Transcription. Title: Amer Sports Q2 Results. Date: Speakers: Päivi Antola, Heikki Takala and Jussi Siitonen

Transcription

1 Transcription Title: Amer Sports Q2 Results Date: Speakers: Päivi Antola, and Conference Ref. No: EV Duration: 33:59

2 Presentation Päivi Antola Good afternoon, and welcome to Amer Sports Half Year Results Conference Call. My name is Päivi Antola. I am the Head of Investor Relations. Together with me in the call I have, the President and CEO of Amar Sports, and, the CFO. We will start the call with a brief summary of the results by the CEO and CFO, and then move on to questions and answers. So Heikki, please go ahead. Thank you Päivi and good afternoon, and welcome from my side as well. We will divide the presentation indeed into two areas. I will cover quickly Q1 sorry Q2, and Jussi will then take the total H1 view, as we believe that is more meaningful, the first six months is more meaningful. H1 was largely in line with our plan. Our top line, gross margin and OpEx investments were according to our on-going plan; H2 improvement is in sight at we expected and out looked, hence the full year is confirmed. So slide number two, a couple of words about the context. The market place has been continuously challenging, however the consumer demand for our brands has continued to be high. Our B2C, our e-commerce and own retail growth is significant double digit. Our growth in e-tail, or third party online, has been bad[?], and in bricks and mortar we see that, where we can read the market, our sales growth has been ahead of our selling in, so the consumer is active and our brands are doing well. Q2 growth to us came from direct consumer and third-party online sales where traditional wholesale was down, whereas a year ago, and especially in the United States, this is partially reflecting the declining, or declined store footprint over 2016 retailer bankruptcies. The trading conditions are gradually improving and this is indicated by our strengthening order positions. Our winter sport equipment pre-orders are up with single digit, and where we did not grow or we did not grow significantly in H1 we see that that order book is better, that s on Precor, that s on Mavic, that s on Suunto and Wilson, just to name a few. On top of that, our own initiative pipeline is robust and it is also further supported by company transformation. We have reorganised ourselves to win with the future consumer. We are much better aligned to the new channel streak, which is prevailing in the market place and, of course, we expect that to give us profitable growth going forward. We do prioritise profit above growth and we continue to drive productivity enabled by on-going restructuring. Then a couple of words about Q2, just with the growth game as usual and the strategic priority areas. Net sales up by 1% in local currencies, driven by apparel, own retail, e-commerce and China gross margins are now normalising. We are at the level of last year. OpEx was up by 12 million, driven by investments into transformation and into our future building blocks. EBIT reflected the higher OpEx, and then free cash flow was well positive, especially versus a year ago. Digging a bit more by business area, so looking at outdoor, net sales are up 3%. Already commented on apparel, driven by Arc teryx. Footwear was up 2%. We did quite a lot of distribution consolidation, which impacted top line negatively or adversely, and then we saw significant volatility in Latin America and the impact on Q2 was more than 5% negative from that volatility in Latin America. Every second year we tend to go up and every second year we tend to go down in Latin America, reflecting the market model. Mavic sales were impacted by high OEM and retail inventories, but that s been the case for the whole industry. Also, the Mavic initiative pipeline is this year focussed on H2, whereas last year the initiatives were focussed on H1. Importantly ENVE continued to grow well, up double digits. 2

3 Sports instruments 7% growth due to Spartan multi-sport watches. We are starting to see the benefit from the Spartan family, and there is of course more to come as we complete the family roll out. And then finally winter sport equipment, remember with Q2 is only 3% of our of winter sport equipment year and, more important is to look at the full year and the pre-order book, which is up mid-single digits, as already mentioned. Then moving on to more sports, we were at last year s level, which is actually quite okay as an achievement given the disruption in the United States market and the fewer number of doors we have there. So from that point of view it was an okay quarter and we had some baseball deals ahead of the changes in the bat regulations before 2018, and that impacted now H1. Finally, fitness Q2, net sales were up 1% versus a year ago, and year-to-date we are up 3%, and we see that growth will solidify. So shipments are unevenly split between the quarters and our order book has strength and that gives us confidence that we indeed have reignited profitable growth but of course we look at these things especially on a total year basis. So with that, that concludes the Q2 overview, and I hand over to Jussi for a half year review. So Jussi please. Thank you Heikki. So the first half in a nutshell our top line growth was 2% in local currencies, the drivers were the same what we had in the second quarter. Apparel up 17%, own retail 22%, e-commerce 45% and then China growth continued at 13% growth. Gross margin for the first six months ended down 140 basis points and this gross margin decline was very much Q1 biased. This gross margin decline was the main driver of our negative swing of 20 million what we had in the first six months, EBIT impacted by 18 million out of this minus 20 million. Top line, small growth there contributed our EBIT by 9 million and then our OpEx growth in the first half was 14 million. I will get back to this OpEx a bit later. Free cash flow, now 82 million better than a year ago at a level of 61 million. We have succeeded to cut our CapEx by some 12 million for the first six months and the working capital reduction was 7.2 million. Those were the main drivers for this budgeted cash flow. Moving on to the next slide and opening up this OpEx a bit more; as I said OpEx growth was 14 million for the first six months and out of this 14 million, 6 million came from top line driven items, sales commissions and the likes. Investment OpEx was 16 million and the maintenance OpEx came nicely down by 8 million for the six months, mainly driven by the restructuring we started August It is worth pointing out that out of this 14 million OpEx growth that we had 8 million came from increased amortisations we had and when we have capitalised those development costs in 2015 and Many investment areas remain the same in retail stores, with a consumer database and strengthening capabilities, especially in e-commerce and home retail. EMEA and North America Go To market omni-channel reorganisation as such is now completed. And then to provide you with a longer term OpEx development the next slide shows you that while the first half of this year the OpEx growth was 14 million, for the similar period 2016 the growth was 40 million. Of course top line OpEx is now less due to the slower growth, but also investment-driven OpEx is now 5 million down. And here you can see that maintenance-driven OpEx is nicely down continuously for a couple of [inaudible]. On balance sheet, next slide: net debt, down due to strong cash flow, of 15 million versus same time last year and then also working capital down 40 million, so we have succeeded improving every sense of working capital. All the balance sheet KPIs, net debt to EBITDA, gearing and the likes remain unchanged as per a year ago. Heikki back to you for [inaudible]. Yeah, so our outlook remains unchanged in Our net sales in local currencies are expected to increase from 2016 and EBIT, excluding items for yeah, I expect to be at approximately at the level of And as we out looked going into the year, the growth is expected to be biased to the second half of the year and EBIT includes further acceleration in investment in the company s transformation toward omni-channel and digital to win in the fast-changing market place. And the five prioritized areas of the company remain unchanged. 3

4 So with that we actually conclude the presentation, the update and I hand it over for Q&As. Päivi please. Päivi Antola Thank you Heikki. And now operator we will be ready for questions from the audience, thank you. Q&A Thank you. And ladies and gentlemen, if you have a question for the speakers please press 01 on your telephone keypad now and please hold until we have the first question. And the first question comes from the line of from JP Morgan. Good morning, thank you for taking my question. I have a few actually today. The first question will be on the apparel growth, which was very impressive. I was hoping for you to provide us with more colour in terms of split between space growth and really like-for-like of the Arc teryx stores? The second question would be on footwear, and the comments you made on pricing at the time of the quarter one, so if you could give us an update on your pricing levels of footwear with the European retailers in Europe? And also I was wondering whether this is the reason why EMEA in outdoor was down in quarter two besides the winter sports equipment division? Third question on gross margin, if you could provide us with some colour and the drivers of the gross margin, it was much better than I had anticipated, so if you could give us more colour there? And finally, can you please remind us of your sensitivity to FX, especially to the euro-dollar moves? So thank you. Wow Chiara. Okay, we will try. So I caught the question on apparel, on footwear and then kind of the EMEA situation so let s Jussi will take the gross margin and the currency. So apparel, it is healthy growth, it is good level of growth and Arc teryx was up more than 20% but even Solomon apparel and gear was up double digit and this shows that the brands are strong and there is good demand and we ve been able to drive geographic growth that we are growing fast in China but also in other countries. China-driven growth, clearly we are growing fastest in home retail and e-commerce and then if anything I would say that they were the slowest or even flattest in the wholesale segment but all in all, so we rely on good kind of multi-level growth, i.e. many things are contributing there. And, you know we ve already commented same store growth so all in all we re up 7% for the quarter, and actually for the year-to-date and it is relatively even between Solomon and Arc teryx, so there we see that like-for-like is solid. And of course, we re still growing e-commerce from a relatively small base, so we are not maxed out there yet and hence the strong 40%+ e-commerce growth, which is of course impacting our soft goods brands significantly. On footwear, I hope I get your question, I think you are asking about the pricing. We took last year s pricing to reflect the current situation in order to protect our gross margins. We took significant price and we ve been sticking to our pricing, so of course there has been some promotional development in the marketplace and, of course, not everybody has taken to pricing at the same time. But we see that the pricing is mostly sticking and we are managing to hold on to a target level of gross margins. Clearly there is some digesting to do, so you can typically not reflect such big currency changes without any impact, and we have seen that top line has been slightly less dynamic as it was in the past years, but we believe that we now have cemented the pricing level and then we can grow again from here, so call it a consolidation year. I hope I have replied to your question. And then EMEA, yeah, is clearly partially impacted by the footwear where we are now slower in H1, and then Mavic, which was down, such a European buyer s brand, so clearly that is weighing on our results there, and then we did not get a positive impact for winter sport equipment yet, that is going to come in H2, as we then ship those pre-orders. Again, remember Q3 of our winter 4

5 sport equipment is only 3% of the annual business, so basically it doesn t represent much. And that s it, I ll hand over to Jussi for the remaining two. Thank you Heikki. If it is okay I would comment the first six-month gross margin changed 140 basis points by channel in B2B we came down by 60 basis point on versus last year whilst now our new channel is beginning to see are overall most improving our gross margins by basis points, so you can see that they were almost offsetting each other. And all the make up for these two was coming from FX, due to the fact that those favourable [inaudible] what we had last year, especially in Q1, they are now out and the impact is now visible in our gross margin. So FX impact was 130 basis points and here you get this 140 basis point impact. On currency sensitivity over all so as you might remember, we are net buyers of US dollars, so that s the biggest single currency we are exposed to. For the next 12 months we are buying US net value of 415 million. We have hedged most of this flow, but with 100% of our net purchases is in US dollar it is hedged before 1.14 to 2017 and for 1.11 for Other currencies, their role is much smaller so you can consider US dollar is the biggest the dominant currency there when it comes to translation but we have 50% in US dollar when it comes to our EBIT. Great. Can I just follow up on your comment on footwear growing growing slower in EMEA; what are the main reason for that? Why is it growing slower in Europe? Yes, as I was saying, so it every now and then you need to consolidate, and consolidation means that you make your distribution choices, you don t you don t take and you don t want to take you don t get all the promotions. And, you know you talk about some promotional volume, which typically doesn t come when you take in significant pricing, so that s one. And the second one, you know, clearly we have made distribution choices to prepare for the omni-channel more and also to make sure that distribution is reflecting the quality of the brand and the kind of image of the brand. So we are we have been cleaning up. And this clean up will continue onto [inaudible] or this is fully done now? It is mostly done, so I expect some improvement there. So again, as I said, it s a consolidation year and you know, we see that H2 is already somewhat better and then we expect 2018 again to be a better year. Great, thank you very much. And the next question comes from the line of Dan Homan from Citi. Please go ahead, your line is open. Dan Homan Hi, afternoon all. A couple of questions from me. The first is just on the US, there was news yesterday that Hibbett is struggling in the US. First of all, I wanted to know what your direct exposure was, if you have any at all? And then, secondly, do you see the problems in the US wholesale market that you ve been experiencing for the last 12 months continuing? And then the second question is really around your second half margins, if you sort of assume that EBIT is going to be flat yearon-year as per guidance, it means that margins have to increase in the second half and maybe even have to hit the highest margin you ve ever done in the second half towards 13%. Can you just explain the drivers behind that? Is gross margin still going to be down? And, if so, where then are you getting the operating leverage? Thank you. 5

6 Dan, the first question was on Hibbett, or I know what you are referring to here. It is a customer, which we sell for a few million per year and that s the kind of size business for us. And then your wholesale, we actually think that gradually we have given last year s significant disruption we don t expect such a disruption to continue, and if it does it would not be within our direct customer base. At least our main customers are better diversified. They are both online, offline or offline, online and we see better preparation in the market place overall. So I think things might actually normalise somewhat and we see still today very healthy business models from some of the big players who are renewing their business model and so on, so it s not the same for everybody. And, of course, we seek to play with the ones who are winning in the marketplace, so we focus our efforts disproportionately to the kind of future winners, if you will. And that also implies then some channel expansions and playing in new places as the consumer has clearly changed his or her shopping behaviour so we need to make sure that we follow and we stay ahead of that quick change. So Jussi, I hand over to you for the second part. Yeah, Dan when it comes to the second half gross margin here, the negative currency impact is [inaudible] out towards the end of the year, so the second half gross margin expectation is slightly better than what we had in the first half of the year. Another thing is that we are expecting further FX leverage, therefore the second half on going restructuring is yielding results and of course then the OpEx growth is expected to be slower as last year. These are the two main drivers. Dan Homan Can I just follow up on that second point? You made the point that about 6 million incremental OpEx in the first half was due to top line initiatives. Are those top line initiatives including things that you expect to come to fruition in the second half? Yeah, yeah, for sure, when we continue growing faster in the second half than the first half naturally it will increase slightly. But on the other hand, as I said, restructuring is very effective in our maintenance OpEx there. Dan Homan Okay, great, thank you. And the next question comes from the line of from SEB, please go ahead your line is open. Hello, thank you. I have a couple of questions. The first one is really a technicality on the US hedge levels, the line was a bit bad so I did not hear the precise numbers so if you care to repeat those? The second question would be on the OpEx, following on what was just said in the previous question, have you scaled down your OpEx ambitions so to say or postponed some of OpEx intentions for coming years due to the further slow start of the year? And then the third question would be on also actually following up on the previous questions on H2, and now focussing on top line, you did provide the winter sports, the ski orders, as you typically do. Any indications you would like to share with us on the footwear and apparel growth for the latter half of this year? And specifically, also thinking about the footwear now; it has had four very slow quarters, now the comparisons are easier year-on-year so is that a that picking up, is that taking a driver for the quarter, or is there something else on the top line for the latter half of this year that we should kind of understand when we do our estimates? Thanks. Hello, this is Jussi. I ll start with the FX question for you first. And actually, I am referring page 21 in our handout there, where all the numbers are that I was referring. But next 12 month US dollar purchases upward of 415 million, and we have hedged these purchases for 2017 at level of 1.14 and for 2018 at level of Right, you ve got a very big question on the OpEx. When the top line is more uncertain and we see that the growth risks becoming more or too expensive as it has done over the past maybe 12 months since the disruption started, clearly we need to rebalance the top line versus the bottom line and make sure that we continue driving kind of a profitable growth model and 6

7 there we just need to readjust and basically look at where the investment and OpEx investments continue to go. They go to places where we get the best return and if we don t get the return because the market is uncertain or it s just so prudent then we scale down our OpEx investments, especially now in the United States as there we have been below our kind of [inaudible] strategic growth targets if you will. So the answer is, to an extent yes, but it is also that we try to grow faster in various areas where investment is yielding good results. So we need to remain agile and fluid in that sense. The second question was on footwear. Well actually, I guess you were asking about the pre-orders in soft goods, both in footwear and apparel. We ve stopped giving pre-order kind of guidance over this some years ago given that we are seeing that the pre-orders do not represent the full year view in the same way as they used to, and more volume is mostly to kind of immediate orders, so we ve seen that happening. And then significantly bigger kind of share of our sales goes through own direct consumer, so be it on retail or e-commerce, and clearly as we have more stores, as we have more global presence, that is where we of course see growth coming, but the pre-orders we don t comment. But your question is on footwear and being that footwear order book is gradually picking up for the second half of the year, and then we know that we have a good pipeline in place for 2018 and we see some first market reactions there and I believe that we are very competitive there. So from that point of view things will start to improve and, as I said, some years are years of growth, some years are years of consolidation, and this year clearly has been this consolidation year according to our plan, but then that sets us well in place for a continuous profitable future growth, which is also quality growth, i.e. sustainable. We are in the right channels, we are in the right distribution, in the right doors and we, of course have the kind of pricing in place, which safeguards our gross margins. So with that, hopefully that is okay? Okay, good, thanks. Can I just ask on the just to get a grasp on the dynamics, in apparel and footwear the pre-order share would be approximately how much of the actual orders? And I understand that not a direct to consumer of course, but if we talk about the sort of old format where you do wholesale, so is it approximately how much would be pre-order and how much would be re-orders of any full season? You are looking at the totality, you know, maybe 50% pre-orders and then say more than 30% already kind of for our own retail, own e-commerce, and then maybe the remaining part re-orders, so that would be today just about the status. Okay, great thank you. And as a reminder, if you do have a question for the speakers, please press 01 on your telephone keypad now. Okay, and we have a follow up question from from SEB, please go ahead, your line is open. Yes, thank you. I actually just wanted to ask on Suunto as well and the Spartan, we sort of wrote now in this quarter about this is sort of where exactly are we in that product launch, and is the growth going to accelerate or level off or sort of where do we stand in terms of the product then and the demand and the sell through? Thanks. Right, so the family of new products is rolling out, and still in Q3 the roll out is an extra initiative there coming to a lower price point and basically completing the line up if you will with very strong production, very pressured highly qualifying product from a consumer research point of view. So the buy plan looks good, and we believe that we can now return to solid growth. It may not be exactly even quarter-by-quarter because you know last year we had our biggest launch in Q3, but looking at kind of half-year basis we believe that we can now remain on good growth track. It is not only about the product, we are also expanding the channels we are playing in much more relevant channels. We are expanding also geographically. We are growing fastest in China. We have solid pre-sale presence in China, we are expanding through various means, which gives us a growth model, which is not based on one building block, but several. We always like to do it in a sustainable way so never become a one-trick pony, make sure that you have more tricks than one and that s being attempted, so it is a broad-based programme. It takes a bit of time to execute and implement, and requires quite some change from our side but we believe that is going to pay out then. 7

8 Good, thank you. And we have an additional follow up question from from JP Morgan. Please go ahead your line is open. Hello, thank you very much. My question will be on fitness. I was wondering so the weakness in quarter two should be just a matter of the timing of deliveries and therefore we are expecting a big acceleration in H2 on the new products? And also, more longer term on the profitability of the fitness division, what kind of level of margins do you see as sustainable for the medium/long term in that division as the profitability has been coming under pressure in the last few years? Thank you. Yeah, indeed the fitness business we reorganised revenue once we have installed the product and that is a relatively long cycle, they are big machines and big instalments so from that point of view there is never an exact quarterly view. So the kind of full year view is positive and we have a strengthening a strong order book and that predicts a strong year and improving H2 and from that point of view we believe that the building blocks we have in place and the investments we have made, they will generate returns. And then looking at the bottom line, EBIT, I mean all of the businesses, they need to contribute to the company, to the growth, and fitness clearly should return to the 10% EBIT that is appropriate for the industry, and that is what we invested against. We have made sure that there is again enough building blocks to make the business sustainable, make it grow in a sustainable way. But of course, we expect that that growth is profitable, and that s the path we are on. It has taken a bit of time, the market has changed a lot and we have needed to adjust a lot of our plans, but we see that many of those plans are already working and we see that that improvement is coming. Do you have a timeline to bring back the profitability to the historical levels and actually beyond? And yeah, do you have a hard deadline an internal deadline and if by that deadline you don t hit that target, would you consider an M&A on that front? The answer Chiara is that of course we have a deadline, but I cannot give it to you, so it s an internal deadline and we are sticking to our glide path as always and now investments are largely behind us, so of course we now expect that yield to come and it will come by a top line, it will not come by a significant squeezing of OpEx because that s not sustainable, so clearly we want to now sustainably reignite the growth. And then on the second half of the question, I am not going to speculate now we have chosen an organic acceleration, but you have seen we have done a lot of connect and develop type of activities when it comes to the spin bikes, when it comes to many of the kind of high intensity training products and so on. And then we ve done some smaller M&A like [inaudible] so I think we look at the efficiency of our pipeline offering in order to play in today s channels and also tomorrow s channels if we see that the channel split continues to change and evolve. We of course need to stay ahead of the game and respond to the needs of those new channels, be it the budget channel, be it the high end boutique type of channel or be it the kind of traditional mix segment if you will. Okay, thank you very much. And as there are no further questions registered at this time I will hand the call back to the speakers. Please go ahead. Päivi Antola Thank you. If there are no additional questions we can finish the call here. And just as a reminder, this year s capital markets day will be organised on 31 st August. So thank you all for attending the call, and have a good day. 8