RAPALA VMC CORPORATION’S ANNUAL ACCOUNTS 2019

SALES AND PROFITABILITY GREW FROM LAST YEAR – STRATEGY EXECUTION PROGRESSING WELL

Rapala VMC Corporation
Financial Statement Release
February 12, 2020 at 5:00 p.m.

RAPALA VMC CORPORATION’S ANNUAL ACCOUNTS 2019: SALES AND PROFITABILITY GREW FROM LAST YEAR – STRATEGY EXECUTION PROGRESSING WELL

January-December (FY) in brief:

• Net sales were 275.4 MEUR, up 5% from previous year (262.4). Organically sales were 3% higher than last year.
• Operating profit was 13.4 MEUR (14.8), down 9%. ¹⁾
• Comparable operating profit* was 17.8 MEUR (16.7), up 7%. ¹⁾
• Cash flow from operations was 25.9 MEUR (6.7), up 287%. ²⁾
• Earnings per share was 0.10 EUR (0.13), down 24%.
• 2020 guidance: Full year net sales with comparable FX rates and comparable operating profit to decrease from last year. Topline reduction driven by decline in Third Party Products sales and extraordinary winter weathers in Europe, which affects strongly winter sports business. Financial benefit of most restructuring projects will materialize in 2021 as well as 13 Fishing launch will take place in 2020. As a result 2020 will be a year of transition. Consequently, The Board of Directors proposes to the Annual General Meeting that no dividend is paid for 2019.

July-December (H2) in brief:

• Net sales were 134.2 MEUR, up 12% from previous year (119.9). With comparable exchange rates sales were 10% higher than last year.
• Operating profit was 2.0 MEUR (-0.5). ¹⁾
• Comparable operating profit* was 5.8 MEUR (1.5). ¹⁾
• Cash flow from operations was 14.4 MEUR (0.7). ²⁾
• Earnings per share was -0.06 EUR (-0.10).

¹⁾ Application of the IFRS 16 accounting standard did have a 0.3 MEUR positive impact on operating profit and comparable operating profit for the full year 2019 and 0.2 MEUR for the second half of the year.
²⁾ Figures impacted by the application of the IFRS 16 accounting standard. Excluding the impact from IFRS 16, cash flow from operations would have been 19.9 MEUR for the full year and 11.3 MEUR for the second half of the year.

* 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.

Chairman of the Board, President and CEO Louis d’Alançon: “We achieved good results in 2019 and our net sales grew by 3% from last year with comparable exchange rates. We also succeeded in increasing our profitability from 2018 as targeted. Comparable EBIT for the full year was 17.8 MEUR and grew 7% from 2018. The turnaround project at the Indonesian lure manufacturing operation is developing well and supported the Group’s profitability improvement from the previous year. Furthermore, several actions in supply chain management are starting to pay off and our inventories decreased by 7% from the previous year and ended at 92.6 MEUR. Consequently, our net debt without taking into account IFRS16 accounting changes decreased from 70.3 MEUR in 2018 to 61.1 MEUR in 2019.

Execution of our strategy of improving profitability and working capital efficiency as well as improving operational performance progressed well in 2019 and was intensified in October, when we started a groupwide restructuring program. The goals of the program are to centralize European distribution operations and increase internal synergies. Partnering with 13 Fishing was one the highlights of 2019 and we are currently preparing the introduction of 13 Fishing rods and reels to consumers outside the USA.

2020 will be a year of transition as we are undergoing significant changes in our Third Party Products business, introduce 13 Fishing products to the markets as well as continue to restructure our operations and distribution worldwide. We expect our total net sales to decrease from the previous year due to decline in Third Party Products sales and lower sales in winter sports business, which is being impacted by extraordinary mild winter weather in Europe. As a result, comparable EBIT is also expected to decrease from 2019. However, the ongoing restructuring projects will continue to be implemented and their financial benefits will materialize for the most part during 2021. Overall, we are very confident in our strategy and its execution and expect to create significant value over time via solid growth in Group Products, profitability improvement and release of capital.”

Key figures

	H2	H2	Change	FY	FY	Change
MEUR	2019	2018	%	2019	2018	%
Net sales	134.2	119.9	+12%	275.4	262.4	+5%
Operating profit/loss 1)	2.0	-0.5	+500%	13.4	14.8	-9%
% of net sales	1.5%	-0.4%		4.9%	5.6%
Comparable operating profit * 1)	5.8	1.5	+287%	17.8	16.7	+7%
% of net sales	4.4%	1.3%		6.5%	6.4%
Cash flow from operations 2)	14.4	0.7	+1957%	25.9	6.7	+287%
Gearing % 2)	49.2%	47.8%		49.2%	47.8%
EPS, EUR	-0.06	-0.10	+38%	0.10	0.13	-24%

* 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.
¹⁾ Application of the IFRS 16 accounting standard did have a 0.3 MEUR positive impact on operating profit or comparable operating profit for the full year 2019 and 0.2 MEUR for the second half of the year.
²⁾ Figures impacted by the application of the IFRS 16 accounting standard. Excluding the impact from IFRS 16, gearing would have been 40.3% and cash flow from operations 19.9 MEUR for the full year and during the second half of the year 11.3 MEUR.

Market Environment

Trading conditions in most of the Group’s markets were mainly as expected. North American market continued the positive growth trend that began in 2018. As anticipated after the first half of the year, the second half of 2019 was particularly strong in North America. In Europe, the changes in Shimano and certain other Third Party distribution agreements caused slight uncertainties but the Nordics and Rest of Europe markets still grew from the previous year. The growth in Europe was supported by the ramp up of Group’s own distribution operations in some of the key Central European markets.

Business Review January-December 2019

The Group’s net sales grew 4.9% from 2018. Changes in translation exchange rates had a positive impact on the sales and with comparable translation exchange rates, net sales were organically up by 3.3% from the previous year.

North America

Following the previous year, 2019 was again a positive year in the North American market. Sales increased by 9.3% from 2018. The growth was supported by favorable exchange rates and with comparable translation exchange rates sales were up by 4.1% from the previous year. Second half of the year was particularly strong as sales grew more than 15% with comparable translation exchange rates.

The Group’s position in the North American market remains strong and the sales continued to grow both in the US and Canada. Overall, most product categories grew in the market. Despite some delivery issues at the beginning of the year, ice fishing sales grew strongly for the full year. In addition, sales of Group Branded lures supported the growth. The group is very well positioned with all major customers and all retail channels in North America.

Nordic

The sales in the Nordic market increased by 2.8% from the comparison period. With comparable translation exchange rates sales were up by 3.9% from 2018.

The sales growth was driven by good winter sports sales in Finland. However, sales in Denmark and Norway decreased from the comparison period.

Rest of Europe

With reported translation exchange rates, the sales in Rest of Europe were 3.6% above the comparison period. With comparable translation exchange rates, the growth was on the same level, 3.5% up from 2018.

Sales growth was supported by the successful ramp up of Group’s own sales operations in some of the key Central European markets following the termination of the distribution agreements with Shimano. Russian market remained at the same sales level as is 2018. Continuing from the strong first half of 2019, Baltics and most of the Eastern European markets witnessed strong sales growth from 2018.

Rest of the World

The sales in Rest of the World decreased 0.9% from the previous year. With comparable translation exchange rates, sales were down by 0.6% from 2018.

South-Africa as well as the Latin American markets contributed positively to the Rest of the World market growth, while sales in some of the other markets declined from the previous year.

External Net Sales by Area

	FY	FY	Change	Comparable
MEUR	2019	2018	%	change %
North America	104.2	95.4	+9%	+4%
Nordic	56.6	55.1	+3%	+4%
Rest of Europe	81.3	78.4	+4%	+3%
Rest of the World	33.3	33.6	-1%	-1%
Total	275.4	262.4	+5%	+3%
	H2	H2	Change	Comparable
MEUR	2019	2018	%	change %
North America	55.6	45.8	+21%	+17%
Nordic	25.7	22.8	+13%	+14%
Rest of Europe	35.3	33.5	+5%	+4%
Rest of the World	17.6	17.8	-1%	-2%
Total	134.2	119.9	+12%	+10%

Financial Results and Profitability

Comparable (excluding mark-to-market valuations of operative currency derivatives and other items affecting comparability) operating profit increased by 1.2 MEUR (7%) from last year to 17.8 MEUR. The effect of translation exchange rates was positive and with comparable translation exchange rates, comparable operating profit increased by 0.8 MEUR from 2018. Reported operating profit decreased by 1.4 MEUR (-9%) from last year to 13.4 MEUR. The items affecting comparability had a negative impact of 4.4 MEUR (1.9) on reported operating profit. Application of the IFRS 16 accounting standard had a 0.3 MEUR positive impact on operating profit and comparable operating profit.

Comparable operating profit margin was 6.5% (6.4) for the year. The turnaround project of the Indonesian lure manufacturing operations had a positive impact on profitability improvement. However, the decline of sales margins in the Third Party distribution had a negative impact on comparable operating profit margin.

Reported operating profit margin was 4.9% (5.6) for the year. Reported operating profit included mark-to-market valuation of operative currency derivatives of -0.4 MEUR (0.7). Net expenses of other items affecting comparability included in the reported operating profit were 4.0 MEUR (2.6). The other items affecting comparability consisted mainly of restructuring expenses and a gain of a sale of a real estate.

Total financial (net) expenses were 3.6 MEUR (2.1) for the year. Net interest and other financing expenses were 2.1 MEUR (1.4) and (net) foreign exchange expenses were 1.1 MEUR (0.7). Following the application of IFRS 16, financial expenses increased by 0.5 MEUR due to lease liability interests.

Net profit for the year decreased by 38% and was 4.1 MEUR (6.5) and earnings per share was 0.10 EUR (0.13). The share of non-controlling interest in net profit decreased by 0.8 MEUR from last year and totalled -0.4 MEUR (0.4).

Key figures

	H2	H2	Change	FY	FY	Change
MEUR	2019	2018	%	2019	2018	%
Net sales	134.2	119.9	+12%	275.4	262.4	+5%
Operating profit / loss	2.0	-0.5	+500%	13.4	14.8	-9%
Comparable operating profit *	5.8	1.5	+287%	17.8	16.7	+7%
Net profit / loss	-3.4	-3.2	-8%	4.1	6.5	-38%
* 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

	H2	H2	Change	FY	FY	Change
MEUR	2019	2018	%	2019	2018	%
Operating profit/loss	2.0	-0.5	+500%	13.4	14.8	-9%
Mark-to-market valuations of operative currency derivatives	0.1	-0.4		0.4	-0.7
Other items affecting comparability	3.8	2.4		4.0	2.6
Comparable operating profit	5.8	1.5	+287%	17.8	16.7	+7%
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

Sales of Group Products grew by 10.5 MEUR from the comparison period to 185.2 MEUR. The increase from previous year was mostly driven by the North American market, where especially the ice fishing sales witnessed strong growth, and to some extent by the Rest of Europe market.

Driven by the increased sales, the comparable operating profit for Group Products improved from the comparison period.

Third Party Products

Sales of Third Party Products grew by 2.4 MEUR from the comparison period to 90.2 MEUR. Increased sales were driven by strong sales in Nordic and Rest of Europe markets.

Regardless of the sales growth, comparable operating profit for Third Party Products decreased from the comparison period following the decline in sales margins.

Net Sales by Segment

		FY	FY	Change	Comparable
MEUR		2019	2018	%	change %
Group Products		185.2	174.6	+6%	+3%
Third Party Products		90.2	87.8	+3%	+3%
Total	275.4		262.4	+5%	+3%
		H2	H2	Change	Comparable
MEUR		2019	2018	%	change %
Group Products		89.9	80.1	+12%	+10%
Third Party Products		44.3	39.8	+11%	+10%
Total	134.2		119.9	+12%	+10%

Comparable operating profit by Segment

	H2	H2	Change	FY	FY	Change
MEUR	2019	2018	%	2019	2018	%
Group Products	7.7	3.2	+141%	19.5	17.2	+13%
Third Party Products	-1.9	-1.7	-14%	-1.6	-0.5	-239%
Comparable operating profit	5.8	1.5	+287%	17.8	16.7	+7%
Items affecting comparability	-3.9	-2.0		-4.4	-1.9
Operating profit / loss	2.0	-0.5	+500%	13.4	14.8	-9%

Financial Position

Cash flow from operations increased to a high level of 25.9 MEUR (6.7). The impact of net change of working capital to cash flow from operations was 11.4 MEUR (-11.1) as, contrary to previous year, cash was released from inventories and accounts receivables. The application of IFRS 16 accounting standard had a positive impact of 6.1 MEUR on cash flow from operations when comparing 2019 to 2018.

As a result of several supply chain initiatives, 2019 year-end inventory value decreased by 6.5 MEUR to 92.6 MEUR (99.1).

Net cash used in investing activities increased by 9.9 MEUR from the comparison period amounting to 14.6 MEUR (4.7). Capital expenditure, consisting mostly of normal operative capital expenditure, was 5.6 MEUR (6.4). Net acquisitions, related to the acquisition of 49% of DQC International Corporation, were 4.4 MEUR. Disposals, following a real estate and certain manufacturing equipment sales, were 3.2 MEUR (1.7). Change in interest-bearing receivables consisted mainly of additional funding of 7.8 MEUR (0.0) to DQC International Corporation.

Liquidity position of the Group was good. Undrawn committed long-term credit facilities amounted to 29.9 MEUR at the end of the period. Gearing ratio increased and equity-to-assets ratio weakened slightly from last year. The application of the IFRS 16 accounting standard increased interest-bearing debt by 13.5 MEUR.  Leverage level (ratio between net interest-bearing debt and reported EBITDA) was below covenant limits and the Group is compliant with all financial covenants.

Group equity includes a hybrid loan of 25.0 MEUR issued in November 2019. The accrued non-recognized interest on hybrid bond at December 31, 2019 was 0.7 MEUR (1.3).

Key figures

	H2	H2	Change	FY	FY	Change
MEUR	2019	2018	%	2019	2018	%
Cash flow from operations 1)	14.4	0.7	+1957%	25.9	6.7	+287%
Net interest-bearing debt at end of period 1)	74.6	70.3	+6%	74.6	70.3	+6%
Gearing % 1)	49.2%	47.8%		49.2%	47.8%
Equity-to-assets ratio at end of period, % 1)	52.4%	53.2%	52.4%		53.2%
Definitions and reconciliation of key figures are presented in the financial section of the release. 1) Figures impacted by the application of the IFRS 16 accounting standard. Excluding the impact from IFRS 16 cash flow from operations would have been 19.9 MEUR for full year, and for second half of the year 11.3 MEUR. Year end net interest-bearing debt would have been 61.1 MEUR, gearing 40.3% and the equity-to-assets ratio 55.0%.

Strategy Implementation

The strategic target of the Group is to build a solid financial and operational platform for growth. The Group will also take determined actions to improve its profitability and working capital efficiency as well as improve operational performance. In longer term, the target is to return to a more aggressive growth track and actively seek synergistic growth opportunities also outside the fishing tackle business.

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 on all levels in the organization. Several organic growth projects are ongoing in all businesses utilizing deep market and customer understanding. Special focus has been set to leverage 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. In the last two months of 2019, several projects and new measures were started under the restructuring program in Europe and Asia, which will start to materialize financially from 2020 onwards.

Significant focus and resources are allocated to streamline internal supply chains and to develop sales and operations planning to achieve improved service levels and lower group-wide inventories. Consequently, improved service levels from own factories has increased product availability and fill rates to customers are on a high level. Furthermore, supply chain operations to new markets in Central Europe were centralized to an existing delivery center in France.

In order to develop global manufacturing operations, lean projects are ongoing in several factories. One of the key projects for the Group is to execute a sustainable profitability turnaround for the Indonesian lure manufacturing operations. The operational transformation project to streamline and simplify the Indonesian factory is progressing as planned. Production of certain product categories and some non-core production processes have been outsourced to specialized companies.

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. The Group has boosted its lure product development procedure by centralizing and expanding the research and development know-how and key resources to one location in Finland that serves both the European and Asian lure manufacturing units.

Product development cycles are getting shorter which allows faster reaction to market needs and developing trends. Product launch schedules are more flexible and can be better adjusted to target specific markets’ seasons.

The most important product launches of the year were a European-wide coordinated launch of a series of saltwater lures, which started in January in France and covered both Rapala-branded hard baits and Storm branded soft plastics. Sufix Advance Fluorocarbon line was launched at the European Fishing Tackle Trade Exhibition in June, where it was voted the Best New Monofilament Line. VMC Hybrid Blade hook won the Best Terminal Tackle category, in which the Rapala RCD Lure Tuning Tool was nominated as Runner Up. Rapala LureCamo Tackle Bag Magnum was nominated Runner Up in the Tackle Bag category.

At the US trade show ICAST in July, new products designed for the North American market were launched, and VMC’s Hybrid Blade continued to be victorious as it was named Best Terminal Tackle of the show.

Preparations for the 2020 new item launches were well under way.

Organization and Personnel

Average number of personnel was 2 604 (2 772) for the full year and 2 501 (2 742) for the last six months. At the end of December, the number of personnel was 2 304 (2 651), decrease coming from streamlining the lure manufacturing operations in Indonesia.

Louis d’Alançon was appointed as President and Chief Executive Officer on September 27, 2019. Furthermore, Jean-Philippe Nicolle was appointed as a member to the Executive Committee and Executive Vice President, Head of European Distribution as of January 1, 2020.

Short-term Outlook and Risks

Market outlook for Group Products in North America is positive and the Group sees continued healthy consumer demand for its products via old and new channels. Furthermore, the Group’s position with major customers in North America is strong. In Europe the execution of the restructuring program and changes in Third Party Products business affects market visibility for 2020. Furthermore, extraordinary winter weathers in Europe will affect negatively winter sports business.

The Group expects 2020 full year net sales with comparable FX rates and comparable operating profit (excluding mark-to-market valuations of operative currency derivatives and other items affecting comparability) to decline from 2019. The decline in sales is coming from the decrease in Third Party Products business, which is expected to lead to decline in the Group’s comparable EBIT. Several restructuring projects are taking place, but their financial impact will for the most part start to materialize in full year figures in 2021. Furthermore, the potential slowdown in global economic growth might have some impact on retail and consumer demand. In addition, weather changes may affect the sales of the Group.

Short term risks and uncertainties and seasonality of the business are described in more detail in the end of this report.

Proposal for profit distribution

The Board of Directors proposes to the Annual General Meeting that no dividend will be paid for 2019 (0.06 EUR per share in the previous year).

Financial Statements and Annual General Meeting

Financial Statements for 2019 and Corporate Governance Statement will be published in the beginning of week 10 commencing on March 2, 2020. Annual General Meeting is planned to be held on March 26, 2020.

Half Year Financial Report 2020 will be published on July 20, 2020.

Helsinki, February 12, 2020

Board of Directors of Rapala VMC Corporation

For further information, please contact:

Louis d’Alançon, President and Chief Executive Officer, [phone]
Jan-Elof Cavander, Chief Financial Officer, [phone]

Olli Aho, Investor Relations, [phone]

A conference call on the financial year result will be arranged on February 13, 2020 at 11:00 a.m. Finnish time (10:00 a.m. CET). Please dial [phone] or [phone] or [phone] (pin code: 292804) five minutes before the beginning of the event. A replay facility will be available for 14 days following the teleconference. The number to dial [phone] (pin code: 7643084). Financial information and teleconference replay facility are available at www.rapalavmc.com.

Attachment

• Rapala VMC Corporation, Financial Statement Release, February 12, 2020