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RAPALA VMC CORPORATION’S HALF YEAR REPORT H1/2020: NET SALES AND PROFITABILITY DECREASED FOLLOWING THE COVID-19 PANDEMIC; SUCCESSFUL MITIGATION RESULTED IN IMPROVED OPERATING CASH FLOW AND SIGNIFICANT REDUCTION IN INVENTORIES AND NET DEBT
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Rapala VMC Corporation
Half Year Financial Report
July 16, 2020 at 5:00 p.m.
RAPALA VMC CORPORATION’S HALF YEAR REPORT H1/2020: NET SALES AND PROFITABILITY DECREASED FOLLOWING THE COVID-19 PANDEMIC; SUCCESSFUL MITIGATION RESULTED IN IMPROVED OPERATING CASH FLOW AND SIGNIFICANT REDUCTION IN INVENTORIES AND NET DEBT
January-June (H1) in brief:
- Net sales were 117.1 MEUR, down 17% from previous year (141.2). With comparable exchange rates sales were 17% down from previous year.
- Operating profit was -0.8 MEUR (11.4).
- Comparable operating profit* was 4.2 MEUR (12.0).
- Earnings per share was -0.12 EUR (0.17).
- Cash flow from operations was 13.4 MEUR (11.5).
- Inventories were 83.5 MEUR (108.6), down 23%.
- Net interest-bearing debt was 63.5 MEUR (104.1)
- Short-term outlook: End-consumer demand is currently on a good level in main markets, but it is still impossible to issue a financial guidance for 2020 due to lack of visibility and significant uncertainties related to the COVID-19 pandemic.
* Excluding mark-to-market valuations of operative currency derivatives and other items affecting comparability. Other items affecting comparability include material restructuring costs, impairments, gains and losses on business combinations and disposals, insurance compensations and other non-operational items.
President and CEO Nicolas Warchalowski: “The first half of 2020 was truly exceptional as COVID-19 pandemic had a profound impact on the Group. Consequently, net sales decreased by 17% from previous year to 117.1 MEUR. Largest topline reductions came from North America and the Nordic region. In North America our distribution centres were closed for more than one month due to governmental lockdown measures. Furthermore, mild winter weathers impacted strongly winter sports business and exit from certain Third Party distribution agreements decreased sales in the Nordic region.
Fishing as a recreational sport has gained popularity during the pandemic and fishing participation has increased in many countries during the current summer fishing season. After a significant initial negative impact on our sales, we witnessed increased demand from end-May onwards and recorded strong double-digit growth in sales for the month of June. Furthermore, our investments in direct e-commerce business are yielding results. European e-commerce sales for the first six months doubled from prior year and in the USA, we recorded double digit growth despite the temporary warehouse closure.
We reacted quickly to the pandemic in March and implemented a strong COVID-19 mitigation plan, where our highest priorities were safeguarding the health and safety of our team members worldwide and protecting the financial position of the Group. We implemented a rapid and forceful ramp-down with fast reduction in operating expenses, cut in purchases and implementation of watchtowers to monitor cash flow and account receivables. We successfully executed the ramp-down plan and consequently our net debt reduced from 2019 year-end by 11.1 MEUR to 63.5 MEUR. Following central purchase quota allocation and new strict sales and operations planning routines, inventory decreased by 25.1 MEUR from June 2019 to 83.5 MEUR, which is the lowest inventory value recorded in more than 10 years. Furthermore, cash flow from operations increased from previous year and was 13.4 MEUR.
Execution of our strategy and the restructuring program initiated in October 2019 has progressed fully as planned and partly accelerated during the first half of the year. The objectives of the restructuring program are to increase efficiencies of operations, increase internal synergies and consequently decrease operating expenses and reduce net working capital. Leadership of European businesses has been centralized and warehouses will be consolidated to fewer locations, which will increase synergies and enable higher focus on sales growth. Another significant part of cost savings relates to Asian lure manufacturing operations, which will be gradually ramped down in the next six months. Overall, we are very confident in our strategy and its execution in order to make our product range even more innovative to win long term with the consumers of tomorrow.”
Key figures
| H1 | H1 | Change | FY | |
| MEUR | 2020 | 2019 | % | 2019 |
| Net sales | 117.1 | 141.2 | -17% | 275.4 |
| Operating profit | -0.8 | 11.4 | -107% | 13.4 |
| % of net sales | -0.7% | 8.1% | 4.9% | |
| Comparable operating profit * | 4.2 | 12.0 | -65% | 17.8 |
| % of net sales | 3.6% | 8.5% | 6.5% | |
| Cash flow from operations | 13.4 | 11.5 | +17% | 25.9 |
| Gearing % | 43.7% | 81.1% | 49.2% | |
| EPS, EUR | -0.12 | 0.17 | -171% | 0.10 |
| * Excluding mark-to-market valuations of operative currency derivatives and other items affecting comparability. Other items affecting comparability include material restructuring costs, impairments, gains and losses on business combinations and disposals, insurance compensations and other non-operational items. Rapala Group presents alternative performance measures to reflect the underlying business performance and to enhance comparability between financial periods. Alternative performance measures should not be considered in isolation as a substitute for measures of performance in accordance with IFRS. Definitions and reconciliation of key figures are presented in the financial section of the release. |
Market Environment
During the first half of the year, trading conditions were significantly impacted by the COVID-19 pandemic. The pandemic started to deteriorate trading conditions in Asia to some extent in February and during the spring Europe and North America were significantly impacted. Furthermore, unexceptionally mild winter weathers in Nordics and North America impacted negatively winter sports and ice fishing businesses. The Group’s sales began to recover during the end of May and in June sales were already ahead of previous year in most of the Group’s main markets.
Business Review January–June 2020
The Group’s net sales for the first half were 17% below last year mainly driven by the direct and indirect impacts of the COVID-19 pandemic. Changes in translation exchange rates did not have a material impact on the sales and with comparable translation exchange rates, net sales were organically also down by 17% from the comparison period.
North America
Sales in North America were 17% down from the comparison period with reported translation exchange rates and 19% with comparable translation exchange rates due to the depreciation of the US and Canadian dollars compared to the first half of 2019.
The sales decrease was mostly driven by the COVID-19 pandemic and consequential governmental lockdowns that affected the Group’s distribution centres in North America. However, sales began to recover again in May after the lockdown period. Despite the temporary closure of the distribution centre in the USA, e-commerce sales in North America grew strongly.
Nordic
Sales in the Nordic market decreased from the comparison period by 28%. With comparable translation exchange rates sales were down by 27% from the first half of 2019.
The Group’s distribution units were operating throughout the first half of the year, but COVID-19 pandemic had a negative impact on retail and customer demand. In addition, poor winter conditions as well as changes in certain Third Party distribution agreements reduced sales in the Nordic market. However, the beginning of the summer fishing season was strong and consequently Group Fishing sales ended up being higher than in the first half of 2019.
Rest of Europe
With reported translation exchange rates, the sales in Rest of Europe were 9% below the comparison period. With comparable translation exchange rates, sales were also down by 9% compared to the first half of 2019.
Governmental lockdown measures had a significant impact on retail shops in the region, which consequently had a negative impact on the Group’s sales. The governmental restrictions were particularly heavy in some of the region’s biggest markets in France, Russia and Spain. Furthermore, the upcoming changes in Third Party rod and reel distribution decreased sales from the comparison period.
Rest of the World
Sales in Rest of the World decreased from the comparison period by 18% with reported currencies and by 13% using comparable translation exchange rates.
COVID-19 pandemic started to impact sales already in February in the East Asian markets. Following the governmental business closures and other lockdown measures, the impacts gradually spread to other parts of the Rest of the World market area during the spring. Sales slowly began to recover in May and in June sales exceeded the level of June 2019. Despite the recovery, some of the markets in the region are still heavily impacted by the pandemic.
External net sales by area
| H1 | H1 | Change | Comparable change % | FY | |
| MEUR | 2020 | 2019 | % | 2019 | |
| North America | 40.4 | 48.6 | -17% | -19% | 104.2 |
| Nordic | 22.3 | 30.9 | -28% | -27% | 56.6 |
| Rest of Europe | 41.6 | 45.9 | -9% | -9% | 81.3 |
| Rest of the World | 12.8 | 15.7 | -18% | -13% | 33.3 |
| Total | 117.1 | 141.2 | -17% | -17% | 275.4 |
Financial Results and Profitability
Comparable (excluding mark-to-market valuations of operative currency derivatives and other items affecting comparability) operating profit decreased by 7.8 MEUR from the comparison period. The change in translation exchange rates did not have a material impact on operating profit. Reported operating profit decreased by 12.2 MEUR from the previous year and the items affecting comparability had a negative impact of 5.0 MEUR (0.6) on reported operating profit.
Comparable operating profit margin was 3.6% (8.5) for the first half. The decreased profitability compared to the first half of 2019 was mainly driven by lower sales, which were heavily impacted by the COVID-19 pandemic. Furthermore, exceptionally mild winter conditions had a negative impact on sales and profitability. However, the Group did react quickly to the pandemic by implementing a forceful COVID-19 mitigation plan to protect its financial position. As a result of the successful implementation of the mitigation plan, operating expenses decreased from the comparison period.
Reported operating profit margin was -0.7% (8.1) for the first half. Reported operating profit included impact of mark-to-market valuation of operative currency derivatives of -0.1 MEUR (-0.3). Net expenses of other items affecting comparability included in the reported operating profit were 4.9 MEUR (0.2). Other items affecting comparability consisted mainly of expenses related to the ramp down of Asian lure manufacturing operations.
Total financial (net) expenses were 1.9 MEUR (1.3) for the first half of the year. Net interest and other financing expenses were 1.6 MEUR (1.2) and (net) foreign exchange expenses were 0.3 MEUR (0.1).
Net profit for the first half decreased by 11.2 MEUR and was -3.8 MEUR (7.4) and earnings per share were -0.12 EUR (0.17). The share of non-controlling interest in net profit was at the same level compared to previous year and totalled 0.4 MEUR (0.4).
Key figures
| H1 | H1 | Change | FY | |
| MEUR | 2020 | 2019 | % | 2019 |
| Net sales | 117.1 | 141.2 | -17% | 275.4 |
| Operating profit | -0.8 | 11.4 | -107% | 13.4 |
| Comparable operating profit * | 4.2 | 12.0 | -65% | 17.8 |
| Net profit | -3.8 | 7.4 | -151% | 4.1 |
| * Excluding mark-to-market valuations of operative currency derivatives and other items affecting comparability. Other items affecting comparability include material restructuring costs, impairments, gains and losses on business combinations and disposals, insurance compensations and other non-operational items. | ||||
Bridge calculation of comparable operating profit
| H1 | H1 | Change | FY | |
| MEUR | 2020 | 2019 | % | 2019 |
| Operating profit | -0.8 | 11.4 | -107% | 13.4 |
| Mark-to-market valuations of operative currency derivatives | 0.1 | 0.3 | 0.4 | |
| Other items affecting comparability | 4.9 | 0.2 | 4.0 | |
| Comparable operating profit | 4.2 | 12.0 | -65% | 17.8 |
| More detailed bridge of comparable operating profit and definitions and reconciliation of key figures are presented in the financial section of the release. | ||||
Segment Review
Group Products
With comparable translation exchange rates, Group Products sales decreased by 16.9 MEUR from the comparison period. Although the summer fishing season began strongly in many of the Group’s key markets, the overall impact of the COVID-19 pandemic pulled Group Products sales below the first half of 2019. Followed by the lower sales, the comparable operating profit for Group Products was also below the comparison period.
Third Party Products
With comparable translation exchange rates, Third Party Products sales were 7.2 MEUR below the comparison period. COVID-19 pandemic impacted Third Party Products sales negatively. In addition, certain changes in Third Party distribution agreements decreased sales in the Nordic market and the upcoming changes in third party rod and reel distribution more broadly in the Group. Followed by the decreased sales, the comparable operating profit for Third Party Products was below the comparison period.
Net sales by segment
| H1 | H1 | Change | Comparable | FY | ||
| MEUR | 2020 | 2019 | % | change % | 2019 | |
| Group Products | 78.3 | 95.2 | -18% | -18% | 185.2 | |
| Third Party Products | 38.8 | 46.0 | -16% | -14% | 90.2 | |
| Total | 117.1 | 141.2 | -17% | -17% | 275.4 | |
Comparable operating profit by segment
| H1 | H1 | Change | FY | |
| MEUR | 2020 | 2019 | % | 2019 |
| Group Products | 4.3 | 11.7 | -63% | 19.5 |
| Third Party Products | -0.1 | 0.2 | -150% | -1.6 |
| Comparable operating profit | 4.2 | 12.0 | -65% | 17.8 |
| Items affecting comparability | -5.0 | -0.6 | -4.4 | |
| Operating profit / loss | -0.8 | 11.4 | -107% | 13.4 |
Financial Position
As a result of a successful implementation of the COVID-19 mitigation plan, cash flow from operations increased by 1.9 MEUR from the comparison period being 13.4 MEUR (11.5). Key driver for the improved cash flow from operations was the favorable development of working capital. The impact of net change of working capital to cash flow from operations increased 6.2 MEUR from previous year and was 5.9 MEUR (-0.3).
End of June 2020 inventory was 83.5 MEUR (108.6). The impact of change in allowance on inventory and changes in translation exchange rates on inventory was neutral. The improvement of the inventory value resulted from tight inventory and purchase control, which was a crucial part of the COVID-19 mitigation plan.
The Group’s COVID-19 response and mitigation plan on supply chain management was overall successful. The direct impacts of the pandemic to the Group’s sourcing and own factories were limited. As a result of decreased demand, finished goods purchases decreased in the first six months of the year compared to last year and factory capacities were reduced via temporary layoffs and furloughs.
Net cash used in investing activities decreased from the level of the comparison period amounting to 1.6 MEUR (2.8). Capital expenditure was 2.0 MEUR (3.5) and disposals 0.4 MEUR (0.7). Disposals were related to sales of some manufacturing equipment.
Liquidity position of the Group was good. Undrawn committed long-term credit facilities amounted to 49.9 MEUR at the end of the period. Gearing ratio decreased significantly and equity-to-assets ratio strengthened from last year. The Group has agreed with its lenders to temporarily change financial covenants used in its loan agreements for the periods from Q2/2020 to Q1/2021. The new financial covenants include limits on the amount of indebtedness, available liquidity, EBITDA as well as gearing ratio. The Group is currently compliant with all financial covenants and expects to comply with all requirements set in the financing agreements also in the future. As a result of successful COVID-19 mitigation, cash balance included excess cash at the end of the period, which will decrease in the next months as short-term commercial paper loans will mature.
Group equity includes a hybrid bond of 25.0 MEUR issued in November 2019. The accrued non-recognized interest on hybrid bond at June 30, 2020 was 0.5 MEUR (0.6).
Key figures
| H1 | H1 | Change | FY | ||
| MEUR | 2020 | 2019 | % | 2019 | |
| Cash flow from operations | 13.4 | 11.5 | +17% | 25.9 | |
| Net interest-bearing debt at end of period | 63.5 | 104.1 | -39% | 74.6 | |
| Gearing % 1) | 43.7% | 81.1% | 49.2% | ||
| Equity-to-assets ratio at end of period, % | 45.9% | 40.4% | 52.4% | ||
| Definitions and reconciliation of key figures are presented in the financial section of the release. | |||||
Strategy Implementation
The strategic target of the Group is to build a solid financial and operational platform for growth. The Group is taking determined actions to improve its profitability and working capital efficiency as well as to improve operational performance. In longer term, the target is to return to a more aggressive growth track.
The Group’s existing assets and capabilities form the foundation for future strategies, both in short and long term. Future strategies are built upon utilizing and capitalizing the brand portfolio, manufacturing and sourcing platform, research and development knowledge, as well as the broad distribution network and strong local presence around the world supporting the sales of Group’s own and selected synergistic Third Party products.
The execution of the group strategy is progressing as planned. Several organic growth projects are ongoing utilizing deep market and customer understanding. Special focus has been set to leverage the Group’s global innovation power to address growing product categories and niches within fishing. After acquiring 49% ownership in DQC International Corporation, known as “13 Fishing”, the Group has entered the rod and reel business with a worldwide approach. The Group will invest outside USA in marketing and product development of 13 Fishing products to serve fishermen and retailers in the best possible manner. After the changes made in 2019 in distribution agreements with Shimano, the Group will also focus on growth in the large European fishing tackle markets in Germany, United Kingdom, Italy and Benelux countries, previously served by Shimano.
The Group initiated in October 2019 a restructuring program, which aims at increasing efficiencies of operations, increase internal synergies and consequently decreasing operating expenses and reducing net working capital. Execution of the program has developed fully as planned and accelerated with focus on direct consumer e-commerce sales, tighter inventory management, centralized purchase quotas and new sales and operations planning routines. The targeted cost savings consist mainly of savings related to European business as well as the Asian lure manufacturing operations, which will be gradually ramped down in the next six months. In relation to the ramp-down of the Indonesian factory, in total 4.0 MEUR of expenses were booked as other items affecting comparability in the first half of the year.
In order to increase the efficiency of global manufacturing operations, lean projects are ongoing in several factories, and a new chapter in Rapala history has now been entered to increase the focus in manufacturing units on product innovation to leverage strong Group capabilities and top worldwide brands. In the first six months of 2020 assembly of ice augers was centralized to the manufacturing hub in Estonia. Additionally, transfer of knife manufacturing from Rovaniemi in Finland to existing manufacturing location in Vääksy, Finland, started in the spring. Further investments will be made to the hub in Pärnu, Estonia, to increase groupwide synergies and utilization of strong local knowhow in operational excellence.
The Group has made investments in group-wide common IT systems and resources to increase efficiencies and enable better end-to-end supply chain and product management. The Group has also increased sales and marketing investments towards digital channels and direct consumer contacts in order to exploit these opportunities stronger in the future. Increasing proportion of Group’s products sales is reaching consumers through digital channels, either by e-tailers, omni-channel retailers or Group’s own e-commerce platform.
Product Development
Continuous product development and consistent innovation are core competences for the Group and major contributors to the value and commercial success of the brands.
Due to the COVID-19 pandemic, several fishing tackle consumer shows and Europe’s most important fishing tackle trade show, EFTTEX, were cancelled. However, during the first half of the year that didn’t have a significant impact on the new product launches, which were carried out on schedule and as planned. The most important launches during the first six months of the year were the introduction of X-Rap Haku – a bait designed for large predator fishing – in Europe, the release of CountDown Elite – a hard bait designed for trout fishing – in Japan and elsewhere in Asia as well as the launch of Rap-V Blade – an all-round blade bait – in North America. All new lures were well received in the regions and will be introduced to all market areas globally in the right seasons.
Preparations for the 2020 second half and 2021 new item launches were well under way.
Organization and Personnel
Average number of personnel was 2 179 (2 751) for the first half of the year. At the end of June, the number of personnel was 2 051 (2 768). The decrease of personnel was mostly related to the ramp down of Asian lure manufacturing operations.
The Board of Directors of Rapala VMC Corporation appointed on February 12, 2020 Nicolas Warchalowski as the new President and Chief Executive Officer of Rapala VMC Corporation. He started at Rapala on March 1, 2020.
Short-term Outlook and Risks
The Group withdrew its guidance for 2020 on March 26, 2020 due to lack of visibility caused by the COVID-19 pandemic. End-consumer demand for recreational fishing products is currently on a good level in the Group’s key markets. The Group’s supply chain, including own factories and subcontractors, is currently working robustly and fulfilling customer orders. However, there is still lack of visibility caused by direct and indirect impacts of the COVID-19 pandemic in the Group’s key markets. Furthermore, several risks have arisen from the pandemic for the second half of the year. Daily new infections of COVID-19 have lately increased in the United States and risks for a second wave in Europe and Asia have increased. Furthermore, potential lockdown measures could have a significant impact either on the Group’s operations or customers’ retail shops. As a result, it is still impossible to issue a financial guidance for 2020.
Short term risks and uncertainties and seasonality of the business are described in more detail in the end of this report.
Other significant events
Annual General Meeting
The Annual General Meeting (AGM) kept on March 26, 2020 approved the Board of Director’s proposal that no dividend is paid. A separate stock exchange release on the decisions of the AGM has been given, and up to date information on the Board’s authorizations and other decisions of the AGM are available also on the corporate website.
Helsinki, July 16, 2020
Board of Directors of Rapala VMC Corporation
For further information, please contact:
Nicolas Warchalowski, President and Chief Executive Officer, +358 9 7562 540
Jan-Elof Cavander, Chief Financial Officer, +358 9 7562 540
Olli Aho, Investor Relations, +358 9 7562 540
A conference call on the first half year result will be arranged on Friday July 17, 2020 at 10:00 a.m. Finnish time (8:00 a.m UK time). Please dial +44 (0)330 336 9401 or +1 929 477 0338 or +358 (0)9 7479 0359 (pin code: 615325) five minutes before the beginning of the event. A replay facility will be available for 14 days following the teleconference. The number to dial is +44 (0)207 660 0134 (pin code: 7783083). Financial information and teleconference replay facility are available at www.rapalavmc.com.
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