Head N.V. saw continued momentum in the first quarter as increased racquet sports participation and a particularly good snow year in both Europe and the U.S. pushed the top line and restructuring efforts continued to boost margins. The strong performance in Winter Sports and Racquet Sports was partially offset by a continued weakness in Diving.
The company completed its change in reporting currency back to the Euro and was able to take advantage of exchange rate shifts to boost the top line. If the reporting structure remained as it was in 2005, reported sales would have decreased 2.0% for the period. However, the Euro is a much more reflective currency for Heads current business structure, with over 50% of sales from the EU and only a third coming from North America.
Winter Sports was a major driver for the quarter with sales increases across the board. Geographically, sales were led by strong performances in North America, but again, results were somewhat skewed by the Dollar-Euro reporting shift. In local currencies, North American sales increased 45.5% compared to the 58.8% reported in Euros. Winter Sports division revenues were mainly due to re-orders and end-of-stock sales.
Globally, sales of skis jumped 27% to 7.5 million ($9.0 mm) while binding sales increased 16.7% to 6.9 million ($8.3 mm). Boot sales jumped 34.1% to 3.8 million ($4.6 mm). Snowboard was a strong segment for the brand, increasing 58.8% to 2.0 million ($2.4 mm).
Margins in the division improved ten full percentage points to 30.2% of sales, due to better inventory management and better product introduction timing. Pre-season bookings were “favorable” to last year.
Racquet Sports, which accounted for 53% of Heads Q1 sales, saw the biggest impact from the currency shift. In Euros, the division saw a strong 13.5% increase, but if Head reported in dollars, the increase would have been 4.0%. North America accounts for 52% of Heads racquet business and sales in the region increased 17.5% to $22.6 million measured in U.S. Dollars. Racquets accounted for 64% of division revenues, and sales in the category increased 42.4% to 23.2 million ($27.9 mm). Ball sales accounted for 36% of revenue and increased 13.5% when measured in Euros to 13.0 million ($15.7 mm).
The companys decision to outsource a portion of its racquet production to factories in China is having a positive impact on the divisions GM, which increased 170 basis points to 40.1% during the quarter. The company “continues to experience positive momentum” in the racquet sports market and its futures book is favorable to last year. Management said the racquet market showed moderate growth, while the tennis ball market declined slightly. Head expects the market to be flat for 2006 with continued pressure from raw material prices.
Diving continues to be a problem as the industry seems to be going through a major down-cycle. Sixty percent of the companys business is done in Europe and only 21% in North America, so there was little impact form the shift in currencies. Sales declined due to a right-sizing strategy designed to reduce the size of the Dacor business, but unfavorable European market conditions and late product launches also negatively impacted the division. Mares brand sales declined 23.6% to 9.9 million ($11.9 mm), while Dacor sales were more than halved to 300,000 ($400,000). Spora brand sales actually increased 33.7% to 800,000 ($900,000). Margins for the quarter decreased 170 basis points to 35.7%, but trailing twelve month gross margins showed an improvement of 170 basis points to 32.3% of sales.
The company expects the declines to level off, and full year sales to be flat to 2005.
Head is in “the last bit of the development process” for their own range of golf products with a “unique concept.” The company said that it will pursue acquisitions in this segment if needed, but if possible, “will launch without buying a company.”
Johan Eliasch, Head chairman & CEO, said, “The last thing we want to do is to be another Wilson because that does not really work. What we hope to do is to come up with the first computerized golf club You can rest assured that unless we have a knockout product, we are not going to launch. That has always been the objective.”
While the company completed the majority of its cost saving initiatives in 2005, it is still looking for more expense reductions. Head also stated that the competitive environment remains challenging, but management is forecasting improved results for the year.
| Head N.V. | |||
| First Quarter Results | |||
| (in $ millions) | 2006 | 2005 | Chg |
| Total Sales | $81.9 | $83.6 | +6.9% |
| Europe | $43.4 | $46.8 | +1.2% |
| N. America | $29.5 | $25.9 | +24.2% |
| Rest of World | $9.0 | $10.9 | -9.5% |
| Winter Sports | $24.3 | $20.9 | +27.0% |
| Europe | $18.9 | $17.1 | +20.8% |
| N. America | $3.6 | $2.5 | +58.8% |
| Rest of World | $1.7 | $1.3 | +48.2% |
| Racquet Sports | $43.5 | $41.9 | +13.5% |
| Europe | $17.4 | $17.2 | +10.7% |
| N. America | $22.6 | $19.3 | +28.3% |
| Rest of World | $3.5 | $5.4 | -30.2% |
| Diving | $13.2 | $18.9 | -23.6% |
| Licensing | $3.0 | $3.0 | +8.7% |
| Gross Margin | 39.6% | 36.4% | +320 bps |
| Net Income | ($6.9) | ||
