Fiskars Oyj Abp

Hello, and welcome to Fiskars Group's Q1 2023 results webcast. My name is Essi Lipponen, and I'm the Director of Investor Relations. I'm here with our President and CEO, Nathalie Ahlström, and our CFO, Jussi Siitonen. As usual, Nathalie and Jussi will first go through the presentation, 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.

And from my side also, welcome here to hear about Q1 in Fiskars 2023. When we headed into Q1, we said that our focus is on cash and profit protection. And I'm here proud and happy to say this is exactly what we have delivered in Q1. Fantastic improvement in cash and at the same time protecting the profit. When looking at the quarter, what we already saw in Q4, the decline in consumer sentiment and retailers' high inventories, that trend continued in Q1, which especially hit our net sales hard in the US. Despite that, our strategic focus is paying off. Our direct-to-consumer continue to outperform significantly, actually outperform the growth in other channels, especially wholesale. And then for 2023, we keep our guidance for 2023 that our EBIT will be slightly below last year, 2022. But let's look into Q1. What were the facts in Q1? Starting with the top line, and here you really see what we talk about with the macroeconomic and the consumer sentiment. And this hit us as well, where we see that the top line dropped. But despite that, we were able to keep EBIT protection and that worked. Also, what we are very pleased and happy about is that we were able to keep our gross margin despite the soft top line. And the gross margin really is the engine for profit growth as the consumer sentiment comes back eventually, that then the gross margin will keep us driving profits up. So keeping the gross margin at 46.4 was good in this quarter. Looking at free cash flow, and Josse will talk about that more, this was a quarter where we had positive cash flow. And also then looking at the delta from last year's Q1 to now, it's quite a significant step up in cash flow of 83 million euros in cash flow improvement. And then earnings per share, of course, with this a bit down, but still at 0.25. On Vita, I think the important here with Vita is also where here we see the sales decline in net sales. But we see that the profit level of total EBIT still is a very high level. So we have been able to turn around ETA from the past to a total new level of EBIT. And we are able to, despite the soft top line, to maintain this EBIT level. The real drivers also in Vita continues to be the e-com, the good growth of e-com across all the brands. And this also shows the power of the brands, consumers, are loyal to our brands, consumers are attracted to our brands. And this fantastic e-com growth is a proof of the power of our brands. And also the content and the lifestyle they get from the e-com. And one good example of this is Moomin by Arabia, that was clearly growing significantly in Q1. Then in Terra, The same we discussed about in Q4 continued in Q1, where the US big box customer retailers focus on cash and focus on reducing inventories continued. That was one fact. The other fact was that in the northern hemisphere, the spring has started in a very cold manner and that has kept the consumers from coming and starting the gardening season and at the same time also retailers hesitant to take replenishment orders before the season starts in. On the good side, we can see that despite the drop in the top line of roughly 20%, we can see that the EBIT margin, we anyway were able to keep at quite okay level, thanks to the profit protection focus we had in Q1. Then on CREA, that was a very stable development for CREA and supported by the timing of shipments in the US. These shipments are often moving a bit from one quarter to another quarter, but very stable development in CREA as we have seen in the previous quarters. Then our strategy. So in Q1, focus is and continues to be on profit protection and cash. And what also helps us in this focus is our very focused growth strategy. And we'll continue also in these times of the macroeconomic challenging environment to invest behind the growth drivers, behind the transformation levers. So this has been very important to us, despite profit protection, that we continue to invest behind direct-to-consumer, behind digital and all the transformation levers seen here. Then take a look at how did it go in Q1 with our transformation levers that we are so focused on. Of our transformation levers, we're happy to say that three out of four are delivering. And they are delivering significant step change. And this is future-proofing our company. This is future-proofing our brands as we go forward. And also, as I said earlier also, when the top line comes back, we are even in a stronger place. Starting with commercial excellence. Commercial excellence, of course, is a very broad area where we're looking at in-store excellence, online excellence. How are we working with our big wholesalers? And this we are measuring by the gross margin. And the proof that we were able to maintain the same gross margin level, that's why I'm very happy about that, because despite the soft top line. So we had successful actions to mitigate the cost inflation and we're able to keep gross margin. Of course, also then the structural change we did already last year with selling US watering has helped on reported figures, but also the organic gross margin we were able to keep at the same level. Then direct-to-consumer continued to deliver. Our e-com grew 12% in Q1, and that's quite massive when thinking that the whole Fiskars group, driven by wholesale, the top line dropped. And despite that, we were able to grow e-com by 12%. Also physical retail, although at only 1%, but still physical retail, our own stores also growing in Q1. So this talks about the power of the brands in our portfolio. The challenge, of course, is US. In US, like in Q4, the trend continued in Q1 and top line came down, net sales came down minus 21%. This is especially in Terra, where the shipments for the gardening season have been delayed because of the cold spring, but also from big box retailers Less risk-taking appetite to take in inventories and also focusing on cash flow. And then lastly, always our joy to talk about China. And of course, China being the second largest consumer market in the world, continue to deliver, growing 14% in Q1. Last year in 2022 in China, we grew over 30%. And now looking at 14%, that might sound a bit low. However, what we had in China was that in January, we have the serious COVID. Then February, March, the growth trajectory was back to last year's level. So fantastic performance yet again in China by our local team in China. On ESG, of course, also we're transforming the company on the sustainability level and taking steps forward there. And here you see the progress on these. And these are slides we will be showing in every quarterly report so that you see how are we progressing. And from this slide, you see that the clear area where we have opportunity to further improve is on circular products. Today, it's 9% of our total products are made out of circular recycled products. Here we have more to do. However, with our focus on pioneering design, our purpose to be pioneers, to dare to do new things, I have no doubt we will soon see also step changes in this area. Other highlights from the quarter is, of course, MyFiskars. We launched in March MyFiskars. MyFiskars is our employee share savings plan. With MyFiskars, we want to have the ownership culture in Fiskars among all the employees. MyFiskars is really for every employee in the whole company. And it's not only the ownership culture we are creating, it's also the entrepreneurial mindset. To be there, curious, drive the business forward, take accountability and feel, this is my company, this is my shop, this is my warehouse, wherever our employees are working. And we've seen a fantastic response throughout the globe for MyFiskars and a good excitement to enroll into the program. Then in line with our purpose, pioneering design, we're also proud to share that we won in Q1 two Red Dot Design Awards. We have over the years won a lot of Red Dot Design Awards. This year we won two. So it's a good step up. And this year we won it for the Fiskars Allsteel cookware. And also for the fifth generation Axis, fantastic Axis. So proud of the teams in innovation and the cross-functional teams behind this. Talking about the innovation and again, future-proofing the company. And also continue to strengthen talent in the company where we have Amir joining us mid-July as Chief Supply Chain Officer and driving the transformation in supply chain. We also came out in end of January talking about organizational changes that we are doing. These are progressing really well. What we are doing is that we are making our business areas and the brand teams end-to-end accountable to simplify, to make them more agile and really be empowering the teams to drive their own brands and be relevant for the consumers. As I said, this is going well forward. We said at the time we would be reducing roughly 100 roles globally. All of this has been executed already. So it's already executed. And the total annual cost savings that we reported then in end of January is 30 million euros, of which half we're expecting to already materialize in the second half in 2023. The total one of cost expensive already recorded is 2.2 million euros in Q1. So organizational changes have been executed. The roles have been reduced. And then in second half, we will see the benefits coming in. So a very targeted project executed and moving forward. And then finally, the guidance for 2023, as said, we're expecting our comparable EBIT to be slightly below 2022 level, that is slightly below 151 million euros. And the assumptions behind the guidance is expected continued volatility of the market. And of course, here the consumer sentiment is a key. We also continue to invest in the strategic building blocks, like I was saying, digital and direct to consumer to ensure that we have the resilience and we are strong when we come out with higher macroeconomic environment. At the same time, to our advantages, of course, the savings from the organizational changes from second half onwards, and also very prudent cost management. As you can imagine, when we are talking about protecting EBIT, it's very much about cost management quarter by quarter. But with that, I hand over to Jossi.

Thank you, Natalie, and hello, everyone. Before entering into the presentation, Natalie talked about red dot winners, and here you can see the axis, the X areas there. Truly piece of art, very functional. Then moving to presentation, first starting with net sales. Natalie mentioned that we were down 13.4% in Q1. Breaking it into pieces, you can see that Vita was down 9% there. It was down in all its key markets here in Nordics, except Finland. So in Finland, we succeeded to deliver positive growth now in Q1. And in Terra, and also Vitta, we need to remember that roughly 10% of Vitta business is in U.S., and it's very much exposed to similar decline there, what we have also in other BAs. On Terra, we were down 19%, and Terra in Q1 is 50% of the total group sales. So, it will have a significant impact on our total development here. And also, just to describe how different market USA is for us, Terra, top five customers in US. Each of one are bigger than many of our countries. They made half of this decline of 30 million, what we had in Terra. Crea, thanks to those phasing of the shipments, we will succeed to be flat in US and then also in Nordic, so there we were only down 2.8%. If you take it by regions, so broad-based negative in Europe, except Finland and export, there were ones growing in the European area. USA, we talked already about, and APAC was down this 6% there, so that China was the only one growing of those big countries, what we have there partially mitigating this negative trend. Then moving to EBIT. In Q1, what we need to remember first, that last year, 2022 Q1, was all-time high EBIT, what we have delivered as Fiscus Group. We came down there, on like-for-like basis, roughly 19 million, out of which Terra made 11 million. And if we move the components there, how this all happened, you can see that volumes was the one taking down our EBIT there. We succeeded to partially mitigate that with some OPEC savings, all in all roughly 3 million what we had in Q1. But you can't compensate this kind of volume drop what we faced in Q1. Gross margin, which is the driving force of sustainable profitability, we had improvement there in Vita. So Vita succeeded to improve gross margin, even in this critical market situation. Crea was flat and Terra was then down on gross margin perspective. A word about this gross margin there also. The cost inflation, what we faced in Q1, was approximately 6%. And that's also our full year expectations that they're at mid single digit. Inflation rate is built to our forecast. Then on cash flow, and as mentioned, cash protection works. This was one of the key themes when we started the year, that we need to get cash flow back on black numbers there. And Q1 cash flow was positive of 13 million. And taking our historical seasonal pattern what we have, typically Q1 cash flow, free cash flow, is negative due to the fact that networking capital is growing in Q1. Now, networking capital was slightly down. We got 18 million more cash flow from inventories, especially from Terra and Crea. And that's based on the actions that we have taken. So when it comes to supply, practically all our operational factories, if I leave out those showcase factories there, so all eight factories were either down or at limited capacity. And of course, the impacts are already partially there in Q1, and then more even in Q2. So 25-35% less own manufacturing, 50% less sourcing there. So these are the decisive actions we put in place already late last year when we saw the trend. On working capital, as said, typically Q1 is always going slightly up versus the year end. Now it came slightly down, 10 million down versus last year, mainly driven by Terra inventories there. Admittedly, we still have work to do. So however you define what is a sustainable, efficient net working capital level, we still have a lot of potential to continue improving our working capital with those plans we have put in place. On balance sheet, net debt increased, but remained still well below 2.5 threshold. Main reason for increase was the first part of the dividend we paid in March. So that's roughly 32 million there, partially offset by positive free cash flow, still took up our net debt. And then also when it comes to lease liabilities here, we finalized some long-term warehouse lease contracts in US, which took it up. One thing where the focus continues being is to improve our capital turnover and asset efficiency further. Then as a summary, this challenging operating environment that we have is very visible in our long-term financial targets. So net sales, if we take last 12 months at the end of March, we were down 4.7%. EBIT were at 11% level, whilst the target is to be there at roughly mid 15. Last well-managed cash flow, still slightly negative. We are getting towards the breakeven and then hopefully towards the target, but it's still negative there at the end of March. And then balance sheet well below 2.5x. That was about all financials. Giving back to you, Natalie.

You used the word decisive, and I would say that's how we are and how we are operating. So the focus is paying off. We are focusing on cash flow and profit protection in Q1 that delivered results. The macroeconomic and consumer sentiment around us was tough, continue to be tough like in Q4, especially in the US. Despite that, our focus on strategic investment behind direct-to-consumer, that is growing. And as I said, e-com growing 12%, so massive shift from wholesale decline. And finally, we keep our guidance of 2023 and say that comparable EBIT will be slightly below last year. With that, over to you, Essi, with questions.

Thank you, Natali and Jussi. We already have quite a lot of questions. Maybe we can start with inventories. There is a question, Natali. Is there a retail inventory problem also at your European retail customers?

Yeah, that's a good question. The inventory problem is global. However, what we are facing the most is in the US with the big box players who take very quick decisions like they did after the Black Week in Q4. In Europe, our customers are much smaller, so it's not that drastic. But yes, we see elevated inventories here in Europe as well.

Yes, and maybe a follow up on that. How about Asia?

In Asia, our net sales is mostly in own stores. If we look at Japan, China, that's mostly own stores. So that's in our own hands, the inventories. Australia, the same problem with inventories as retailer we have there as in US.

Yes. How long do you see retailers continuing to drive down inventory levels? Do you have a view on that?

Thanks to our data and analytics team, we have quite fact-based view on this. And we see that, especially with the Terra, as soon as the cold spring stops, we will see ease of that. But inventory levels are quite inflated still.

Let's continue with the same topic. In the US, Natalie, is the retail inventory problem only in the garden products or also something we should worry about for H2?

In inventory, when we look at the US, it's in the big box, so that's terra, gardening, where we are having it, and therefore very weather dependent. In Vita, we've also seen bigger inventories at our department store customers, at their retailers, and they are depleting them at the moment. all going well, they should have cleared out before the second half and also when we come to the very important Q4.

Then a question about our own inventories. What kind of products is in that inventory at the end of Q1?

And Jussi was addressing it saying that with our focus on cash, we've really been focused on cash. We have reduced our own sourcing by roughly 50%. Then in addition, with the furloughs at our factories, we're reducing own production by 25 to 35%. So that's already impacting also that we are not building more inventories. Then the question, what kind of products do we have in the inventory? In Europe, it's quite Vita-heavy, thanks to our decision ourselves after the Ukraine war started, where we wanted to make sure that we had products when the energy situation still last year, in March last year, was uncertain. So we ourselves built up the Vita inventories ahead of Christmas season last year, 2022, So those inventories in Vita, we are now depleting. And then in the US, it's the Terra inventories.

On that topic still, so roughly 10% of our gross inventories is so-called excess and obsolete. So the clear focus what we have at in Q1 is to get this excess and obsolete inventories also down, because then it's not only a cash flow impact, but it has also a profit impact for us.

Yes. Maybe then moving on to Terra and Natalie, if you take this one. Have you seen any pickup in gardening sales in the US after Q1? Or are retailers' inventories still at high level? Well, that we already discussed. So yeah, if you can discuss what's been happening after Q1.

Yeah. Q1, now we are in April. Actually, last week we saw at certain big box retailers in the US a pickup, at certain of the big ones. And like we said many times, our customers in the US are bigger than European countries. However, some still didn't see the pickup. And we also know that still this week, even in the US, the weather was very cold. But some good signs.

Yes, then continuing on Terra and a question for you, Jussi. In Terra, Q1 net sales were roughly in line with 2020 and 2021 levels, while profitability was clearly higher. How large part of the improvement is due to the divestment of US watering business?

Yeah. U.S. watering, when we divested it, it had a top line impact of roughly 70 million euros. It was very dilutive to our gross margin. And then on EBIT, actually not a big impact in the slides, but we saw those EBIT bridges, these structural changes, which is now in Q1 when we compare last year, it was only less than 2 million.

Okay. Yes. Then a question. about CREA, and Natalie, if you take this one. How large top-line effect from the timing of shipments in CREA were these advanced shipments from Q2?

These CREA shipments, and we will see it also in Q2, Q3, Crea shipments in US are sometimes quite big, and depending on which day they fall on, then they come. But in terms of growth, it's a few percentages. They were not advanced shipments. They were how they happened. And usually also then in Q2, Q3, we see with the back to school timing of where they come. But Crea is a very stable business.

Yes. Then a question on China. Natalie, in China, there was a pickup towards the end of the Q1. Can you comment of growth rate in March, and have you seen similar development after Q1?

Yeah, in China, January was negative growth figures for us. The hard COVID in China, consumers didn't move around. Everybody were a bit on lockdown. Then in February, it came up and in March, it was at the same levels as the whole last year. So roughly 30-40% growth in March. And we see that trend continuing. thanks to the power of the Chinese market being the second largest consumer market in the world. And secondly, our China team is doing a fantastic focused work. Yes, indeed.

And Jussi, if you take this one, organically, cross margin was down 20 basis points. Have you estimated how large impact lower volumes had on cross margins in Q1?

The way we have made those furloughs and downtime in the factories, they have been quite effective way, how our supply chain have succeeded to do those. So the impact is very marginal, what we have there, due to the fact that actually the additional fixed cost, what we have to upsell there, we have succeeded to put very minimum. So not any significant there.

Maybe continuing on this topic, Natali, what kind of production plans do you have for the coming quarters? Are they down as much as in Q1? And when are you expecting to get your production overheads to better match the lower production volumes?

When we talk about the furloughs in our production units, they're actually more in Q2 than in Q1. For example, Itala is going on quite a long furlough, which coincides with a big investment we are doing in the Itala factory, where we are stepping up the sustainability CO2 footprint of the factory. So we are timing them like that. So that's on the production itself and the plans for Q2. Then when it comes to the overheads in supply chain, with a focus on EBIT protection, of course, we are looking at that all the time. Yes.

Then you see a couple of questions on costs for you. How have raw material prices and logistics costs evolved during Q1? And what kind of an impact should we expect during the rest of the year?

I think I partially answered that already. So, in Q1, we faced roughly 6% cost inflation there for the full year. We see that we will stay there at roughly mid-single-digit type of inflation. We see raw material price decreases at the same time. However, when the volumes are lower than what they were last year, of course, the impact is somewhat smaller. At the same time, what we need to remember that the total wages and salaries, what we have in fiscal 250 million, there we have roughly 3% to 5% salary inflation. So that's coming on top of that.

So there is also a question, is the 6% cost inflation mentioned cost of goods sold only or COGS and OPEX together?

This 6%, what I referred, that's the cost of goods.

Okay. Then, Nathalie, are you able to raise prices in 2023? And if yes, in which categories?

With commercial excellence, it's a big toolbox that we are working on. on the right channels and what are the right products and mix for those channels. And then looking there, what is the right pricing. In the past years, we worked a lot on this and we will for sure continue to do this in 2023. So it's more a mix and channel optimization, of course, because we are in a low consumer sentiment environment.

Yes. I just wanted to let you know that now we have only one question left. If you still have more questions, keep them coming. But in the meantime, I will ask the final question that I have for now. Natalie, you start the year with Q1 a bit clearly behind last year. Where do you expect to catch up in Q2, Q3, Q4? Is it volumes, pricing, cost savings, something else?

Oh, this is a good question. It's in second half where we are. So first half is still tough. Second half, that's where the measures from, for example, the organizational changes are going to impact. And then also how to make the year. It's focused on the gross margin enhancement and OPEX efficiency.

Okay, let's see if that was the final one. Yes, there are no further questions. Thank you for active participation and have a nice day.

Thank you.

Thank you.