Continuous improvement and transformation for long-term value creation
2017 was the eighth consecutive year of growth and broad-based improvement for Amer Sports, despite a challenging market with quickly changing consumer shopping behaviors that put legacy commercial models under pressure, calling for a consumer-driven business model transformation.
We pursued this transformation proactively, with a focus on long-term value creation, and hence we continued to invest significantly into the commercial omni-channel transformation and the strengthening of our future initiative pipeline rather than seek to maximize short-term EBIT. Importantly, in 2017 we did also continue to create shorter-term value as we reached record results in three out of our four strategic targets: record sales, record cash flow, and the strongest ever balance sheet. We believe that our approach, the Sustainable Growth Model, drives the best value creation over the cycle.
Our glidepath: strategic targets and priorities
In 2017, we revised our 2020 financial targets to align them to market conditions and our transformation plans and to ensure we can follow our Sustainable Growth model. The 2020 targets are:
i) Annual mid-single-digit topline growth (in local currencies)
ii) Annual EBIT margin improvement
iii) Free Cash Flow at least 80% of Net Profit
iv) Balance Sheet: year-end Net Debt / EBITDA < 3
While we continue to target solid growth, the key change in the financial targets is a higher prioritization of profitability in a context where the rapid changes in the market risk making growth overly uncertain and expensive. Hence, we pursue higher Opex productivity, faster restructuring, and Gross Margin improvement. Our strategic growth drivers are unchanged: Softgoods, Direct to Consumer, China, USA, and Connected Devices and Services. We pace our investments based on expected returns and expect strong growth across these drivers, with possibly slower growth in the USA in the short term due to the wholesale market slowdown.
Beside our 2020 organic glidepath, we continue to be active in M&A and look for criteria-based non-organic growth opportunities as we have done over the past years with several smaller scale acquisitions. In this context, we also continuously assess the attractiveness of the businesses we are in, and evaluate ourselves through the lens of “Are we a better owner?” for these businesses.
This approach ensures that we remain focused, but also agile and realistic about future value creation.
Progress in 2017: a logical slice of the 2020 glidepath
1. Financial performance
We are guided by our long-term financial targets which we break down into logical annual sub-targets. In 2017, we continued to improve our performance and reached company records and met or exceeded the annual sub-targets in three out of the four areas
- Record Net Sales: we grew 4% on a currency-neutral basis
- Record Cash Flow: we recorded Free Cash Flow at 117% of net profit
- Record Balance Sheet: we recorded a year-end Net Debt/ EBITDA ratio of 1.6
We did not meet our fourth financial target of annual profitability improvement as we kept EBIT practically at the previous year’s level, reflecting our choice to continue to invest into the company’s transformation and longer-term initiative sufficiency. It is worth highlighting that we improved our Asset Efficiency to maintain Return on Capital Employed at a good level, offsetting the slight decline in EBIT margin.
2. Strategic growth priorities
In 2017, we continued to make strong progress on our long-term strategic growth priorities:
- Softgoods net sales grew by 7% toward EUR 1.1 billion (long-term target EUR 1.5 billion). Apparel, especially Arc’teryx, continued to grow at a strong double-digit rate, driven by a balanced range and geographical expansion, and significant progress in Direct to Consumer sales. Also Footwear made good progress in range expansion and Direct to Consumer, but growth was slow in wholesale, so we will continue to work to gain speed.
- Direct to Consumer grew by 25% to EUR 250+ million (long-term target EUR 400+ million). Specifically, own retail grew by 19% and e-commerce by 38%, indicating that consumer demand for our brands remains high. By the end of 2017, we had approximately 300 own retail and partner stores, and almost 90 e-commerce stores.
- Sales in China grew by 15% to EUR 120 million (long-term target EUR 200 million). The growth could have been even faster, but we executed a major distribution model change for the benefit of long-term growth that had an adverse impact in 2017.
- Connected Devices and Services, mainly Precor and Suunto, grew double-digit toward EUR 300 million (long-term target EUR 600 million), and we gained momentum toward the year end as the business responded favorably to our initiative pipeline investments made in 2015–2016.
The one strategic priority area where growth remained slow was the USA where our business remained at the previous year’s level, as the wholesale market slowdown particularly impacted Ball Sports, and our rapid growth in Direct to Consumer sales and new channels did not yet sufficiently offset the wholesale impact.
Another area worth highlighting is our strong progress in Winter Sports Equipment, which grew 8% with continuously improving profitability, thanks to our robust operating model and strong brand initiatives. On the challenging side, Cycling continued to decline due to high industry inventory levels and lower sales to bike manufacturers.
Shareholder value creation
Since 2010 when we started the current strategic glidepath, Amer Sports has delivered a Total Shareholder Return of approximately 350% consisting of share price appreciation of 260% and paid dividends (reinvested) of 90%. The annualized return has been 20%. In 2017 (January 1, 2017 – February 14, 2018), our total shareholder return was 3%.
Thanks to our improving performance and strengthening balance sheet, we have now increased our dividends every year since the renewal of the strategy in 2010, and for 2017 the Board of Directors is proposing another increased payout to the shareholders, in line with our dividend policy. In addition, in 2017 we acquired approximately 2.5 million of own shares of which we cancelled 2 million in early 2018.
Prioritizing sustainable, profitable growth over short-term result maximization
We continue to strictly follow our Sustainable Growth Model which consists of annual growth, annual profit improvement, and annual investment to secure long-term success. This model ensures that we deliver both appropriate financial results in the short term and secure the long-term health of the company. In the current market context with significant changes in the consumer and commercial landscape, we have chosen to further prioritize the long-term health through on-going investment into transformation, restructuring, and the future initiative pipeline, rather than maximize short-term results. We believe our long-term focus drives the best value creation over the cycle.
Moving forward with confidence
We have a portfolio of great market-leading brands that delight and improve the performance of our global consumers and athletes. Our organization is motivated and capable. We collaborate with our customers, suppliers, and other stakeholders to create joint value. We seek to do the right thing, always looking to improve across all areas of Corporate Responsibility.
We have a good track record of delivering short- and long-term results and value creation. We accept challenges, embracing change and transformation, and deal with business issues proactively but also with patience. Over the cycle, this approach has given us good and sustainable results. We believe our strategies are strong, and as we execute them with excellence, we continue to create significant value.
We are looking forward to delivering our long-term glidepath, and as part of that, another year of growth and improvement in 2018.
February 15, 2018
PRESIDENT AND CEO