Harvia Oyj

Hello, everyone, and welcome to Harvia's Q1 2024 earnings webcast. My name is Mattias Järenfelt. I'm the CEO of the group, and with me, I have Ari Vesterinen, our CFO. Hi. To begin with the presentation, I will cover first the highlights of the quarter, and after me, Ari will be covering the financials in more detail. First, top line. Our revenue increased by 2.3% to 42.4 million euros. Organic growth was 1.4%. During the quarter, we had some negative impact from the political strikes taking place in Finland. The sales results were supported by strong sales development outside Europe, both in North America and our APAC Middle East and Africa regions. On the other hand, we faced some severe headwinds in Northern Europe. Market continued to stabilize in Central Europe. However, the level of demand in Central Europe continues to be below its normal long-term potential. Our good performance in North America continued to support our sauna room sales, since the majority of our business is selling complete sauna kits or sauna rooms to the markets. On the other hand, weakness in Northern European business impacted especially our equipment business, namely wood burning heater sales. Profitability and cash flow was on a strong level. Quarter one adjusted operating profit was 10.1 million euros, which is around 9% more than quarter one before last year. Adjusted operating profit margin was around 24%. Cash flow continued to be on a high level and cash conversion was 95%. We were able to deliver these strong profit and cash flow results due to high performance in our operations, as well as our commercial execution, including pricing management to optimize for both sales and margin. At the same time, we also saw support from inflation being less in some of the key materials, gases and components in certain key markets of ours. Going forward, we have heavy focus on driving growth. We already have a strong level of profitability and a key lever for us to drive the value of the company is to scale the business up. And we have been implementing a number of activities during quarter one. One of them is that we've acquired land around our Northern American factory, which will support the continued development of the site for the years to come. We have also implemented our new organizational structure, effective 1st of January, and it has started well. And overall, we stay very positive in terms of long-term outlook for the business where we are. A bit more detail for the quarter one results. As said, revenue was 42.4 million. That's one million euros more than the quarter one last year. At comparable exchange rates, revenue increased by 2.7% and organic revenue growth was, as mentioned, 1.4%. The difference between organic and overall revenue growth is due to our rather small acquisition of Phoenix Elmec, a component manufacturer in Italy last year. Operating profit was 9.9 million euros and adjusted operating profit, as said, 10.1 million euros, which is roughly 800,000 more than the year before. And relative profitability increased by 1.4 percentage points to 23.8%. At comparable exchange rates, the adjusted operating profit was 10.2 million and 24% of the revenue. Earnings per share during the quarter were 40 euro cents, and that compares to 34 euro cents year before. Operative free cash flow was 11.1 million euros. We are very solid. Net debt was 26.5 million and our leverage is 0.6. The rationale here is that we feel that there's plenty of opportunities for growth in the market, both organic and inorganic, and we want to make sure that we have war chest to invest when the opportunity arises. Equity ratio was 52.4%. During the quarter, we've continued to implement systematically our strategy. Increasing the value of average purchase essentially means that we want to get more money out of every sauna built or every sauna renovated. One key part of that strategy is continuing to sell our full sauna kits or sauna solutions. And the Northern American performance is heavily driven by our success here. Also, we have been selling well our premium range of offering during the quarter, especially in Central Europe, where we see on average higher prices for the equipment compared to, for example, our Northern European region. And we are definitely working on an ongoing basis to deliver in the future even more exciting innovations to the market supporting this strategy. In terms of geographical expansion, over the past years we've expanded our distribution and currently our products are sold in around 90 countries. Right now our key priority is to make sure that we drive actively market making and take share in the most important markets. For example, US and Japan being examples. And I'm very happy to see that the results of this systematic work is also bearing fruit, as can be seen in our performance, for example, in the US. And Japan was a key driving force for our growth in APEC Middle East and Africa. At the same time, we recognize that still majority of our business is coming from Europe, and it's very important that we are able to turn it back to sustainable growth, and we are implementing a number of activities to support our European business in the quarters to come. One core pillar of our competitive advantage is that we are able to produce products that markets want and do that in a sensible, effective manner. There our operative performance plays a key role. And again, I would like to thank our team in Harvia for delivering such strong results again during this quarter. And we've continued also developing our capabilities for future improvements in productivity. As mentioned, we also acquired land around our West Virginia factory so that we can continue to invest both to continue to modernize production and also increase capacity as a market demand requires. And the new organization model became effective from 1st of January, and I'm happy to report that it has started to perform well. Here we can see the geographical and product group split of our revenue. As communicated during last year, we changed somewhat our geographical segments. Now we have four regions, Northern Europe, which consists of the Nordic countries, Finland, Sweden, Denmark, Norway, as well as the Baltic countries, Estonia, Latvia, Lithuania. It also includes Iceland. The green one here is continental Europe that includes Germany and the other European countries. Red is North America and yellow is APAC Middle Eastern Africa. Here you can see that 60% of our revenue came from the European regions. 28% came from Northern Europe and 32% came from continental Europe. The biggest shifts in this picture is that the Northern European weight of our total revenue distribution was less than the year before. One year ago it was 34% and this year 28%. And on the other hand, Northern American roll continued to grow from 27% of our revenue last year to 32% this year. And some slight increase also in our APAC and Middle East in terms of the share of the total pie. Revenue by product group still continues to be dominated by what I would call equipment business, mainly selling heating equipment and control units. Blue one is saunas and Scandinavian hot tubs. The sales for saunas and Scandinavian hot tubs was supported by our strong performance in Northern America. However, Scandinavian hot tub sales declined, and that's why the share did not change too much compared to last year. So here we can see the regional sales development. And of course, there's one glaring exception in this picture, which the red on Northern Europe declining by 2.4 million euros compared to quarter one last year that 17% declined. This is basically a combination of a number of things. One is that in Northern Europe, the biggest market for us is Finland. And in Finland, construction market and also property market are at very low levels. And typically when consumers make a sound renovation, it has to have a trigger event like a move. Another trigger event, of course, is building a new house. And, you know, because of the property market and construction market being on a low level, that does have an impact. Another big market for us in Northern Europe is Sweden, where as mentioned already in our quarter four report during last year, there is a significant customer channel shift taking place as one of our key customers is restructuring their retail network in Sweden. On the other hand, we see a great development in Northern America and our Northern American business has already, is basically from 2019 to 23, it's four times as big and it continued to grow again by nearly 24%. Of course, this is a great performance and heavily supportive to our business and will continue to play a strong role in our strategy also going forward. APEC and Middle East and Africa also grew over 20%, and the main market driving this performance is Japan. We have been also taking a very active role in driving market through our Harvia Japan Limited joint venture. Continental Europe remained flat compared to last year. Revenue by product group now not so big red marks anymore compared to, for example, some of the reports during the last year and more of blue, which is, of course, great. Saunas and Scandinavian hot tubs grew by half a million. That's 5% compared to last year. And as I said, sauna room sales grew more than that and Scandinavian hot tub sales declined. Accessories and heater stones also performed pretty well during the quarter. Now let's look at then our quarterly performance, both in terms of revenue and adjusted operating profit since 21 to this year. One of the things that you could draw your attention to is the fact that when we compared the quarters last year to this year, we can see that the biggest quarter during 23 was quarter one. And that was the only quarter during last year where we sold more than 40 million worth of, delivered more than 40 million worth of revenue. And we increased that. Looking at quarter two and quarter three from last year, we can see that the base in terms of comparison figures is much lower. Another point to make is regarding quarter one performance is that actually with 42.4 million euros, it's the second highest quarter one ever, with the exception being the quarter one 2022, which was the all time high at nearly 51 million euros. In terms of adjusted operating profit, we delivered 10.1 million euros, and that's more than during any of the quarters during last year. We see plenty of opportunities for Harvia to grow. One of them is that we want to play in all of the three global sauna types, that's the Nordic sauna, the steam sauna and infrared sauna, and also play more of the solutions game, which is a strategic priority for us. And right now, most of our revenue comes from selling equipment to the Nordic sauna. And the shift to solutions is supportive to our long-term growth ambitions. And in the coming years, we have ambition to significantly grow also our business in infrared and steam saunas. And the strategic priorities, we continue to drive them systematically. Increasing the average purchase value said is essentially we want to get more money out of any sauna built or renovated. Geographical expansion is very much about being active in market making, in markets that matter, and productive improvement continues to be in the heart of our strategy also going forward. Now, Ari, you can go through the finances more in detail. Yeah, thank you.

Okay, here we have the comparison table of the most important finances. Okay, the revenue grew 2.3 percent. This is the accounting revenue. There is something in the background also. Last year we had really the pipeline quite empty. Order stock very well shipped at the end of March. Now we shifted for certain reasons. The strikes in the harbors and Also, for the sake of effectiveness, some sales did a quarter too, so this describes just the accounting numbers, but the effect is, well, over one million at least in the comparison between the two years. But yeah, we are reporting the accounting numbers. Then what is important is here to see how the adjusted operating profit has improved in relation to the sales. We were having a 2.3% increase in the sales, but the adjusted operating profit increased almost 9%. So our effectiveness of the company has been improving quite nicely. This time it came, if you compare the interim report line by line, mainly from the difference in the material and service costs. We have been not anymore facing so strong inflation. as in the past and we have quite good pricing power in respect of the sales prices. So we have been improving our material matching quite nicely still. Then the basic earnings per share has been improving also clearly more than the sales increased. That's due to certain actions in tax planning and other like financing costs which have been going down thanks to the good cash position which has been invested to earn some interests. Net debt has gone down substantially compared to last year, and that's because of the strong cash position and tight control of the net working capital, which has also gone down about 9 million compared to last year. and couple of millions compared to end of last year. So the company has very strong financials, good profitability, and we are really happy about the situation where we are now after the recovery years from the COVID and so forth. As you see, we have been also able and willing to employ more people. For Harvia Group end of last year we had 605 employees, now 20 more after three months. So we are growing in production and in operations. Here we see the development of the cash conversion and the free cash flow. It's always been very strong in Harvia and that development continued also this quarter. As we see from the left-hand picture, the interest-bearing net debt and leverage have been going down quite rapidly. The peak time in Q3 2022 was after the acquisition of the EOS minority last 20%, and after that we have been earning quite well money. and controlling our networking capital, not having too high investments volumes, so we are going down with the net debt quite rapidly. Actually, we had end of Q3 altogether 1.5 million cash and we try to earn also interest with that but it's also, as Mattias mentioned, to be prepared for potential acquisitions. We would have, of course, the opportunity to also pay back the loans, but we don't do it right now. The net financial items have been quite stable, even if the interest rates have gone up, but since we have some cash earning also interest income, so that stabilized the situation a little. Here we see the investments in tangible and intangible assets. They have been growing in Q1 2024, and that's mainly due to the investment in the plot of land in US around our current factory 8.7 hectares roughly. So we have their opportunity to expand the factory and the logistic facilities also in future. The distribution of the shares has changed quite much compared to last year. One year ago we had about 5% less international investors, 39.5% and now 44%. So the international investment funds have shown great interest towards Harvia and they have been investing again in Harvias shares. The share which has gone down are the Finnish households. Now there are about 28% of the shares in Finnish households, and it was almost 6% more a year ago in this time. And you can see that development also from the right picture, how the amount of the shareholders, there are mainly small shareholders, households, private people, that amount of shareholders has gone down. But at the same time, the market value of the shares has increased from roughly 410 million to 720 million. The Harvia's long-term financial targets, as you may know, we target average annual revenue growth exceeding 5% and profitability over 20% adjusted operating profit margin, which we exceeded clearly during Q1 also. and the leverage target is between 1.5 to 2.5. Now we were at 0.6, so we've been quite strong in cash and that means also that the leverage, we are under the leverage range currently. Harvia pays regularly increasing dividends and biannually. We had the organizational management changes from the 1st of January, as Mattias said, and that has been implemented very well and we are now going forward based on the new organization for geographical regions and EOS as a special brand and then the group functions and Internally in the management level we are also reporting and targeting the results on that level. And Jennifer Thayer has also studied very well in US to manage the US business. We had actually last week the AGM, Annual General Meeting of Harvia, and the Annual General Meeting approved, based on the Board of Directors' proposal, €68 per share to be paid as dividends, and the remainder of the distributional funds be transferred to shareholders' equity. And the first installment will be paid actually beginning of next week, 34 euro cents. And the other 34 euro cents will be paid in late October 24. Okay, questions. We have had some questions here coming through the chat and I start just from the beginning and you can answer, I can answer and so forth. Any comments from the start of infrared saunas under almost heaven saunas in the US?

I think it's a bit early to comment on that. Overall we see plenty of opportunities for a strong role for Harvia also in infrared saunas in the US market. We know that infrared plays a very significant part of the US overall sauna market and that by being mainly focused on the traditional saunas in the US, has limited our market potential. And we are determined to change that. We see that there's plenty of very interesting differentiation opportunities for us in the infrared. Of course, one example is so-called multimode saunas that, you know, sauna cabins that come with both traditional heater and also infrared panels. But, you know, key competitive advantage for us compared to the current competition is that, you know, we have a very efficient production facility in West Virginia. And we have certainly plans to offer high quality, very attractive, innovative, made in America, infrared saunas in America going forward.