Harvia Oyj

Hello everyone and welcome to Harvija's second quarter 25 earnings webcast. My name is Mattias Järnenfeld, I'm the CEO of Harvija and with me I have Ari Vesterinen, our Chief Financial Officer. Hello. Today our presentation outline is here. So I will start by covering the highlights of the second quarter in terms of the business events and financial performance. And I will also update you on our strategy implementation. After my part, Ari will then cover more in detail the financial side of our earnings release. So let's start. First of all, the highlights of the second quarter. Starting with the top line. Harvija's top line growth continued, but on a more modest level than we have seen in the past quarters. So revenue increased by .4% to 47.3 million euros. In terms of organic growth, that's 2.4%. When you look at our numbers, you can clearly see that the biggest change from the past quarters comes from the fact that our sales growth in North America was quite substantially slower than we've used to seeing in the past. And basically there's three main explaining factors to this. Market environment, timing of deliveries and weaker US dollar. And let me open these a little bit here. So in terms of timing of deliveries, when we look at the situation we had a year ago, so the comparison period, we had first of all a year ago in the winter season, we actually were in the end of the quarter one in sold our situation with some of our high selling sauna models in the United States. And that meant that part of our order intake from the winter last year then was moved to the quarter two in twenty four. The other factor affecting timing of deliveries a year ago was that we had political strikes in Finland during that time. And our largest heater equipment manufacturing facility in Murame had some challenges in delivering because of those. And that also meant that deliveries towards to significant part US were postponed a year ago from quarter one to quarter two. This year we were very successful in inventory management and having good availability for our products in the US. And there was no disruption like we experienced a year ago with the political strikes. And it's actually visible when we look at the quarter four and quarter one numbers for the US. So quarter four last year we grew by 60 percent in the United States or North America. And we also grew by 60 percent during the quarter one this year. So that shows how successful we were in capturing the high selling season during the past half a year. But then that left no support from the winter season to the quarter two this year. So that's one factor. And actually it's multimillion impact on kind of baseline. And then the second thing is the weaker US dollar. And as you know, US dollar has significantly depreciated since the beginning of the year by over 10 percent versus euro. And in fact, it's actually quite historic. So I was actually looking at the history books. And the previous time US dollar had such a poor first half a year was actually in 1973. So 52 years ago when there was the oil crisis of the 70s. So this weaker US dollar had also quite significant impact over a million euro impact on our reported revenue for North America in this quarter. And of course, then there was, I would say, quite substantial volatility in the market environment generally, in particular in the United States, the tariff discussions. And also we saw, in particular, in the beginning of the quarter, the consumer confidence in the United States plummeted significantly. So when we look at, for example, the consumer board consumer confidence indexes, it was on the lowest level since the beginning of the pandemic in April this year. Then we saw gradual recovery as the quarter progressed. But indeed, there has been significant factors affecting the business during quarter to impacting on the United States. When we look at the other regions, APAC and Middle Eastern Africa continent strong sales growth. And then when we look at Europe, it was rather modest. But this is also something that we've seen in our figures in the previous quarter. So the big difference, of course, now comes from North America for the reasons I just explained. Now, profitability operating profit adjusted was eight point two million euros. And that's 17.3 percent of our revenue. And that is below our 20 percent target level. And essentially, there's two key reasons to this. One is that, of course, sales growth was more subdued than than than anticipated. And how do we a growth model is that we need to grow rather at high speed and at high gross margin to finance our sort of activities to build stronger foundations for our future growth. And that means, for example, we are increasing our operating expenses in the areas of marketing, research and development, et cetera. And now in quarter two, there was a mismatch between the sales growth and the rate that our operating expenses have been growing. The other factor was one off in nature. And we are systematically modernizing our IT landscape in the company. And during the second quarter, we went live in beginning of June with a new ERP system in in hardware US. And as part of that transition, there was a full inventory recount, including also inventory valuation. And as a result of that activity, we decided to make a correction of around 800000 euros to the inventory value in the US. That was then impacting our materials cost in the PNL. On the positive side, as you can see in our release, our so-called materials margins or margin we make after deducting materials and services costs from our sales remained on a very good level at around 66 percent. So essentially, the gross margin of the business is at a very high level. Now, if we put this kind of full first half in context, first half actually was pretty strong. We delivered 16 percent revenue growth in total and an over 20 percent adjusted operating profit margin. And even when we look at North America region specifically, North America grew by 35 percent during the first half this year versus first half last year. And that's roughly 10 million euros additional business that we delivered in North America during the first half. Out of that 10 million, roughly half is coming from the acquisition of thermosol. So inorganic and roughly half is actually driven by organic growth. So not too bad. While we've been navigating rather volatile operating environment and kind of macro environment, we've also taken significant and meaningful steps in advancing our strategic initiatives to make Harvia stronger for the future. I already mentioned that we are in the process of stepwise transitioning the whole group to a more modern and simplified IT infrastructure where a significant milestone was hit in the US when we went live in the beginning of June. We also investing in marketing, brand building, making our D2C sales channel stronger and of course our innovation pipeline to strengthen our portfolio of products. And in all of these fronts, we've seen good development. And looking ahead, it's very important we realize in which kind of business and which kind of moment in time we are. Sauna business globally is a growth business that is driven by significant long term growth drivers such as health and wellness, experience, increasing awareness, for example, due to visibility in internet and social media. And we are in the pole position to be the absolute leader of this business in the years to come. So we are systematically continuing to invest in making the company stronger for the future. Having said that, of course, at the same time, we want to deliver strong, solid results all the time. And key parts of that equation are continued sales growth and also operational efficiency to get the most out of our expenses as we develop our business. But in the big picture, we are strong believers of the long term attractiveness and growth potential of this business and of Harvia. So then let's look at the summary of quarter two figures. So revenue at forty seven point three million euros, and that's nine point four percent growth year on year. And you can actually see here that the US dollar had quite significant impact on the numbers because at comparable exchange rates, our revenue would have grown twelve point two percent this year. And the whole difference really comes from the dollar and euro. So in particular, this is relates to our numbers in North America. Organic revenue growth, as said, at two point four percent adjusted operating profit at eight point two percent. I said a little bit below our target level of 20 percent for the reasons I explained in the previous slide. Operating free cash flow was around four million euros, and that's around 40 percent cash conversion. The biggest item affecting cash conversion in this quarter is the increase in our inventory. And I'd like to also give some context to what's happening there. On one hand, we are in high gross margin business, so it's very important for business success that we have good availability of products to deliver when the customers and consumers want them. The other thing is that we want to tap into the market potential in countries like the United States even more than we've been doing so far. So we are launching new products and head of new product launches. We also building inventory. So we have availability of those new products as they hit the market. And then actually quite importantly, importantly, during the quarter to there's also tactical moves because of the tariff environment volatility. So we actually took tactical decisions to ship products from Europe to US when there was periods of low tariff in also anticipation that the tariffs, while we now also know that there is a tariff agreement in place between the United States and European Union, would likely see the tariffs go up. So we have been taking anticipatory steps to build inventory when the import duties are on low level. So this is the explanation for these figures. And then when you look at the first six months in total, a revenue nearly 100 million at 99 million euros, and that's 16 percent growth and organic revenue growth of close to 10 percent at eight percent and growth at comparable exchange rates, nearly 17 percent. Adjusted operating profit in euros 20 million and in percentage 20 percent. Operating free cash flow at 14 million euros and cash conversion at 60 percent. So then we look at the kind of regional growth in more detail. You can see here that we have two regions that really delivered the growth this quarter. It's North America at 13 percent, but this is all growth coming from thermos all acquisition. In fact, organically, we saw slight decline in the business during the quarter, too. But I said there was significant reasons such as the shifting of timing of deliveries this year versus last year between quarter one and quarter two. And then APAC and MEA, which delivered 50 percent growth last year for the full year, continued strong path at 54 percent this year, adding 2.2 million to our top line. Northern Europe and continental Europe, where slug is pretty much flat looking at year to year. Now, first few words about North Europe as I cover all of our four geographical regions. North Europe represents now 24 percent of our revenue and has been pretty much flat for the last three years. And the main explaining reason is the kind of lackluster performance in our home markets in Finland, where both new built construction and basically housing market, property market have been very slow. And there hasn't been a significant uptick even today, while there seems to be some encouraging signs going forward. Also, one factor we believe affecting quarter two this year in particular in Finland and Sweden was actually weather, because in both Finland and Sweden, summer houses or summer cottage holiday houses represent a significant opportunity in particular for the wood burning heaters. And as you might remember, those who are based in this geographical part of the world, we had actually quite poor weather during the spring and early summer. Then, of course, July has been much hotter and nicer, but the beginning of the kind of the summer was not so not so great. And basically, when the weather is great, people go to their summer cottages and renovate when weather is not so good, they stay home. In continental Europe, we've seen gradual growth now for three years, but this quarter was rather modest, flat year on year. It's very clear that we see significant opportunities here and are systematically working to turn this region to a more substantial growth. And one important step in our journey is that we've appointed a new region head for continental Europe, Ivan Sabato, who joined us from Techno Gym. And he started in his position in the beginning of the quarter, so first of April. And we're very much looking forward to having him in the in the team and seeing the results that he and the team will be delivering in the in the coming years. Then let's look at North America. And of course, you can see that we have had a rather strong track record of multiple years. And even if we go further back in history, this time the growth rate was somewhat more subdued at 13 percent as discussed than the history. But we need to also put it in the context of that we have two 60 percent growth quarters behind us. And when we look at the first half in total this year, I said it's 35 percent growth and half of it is organic. And I think it's actually pretty good achievement given everything that has been happening around us in terms of currencies and kind of micro macro environment, including consumer confidence. Now, maybe a word about the consumer confidence. We are very glad to see that the kind of dip happened in the beginning of the quarter. And since then, the consumer confidence has gradually been being picking up. And we also feel it in the business and felt it in the business that that in the beginning of the quarter, there was a visible slowdown in the activity. But at the same time, then we have seen that as time progressed, things have been getting better. APEC and Middle Eastern Africa, strong growth continued. And when you look at this figure and in particular the figures from 22 significant portion, roughly half of it was Harvey's business in Russia, which we closed down all of it during the year of 22. And then we had to start to rebuild the business in the region from rather low levels. And I'm actually very happy to see that in rather short period of time, we've been able to bridge the gap that Russia and exiting Russia left in our books. And while we comment here that this is the smallest region, it's already 14 percent of our top line. We also comment that that they're unlike the other regions, project deliveries in Patrick in Middle East play a rather significant role. But I'm also happy to say that we had strong double digit growth figures also in other focus markets like Japan and China in this region. Then let's look at the product dimension. As we've communicated, Harveya wants to be the absolute leader in the sauna products and solutions worldwide, including products across the sauna types of traditional Finnish sauna, infrared and steam, and also different price points and different applications in terms of private and professional customers. Now, if we look at the share of revenue from different product categories, we're still quite heavily a sauna technical equipment for sauna. So heating equipment over 50 percent of our revenue and similarly technical equipment like steam generators. That's 10 percent of our revenue significant growth from last year driven by thermosol acquisition. Saunas and Scandinavian hot tubs, the share declined somewhat. And basically the reason is the shipments of sauna cabins in the United States and also kind of slowing kind of business with with the Kirami branded hot tubs. Accessories and heater stones and spare parts and service is very stable compared to the comparison period. So then when we look at which product categories contributed to the growth, positively and negatively, we can see that the star was the steam products, adding three point four million euros to our top line. And that's around 250 percent growth, most of it from thermosol acquisition in the United States, but not entirely since we had some good steam deliveries in Middle East also during this period. Heating equipment up by around eight percent and accessories and spare parts up by 10 percentage points roughly. Saunas and Scandinavian hot tubs declined by 15 percent versus the comparison period. Now in this very interesting market where we believe that there are significant growth opportunities for many years to come and there's an opportunity to make Harvey a significantly larger business than we are today. The cornerstones of our strategy, how to get there are here. So they center around four questions. What do we sell in terms of portfolio? Where do we focus geographically? To whom we sell in terms of channels and customers and how we do it in terms of operations and great people. And I'm happy to report that again during the quarter two, we made significant process progress in each of these areas. So in terms of the portfolio, we've been complementing and making our offering for the traditional sauna category stronger, for example, launching a new wood burning version of the cylinder heater, which is a very high selling product model for us, launching new kind of mid range touch based control panel called Harvey Phoenix. And I will in the next slide talk about something that's quite unique and really novel in the business partnership with Toyota. But let me get to that in a short while. Also in terms of steam, based on our acquisition of thermosol, we have been continuing to make the thermosol core business stronger. And also we have been taking steps to leverage thermosol as a cross selling platform for the remaining parts of Harvey's portfolio. And also good progress with our premium brand EOS in Europe. In terms of winning in the strategic important markets, the core question here is that we are still relatively small company playing in fully global business. So roughly 50 percent of our revenue is coming from Europe and roughly 50 percent outside Europe. And with the company our size, we need to focus on. So the most important market for us, obvious, is the United States, where we continue systematic work to strengthen our portfolio, open new channels and making our own DTC even stronger. And as said, during first half, you know, 35 percent growth, half of which is organic. I think it's a testament to the work we are doing there. APAC and Middle Eastern Africa, we have focused systematically on China, Japan and Australia in terms of our continuing business. And then Middle East and Middle East area for our project business. And all of these are yielding great results, as I just explained that APAC numbers are not dependent on any single country or any single project delivery. It is now more wide, wide, broad based. Continental Europe and Northern Europe clearly need more work. And there are signs of kind of encouraging progress in a number of markets, but the totality is still too slow to our liking. And here the work clearly continues. And one step for us is the appointment of Ivan Sabato to be the new head of Continental Europe. Leading key channels, we are expanding our channel with new partners, for example, in Sweden. We have some significant new partners in the US. We have been expanding our distribution to higher end price points than we have been kind of focusing in the past. But at the same time, we also deepen in partnerships with our important existing customers and their situation is solid. We also accelerating our progress in making direct to consumer channel and even bigger part of Harvey's business. And this project business in APAC and Middle East is one of the highlights of the past quarter. We are building a company for the long term success. And a few things I mentioned is the IT landscape, which used to be quite old fashioned and very diverse and fragmented as a result of growing through acquisitions. And now we are stepwise moving the whole group to a unified, more modern and simplified architecture, where a significant milestone for us was the biggest geographical region, United States, moving and go live in the being of June. And I'm happy to say that operationally it was a smooth, good transition. We also have made significant investments in increasing our efficiency and capacity, for example, in our most important factories in Murome and Lewisburg. And there was some change in the management team, Ivan Sabato joining the team and then Jennifer Thayer, the head of Northern America, resigning during the quarter. But the recruitment of the successor is ongoing and we have a good backup solution in place at the moment. And then my final slide before handing over to Ari is just brief kind of highlighting a recent announcement that actually Toyota, which is a leading player, not only in the car business, automobile business, but they are also leading player in hydrogen based energy transition. And we are very happy that they approached us and made a proposal to partner with hydrogen based energy technology in the saunas. I think it's a really testament of also visibility of saunas, a category, you know, growing and huge players, you know, taking a notice. And actually hydrogen and sauna go really hand in hand. If we think about hydrogen energy, it's hydrogen H2 plus O, oxygen, it's H2O. So hydrogen plus oxygen is water and energy and sauna is steam, water steam and heat. So almost like they are kind of a perfect, perfect couple. And it's actually pretty exciting to see that we can do it also, you know, sauna with hydrogen and in actually very pleasant experience. We don't anticipate this to be commercially significant for us in many years to come. But still, it's a testament of innovation opportunity in this business. So then I would hand over to Ari.

Thank you. So here we see first the last couple of years, the quarters, the development of the quarters. And I want to first remind you about the seasonality, what Harvia's business has. Typically, our peak sales seasons are Q4 and Q1. And then Q2 and Q3, they are a bit lower. And the Q4, Q1 sales are typically a bit more campaign driven than the lower season sales. And in this picture, you also see that we have been continuously being over 20 percent adjusted EBIT, except last quarter four and now quarter two. Mattias already explained some reasons for the lower relative profitability in Q2 this year. But there were plenty of them. Shift in the comparison figures of 1.8 million alone in northern America. And this one of inventory correction this year. Also, the IT landscape renewal took a couple of delivery days. And there were multiple reasons. But I'm really happy to say that we succeeded quite well with all these happenings during the Q2. And we are looking very positively towards the future. Here we see the most important financial figures of the group. OK, probably some figures which need a little more explanation is the decline of the basic earnings per share. It doesn't just come from the lower adjusted operating profit, but it comes also from rather high financial items, which I saw a little later. And they are related to weakening US dollar during the quarter. So the dollar had multiple effects during the quarter. But on the other hand, we have been working with dollar for many years and we will also work with dollar in future. And this is the normal fluctuation what we face with dollars. The number of employees has been increased slightly over the number of steam, thermosol steam bath LLC of some 38 persons there. Networking capital has been rather on a high level now at the end of Q2. But that's really good to have, for instance, a lot of inventory now in the US, since the effective tariffs import duties are increasing slightly compared to what we had paid effectively during Q2. During Q1, they didn't have an effect at all yet. We are confident that we can handle really the tariff situation in the US. We have quite good pricing power and we are flexible in many terms. And also the production what we have in the US, we make over 70 percent of the total sales in Northern America produced in the US. So the import duties don't affect so much the business. And there are also customers, rather large customers actually in US, which import directly from our factory in Finland, for instance, the heaters and pay their duties by themselves. So we have rather well have the tariff situation going forward under control. The free operating cash flow and cash conversion vary quite much from quarter to quarter, but there is certain pattern. We have typically the queue for the highest cash inflow. And during the summer quarters Q2 and Q4, we invest in inventory and also in capital expenses like machines, IT making our production more effective for the peak season. This was also the case in this year. Typically, Harvia has had a strong cash conversion in the past and I believe it will be the case also in future. The net debt, OK, that's bank debt, interest bearing debts minus the cash situation. Since we have been investing in machinery, in systems and also increasing the networking capital, the cash position didn't grow so much. So actually then the equation gives that the net debt went up slightly about six point eight million compared to end of Q1. Towards the end of the year, typically in the history, we have been able to produce more cash and reduce the net debt. The leverage, the equation of the interest bearing debt to the EBITDA is one point three, which is remarkably lower than our long term financial target of two point five. So we have really capacity also with our internal targets, but also with our bankers to take much more interest bearing debt if there is a need or opportunity for that, for instance, in the area of MTA or whatever. Here we see the dotted line. It's actually the interest costs as we pay them to interest costs and bank duties out of our cash balance. And the rest of the box, they are the columns, they are then the calculatory financial costs. And unfortunately, in 25 Q2, we had a rather high USD position in our hands. And when US dollar went down, we had to book some financial costs on these calculatory positions in our P&L. We have also covered ourselves against the interest rate fluctuations and these interest rate swaps derivatives. They cause also some changes to the interest costs, but they were not so big in Q2 now. Here we see the level of investments in Q2. It really went up and this is actually a very good time to invest in our group. It's quite a peaceful time of the year compared to the peak season, Q4, Q1. And I'm happy that we did, for instance, the Go Live in the US during that quarter. The Go Live of the new IT system went very well and now we are ahead of the situation where we were in the past many years. Harvias long-term financial targets, they haven't changed. We target an annual revenue growth of over 10%. The profitability of adjusted operating profit margin, our target is to be over 20% and the leverage under 2.5. We could certainly get also with higher leverage with our cash flow financing if needed, but this is the leverage level what our board of directors has set for us quite a long time ago. We don't publish short-term outlook, we play the long game and our dividend policy is to pay regularly increasing dividends with two payouts in a year. This year, the HGM in April decided based on the board of directors proposal that 75 euros will be distributed to the shareholders, out of which 38 euros were already paid in the middle of April and the rest will be paid at the end of October. We have had different kind of seminars and celebrations in different units for the 75 years anniversary and this will continue also to motivate our stakeholders, suppliers, customers, also own employees and this has been a nice year. So, questions. We have got a list of different questions over the chat and I just start from the beginning. Can you talk more about growth in AIPAC? Relatively new market but not so small anymore for the group. What types of saunas are popular there? Do you need M&A to grow food or can you grow organically?

A great question and you are indeed right that AIPAC Middle East representing now 15% of our top line and the growth rates that we are seeing, it's no longer insignificant region for sure. As I explained in my presentation, what I am very pleased with is that as the region keeps growing and as we continue to systematically work to develop the region, I don't feel that we are any more dependent on any single country or sub region per se. For example, during the second quarter we had strong double digit growth figures from Japan, strong double digit growth figures from China and also strong actually triple digit growth figures from the Middle East sub region but in the Middle East there is also this project delivered dynamics. But the point is that we are having rather broad based growth in AIPAC. Now we are still a rather small company for the global market and also AIPAC and Middle East geographically is just absolutely vast and if we think about geographical differences and cultural differences, we made the choice that we focus on four or three countries plus one sub region. So it's Japan, China and Australia. Australia for the reason that it dynamics wise and product wise kind of resembles a lot the US. So kind of the same recipe for success can be multiplied in Australia and then Middle East for the pro-trade business. There's also quite significant differences in terms of what sauna types are popular. So for example when we go to Japan, actually it's the kind of the traditional Finnish style sauna that really is picking up and increasingly part of many of the onsen experiences, the spa experiences. When we go to Middle East it's traditionally more steam based and really high end kind of home spas and commercial spas being built. In Australia we see that traditional kind of easy to assemble and rather affordable like almost heaven sauna type products are very popular but so are also infrared saunas. So there is certainly a variation between countries and sub regions in AIPAC and Middle East but as said we feel that it presents a significant potential for us. In most countries we still are not actually present ourselves kind of no feet on the ground. Instead we work through distributive partners and the idea is that as we keep growing there we might take one step at a time to add our own sales organizations in the most potential countries as we move forward.