Converted From Text Transcript Q Amer Sports Oyj Earnings Call February 6, 2015

Transcription

1 Event ID: Culture: en-us Event Name: Q Amer Sports Oyj Earnings Call Event Date: T13:00:00 UTC ****************************************************** Notes: Converted From Text Transcript Q Amer Sports Oyj Earnings Call February 6, 2015 C: Paivi Antola; Amer Sports Oyj; Director - Corporate Communications & IR C: Heikki Takala; Amer Sports Oyj; President, CEO C: Jussi Siitonen; Amer Sports Oyj; CFO P: Chiara Battistini; JPMorgan; Analyst P: Kalle Karppinen; Danske Bank Markets; Analyst P: Rauli Juva; Nordea Markets; Analyst P: Robin Santavirta; Handelsbanken Capital Markets; Analyst P: Aidan Farrell; Goldman Sachs; Analyst ****************************************************** C: Paivi Antola;Amer Sports Oyj;Director - Corporate Communications & IR C: Heikki Takala;Amer Sports Oyj;President, CEO C: Jussi Siitonen;Amer Sports Oyj;CFO P: Chiara Battistini;JPMorgan;Analyst P: Kalle Karppinen;Danske Bank Markets;Analyst P: Rauli Juva;Nordea Markets;Analyst P: Robin Santavirta;Handelsbanken Capital Markets;Analyst P: Aidan Farrell;Goldman Sachs;Analyst P: Operator;; +++ presentation Paivi Antola^ Thank you. Good afternoon from our side as well and welcome to this Full-Year Results conference call. With me in the call, I have Heikki Takala, the president and CEO of Amer Sports, and Jussi Siitonen, the CFO of the Company. We'll start with a short presentation by Heikki Takala and continue with a Q&A. Heikki, please go ahead. Heikki Takala^ Okay, thank you, Paivi, and good afternoon and welcome. We'll start with a very short update on quarter four which was a good quarter.

2 We had a 6% top-line growth driven by -- specifically by footwear and apparel, both at more than 20% growth level. Cycling was good equally sports instruments and fitness. And even ball sports showed a modest growth for the quarter. On the negative side, winter sport equipment had an adverse development because of the very late and very mild start of the winter. Gross margins went up by 1 point and EBIT improved and because EBIT contributed for the quarter was on our ball sports business which went up from 3% to 9% in the quarter behind good initiatives but mostly behind the restructuring impact as we had significantly lower close-out sales than previously. And I will say here it's not yet indicative of such an improvement nevertheless of sustainable improvement, nevertheless, we went to the right direction and that's good. And free cash flow was slightly behind last year. Then more importantly the full-year results, net sales up 6% in local currencies and that we successfully mitigated the relatively challenging market environment. Regionally, EMEA and Americas are 5% both and then APAC 10%, business to consumer up 36% and e-commerce 73%. Gross margins continued to improve and OpEx went directionally down versus a year ago as percentage of top-line. EBIT improved excluding NRI and we had good and solid improvement across what we call operationally the key drivers that's top-line gross margin and OpEx but then partially offset by the exception of currency impact which was EUR7 million that came mostly from the Russian ruble. The one highlight we wanted to give here is the ball sports which started its turnaround and especially the probability improved versus a year ago behind the restructuring activities. Free cash flow improved directionally and then dividend proposal is slightly up versus a year ago. In the next page, just a reconciliation of the -- of the growth by business unit and we can see that again, footwear and apparel continued very solid growth. And then we have solid improvement from cycling, sports instruments and fitness. And the one where we went back is winter sports equipment and then, of course, our individual ball sports where restructuring impact was minimal as we cleared up some of the unprofitable sales and distribution channels overall.

3 On the next page, just the EBIT bridge, we had the good impact from top-line sales and gross margin improvement. OpEx went up along with the growth. Nevertheless, we realized some OpEx inefficiencies and then we had this currency impact which then impacted on top of the operational drivers. On the next page, we look at the investments or actually the OpEx drivers. And investments continued. We continue to invest into the business but not quite at the same level as in the previous years. The biggest OpEx increase actually came from top-line -- top-line driven OpEx investments go on and importantly, maintenance OpEx remains flat. Next page, just a couple of milestones we're highlighting as we went through the year. We were able to sustain our winter sports equipment profitability, you know, despite the adverse impacts on the top-line and just anecdotally, we now are able to sustain a midsingle digit profitability and with the same top-line some six, seven years ago, we were actually at the negative EBIT. So the role in the portfolio has been fulfilled in that instance. Fitness and sports instruments turnaround continued. Softgoods is now just about EUR800 million and, you know, logically up by almost EUR0.5 billion versus the start of the new strategy. Business to consumer is now 5% of the group sales. It was below 1% in 2010 when we started. Now, we have a global footprint of 250 retail stores and 60-plus own e-commerce stores. Sales in China up about four times versus four years ago and are still not at the very high level but significantly up versus the starting point. And finally worth highlighting, our connected -- or digitally connected devices, our sales right now about 6% of the group total sales, so it is coming up quite rapidly. For balance sheet, I would like to pass or hand over to Jussi, please. Jussi Siitonen^ Thank you, Heikki. So the balance sheet continue strengthening further. Net debt down by some EUR13 million and all our balance sheet KPIs improved. Net debt to EBITDA target being EUR3 million or less, it was EUR2.0 million last year, now 0.2 points versus And also net debt to equity now EUR0.50 million being EUR0.57 million last year. Our capital employed came slightly up EUR70 million mainly driven by working capital which came up by EUR40 million, and out of this EUR40 million, EUR20 million is cash flow-based and another EUR20 million is cash translation difference. Moving then to the next slide, slide number nine, our 2015 refinancing needs, we have EUR154 million long-term -- long-term net debt to be refunded. That's now covered. We

4 issued this EUR100 million Schuldschein earlier this year and then the financial fee have -- for the rest, they are in place. We have cash and uncommitted facilities up to EUR390 million and therefore our funding is not bottlenecking the growth and those items [take it, has been through] where we continue investing. Okay, back to you, Heikki. Heikki Takala^ Okay. And then on the next page, simply the summary, you know, versus the long-term targets and again, we can see that we are growing for the fifth year in a row. The top-line continues to be green. We improved on profitability but clearly behind our mid-term target of 10% so we still have a, you know, way to improve there. Cash flow, not quite at the target level, partially hit by the growth rate which still remains at good level, so if cash stay at no working capital than we [land] the balance sheet as we confirmed already continue to strike that. Moving on to outlook, simply 2015, we expect our net sales in local currencies to increase and EBIT margin excluding NRIs to improve from 2014 despite somewhat challenging market conditions and the challenging [gear main] and of course, there are the impact of the mild and late winters, [demonstrating] to the political situations in the world and, of course, these things make it quite difficult to navigate in this current environment, nevertheless, we confirmed this outlook. And finally, just moving on, looking -- moving forward, we accelerate towards 2020 in line with the capital markets day content. We remain in growth and expansion mode and we have our Amer Sports sustainable growth model. We're looking at driving annual sales, driving annual profit growth and at the same time investing for the future as we see a lot of long-term potential. We renewed our sales and allocate resources into areas where we see the biggest benefit but clearly, we're looking for faster growth, higher profitability and better asset efficiency. And towards 2020, we're clearly going to focus on driving in the core businesses and the areas with disproportionate growth, remains obvious ones clearly footwear and apparel, business to consumer what we call our focus markets, this will include China and some other markets, of course, and then finally, digitally connected products and services. So that's it. That's from the presentation. So if I can then hand it back for the Q&A. +++ q-and-a Paivi Antola^ Thank you, Heikki, thank you, Jussi. So operator, we will now be ready -- ready for the questions from the audience please.

5 Operator^ Thank you. (Operator Instructions) We will now take our first question from Chiara Battistini of JPMorgan. Please go ahead. Chiara Battistini^ Good morning. Hi. Just three questions from me please. The first on your growth outlook for 2015, I see that you're guiding for growth ex-fx for this year. Last year, you guided to at least 5% growth for full-year 2014, so I was wondering why you haven't felt as confident to guide to a precise number for full-year '15. Then on the hedges, for the cost of goods sold with dollar, for full-year 2015, if you could remind us where you -- where you are hedged for full-year 2015 and how you're thinking about gross margin for full-year 2016 and given the current currency situation? And finally, if you could expand or provide us more color with -- with more color on the ball profitability improvement which was quite remarkable in Q4, to what extent that is driven by gross margin announcement and cost savings please. Thank you very much. Heikki Takala^ Okay, Chiara. We'll divide the questions, I will take the first one, Jussi will take the second one. And I'll need to ask you then to reconfirm your question 3 but don't do it yet, so hang on, you know, bear with us for a second. 2015, I'll take that, one of your questions was about the guidance of growth and, you know, where we stand on that one. You know, we guided that we continue to grow topline and we have said that we will improve our profit margin. Today, you know, we have now two very difficult winters. Now, back, we don't have visibility yet, you know, how things are going to go. The pre-order season is starting on, you know, some weeks from now. It's going on a few months. And only then we get real visibility of the inventory levels at the trade and the overall kind of global picture there. You know, and that, of course, you know, does have a significant impact on our -- on our growth ambitions and targets. What we'll do -- what we'll do is we confirm our long-term targets of the annual 5% topline growth remains our target. Clearly, you know, we're not walking away from that, but now, we have, you know, a situation where we -- where we better get that visibility first before we confirm exactly. And in this current year as we are continuing to work what our mid-term targets, we want to make sure that we have a balanced growth model and now, we have clearly prioritized the profitability in order to gauge our 2016 targets which we have expressed. So at this situation, we can be more exclusive on the growth. So the second question, Jussi, you'll take that.

6 Jussi Siitonen^ Yes. You know, Chiara, so our -- the next question which was about our hedges -- about FX and hedges impact in our gross margin. So our hedges are mainly in US dollars, so US dollar is the most dominant currency, what we have there, you know, in our sourcing operations and therefore it has the biggest impact on our gross margin. So over the next 24 months, our net flow in US dollars is roughly $860 million, we are net [by Europe $860 million. For 2015, we have hedged practically all 99% of 2015 flows have been hedged at level of 1-135, [EUR135 million] for 2015 and then 60% of 2016 flows hedged at the level of [EUR132 million]. So for the next 24 months, we have pretty well covered our sourcing operations when it comes to currency. Chiara Battistini^ Perfect. Thank you very much. Great. And then -- and then just first on -- one follow-up on the -- on your answer on the growth outlook. You mentioned you have a low visibility on your inventories in the trade. Did I understand that correctly? And if so, just for equipment or was it for softgoods please? Heikki Takala^ Not our, say, overall trade inventory. So if the trade has some overstock, it impacts the suppliers but what we cannot know today is what the overall inventory level. That's why we need to wait for a [pre-audit] to start so that we get a visibility of where do we stand. This will impact, of course, primarily the equipment but also the winter softgoods, so typically hats, gloves and insulated apparel. Chiara Battistini^ Great. And then my last question was on -- now on the growth of profitability improvement in quarter 4 that was quite remarkable, so I was wondering whether you could give us more color on to what extent the gross margin drove that improvement or cost savings. Heikki Takala^ Okay, okay, got it. So you were asking about balls sports. The primary driver for the improvement was gross margin, and clearly, as we eliminated unprofitable SKUs and even exited some product lines and even some sports completely, you know, we saw a significant mixed improvement of, you know, by a few 100 basis points and even more. And, you know, then at the same time, we did not have a lot of close-out sales as I said but that contributed on top. So we had a good gross margin pickup but then, of course, we've been restructuring the operation as well, we've gotten leaner and we eliminated some fixed cost which is contributing. But the clearing that was mostly on gross margin and as I tried to say I would not yet plan I guess such an improvement. I think we're getting some short-term impact from the restructuring and the sustainable level is yet to be confirmed. We said earlier that we want to get Wilson or ball sports to go at 8% EBIT as the minimum and that's where we in the first place are working I guess.

7 Chiara Battistini^ Great, Heikki. Thank you very much. Operator^ We will now take our next question from Kalle Karppinen of Danske Bank. Please go ahead. Kalle Karppinen^ Hi, Kalle from Danske here. One question about the apparel business and its growth and profitability, can you give an indication where profitability of apparel is now and also what is the split between Arc'teryx and Salomon in sales and profitability and growth within -- within that business unit? Heikki Takala^ I would say that softgoods overall, footwear and apparel as the unit are at our target level, target profitability level. And clearly, we've been investing now more into the apparel side. That's really a totally new business for the Company that has been -- you know, that has been attracting a lot of the investment OpEx as we speak. And you can see typically as we open the grand stores, they are mostly apparel driven, so hence, you know, we load the apparel profitability with some of these investments. Clearly, Arc'teryx is more established, it's more year-around and it is more global and it is the majority of the apparel business, it started to be really scalable global business with multi-season presence and Salomon is only coming so Salomon is still a lot -- in a couple of segments only to typically in [train] running and the likes and then a lot in the winterrelated apparels. And then now that we're getting this winter situation, clearly, it's impacting Salomon apparel more but, of course, you know, Arc'teryx does have a small winter apparel line as well. All in all, it's going to the right direction. We're growing well and we're growing fast and we're building the capabilities behind it in order to sustain a -- you know, our long-term targets and that includes, of course, the e-commerce and the home retail as well as the, you know, related product capabilities to turn these brands into year-around franchises. I can say that we are -- by and large, we are according to our own plan. Kalle Karppinen^ Thank you. Operator^ We will now take our next question from Rauli Juva of Nordea. Please go ahead. Rauli Juva^ Yes, hi, Rauli here with Nordea. I have also have a question on the guidance, maybe I can continue on that. So last year, the winter or previous winter season wasn't too good either and then you were guiding 5% growth. I was wondering is it now that outlook for the winter sports equipment is weaker than last year or is it weaker for the rest of the portfolio or some combination of this?

8 Heikki Takala^ Yes, I wouldn't say -- I wouldn't say, you know, that it's weak or it's better. You know, it's not that usual to have too -- such difficult winters in a row so, you know, it makes a bit more challenging to really understand, you know, what will happen and what constitutes the level of confidence at retail level and so on. And the winter is still going on, so we see that the conditions have significantly improved over the past week and thinking that that will head up holiday season and so, so this may still change the situation a bit or actually a lot. The key thing here is that what we don't want to do is grow for growth sake. So, you know, in a situation where you would need to overly push or, you know, fight for market shares and make an extensive growth. Now, you know, our sustainable growth model, we can say that it makes more sense to prioritize profitability and hence we want to read that leeway. We will guide, you know, as we get the visibility and if the situations and conditions improve and we get, you know, good confidence that the market demand is healthy, we'll go for growth, but at this stage, that would be slightly [on current]. So again, you know, we were looking for growth and the long-term targets there remained intact but sometimes you need to, you know, make sure that you don't push but rather you do the right thing, and that is that it probably is more accessible to go for profitability improvement as we still have a way to go to get to our 10% target. Rauli Juva^ Okay, good, that's all, thank you. Operator^ We will now take our next question from Robin Santavirta of Handelsbanken. Please go ahead. Robin Santavirta^ Hello. A lot of questions already asked but if I will continue on the ball sports' EBIT improvement, can you give some comments or some indications about the magnitude of the short-term restructuring impact now in Q4? Is it, for example, say I have to say some 50% of the improvement year-on-year is driven by short-term restructuring impact perhaps not that sustainable for 2015? Heikki Takala^ Yes, I mean, you know, clearly for 2015, we continue looking for profitability improvement in ball sports, actually more than grow using -- of course, we always say that, you know, first get the structural P&L right and then grow. It's not mutually exclusive, of course, and growth is good but we're now looking at, you know, moving to a model where we -- where we again would push too much and start to be, you know, sales-driven. So -- but we create non-productive lines or SKUs on all of that and play the pricing game. So more than that, we now want to, you know, have a sustainable growth model with annual top-line growth and we would also have, you know, a significant improvement

9 infrastructure -- structural P&L starting from the gross margin and that should then flow to the bottom-line. As with the Q4, I said already, you know, it's not -- improvement is not indicative of the long-term health. I would almost say that we don't know yet. We're still in the year one of the restructuring and a lot of things are being now done, they are still underway, some have to be completed. We're starting to launch new product lines, we started to launch new models and we are encouraged by what we've done. I'll give an example, you know, that's the Roger Federer?s new racket which was a highly successful launch. There is more to come and that, of course, is impacting especially our tennis business. And that, you know, as we see that these things continue working, of course, we gain confidence. But clearly, you know, for 2015, we continue looking for profitability improvement and then, you know, modest top-line growth is feasible. Robin Santavirta^ Good. And there we go in winter and outdoor or actually the margin for the full-year declined somewhat. Now, you have very good growth in the softgoods part and in cycling -- or in apparel and footwear and cycling and Suunto and then not so much in winter sports equipment. But when I model this, in my model, it's difficult for me to explain sort of the margin decline for the whole division by only winter sports equipment. It feels that there must have been some margin pressure in either apparel, footwear, cycling or Suunto as well. Am I right here or did all of these either segments in winter and outdoor improve margin in 2014 versus 2013? Jussi Siitonen^ Yes, Robin, Jussi here. So one critical thing is that as we reported, we do take approximately 7 million from currencies to many Russian rubles. Those winter and outdoor businesses that we have the, they were the ones who took a hit, so that's one kind of clear nominator for total segment decreased profitability. It's then, of course, spread around nicely throughout all businesses but has this kind of one single factor what we have said. Heikki Takala^ You know, just so -- you know, so that you understand, our business in Russia is mainly winter and outdoor. Robin Santavirta^ Yes, yes, yes, yes. Heikki Takala^ We do have ball sports there but it's not significant and then clearly, fitness is not big there and hence the impact on all of that segment. Robin Santavirta^ Right, good. And then finally, extremely good improvement by the fitness division throughout the year and now one -- one sort of weak quarter but the margin is slightly below last year's Q4, how would you sort of -- could you give any

10 comment about the outlook, the margin outlook? I guess the outlook is quite good but the margin outlook for the fitness division out for Heikki Takala^ I mean, you know, as part of the portfolio logic and the kind of strategy number one, every part of the portfolio has a clear target and, you know, an approach also to scale the synergies. But clearly, all of the unit must get to our 10% profitability target. That would be logically and systematically work against and it will be relatively successful. So the expectation is that the ones who are below, they continue getting toward the target. And, of course, we know that not everything will always go smoothly. I'm not referring yet to fitness. I'm saying that we will always have some bumps therefore, some of the businesses logic, it must be about a 10% target, but all of the units do have that target. When I -- previously, I mentioned that, you know, ball sports has the 8% target, that's the first turnaround target. That's not the long-term target clearly. You know, again, everybody must be at the group average in order for them not to be diluters. But we also need to be realistic that's why we run the Company on a glide path and with building blocks to make the growth model sustainable and you cannot jump it from year -- one year to another one. You need to base it on fundamentals, that's what we tried to do. So the expectation for fitness clearly is to continue improving and you should not look at kind of quarterly, you know, ups and downs, look at the longer-term trend. And as long as the longer term trend is healthy, that should be the sign of a good business. Robin Santavirta^ Good, thank you. Operator^ (Operator Instructions) We will now take a question from Kalle Karppinen of Danske Bank. Please go ahead. Kalle Karppinen^ Hi, Kalle again. A quick follow-up on Wilson ball sports, an individual ball sports in particular, you had declining sales for the first nine months of the year but then improving sales in the fourth quarter. Can we still expect -- on going to 2015, can we still expect sales to decline as a result of these portfolio streamlining or could it be that most of that stuff is now already done? Heikki Takala^ Yes, I mean the -- at least we intended to do the cleanup and the kind of, you know, patient care in 2014 and make sure that we have right-sized, we correct the issues and we get the base clean. Now, we don't yet have a lot of -- a lot of experience about what happens next. We've seen our own innovation pipeline and we're seeing the initiative pipeline and we're seeing the fundamentals and, of course, the expectation is that we will have improvement.

11 But we're not relying yet on significant growth. We continue focusing on the structure of the -- of the P&L and make sure that the gross margins become healthier and the OpEx remains under, you know, [a tight] bracket. And then growth, of course, we're looking for it but not at any cost. So, you know, if needed, we'll continue right-sizing the model until we believe that the base is right. Having said that, I think our building blocks are pretty good and we're already now introducing the new racket lines, new shoe lines, new footwear lines and there is a lot of exciting innovation coming, they are digital initiatives and so on which are in the pipeline. And I think out of that, you know, we can see -- we can start to see some momentum. Kalle Karppinen^ Okay, thank you. Operator^ And we will now take a question from Aidan Farrell of Goldman Sachs. Please go ahead. Aidan Farrell^ Hey, good afternoon. Just a very, very simple question from me and this is in relation to your cash flow conversion target where you're looking at annual free cash flow equal to net profit. I'm just of interest in your thoughts about that target versus the growth that you're seeing in your business right now, which you clearly alluded to, impacts on inventory. And over what period of time would you expect to see that objective to be achieved in terms of cash conversion? And presumably it comes through your working capital line, is that fair? Jussi Siitonen^ Hello, it's Jussi here. So it's all impact to us, our capital markets day, where I think we have a pretty open saying that this target of 100% cash conversion rate, i.e. free cash flow [PE, continental] profit is currency in the current conditions and we have businesses like footwear, aerobics are growing fast. So on this perspective, when we continue growing fast, this kind of 0.8 target is more sustainable. However, target is to target -- we are quite sure of that target. All this kind of complexity reduction items we have now in place or Wilson also for other brands are shooting towards that target that we can improve our working capital efficiency, we can improve our capital employed efficiency. So those are in place but now, and the [pro-basis], it's kind of pricing -- this is where we need to tie a lot of inventories for pre-seasons, therefore it's not sustainable at the moment to raise to 100% level. Aidan Farrell^ Great. So you think that an 0.8 conversion with the current growth rates will be -- will be achievable in short?

12 Jussi Siitonen^ In short term it's achievable and it's also sustainable that we can continue growing in total businesses which are our clothes businesses and still have a good cash flow, so 0.8 is a short term -- short term sustainable level. Aidan Farrell^ Great. Thank you very much. Operator^ There are no further questions in the phone queue. Paivi Antola^ If there are no additional questions then we would like to thank you all for participating and wish you a good day. Thank you.