RAPALA VMC CORPORATION'S ANNUAL ACCOUNTS 2017: SOLID CASH FLOW, WHILE SALES AND PROFITABILITY DECREASED AS A RESULT OF DIFFICULT RETAIL MARKETS - STRATEGY EXECUTION PROGRESSING

Rapala VMC Corporation
Financial Statement Release
February 16, 2018 at 9:00 a.m.

RAPALA VMC CORPORATION'S ANNUAL ACCOUNTS 2017: SOLID CASH FLOW, WHILE SALES AND PROFITABILITY DECREASED AS A RESULT OF DIFFICULT RETAIL MARKETS - STRATEGY EXECUTION PROGRESSING

January-December (FY) in brief:

• Net sales were 253.3 MEUR, down 3% from previous year (260.6). With comparable exchange rates sales were 3% lower than last year.
• Operating profit was 8.9 MEUR (7.2), Comparable operating profit* was 11.4 MEUR (18.8).
• Cash flow from operations was 19.1 MEUR (26.7).
• Earnings per share was 0.05 EUR (-0.08).
• Dividend proposal is 0.04 EUR per share (0.10).
• 2018 guidance: Full year net sales with comparable FX rates expected to be above last year's level and comparable operating profit to exceed 15 MEUR.

July-December (H2) in brief:

• Net sales were 112.4 MEUR, down 4% from previous year (117.5). With comparable exchange rates sales were 1% lower than last year.
• Operating profit was -2.1 MEUR (-7.0).
• Comparable operating profit* was 0.1 MEUR (3.2).
• Cash flow from operations was 11.1 MEUR (20.5).
• Earnings per share was -0.11 EUR (-0.27).

President and CEO Jussi Ristimäki: "2017 turned out to be an exceptional and challenging year. Consequently, our net sales decreased by 3% from last year. The decrease was mainly driven by lower Third Party Products sales, while the sales of Group Products decreased only marginally. The positive highlights for the year were good sales development in carp business and Marttiini knives as well as successful turnarounds in Canada and Southeast Asia.

The ongoing structural changes in the US retail market had a negative impact on our sales and profitability as consumers are increasingly going online. We are responding to this by making more investments into our digital presence and by increased focus on customers operating online. Big European markets were affected by cold spring and late start of the summer as well as tighter competition.

Our profitability decreased from last year followed by operational challenges at our Indonesian manufacturing facility, retail turmoil in North America and declined market conditions in Russia and France. Two of our key customers entered Chapter 11 in North America, which led to write downs of account receivables and loss of business with these customers. Focus on working capital management yielded results and inventories decreased 9.7 MEUR to 92.5 MEUR.

Execution of our strategy of improving profitability, lightening balance sheet and improving operational performance is proceeding well. In July, we made some changes in our management organization to speed up the strategy execution. One of the key priorities for 2018 is to generate a significant profitability improvement at our Indonesian lure factory. We will elaborate more on our strategy and its execution in a capital markets day organized in May 2018."

Key figures

* 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

Trading conditions were challenging throughout the year, particularly during the first half. Especially in the US, consumers are increasingly shifting to digital sales channels, which is disrupting the traditional retail channels. The turmoil had a negative impact on the Group's sales in North America as two major customers entered Chapter 11. However, the Group has been able to shift lost business to other customers in the marketplace.

In Europe, cold spring and late start of the summer impacted negatively the main fishing season. In addition, the increased price competition in Europe led to underperformance of certain product categories.

Business Review January-December 2017

The Group's net sales for the year were 3% below last year. Changes in translation exchange rates had a minor negative impact on sales.

North America

With comparable exchange rates, sales were at last year's level in North America. The weakened US dollar, however, pulled the sales below last year. The ongoing changes in the US retail landscape, where e-commerce is taking market share from the traditional retail business, caused turmoil during the year. The Group expects to have kept its market share in the US market as the whole fishing tackle business is hit by the same challenges. Canada contributed positively to the whole region's sales as the full year sales grew well above last year's level. The fourth quarter sales in North America were below last year partly driven by early deliveries of certain winter fishing products in the third quarter.

Nordic

In the Nordic countries, full year sales were slightly below the level of last year. During the second half of the year, sales recovered well from the first half drop caused by lower hunting sales in Denmark and unfavorable weather conditions in Finland, and the whole region's sales in the second half exceeded last year's level. The Group's knife factory Marttiini showed strong growth supported by the Finland 100 Anniversary Knife sales. Sweden and Norway were also able to significantly increase sales from last year.

Rest of Europe

Full year sales for Rest of Europe were below last year's level. Foreign exchange rates supported the region's sales as the Russian ruble appreciated. Unfortunately, the strengthened ruble did not materialize into higher consumer demand. Sales in the other large market in Europe, France, also lagged last year. Sales in France were affected by generally weak demand of fishing tackle products and, at the same time, tightened competition in the industry. Poland, on the other hand, suffered from product portfolio changes. On a positive note, Spain's and Portugal's sales exceeded last year.

Rest of the World

Sales for the region were below last year despite positive development in some of the markets. New hunting and outdoor business and sales to Middle East and North Africa helped South Africa to grow sales. Latin America also contributed positively to the region's sales. On the other hand, Thailand suffered from difficult market conditions, especially during the first half of the year. Sales in Australia were impacted by changes in product portfolio and outsourcing of the warehouse operations, which had a negative impact on sales.

External Net Sales by Area*

*Geographical areas are presented based on unit location. Rest of Europe includes France, Russia, Eastern Europe, Spain, Portugal, Great Britain, the Baltic countries, Switzerland and Kazakhstan. Rest of the World includes Asia, Latin America, Australia and South-Africa.

Financial Results and Profitability

Comparable (excluding mark-to-market valuations of operative currency derivatives and other items affecting comparability) operating profit decreased by 7.4 MEUR from last year. The effect of translation exchange rates was slightly positive and with comparable translation exchange rates comparable operating profit was 7.6 MEUR lower than last year. Reported operating profit increased by 1.7 MEUR from last year as the items affecting comparability were lower than last year.

Comparable operating profit margin was 4.5% (7.2) for the year. The decline in profitability was driven by lower sales, operational challenges at the factory in Indonesia and write-downs of account receivables in North America. Despite investments in strategic development areas, which increased fixed costs, Group's overall fixed costs decreased from last year.

Reported operating profit margin was 3.5% (2.8) for the full year. Reported operating profit included loss of mark-to-market valuation of operative currency derivatives of 0.3 MEUR (1.6). Net expenses of other items affecting comparability included in the reported operating profit were 2.3 MEUR (10.0). 2017 items affecting comparability included mainly organizational restructuring expenses and restructuring of the Batam plant in Indonesia. In 2016 items affecting comparability consisted for the most part of inventory write-offs according to renewed Group policy and restructurings.

Total financial (net) expenses were 3.2 MEUR (5.0) for the year. Net interest and other financing expenses were 2.1 MEUR (3.7) and (net) foreign exchange expenses were 1.2 MEUR (1.3). In the second half of the year, the future change in the U.S. federal corporate income tax rate reduced Group's deferred tax liability by 0.6 MEUR, with a corresponding deferred tax income in the income statement.

Net profit for the year was above last year's level and earnings per share were 0.05 EUR (-0.08). The share of non-controlling interest in net profit decreased from last year and totaled 0.0 MEUR (1.0).

Key figures

Bridge calculation of comparable operating profit 

Segment Review

Group Products

With comparable exchange rates, sales of Group Products were slightly below last year's level. 

Group fishing product sales were below last year's level driven by lower lure sales in North America as a consequence of the retail turmoil. Carp fishing sales grew clearly from last year following the increased focus and investments on the product category. Winter fishing products benefited from good winter conditions and the sales were higher than last year, especially in the US. 

Sales of other group products were up from last year. The sales of hunting products were supported by increased Marttiini Finland 100 Anniversary Knife sales. The sales of winter sports products were also up from last year.

Comparable operating profit for Group Products declined compared to last year. Operating profit was burdened by operational challenges in lure manufacturing and write-downs of account receivables in North America.

Third Party Products

The sales of Third Party Products were below last year's level, driven by the loss of a product category in Poland as well as challenging market situation affecting sales especially in Russia and France. Additionally, Third Party hunting products were struggling in Denmark. 

Comparable operating profit for Third Party Products was below last year`s level burdened by lower sales and increased competition. 

Net Sales by Segment 

Comparable operating profit by Segment 

Financial position

Cash flow from operations decreased from last year's record level to historically good level of 19.1 MEUR (26.7) for the year. As a consequence of decreased inventories and timing of trade payables, working capital continued to develop positively and the net change in working capital was -11.6 MEUR (-10.5). The declined profitability, however, pulled cash flow from operations below last year.

Despite lower than anticipated sales, inventories decreased from the end of last year amounting to 92.5 MEUR (102.2). Organic decrease in inventories was 8.0 MEUR, while the rest of the decline is related to changes in translation exchange rates and inventory allowance. The inventory reduction is driven by the ongoing focus on working capital management and various supply chain initiatives.

Net cash used in investing activities was on last year's level amounting to 6.4 MEUR (6.0). Capital expenditure was 6.0 MEUR (8.4), net acquisitions 1.5 MEUR and disposals 0.8 MEUR (2.2). The acquisition was related to South-African subsidiary where the non-controlling interest of the company was acquired. In 2017, the Group received the final installment related to the disposal of the gift business in 2011.

The Group issued a 25 MEUR hybrid bond in May 2017. The bond is treated as equity in the financial statements. It has no maturity but the company may exercise an early redemption option at the earliest on 31 May 2019.

Liquidity position of the Group was good. Undrawn committed long-term credit facilities amounted to 59.9 MEUR at the end of the year. Following the successful issuance of a hybrid bond in 2017, gearing and net interest-bearing debt decreased from last year and equity-to-assets increased from last year's level. Following the higher ratio between net interest bearing debt and reported EBITDA at the end of the year, the Group renegotiated the leverage covenant for the last quarter of 2017. The Group expects to fulfill the requirements of the lenders also at the end of the first quarter of 2018. 

Key figures

Strategy Implementation

The Group updated its strategy in February 2017. Following the conclusions of the strategy update, in order to build a solid financial and operational platform for long term growth, the Group's primary focus in the coming years will be on capturing organic growth opportunities in the fishing tackle business. The Group will also take determined actions to improve its profitability, lighten balance sheet and improve operational performance. In longer term, the target is to return to 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 platform, research and development knowledge, as well as the broad distribution network and strong local presence all around the world supporting the sales of Group's own and selected synergistic third party products.

The execution of the updated strategy started on all levels in the Group. Several organic growth projects are ongoing in all businesses utilizing deep market and customer understanding. Special focus has been set to leverage our global innovation power to serve growing product categories and niches within fishing.

Significant focus and resources were allocated to streamline internal supply chains and to develop sales and operations planning to achieve lower group-wide inventories. Additionally, lean projects were ongoing in several factories. Certain production phases were transferred from Finland to Estonia and Russia. One of the key projects for 2018 is to develop the operations at the lure factory in Indonesia and to fix identified challenges.

The Group made investments in group-wide common IT systems to increase efficiencies and enable better end-to-end supply chain and product management. The Group also increased investments towards digital channels in order to exploit these opportunities stronger in the future.

The Group will organize a capital markets day in May 2018 to elaborate the updated strategy and its execution. 

Product Development

In line with the Group's updated strategy, strengthening and further leveraging the Group's global innovation power is one of the key success factors in the future and key requirement for enhancing the organic growth. By utilizing its unique global market knowledge combined with R&D, manufacturing and sourcing capabilities, the Group will address target markets with new innovative products and concepts and will swiftly respond to market needs.

The Group has reorganized and boosted its lure product development procedure by centralizing the product development know-how and key resources to one location in Vääksy, Finland. The R&D center serves both the European and Asian lure manufacturing units. This has also increased the agility of the product development procedures.

The most important product launch in 2017 was the introduction of the Storm 360 GT soft plastic lure in January 2017, supported with coordinated global marketing campaigns. Rapala Rip Stop hard bait was launched to the US market at the iCAST show in July, aimed mainly at the bass market, the largest target category in the US. The revolutionary Sufix Advance monofilament line with proprietary material technology, was introduced to the trade at EFTTEX in July, winning the Best New Monofilament Line award at the show.

Preparations for the first 2018 new product introductions were finished during the second half of the year 2017, and the Rapala big predator baits, targeted at the European pike and global large predator fishing, were launched with great success in January at the Clermont-Ferrand show in France. Other preparations for new lure and fishing line 2018 launches in the second and third quarter are well under way.

Organization and Personnel

Average number of personnel was 2 736 (2 829) for the full year and 2 696 (2 740) for the last six months. At the end of December, the number of personnel was 2 626 (2 751).

The Group made the following appointments and changes in the Group's Executive Committee in 2017: Lars Ollberg was appointed as Chief Operating Officer (COO), Jan-Elof Cavander as Chief Financial Officer (CFO), Cyrille Viellard as Head of Market Intelligence and Business Development as well as Tom Mackin assuming a global role in brand management, marketing and e-commerce. Aku Valta left the Executive Committee.

Short-term Outlook and Risks

2017 was a year of market turmoil and structural changes in retail especially in the US. There is still somewhat lower visibility to the North American market due to the structural changes experienced during 2017. However, the Group sees continued healthy consumer demand for its products via old and new channels. In Europe, the price competition in certain product categories has increased and the markets continue to be competitive.

The Group has launched various strategic initiatives to boost organic growth and improve cost and capital efficiency as well as operational performance in the future. These initiatives will continue to trigger some additional expenses and investments in 2018.

The Group expects full year net sales with comparable FX rates to be above last year's level and comparable operating profit (excluding mark-to-market valuations of operative currency derivatives and other items affecting comparability) to exceed 15 MEUR.

Proposal for profit distribution

The Board of Directors proposes to the Annual General Meeting that a dividend of 0.04 EUR for 2017 (0.10 EUR) per share is distributed from the Group's distributable equity and remaining distributable funds are carried forward to retained earnings. It is proposed that the dividend is distributed in two equal installments. At December 31, 2017 the distributable equity in Group's parent company totaled 20.1 MEUR.

No material changes have taken place in the Group's financial position after the end of the financial year. The Group's liquidity is good and the view of the Board of Directors is that the distribution of the proposed dividend will not undermine this liquidity.

Financial Statements and Annual General Meeting

Financial Statements for 2017 and Corporate Governance Statement will be published in the beginning of week 10 commencing on March 5, 2018. Annual General Meeting is planned to be held on March 29, 2018.

Half Year Financial Report 2018 will be published on July 20, 2018.

Helsinki, February 16, 2018

Board of Directors of Rapala VMC Corporation

For further information, please contact:

Jussi Ristimäki, 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 financial year result will be arranged today at 11:00 a.m. Finnish time (10:00 a.m. CET). Please dial +44 (0)330 336 9104 or +1 323 794 2442 or +358 (0)9 7479 0360 (pin code: 114489) five minutes before the beginning of the event. A replay facility will be available for 14 days following the teleconference. The number to dial +44 (0) 207 660 0134 (pin code: 7833646). Financial information and teleconference replay facility are available at www.rapalavmc.com.