Transcription. Title: Amer Sports Q1 Results. Date: Speakers: Päivi Antola, Heikki Takala and Jussi Siitonen

Transcription

1 Transcription Title: Amer Sports Q1 Results Date: Speakers: Päivi Antola, and Jussi Siitonen Conference Ref. No: EV Duration: 31:28

2 Presentation Ladies and gentlemen, welcome to the Amer Sports Q1 Results. Today I m pleased to present Päivi Antola. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Speakers, please begin. Päivi Antola Thank you very much. So welcome to this first-quarter results call for Amer Sports. Together with me in this call I have, the President and CEO of the company, and Jussi Siitonen, the CFO. As usual, we ll start with a brief introduction by Heikki and then move on to Q&A. So Heikki, please go ahead. Good afternoon, good morning. We are in a context of a slight change in the marketplace. The market is changing in The US wholesale slowed down significantly, and in 2017 we see that the wholesale market is still prudent[?]. However, the consumer is active. The consumer-driven transformation is a must for us, and we are accelerating the transformation of our business models. We are investing into the future growth of the company. In Q1 we had solid results, despite the challenging market. Net sales were up 2%, and driven by good progress. In apparel we were up 14%. Own retail we were up was up more than 20%. Ecommerce was up more than 40%. China grew double digit. Winter sport equipment was up double-digit. And our fitness started to rebound with a 6% growth. Gross margin was at 45% flat, level, which is basically the target level where we wanted to cement the gross margin. It is down versus a year ago due to the less favourable USD hedges and they were especially favourable in Q1 in 2016 and started the favourability started to go away during the quarters two, three and four in EBIT was at 38 million; down versus a year ago by 8 million, and we invested at full speed into the company s transformation, responding and being proactive in light of the rapid change in the marketplace. So again, the investment went into our own retail, ecommerce, soft goods, China and basically changing our organisation to be more and more aligned with the changing customer habits and practices, especially on the shopping side where the consumer is shopping more online and looking for information online before they actually make the purchase. Free cash flow improved significantly versus a year ago. So with that, I actually hand over to Jussi for balance sheet. Jussi Siitonen Thank you, Heikki. Our net debt was up 26 million in Q1 so that share buybacks what we made, especially in March, they increased it by 16 million, and then paid dividends by 66 million. It was then partly offset by good cash flow, just Heikki mentioned. Working capital decreased even below last year s level, the biggest driver being receivables which came down now in 67 million from the year-end. And our capital turnover which is 12-months trading average remain unchanges versus year-end, but due to lower profitability our return on capital employed came slightly down versus year-end. Balance sheet remains strong and our typically seasonally higher Q1 net debt equity was 0.61, slightly better than a year ago. Heikki, back to you. Okay. And then as usual, we move to segment-based breakdown. And first, outdoor had a solid 4% growth in outdoor, despite a significant decline in Suunto. I ll break that down even a bit more. Market softness in especially in the US impacted our growth 2

3 ambitions in footwear. We were up 2%, basically in line with our expectations; we have seen that in the pre-orders and we see that our sell-through is good, so we are encouraged by that, but we knew going in that the pre-orders were prudent. Cycling down 6%, especially the OEM business there is pressured. The market has a lot of inventory and we see that the inventory has not yet sold through, but it s starting to look better. On retail, ecommerce, all in all worked really well, especially for footwear and apparel, of course, and we see double-digit growth for our footwear, ecommerce and the retail, which means that the consumer demand is there. Apparel was up 14%, and driven by Arc teryx, which had, again a very strong quarter, but also Salomon apparel was up for Q1. In the sport equipment, it s a small quarter for us. Nevertheless, a good 18% growth showed that our brands are strong and we could enjoy the conditions which were pretty good the winter conditions were pretty good globally. Sport instruments down by a significant amount, and that seemed to reflect in the launch of the pipeline. We started to ship our latest models from Suunto in the last days of Q1 so there was no business impact yet. We started to look for that impact in Q2 and especially Q3 when the full family is relaunched. Moving on to ball sports, that s where we see the US wholesale softness. Net sales down 4% and clearly we see that coming from the wholesale. Own ecommerce direct to consumer grew at high double-digit level but was unable to offset the prudent inventory taking in the wholesale segment. Also there is an upcoming change in the baseball regulations, and there is some destocking ahead of that. However, that s not significant. EBIT down slightly versus a year ago. Fitness: we had anticipated growth. Over the past couple of quarters we had now the pipeline well in place so that the introductions have been done and the marketplace is responding very favourably and we are now in full execution. We had a good 6% growth for the quarter, and you know, we anticipate improving performance going forward, and that will then again in turn drive profitability. So if we then recap a bit what s working, what s not working yet. So looking at the consumer overall, the consumer is active and engaged. We see it in our KPIs, we see that our brands are strong, and we attract more and more consumers. Business to consumer for us up 27%; ecommerce up 43% as said already and we also see that our same store growth, which is the core indicator of the health of the own retail same store growth, 6%, which is strong. Own building blocks[?] are working overall. So ecommerce I mentioned already. Own retail expansion we continued to roll out in stores during the quarter, and the core fleet[?] is working well as well. China double-digit growth, apparel double-digit growth. So all in all, most of our strategic acceleration areas are working well. Mentioned already the winter sport equipment market, which is now healthier. What s also working is that Precor is showing these early signs of responding to the innovation to our investment, and of course we re looking at gaining traction in the marketplace. For Suunto, the pipeline is, as I said already, more in place for Q2 and Q3, but then look at the business broader, even when the where there is not and when there is not growth, our shares are strong and we have brought various market share gains. We can read that with the official statistics. For example, in performance tennis where we continue gaining share month-by-month. What is not working is the US wholesale market. We ve seen transformation. There is a lot of softness and prudency there, and clearly that s a surprise factor in the sense that the transformation is so quick and the impact is so rapid. We re dealing with that, we re moving faster and basically, you know, we know what we need to do, but clearly we re seeing that now; an adverse impact from the marketplace. The other area which is not working is our OPEX versus our own product EBIT target. We realise that we need to now wait a bit more and invest faster into the transformation, making sure that we stay ahead of the curve and we are relevant where the consumer shops today. And tomorrow, hence we continue in being in investment mode. That s investment into retail, ecommerce, digital transformation, databases, all things we have called out for already earlier. Moving on to the outlook, in 2017 our net sales in local currencies are expected to increase from 2016 and EBIT is expected to be at the level of The rationale clearly we see that the growth will be biased towards the second half of the year. That s also based on the pre-orders we are seeing. And when it comes to the EBIT, we choose to further accelerate our investment into this transformation into omnichannel and digital to make sure that we deliver our mid-to-long-term targets. And we know that these 3

4 investments have a short-term adverse impact on our profitability, but we see that they fundamentally important they are crucial for us to reach our longer-term targets. So that s the business review and that s the outlook, and I would like to hand it over for Q&A. Päivi Antola Thank you, Heikki. So as Heikki said now,, we would be ready for questions from the audience. Q&A Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. And please hold until we have the first question. Our first question comes from the line of Dan Homan from Citi. Please go ahead, your line is now open. Dan Homan Afternoon, all. Thanks for taking my questions. A couple from me. First of all, just on the gross margin in terms of the full-year outlook. I think you previously said you expected it to be around flat year-on-year. It sounds like you might expect it to be mid-year[?] target, 45% now. Is that correct, or am I reading too much into it? And then second, on the updated guidance and the additional cost investment, it sounds like there s an additional sort of 20 million of cost going into the business. I just want to understand what s changed over the last 11 weeks since your full-year results to make you need to put this cost in so suddenly. Thanks. Okay Dan, the first the line was a bit poor, so I need to confirm that the questions came in right. So the first one is versus our what we the way you understood our gross margin guidance, is there a difference? And basically what we said always is that first we need to get the 45%-plus gross margin. That for us is a sustainable level. We say that that s where we need to safeguard our gross margins. You know, already last year we say that the hedges are disproportionately positive in the first part of the year, so they are not at a sustainable level. So we said that we first seek to safeguard gross margin, not[?] 45%. That s what we re going to do, and then you know, we ll seek to mitigate all of the negatives which are hitting our gross margin. We ve done them proactively, including pricing and cost actions. And then over time, as the hedge levels, they evaporate, we still stay at 45%-plus and seek to be close to last year s level. But 45% is kind of the threshold which we always looked at. The second question was more the line was worse, so I guess you were asking about cost and what we have done over the past 11 weeks to decide, or what has led us to decide to increase our cost level. And you know, if that s the question, I m answering it and you can then precise if I m answering the wrong question. First of all, we ve seen that the softness in the marketplace is seems to be there to stay for a while. And we see that the wholesale index in the US our wholesale index is, you know, down almost 10%. So we ve clearly seen softer-than-expected markets. So it basically encourages us to go faster to omnichannel, make sure that we engage consumers directly. We are more present, we are more in the omnichannel and we proactively build that direct-to-consumer linkage even faster than we had in our [inaudible]. So basic [inaudible] did not anticipate such a rapid decline in the US market. You know, of course we have now readjusted the US plans over time to make sure that we stay ahead of the curve. At the same time, as we ve seen softness in the US, we have of course started to accelerate even further in other parts of the world, especially in China. The all these investments, all of the actions, they take a bit of time; you d better make the call early enough. And the key here is to stay dynamic and agile, because otherwise you re basically watching what s happening rather than making things happen. We choose to make things happen. Dan Homan That s great. Those were my questions, thank you. 4

5 Our next question comes from the line of Adrian Rott from Deutsche Bank. Please go ahead, your line is now open. Adrian Rott Hi everyone, afternoon. Just a follow-up on OPEX and incremental investments. First, could you maybe just give one or two examples on just on where you invested what those omnichannel investments look like? So is that Salomon now also increasingly taking a B2C approach, maybe also including stores? Or just one or two anecdotes would be helpful. Then secondly, you ve just mentioned there some of the productivity KPIs were below your targets. So is that a hint at some of the investments that haven t sort of paid back, or in the way that you expected? Or is that just related to sales being below expectation in some parts of the world, as you ve discussed previously, while costs have been rising a bit? That would be helpful, thank you. Yeah, Adrian, thank you. Examples of the investment into omni, if we call it omni, will change in the organisation. As we speak, we re putting in place new capabilities across the business areas, across the company, to basically build databases, to build them faster, to bring more consumers into the funnel[?], to convert the consumers better, investing in the digital marketing capabilities and kind of underlying platforms. We re building our own database faster than we were, you know initially planning. We also concretely we are opening stores as we speak, so every quarter we go for this five, six, seven store opening as fast as we can find locations. And then we continue rolling out ecommerce; still in the brands where ecommerce has not been established yet, so by the end of the year I expect to have 10, 15 more ecommerce stores opened locally for our different brands. So we re doing that as well. And then of course we re just operating the current platform better and better. But the key thing here is a significant organisation renewal and transformation to basically prepare ourselves for what we believe the new future model will look like. Equally, we re still in an investment mode into Suunto and into Precor, so when we decided to accelerate and put our bets into them, you know, of course we made significant underlying investments. We re starting to see the payback now in Precor, and we see that the building blocks are well into place on Suunto. As said already, [inaudible] the pipeline is yet to come. So to your kind of second question, is there: did the top line not come? No, the top line did not come in Q3 and Q4 last year, as we said that the top line impact was not as anticipated. But now in Q1 we see it coming from Precor and of course going into Q2, Q3, we expecting that positive impact from Suunto as well. One surprise factor, if you will, is we ll attribute that to the rapid change in the US wholesale marketplace. So that was that s an external thing we need to now mitigate, and we re mitigating that through these accelerations elsewhere in the portfolio. But the building blocks are very much the same, so it s direct to consumer, it is soft goods, it s China. So basically we just grow faster there. Adrian Rott Okay, great. Understood, thank you. Our next question comes from the line of Kalle Karppinen from Danske Bank. Please go ahead, your line is now open. Kalle Karppinen Hi, Kalle here from Danske. Still coming back to OPEX, can you confirm that your target is still to lower OPEX for sales ratio by 100 basis points over the next two years? And second question regarding depreciation: it was up quite notably year-on-year. Can you elaborate on that? So this will be [inaudible] that s, I think, mostly in gross margin, right? Jussi Siitonen Yeah, Kalle, you ll see here I can confirm the OPEX efficiency target that we announced after Q4, the 100 basis points by 2018, that s still our target. 5

6 Then moving this OPEX up, depreciation, at least on[?] depreciation of what we had, roughly 4 million now in Q1, that s mainly those capitalised development costs what we have done around digital in 2015/2016. It s there in OPEX. So if you take that out from our OPEX growth you can see that this cash[?] OPEX is actually pretty neutral. Kalle Karppinen Thank you. Our next question comes from the line of Rauli Juva from Nordea. Please go ahead, your line is now open. Rauli Juva Yes, hi. Rauli from Nordea. Most of the things were already asked but just a follow-up to Kalle s question to clarify. So basically the 100 basis points cost improvement is still aimed to be [inaudible] cost improvement and these further acceleration things are not kind of eating anything out of that. Jussi Siitonen Yeah, a bit repeating myself, but exactly. It s still the target including all of the acceleration investment what we have in OPEX. Rauli Juva Great, good. Thanks. That s all from me. We have a follow-up question registered from the line of Adrian Rott from Deutsche Bank. Please go ahead, your line is now open. Adrian Rott Hey again. After we ve gone through the OPEX stuff maybe just a bigger picture question on Salomon. You ve mentioned that Salomon was particularly impacted by the US situation because it s much more dependent on wholesale. Can you share some numbers or details on how the brand did in other parts of the world? Or if you look at the pre-orders for the back of the year, whether well, there would be something[?] that really suggest that we ve seen the low point for Salomon with that just 2% footwear growth. Yeah, Adrian. Sorry, the line is not very good. I don t know why it keeps breaking, but I think your question was: are we seeing a low point on Salomon, and how is the kind of underlying health globally. And basically, you know, I would say that the pre-orders going towards the second half of the year are improving. Our sell-through rates are good, our own ecommerce and own retails sell-through rates are very strong, so double-digit growth there. So we see that there is underlying demand. When you take a lot of price increases as we have done, you know, you get some commercial issues, you get some customer support issues, and especially, you know, key promotions, key deals, you may lose them to somebody who is a bit more aggressive on pricing. That s typically temporary in nature, and you know, you just need to kind of hold on and keep going because you need that structural health in your P&L. The right thing to do is protect your gross margins and basically price for it. Somebody wants to take short-term advantage on that and, you know, take away a few deals from you, that s okay. You know, that happens. I still think that, for the long term, we ve done right. So then the question being, okay, have you seen the low point? You might need to remember that there are two different things here. One is what we ship to the marketplace, and one thing is the consumer demand. The consumer demand is good. Salomon is doing well, and what the KPIs we are following indicate that the brand is healthy and continues to be healthy, and I expect the shipment to start improving. Again, the pre-orders for the fall/winter indicate that we started to grow again a bit faster. Adrian Rott Okay, great. Thank you very much. 6

7 And I remind you that if you want to ask a question, you will have to press 01 on your telephone keypad now. Please hold until we have the next few questions. Our next question comes from the line of Chiara Battistini from JP Morgan. Please go ahead, your line is now open. Chiara Battistini Good morning, thank you for taking my question. I have a couple left, please. First on the gross margin in the quarter, I was wondering whether you could give us more colour in terms of the different drivers of the gross margin, because I think, if I m not mistaken, product mix and channel mix, and maybe also geographical mix, were positive. So I wonder how much FX was actually negative in Q1, please. And then I was wondering, on the footwear exposure, can you remind us how much of footwear is in the US, and how footwear outside of the US is performing, please? Thank you. Jussi Siitonen Chiara, it s Jussi here. I ll start with gross margin and then passing to Heikki. So when gross margins in Q1 came down basis points, the less favourable hedge[?] season underlying is less favourable because they are still favourable versus spot rate. The less favourable hedges takes some 200 basis points out of this whole chain, so you can see that it was predominantly driven by hedge change, while of course when we have more B2C in our portfolio with much higher gross margin, they were then improving it. But currency was the main practically only big driver now in Q1. And I ll take the footwear question. The United States is approximately 15-20% of our footwear, so say approximately 15-20%. Say it s 15-20% of the of footwear, and of course, we had significant growth targets. We continue doing well. We re gaining share there. We re doing fine, and we re gaining fundaments, but and we also know that the sell-through has been good, but I think there is a prudent order taking, which is impacting that. In APAC in Asia Pacific from a lower level we grow double-digit, so footwear is healthy there, China especially. And then in EMEA, the that s where we ve seen about[?] the impact of the price increases. We are still at last year s level, and I would attribute that to basically walking away from a couple of key, big promotions where pricing is key and where we ve chosen not to go to the price levels needed to get those promotions. So it s partially our own choice needed to make sure that our new pricing is ticking, because you know, otherwise we cannot hold on to our gross margin target. So we prioritise gross margin health and then we make sure that we start to build a top line on that. Also looking at the pipeline which is coming on footwear, we have very good innovation in running about to hit the marketplace, we have very strong innovation in our core trail[?] running and of course if I look at our core hiking, the range is strong and very, very competitive there. Then we have all of the underlying building blocks supporting this expansion, so the retail opening, the ecommerce expansion and the consumer databases and the likes. So you start to add it all together, I think we have a lot of building blocks in place to, let s say, reignite profitable growth after the need to intervene on the gross margin, i.e., take[?] significant pricing, which we did last year. Chiara Battistini Understood. Thank you. And may I just ask, on online and the initiatives you are implementing on online, can you give us some tangible examples of what exactly you are doing in terms of online? And how is this OPEX investments, and on CAPEX investments also? For tangibles go and see our ecommerce, go and see our engagement models on Wilson, on Salomon, on Arc teryx. You will see the tangible examples there. So clearly the KPIs are improving rapidly. The traffic numbers been driving our kind of share of the online fundamentals, if you will. So they are relatively visible there, and hence they drive automatically, both ecommerce as well as multichannel, omnichannel demand. And that leads to your brand awareness, it leads to your NPS numbers, it leads to everything related to the kind of brand KPIs. Then there is the underlying thing, which is the company database company cross-brand or cross-portfolio database. Our ability to engage with the consumer with the mobile brand offering. So say that if 7

8 you are a runner, if you are a skier, we have the head-to-toe solution. And of course, you know, we used to have things on a brand-by-brand basis over the past year or two. We have now invested and built that cross-selling capability, which of course then emphasises Amer as a better owner for this portfolio as we are able to create the cross-portfolio benefit-driving initiatives, offerings, which make sense. So they are not forced, but they actually build with the target consumer in mind, whether you are a skier, triathlonist, whether you are a, you know swimmer, diver, whatever. I think we have a unique portfolio for that, and it s our responsibility to make it happen, hence that s what we re doing. Chiara Battistini Understood, thank you. And if I may, I just have one final question, please. On the fitness division, are you done now are you done with the large majority of the shipments of the new product launches, or is there more to come in Q2 and therefore we should expect still sustained growth in Q2 as well? No quarterly guidance, but I think here you asked about fitness. So Precor no quarterly guidance, but we have rolled out and it s hopefully not a one-quarter impact, but it s a sustainable reignition or reigniting of the growth. And we see, you know, the audit books are healthy, we see the geographical expansion, we see that we still need to tailor some of our offerings to the needs of China or Japan as a whole. That s also the digital offering we make in the right languages, the right consumer userface[?] and all of that. So as everything rolls in over the coming quarters, of course these are the building blocks which then are expected to make the growth sustainable. So of course, we are always investing into sustainable, profitable growth, we invest into a [inaudible]-based thinking, and we see that there is plenty of upside potential as we continue rolling these things out. So I think we are now encouraged about Precor. It took a bit too long, but now at least we see that the signs, they are there. If you look at the pipeline, if you look at the product, they are strong, and I think our digital offering is second to none. So you know, one by one, we re turning it around. Chiara Battistini Understood. Thank you very much. There are no further questions at this time, so I will hand back to the speaker. Päivi Antola If there are no additional questions, then it s time to finish this call. Thank you all for participating and have a good day. 8