accountability end to end for the brands and the businesses. So simplifying our organization and being empowering the frontline.

Yes. And we have again quite many on the inventory situation. Let's see where we start. Maybe with a general question. The inventory decreased from Q3, but was still significantly above last year's Q4. Natalie, if you want to take this one, when will inventory be back at the normal levels?

We have two factors here with the inventories. One is the behaviour of our big box retailers, especially in the US, because they are so big, who are fiercely managing their cash, like we are also going to do now in first half. So here it's difficult to predict how they are going to look at their own inventories this year. So on the inventory side, we also know that our biggest customers' inventory levels are not yet at a very low level. They still have inventory. So it's a question of also a bit of when does the spring season start? When does a big loading of Terra start for the summer? Secondly is that many of our big box customers, their financial year, some ends in end of January, for example, Home Depot, some end even later in the year. So they're managing on cash, which is extreme focus on cash. It is not tied to the same calendar year as we are having.

If you may, on inventories, our inventories, I mean. So if you take a longer period there, actually, it would be good to define what's the normal look like. Because at the time of COVID, we were unsustainable low level. And now I would say from mid 2022 or early 2022, Two, we are unsustainable high level. So if we take a period before these kind of volatile events, then just looking at our numbers, we are roughly 100 million above in trade working capital versus our long-term trend.

Maybe continuing on that, we have a question. In which divisions and geographies is the excess inventory?

I can start. The majority of the excess inventory is in the US due to the cold spring and summer in the gardening last year. So that's the majority in Terra US. Another part is here in Europe, where we made a conscious decision last end February, March, when the war in Ukraine started. And we ourselves started to significantly build up the Vita inventory as the energy situation and gas availability in Europe at that time was extremely uncertain. So we took that decision ourselves to build up the inventory to secure Q4.

Still continuing on the inventory topic. And Natalie, a question for you. Some Terra deliveries were cancelled in the US in late 2022. Have you seen those orders coming back now in early 2023?

Yes, that's right. And after the highly successful Black Week and Cyber Monday that was successful for us from Australia all the way to Portland, the whole world. Then after that Black Week, we saw many orders being cancelled. Many additional replenishment orders didn't come. And do we see them coming back yet? Not as forcefully as you might expect because of this financial year ending, not being at the same as we have with the end of December, but being later in Q1. So it's very much tied again to the big box, how they are managing their cash and their inventories.

And a follow up on that. How good visibility do you have on the customer inventories?

Very good. And I can say that with confidence because we have over the year been boosting our digital team and the investment in the digital team and the data and analytics we get from our team is just amazing. It's amazing. And this gives us in the future much more foresight into where the business is going. So the key to all is data and analytics.

This is especially the case with the US, where we have very good visibility for most of our customers.

Then I think this is the final one on inventories. You mentioned earlier that the inventory reduction in US retail is likely to continue in Q1. Is this still the picture? And are you expecting similar sales drop in Q1 as in Q4? And I think partially we've already covered, but maybe the sales drop in Q1 as in Q4, so what? What is our answer on that?

Well, we are saying also on the guidance, our outlook and also that we are focused on profit and cash. That just shows that it's uncertain environment we are in at the moment. Then if we take a broader perspective, outside of Q1 and maybe 2023 and above, we firmly believe US will pick up faster than Europe. And I personally think that China will be a big success surprise this year because of the opening of the whole country. But it's Q1, Q2, it's uncertain world we are living in, and therefore our focus on profit protection and cash.

Yes. Then moving on to our EBIT guidance. Natalie, a question for you. Do you assume sales to decrease? You will have at least FX headwinds.

Yeah. And we have a lower consumer demand and the high inventories at our customers. That's our assumption, yes.

Maybe one for Jussi. How do you expect your material costs to develop this year?

It's a bit twofold. First of all, when it comes to raw material prices, we already see a decline in prices there, as well as in inbound freight. So those are the ones coming down. When it comes to outbound, when it comes to energy cost, and then we are expecting also certain salary inflation there. So these are balancing out the benefits that we are getting from declining prices. Overall, our rough inflation estimate, of course, it's coming from different streams, is roughly there at mid to high single-digit level, what we are expecting.

Yes. And Jussi, if you continue with the next one, please provide some colour on the cross-margin moving parts for this year.

This year, of course, I can't highlight enough the importance of this commercial excellence. It's not only price increases, it's also how much we get the floor space in the stores, how we get our product in the high margin channels and the likes. So that's the one which continues driving up our gross margin together with D2C. So when D2C is taking more share of our sales, the gross margins are improving. So these are the key drivers what we have in our portfolio. And of course, what we have said many times is that these kind of external things, be it currency, be it cost inflations, of course, we need to be able to mitigate those through price increases.

Thank you, Jussi. And now I still have one more question left. And I want to highlight that if you still have questions, you have time to type in the chat. It always takes a bit, a while before they show up on the screen. But while I'm waiting, I'll ask the final one that I have right now. And Natalie, if you can take this one. Are your 2025 financial targets for growth and EBIT margins still valid? It is quite soon. And now you guide for 2023 EBIT to decrease.

We are committed to our long term strategy. Well, it's not that long term. Our growth strategy, the whole how we're driving the company and also those financial targets. There's been a bit of bumps in the road, like 2022. This year also is not easy, but that's absolutely where we're heading. Full speed ahead.

Yes, definitely. And now I can't see any more questions. Maybe I'll give it just a few seconds if anything pops up. OK, doesn't seem like there are any more questions. So thank you, everybody, for your active participation and have a nice rest of the week.

Thank you.

Thank you.