Transcription. Title: Amer Sports Q1 Results. Date: Speakers: Heikki Takala and Jussi Siitonen. Conference Ref.

Transcription

1 Transcription Title: Amer Sports Q1 Results Date: Speakers: and Conference Ref. No: EV Duration: 33:01

2 Presentation Hello, and welcome to the Amer Sports Q1 Results. Throughout the call all participants will be in a listen-only mode, and afterwards there will be a question and answer session. I will now hand you over to Samppa Seppälä, please begin. Samppa Seppälä Thank you. Good afternoon, ladies and gentlemen, this is Samppa Seppälä speaking. I m the new Head of Investor Relations at Amer Sports. Welcome to join this call on our first quarter results, which we have announced two hours to go. In this call, we have Mr, he s the President and CEO of Amer Sports, and Mr, the CFO of the company. We will start with a presentation, followed by a Q&A session. At that time, our operator will assist you how to technically pose a question, but now let s kick off the call, I will hand over to Heikki, please go ahead. Okay, Samppa, thank you. This is Heikki and I m here with Jussi, and indeed we had an okay start for the year. We solidified our margin structure and made sure that we have good quality growth and we have good quality fundamentals in place. We did not push promotional volume, we focused on full[?] budget and sales, and that s what we got. Also looking at the EBIT, we improved to 40.4 million versus a year ago, up 120 basis points. Nett sales was up 1% in the local currency, and of course there was a significant translation impact due to the strengthening of the Euro. Especially versus the dollar, the Euro was 15% stronger on average during the quarter, versus a year ago. Gross margins were very healthy at 46.8%, and the margin improvement came from more attractive mix, higher quality distribution, and a significant reduction of promotional sales. We said already, we focused on full price sales and that s what we got. Free cash flow was somewhat down, versus a year ago. And again, Q4 last year was up significantly, so it looks like we are on a constant patern[?] over longer cycle. Page three, transformation continues, and it s continued as planned. We have a solid progress in the company across the strategic transformation areas. I ll just mention a few here; direct to consumer was up 17%; and on retail, that was up 16%; and most importantly the same-store growth was 8%, so healthy consumer demand. E-com was up 22%, versus a year ago, and consisted of mostly, or almost entirely, full-price sales. We also grew rapidly in e-tail[?] and click and mortar, so we can say that the modern channels, or modern sales channels are doing really well, and represent today about 30% of the company sales. And only some five plus years ago the number was almost non-existent. So, the transformation is truly happening. China was solid, 20% growth, primarily driven by Arc teryx and we had good ongoing top line momentum in fitness and sports instruments; fitness up 4%, but solid order book for the total[?] year to visibility of orders. And sports instruments was up on a strong double digit, and the pipeline there is strong. We ve got this Suunto 3 fitness watch, and I just want to add that I ve launched it as we speak during these days, and that the pipeline has more to come. So it looks like we are solidifying the turnaround in those two transformation areas where we invested significantly over the past couple of years. Our trades didn t have a very strong quarter, but for the total year the order book is very strong, and we are forecasting, or we are seeing again double-digit growth for the brand for the year. And as we have huge momentum in many areas of the company, we, as always, we do the right thing and we make sure that the growth is high quality, it s sustainable. And we have decided to produce our distribution footprint, improve the distribution quality in footwear to make sure that we have sustainable growth model there. So then, moving on to page four. That s the balance sheet. I hand out over [?]. Thank you, Heikki. So, a couple of points on our old balance sheet, then net debt down from the 6 million a year ago, and this is proven by trade working capital management, which is also down some 45 million versus Q What we have focused is our broken[?] capital and asset efficiency overall. Our capital turnover improved significantly versus a year ago, and that s also driving 2

3 up our return on capital employed, now being 15.9%. Net EBITDA, one of our geometrics, continues to be well below 2, now being 1.8, that s mainly for the balance sheet. Back to you, Heikki. Okay, and then, let s move to page five, and here just a couple of comments by the business area. So, here first, outdoor comments and in outdoor, net sales were up 2% in local currencies. I said already, not a very strong quarter, not very strong preorder shipment on apparel but full year looks good, and we see good momentum overall. Footwear, minus 5%, commented already, we significantly reduced our distribution footprint. We continue to do that as we grow into modern channels, as we push for more choiceful, high quality distribution. And within this, we also reduced our promotional volume, hence our gross margins went up well, and our mix was more attractive, but of course, the top line was down slightly; that s our choice. Winter sports equipment, up 16% by seasonally a small quarter. Just the sales of the Winter has been good, and that of course, promising well for the rest of the year. Cycling continues to be a difficult market, especially the OEM business is down. OEM means[?] that our sales to the frame makers and bicycle makers, so we still continue on a downward trend there, and continue to work on the building[?] blocks to turn that business around. I commented already on sports instrument, up 26%, and with the pipeline indeed is well in place, so it looks like a turnaround is confirmed. EBIT for the segment was healthy and it looks like it s a good healthy mix, and good spending patern. Moving on to page six. Ball sports was virtually flat, versus a year ago. We continued to gain share across all of the categories, but the market, especially in the United States, has continued to be depressed. EBIT margin actually improved, versus a year ago. Margins look good, and our OPEX control was good. The pipeline is also quite exciting, but the market remains kind of flat, and show even down, as we know. Moving on to page seven, that s comment on the fitness, and net sales up 4%, very uneven quarterly development. We don t focus on quarters so much, we see that the full year is healthy, top line remains dynamic, and we see that the sales and EBIT are biased the second half of the year in fitness, as we get our operating model fully up and running. And as we now start to get the benefits from the investments into the pipeline, we re now competing well for the orders and the proceeds in all of the relevant segments. We are now growing fast in the budget segment. We are also growing in the kind of traditional segments where we used to be strong. And if I look at our participation success rate into the deals, we continue improving there, so from that point of view it s looking quite positive in this segment overall. If I look at the outlook, that s page eight, no change there. As always, guided by our long-term target strategies, we focus on sustainable growth, we always do the right thing in the short-term, or the long-term health, but we also deliver appropriate short term in line with the guidance. In 2018, net sales in local currencies and EBIT are expected to increase in 2017 and the key drivers remain the same. And as we said, going into the year, that there s going to be quarterly volatility because the whole market pattern is changing from pre-orders to re-orders. And as we also have a significantly heavier weight in our own retail[?] and our own ecommerce, we control much more of the distribution as percentage of the total volume than we used to do in the past. So, that s going to drive some changes, but overall, the momentum is quite okay, and the business remains relatively dynamic. That s basically it, that s the presentation. So, I hand over for Q&A, so please. Q&A Thank you. If you do wish to ask a question, please press zero one on your telephone keypad now. If you would like to cancel your question, you may do so by pressing zero two to cancel. And our first question comes from the line of Chiara Battistini from JP Morgan. Please go ahead, your line is open. Chiara Battistini Good morning, hi, thank you for taking my question. The first one would be on footwear, and the clean up of the distribution you re doing and you initiated in Q1. So, should we actually expect footwear to remain negative throughout 2018, giving that you 3

4 will analyse the closures of the doors. And the second question on the gross margin for the year, is this now the new run rate for the Q1, the new run rate that we should expect for the rest of the year as well? Thank you. Yes, this is rate, yeah he answer to your first question of footwear and what to expect of the year. Yes, this is the year when we now solidify the footwear business model, we expanded it so rapidly over the past years. We went into new channels, we went into new type of distribution, and now we know what s working, what s not. And we also see where the consumer is engaging and interacting with us. And we see that now we can make a better market segmentation and we can make sure that our distribution policy corresponds to that of the consumer shopping habit and practice. And of course we are today in quite a broad distribution. We will brighten[?] it up, we know that that s going to give us better quality, better equity and it s going to take this year. It s not an indication of the top line yet, it s more we are now acting on something which we know we need to do as we start to be a 0.5 billion footwear company, and now we need to prepare ourselves for the next growth stage. It s the right time to do it, and I think that s going to make us stronger for the next quarter. Kiara, on gross margins we do expect margins to improve for full year. However, this kind of turn[?] basis point improvement we had in Q1 is not a proxy for the full year, so it will be smoothen there. However, as said, we believe the gross margin improvement overall for the year. Kiara Batistini Thank you, and just a follow-up on the gross margin your answer on the gross margin, in terms of the drivers in Q1 versus the rest of the year, shall we expect anything different from a drivers perspective for the coming quarters versus what s happened in Q1? Drivers, Kiara, drivers are pretty much the same, now that we had high volumes, [inaudible] and the likes where we have all manufacturing. In Q1 of course, we had some positive [inaudible]. They would be smoothing and go further off[?] the year. When it comes to pipeline clean up, that will be maintained. And of course, when all B2C[?] continues growing faster than the balance of the channels, that will improve our mix overall. Kiara Batistini Great, perfect. Thank you very much. Thank you. Our next question comes from the line of Panu Laitinmäki from Danske Bank. Please go ahead, your line is open. Panu Laitinmäki Yes, thank you. I would have two questions. Firstly, on apparel growth, the growth figure was the lowest in many years, so basically, why was that, and how good visibility do you have through the remainder of the year? You mentioned good order books, but can you give more colour on that development of this? And then the second question is on the growth outlook overall. You keep the guidance for local currency sales to increase, Q1 was 1%. You indicated that the footwear will be lower; perhaps to the just mentioned reasons, you will have quite strong comps in Q4. So, where do you think you will be, compared to the target of mid-single digits longer term? Okay, on apparel, we have good visibility of our own pipelines. We know exactly how many stores we are opening for the year. The pipeline is only going to be about 25 retail stores, so we know just about what s the average sales per stores, so [inaudible] out there. We see the online sales following a relatively steady pattern of growth, both in retail commerce and in e-tail, so pretty good capabilities to project the growth there. And then we have quite a good grip of the pre-orders for winter It s quite dynamic there, especially for Arc teryx. Hence, like I said, our visibility is good and I already commented that we expect ongoing strong momentum on Arc teryx for the full year. I would not look at one quarter. If you look at one quarter that s okay, but on apparel it continues to be volatile, what is important is the long-term trend. 4

5 When you then ask about the overall top line, we re not going to give you a number here. We just say that we expect growth for the year, and the growth is going to be uneven. If you look at last year, you saw that the year was uneven. The outlook is fine, we have a relatively good view on apparel and footwear, we have a good grip of the order book on pre-core[?]. We have a good early indication of winter sport equipment. As you know we are in the middle of the order-taking[?] season, so that covers so much of the visibility that we remain relatively confident about our short term, which is Panu Laitinmäki Thank you. I have a kind of follow-up. You mentioned the winter sports equipment. Obviously the Winter was very good; what is the impact for the next season from the good winter from this year? Can you comment on the pre-orders? No, the pre-orders have been taken and we have stopped or we have not given pre-order guidance before they are complete, so we typically comment on them next time. But the point is yes, it was a good winter. We see that the momentum is there, it s good. Skiing has been popular, and people have been skiing. They ve been buying and renting and that s always good. And when we have some of these building blocks pretty well visible, then we can make these choices that we re making as the company, to fix areas where we know that fixing is required. So it s a good time this year to do this in footwear, as we see momentum elsewhere in the portfolio, and hence we can balance out. That s really the way we look at the priorities and the sequencing of the company. And of course, you know, when many things are working well, then you can focus on fixing the ones where you know that that s going to be helpful for that unit, or that business, for the long term. Panu Laitinmäki Okay, thank you. Thank you. Our next question comes from the line of Dan Homan from Citi. Please go ahead, your line is open. Dan Homan Hi, afternoon all, and thanks for taking my question. First of all, just on the gross margin, coming back on that. Obviously, it was all driven by the outdoors segment. Can you just maybe give us a little bit more detail around whether that was driven by mix, or whether that was driven by the tightening of the distribution of footwear? Second question was then, just on your guidance, what kind of FX impact on top line sales growth are you anticipating for the year? And then the final one, slightly sort of longer term thing, Heikki, your comments around the markets moving to re-orders, rather than pre-orders, is there any way you can indicate how much of your sales are coming from re-orders in the last few months? And how that compares to maybe a couple of years ago, just so we understand how quickly the market is changing? Thank you. Okay, so we need to divide and conquer here, Dan. Okay, the mix impact really was the healthy inventory levels. First of all, we did not take inventory risk, so we had lower close-outs, so we sold at full price. We significantly reduced our promotional volumes in footwear. I m talking significant reduction, and of course that s driving the mix up quite a lot. Then of course our own e-commerce continues to weigh heavier in the portfolios, so that s driving further positive in the mix. So, it s a combination of many things, but, yes, of course, as we sell at full price, and we decide not to sit on a lot of inventory, and we don t do a lot of close-out, that s always good. It has a good impact on the gross margins. Jussi will take the other - Yes, this gross margin topic. So, you ask about the components of the gross margins and what was the main driver of this improvement. Roughly 80% of improvement is coming from pipeline cleaning and consolidation of our distribution there. B2C, overall improved our gross margins some 40 basis points, out of this 210 basis point improvement. We stayed at high level in all 5

6 B2C. They share still 12% of the sales, so it s impacting first margins less than what we expected to do on full year basis, but major part of the improvement of course coming from traditional B2B pipeline cleaning and consolidation. And your third question was on the pre-order, re-order split. To that, that split is changing, especially in footwear, and apparel, to go[?] to re-orders, partially because so much of our business is now in own retail and ecommerce. So in Arc teryx and Solomon, apparel and gear is starting to get towards 30% direct the consumer from us, so clearly that s where we don t ship pre-orders. That s where we hide[?] it, everything is instant orders or re-orders. From that point of view you see a very significant organic split or mixed development. And then, of course, the market remains prudent. The wholesale market doesn t take a lot of inventory risks, so it rather has a prudent pre-order pattern, and then looks for and seeks re-orders, wherever available, if the season is good. So, I m not going to give you a number here, because I haven t done it over the cycle, but clearly if it s used to be a 80/20, or a 90/10, it has moved towards 70/30 or the like, so clearly pre-order, re-order is moving toward re-orders over the past two to three years. So, I m not giving you a specific number, because I don t have that today, but we can get back to that in one of the future calls. Dan Horman Great, thank you, and sorry, just the third question which I don t think got touched on, is just what are you expecting on FX impact from currencies for the year? Yes, as you saw, in local currencies we were up 1% in current FX, so in reported currencies we were down some 6-8% there. So, it is quite swing there when it comes to translation differences. When it comes to transactions, of course we are now much better off we used to be last year. When it comes to [inaudible], we are now, for this year, hedge[?] levels and US dollars, 1.13, exact the same we were last year. So this kind of currency-related impact versus 2017, we should not have, in that extent, we had last year. What we expect from translation of course, assuming they ll always stay at this level, then it s about this magnitude and then smoothening out, or cap will be closed close[?] to end of the year, when the US dollar started to weaken last year. Difficult to say, this is so much based on how the US dollar would go. Dan Homan Okay, thank you. Thank you. And our next question comes from the line of Jutta Rahikainen from SEB. Please go ahead, your line is open. Jutta Rahikainen Hello and good afternoon. A lot of questions were asked already, but could we perhaps go back to the footwear topic once more? Two questions in that area. Firstly, this cleanup that you refer toward the sort of narrowing down the distribution, is this simplest of a traditional retail and online retail game? Or is it so that you have a specific market where you ve done it, geographical markets? And the second thing would be that, was this a project that you started, say January 2018, or is it actually something you ve been doing already last year? And you kind of mentioned that this is the year when you do it, but is it going to be the whole year that impact sales? Or did it perhaps already start, or is it perhaps going on until 2019? Again, for us to get sort of the feeling on where really should we think the footwear growth is going. Thanks. Yes, I ll take that one. Of course, we ve seen there s so much of the distribution is now build online, there s all the time, there s visibility, there s a lot of competition in the marketplace. And so what do you see it that what is the distribution we want to have with the different lines? Is that distribution purely promotional, or is healthy in the long-term, solid distribution, which builds the 6

7 brand equity? And as we now move[?] to an omnichannel model, where we clearly follow the consumer and we re going online and we go onto marketplace and all of that, now today we know what is sustainable equity-building distribution and what is then purely promotional. And now we re making those choices, and clearly we started to clean up already in Q4, but now we plan to complete the kind of remodeling of the commercial strategy during I don t think it s going to be dramatic, and we ve seen many other companies have done that already. And clearly that s something that needs to be done, you know, so you grow, you consolidate, you grow, you consolidate. And if you don t consolidate in between, you typically become quite promotional and then you start to chase against the bas[?] period[?] which is very promotional. And then you just need to become more promotional and more, and that s not quality equity-building model; hence now is the time to do this one. Jutta Rahikainen Okay, thank you. And then a second question which is more generic, has to do with the market overall. Last year was the last about the US market being challenging. Would you care to comment on a specific market, mainly now Asia, or China, in your case, Europe and North America? Are they equally difficult this year, or would you say that they are getting more difficult, or perhaps better than last year? The market is quite even, so in each and every market you see some part of the market being very dynamic, and in some parts not being very dynamic. So, it doesn t seem to be a geographic difference, it s more channel driven, so clearly online is dynamic. So online, from pure online players and/or the players who have both brick and mortar and online, but clearly the consumer is moving online, as we see that all over the world. Overall demand is quite healthy and we see that most of our categories, the consumer remains active and healthy. And we ve seen some improvement in the United States, so it s early, but we are cautiously optimistic there. China remains good. Japan remains good, and then Europe has ups and downs, so that Europe remains kind of okay, so there s not a huge delta between the geographic regions overall. Jutta Rahikainen Thanks, and then the last one on my behalf, I m actually on the topic of Solomon apparel, that also maybe mentioned, I would have thought that the weather would have helped that specific business area, as it s a lot of winter clothing in Q4 and one, I think Q1, but you did not mention that it actually performed particularly well. So is there something well, how is it doing, that business, if I ask it that way? The expansion of Salomon has been a lot toward kind of active business running, and so now we re shipping to season and then we ve seen how the consumer responds. So we are not in a high growth, but we are okay, then we see how the consumer actually responds. So, from a winter point of view, this was now the end of the season, Winter was shipped already kind of during last year, so now it s more Spring, Summer. And at least in our own retail and own ecommerce, we see good encouraging consumer demands, so from that point of view looks like it s quite healthy, and it continues to be healthy. And that s a good new leg for us to really expand in this kind of running fitness type of activities where the market is much bigger than where we currently play. Jutta Rahikainen Okay, thanks. That s all. Thank you. Before we go onto the next question, I would like to remind all participants to please press zero one on your telephone keypad if you wish to ask a question. And our next question is a follow-up question from Panu Laitinmäki from Danske Bank. Please go ahead, your line is open. 7

8 Panu Laitinmäki Yes, sorry, I was muted. So, I would like to have two questions, if I may. Firstly, on cycling, so the growth rate was quite negative still. Could you explain what is going on in that business? And then secondly, on the OPEX development, there was a lot of talk about the gross margin, but how do you see OPEX developing and are you on track with the target already, or is it by one percentage point of sales? Thank you. Right, as the cycling market has continued to be quite challenging actually and there has been quite a lot of changes, a lot of inventory. And I said already that the OEM sales which had been a significant part of our overall top line, OEM has not rebounded yet, it has actually continued to go down. So if the bike makers don t make bikes, then they don t order wheels; that s kind of the logic there. And we ve seen continuous top line pressure for them, which then radiates to them, by ordering less from us. That s what we re seeing and of course at some stage the market will reach its bottom. But we will clearly be going along with the market, so if the market doesn t get traction, it will impact us, and that, especially the OEM side, which has been a significant part of our selling overall. That s really the driver, based on nothing else very dramatic, of course. We re not just watching and seeing what s going on, we re pushing quickly[?] online, we re pushing or distribution to new channels, and so we re trying to regain there. But of course our fast growth in those channels is not yet enough to offset millions to millions worth of decline in the OEM orders. And so it will only have an impact over the cycle as to a, call it a scale, which is impactful[?] enough. A final on OPEX spend, OPEX produced more than - we are pleased with the brokers there. As we said we are up to Q4, we are a bit [inaudible] of supplies; that is still the case. However, we are not changing our guidance that all the improvements there should be in our full 2019 P&L. As you might have admitted[?], that any one [inaudible] comes in our Q1 result. We still have some tails[?] left, most likely placed in Q2 results then, when it s busy. When it comes to OPEX efficiency and then OPEX targets we have set for 2018, we are well aligned with those targets at the moment. We haven t come up with any precise OPEX numbers varies that we still want to keep the full [inaudible] in our own hands. So, if we see some action rates and potentials out there, which we took our top line growth for mid and long, definitely we will reinvest back in towards businesses. That s why we haven t been very explicit with our OPEX drivers but underlying OPEX growth is in the plan of what we introduced a year ago. Panu Laitinmäki Thank you. Thank you very much. As there are no further questions, I ll hand back to our speakers for any closing remarks. Samppa Seppälä Thank you for all your questions. Well, if there s no additional questions, I would like to thank you for participating in this call today. Thank you, and I wish you all a pleasant rest of the day. Bye now. 8