Given that there isn’t a lot of (high-quality) coverage available, we’re very excited to share this new deep dive on Harvia, the world’s largest sauna and spa manufacturer.
The stock trades on the Helsinki exchange under the ticker “HARVIA”.
Following its initial public offering in 2018, the company has accelerated its internationalization efforts and broadened its product offerings, all while markedly enhancing returns on invested and incremental invested capital and generating significant growth in NOPAT per share.
Exhibit I - Harvia heater
The deep dive will cover:
Part I - Harvia’s History & Product Assortment
Part II - The Sauna Market - a Growing Industry
Part III - Harvia’s Financial Performance
Part IV - M&A Track Record
Part V - Reconciling NOPAT and Organic ROIC
Part VI - Recent Financial Performance and Emerging Trends
Part VII - Base Case Valuation
Part VIII - Risks & Uncertainties
Part IX - Conclusions
Part I - Harvia’s History
Going Back to the 50s
Harvia’s story began in 1950 when a Finnish sauna enthusiast, Tapani Harvia, sought healing and warmth after a plane accident from the most natural source Finns can imagine – sauna. That’s how the production of wood-burning heaters for the local communities was born.
Exhibit I - Harvia’s founder - Tapani Harvia
Since then, Harvia has been developing the production of sauna heaters, a core area of expertise that has remained central to the company's business, although the heater dominance has been reduced notably from 59% of total sales in FY17 to 55% in FY23 (but that also includes a sizable portion of control units).
Harvia produces both electric and wood-burning heaters, with electric heaters making up the majority of sales. Related heater accessories include safety rails, protective sheaths, protective beddings, electric heater embedding flanges, and chimneys and pipes for wood-burning heaters. Electric heater sales also encompass combi heaters, which feature an integrated steamer.
Exhibit III gives the FY17 sales breakdown by product and country. In the financials section, it will become clearer how Harvia has internationalized its strategy since the IPO.
Exhibit III - The Compounding Tortoise
Sauna Rooms
Talking about Harvia’s other product segments, Harvia's sauna product range includes both individual sauna interior components and fully assembled/ready-made saunas. The interior products consist of items such as sauna doors, benches, panels, and other essential structural components for a sauna room. These include various custom-made sauna benches designed to fit specific measurements. While most of these products are crafted from wood, the range also features glass sauna doors and walls. A significant portion of the sauna product group’s revenue comes from the sale of these interior components.
In addition to interiors, Harvia also offers complete ready-made saunas. These can be installed as standalone sauna buildings on a property or as dedicated sauna rooms within a building. They also produce sauna rooms designed for infrared saunas. One specific product type, bathroom saunas, are freestanding units with adjustable legs, allowing them to remain separate from the bathroom floor and walls. Among these: the award-winning SmartFold sauna, a flexible, foldable solution ideal for bathroom spaces.
Control Units
The control units are Harvia’s most profitable products. Many of the electric heater models are available without a control unit, but certain models, such as electric heaters for communal use, combi heaters, premium residential heaters, and infrared saunas, require a control unit. Harvia also supplies control units compatible with heaters from other manufacturers.
A control unit or control panel can be installed in the sauna room, washroom, or another location, with the primary function of improving the ease and safety of heater operation while also enabling control over sauna accessories. These units manage functions such as temperature, operating time, lighting, ventilation, music, and humidity in combi heaters, as well as the infrared radiator in infrared saunas. Harvia’s most advanced control units feature wireless operation and can integrate with home automation systems.
The management team believes the company is highly competitive in the entry-level and mid-priced control unit market, thanks to advantages in production volume, cost efficiency, and a strong price-to-quality ratio. The acquisition of Sentiotec and EOS (see below) has further expanded Harvia’s premium control unit offerings, which now include advanced safety features, remote control, and wireless solutions. Control units are well-known in German/DACH markets.
Steam Generators
Steam generators serve as the heat source in steam saunas, producing both the steam and the heat required for these environments. Harvia’s steam generator lineup has traditionally focused on residential models, but the company has recently expanded its offerings to include steam generators designed for commercial use, such as those in fitness clubs and spas. Additionally, Harvia provides a range of accessories for steam generators, including steam nozzles, scent pumps, and automatic valves, all of which are part of this product group.
Back in FY17, Harvia had no steam generator offerings for the US market, which has now changed with the acquisition of ThermaSol (see further).
Other Products and Spare Parts
The product group consisting of spare parts, services, and other products includes items such as sauna heater resistors, spare parts, sauna stones, hot water containers, lighting fixtures, waterproof speakers, and various sauna accessories like fragrances, buckets, ladles, and thermometers. In Finland, this group generates most of its revenue from spare parts and heater stones, while in Central Europe, a significant portion comes from other sauna and spa accessories.
This product group also covers sauna-related services provided by Velha and Saunamax, including maintenance, installation, upkeep, and repair services for both consumer and corporate clients, but these revenue streams aren’t significant.
Additionally, the group includes infrared radiators, which serve as heat sources in infrared saunas. These radiators are installed in the walls or under the benches and can be combined with traditional heaters in hybrid saunas. The company's offering also features wooden sauna rooms specifically designed for infrared saunas, which can be installed in dry rooms with temperatures lower than traditional saunas, typically around 30 to 40°C.
The product group also encompasses spa modules, including wall, ceiling, and seating structures compatible with steam rooms, as well as rest divans, all of which are available as installation-ready units. For large commercial spa suites, Harvia also offers turnkey delivery of spa modules.
With the recent strong growth in the US, Harvia will play catch-up in infrared saunas, where organic growth is the no. 1 priority (focusing on US-made solutions).
Worldwide Presence
With its extensive experience and broad sales network, Harvia has developed a strong understanding of customer needs, market dynamics, and production methods. At its Muurame plant in Finland and later the Lewisburg factory in West-Virginia, Harvia’s close collaboration between sourcing, production, product development, and sales allows the company to offer efficiently manufactured, tailored products.
The integration of the sales organization with product development ensures that products are designed to meet the needs of both professional and consumer customers. Additionally, Harvia’s product development and production teams work together to streamline manufacturing, reducing the number of components to lower production costs. The company uses advanced automated material processing equipment and in-house designed tools to enhance production efficiency, minimizing reliance on external suppliers and ensuring smooth manufacturing processes. These principles apply not only to heater production but also to the design and manufacturing of sauna rooms.
Harvia's headquarters, largest production facility, and logistics center are located in Muurame (Finland), forming an integrated complex where material sourcing, production, R&D, and sales are closely coordinated. The company also operates production facilities in the US, Germany, Romania, China, and Estonia, and a logistics center with a sales office in Austria.
Exhibit IV - Harvia
By centralizing production across different locations focusing on specific products and price categories, Harvia optimizes the availability of raw materials and ensures cost-efficient production. Historically, supply and material costs have accounted for around 40% of revenue, while employee benefits have averaged 20%, reflecting a high level of automation.
Long-Term Partnerships
Harvia’s long-standing customer relationships, some of which exceed 30 years, reflect the high quality of its products and customer service. The company serves a wide range of customers, including building supply companies, retail stores, sauna specialists, wholesalers, integrators, sauna builders, and construction companies, as well as selling directly to end users. Harvia’s management highlights the company's ability to flexibly meet the diverse needs of its customers, maintaining strong relationships within its distribution network. In Finland, Harvia has established ties with electrical wholesalers and construction companies in the new-build sector, while in Germany, it operates through retail, sauna specialist stores, and sauna builder channels.
Harvia has also cultivated long-standing relationships in key export markets, including North America and Russia. In the US, Harvia works closely with the largest sauna builders, who serve as importers, further solidifying the company’s position in the global sauna and spa market. Network density has been improved gradually through acquisitions, and to a lesser extent through organic growth.
Protecting Brand Equity
Brand equity is key to earning the solid profitability it has had over the past few years. In its home market of Finland, Harvia stood out as the most recognized brand, with 82% of consumer survey respondents acknowledging the brand (information from 2017). In comparison, the second most recognized brand garnered only 64%. Harvia's marketing efforts are aimed not only at customers but also involve collaborative initiatives with them to reach end users, such as through advertising and special offer campaigns. Additionally, the company participates in industry trade fairs and exhibitions both in Finland and internationally.
Part II - The Sauna Market - a Growing Industry
Aside from the health benefits, the sauna concept and the size of the sauna market isn’t that well-studied. In order to spot changing trends and opportunities, Harvia regularly conducts market studies via consultants.
Multibillion Market Underpinned by Growing Installed Base
Exhibit V reveals that the global sauna market (which includes the sauna equipment (heaters and components), accessories, rooms, and labor) was worth 3.5 billion EUR in 2023, and 3 billion EUR when excluding Russia.
Exhibit V - Harvia
It’s fair to say that labor accounts for 40-45% of this number, i.e. 40-45% of the market value isn’t part of Harvia’s total addressable market as it primarily sells equipment and complete sauna offerings. The share of labor depends on the characteristics of the sauna project: remodeling/renovating, a completely new sauna building (detached from the house, or not?).
Overall, we could say that back in 2016, when a full study on the sauna market got carried out by the International Management Consulting firm, 77% of all heater equipment sales was linked to replacement.
Exhibit VI - The Compounding Tortoise
Sauna heaters in commercial or communal settings are typically renewed or replaced every 2–5 years, while in residential use, the replacement cycle ranges from 10 to 20 years. Regular maintenance, such as replacing heater stones and elements, helps extend the lifespan of a sauna heater. Due to the more frequent renovation and replacement of sauna components, the relative value of heaters and related parts increases over time. Initially, a sauna heater and its components account for about 10% of the total value of a new sauna, but over the sauna's lifecycle, this can rise to approximately 30% of the sauna’s total value.
Particularly in Finland, saunas are an integral part of everyday life, and when a sauna heater or component wears out, it is typically repaired or replaced regardless of the construction cycle. The widespread presence of saunas and the large installed base in Finland means that replacement demand plays a significant role in driving the sauna and spa market. This pattern is mirrored in other mature markets with high sauna prevalence, such as Russia and Sweden, where both residential and commercial sauna replacements contribute to market resilience.
In markets like Germany and emerging regions such as North America, where residential saunas are less common, the replacement of sauna and spa facilities in commercial settings enhances the stability of the market. Thanks to the steady demand for replacements, the sauna and spa market, including sauna heaters and components, has historically been more resilient to economic fluctuations than the broader construction industry.
Exhibit VII shows the year-over-year growth rates for the sauna market relative to the global construction activity.
Exhibit VII - The Compounding Tortoise
Geographical Footprint
The growth of new sauna construction is driven by increasing awareness of the benefits of saunas and sauna bathing, rising numbers of residential developments, and expanded construction of saunas for commercial use. In addition to factors influencing market volume, the value of the sauna and spa market is also boosted by higher average prices for saunas, spa equipment, heaters, and components, as well as a more diverse range of products in typical sauna and spa purchases.
In more established sauna markets, such as Finland and other parts of Northern Europe, new sauna construction is primarily driven by growth in residential and commercial real estate. Meanwhile, in developing sauna markets, rising awareness of saunas is expected to lead to increased sauna penetration in both new builds and existing properties. This growing awareness is particularly noticeable in emerging markets like North America and China.
Sauna-bathing is oftentimes associated with wellness and well-being, which has been strengthened by the growing global travel industry. As populations grow wealthier and travel more, an increasing share of the population are also in a position to learn about and experience sauna. The desire to experience the sauna is bolstered by the perception of the sauna as a general promoter of wellness and the desire and ability of the aging population in particular to take care of their health and wellness.
Saunas are deeply embedded in Finnish culture and daily life, and they have also been well-known for decades in the Baltic and Nordic countries, Germany, Russia, Japan, and South Korea, though they are less integral to everyday life in these regions. In Central Europe, sauna bathing is most commonly associated with commercial venues such as gyms, hotels, and spas. In contrast, regions like North America, China, and the Middle East have lower awareness of saunas, with most sauna installations found in high-end commercial properties. These emerging sauna markets offer great potential for Harvia’s cutting-edge solutions.
Sauna Types
Within the sauna and spa market, Harvia plays in all three main types of saunas: traditional saunas, steam saunas, and infrared saunas.
Traditional saunas are heated by either electric or wood-burning heaters, with temperatures ranging from 60 to 100 degrees Celsius. These saunas are primarily made of wood, and the humidity is relatively low.
Steam saunas operate at lower temperatures, typically between 35 and 45 degrees Celsius, with 100% humidity, filling the room with steam. These saunas use steam generators instead of traditional heaters.
Infrared saunas are a more recent innovation, where the room itself is not heated. Instead, heat is directly applied to the body through infrared radiation from infrared heaters. These saunas typically maintain temperatures between 30 and 40 degrees Celsius, with humidity levels matching the surrounding environment. Unlike traditional and steam saunas, infrared saunas do not require a separate wet room.
In addition to these three primary types, the market also includes:
Combi heaters, which combine traditional sauna heaters with steam-producing functionality.
Hybrid saunas, which integrate both traditional and infrared sauna features.
Steam showers, where a steam generator is incorporated into a shower stall.
Health Benefits
Over the years, an increasing body of research on the health and wellbeing benefits of sauna bathing has been published in academic medical journals, with these findings gaining greater attention in the general media. Recent studies from the University of Eastern Finland, which explore the health effects of sauna use, have attracted international media coverage.
These studies suggest that sauna bathing may contribute to the prevention of heart disease, hypertension, and memory disorders. While the research does not establish a direct causal link, the researchers believe the health benefits may stem from the sauna's relaxing environment, which promotes overall wellbeing, reduces stress, and lowers blood pressure - factors that positively impact heart health and cognitive function.
Market Growth and Share
Exhibit VIII gives an overview of Harvia’s main markets and their relative share in 2016 vs. 2010. Over time, Harvia has expanded its footprint, and is now having good inroads into Japan (JV with Bergman) and Oceania.
Exhibit VIII - The Compounding Tortoise
Exhibit IX gives an overview of Harvia’s main markets and their relative share in 2016 vs. 2010.
Exhibit IX - The Compounding Tortoise
Based on a 60% share of sauna equipment and accessories (with the remaining 40% labour) in the total US market size, ThermaSol most likely has a 15-16% market share in steam saunas. We estimate that, at the end of FY23, Harvia had roughly 25% share in traditional saunas and 10% overall. Globally, and excluding Russia, Harvia is the undisputed leader with - according to our estimates - ca. 10% share.
Technological Advancements and Upsell
Sauna heaters and components have evolved significantly over the years, with more advanced accessories now available, making it easier for consumers to purchase heaters that can be controlled via control units. Technological advancements will expand the role of control units beyond basic heater regulation, allowing users to manage additional features like lighting, ventilation, infrared radiators, and other sauna functions. Additionally, enhanced by IoT, remote control of saunas will become increasingly popular due to ongoing technological innovations (also with AI).
Over time, various sauna concepts have emerged, with new methods of sauna bathing developing as awareness grows, particularly in emerging sauna and spa markets. Over the years, hybrid saunas, that are equipped with both a traditional electric heater and one or more infrared radiators, have gained popularity, especially in Central-Europe. Additionally, combi heaters, which integrate a steamer into the electric heater, are also becoming more widely used.
As sauna offerings continue to evolve, the demand for more advanced and better-equipped saunas is expected to rise. Consumers who previously purchased only a heater may now be more inclined to buy additional accessories, such as control units for easier operation, safety railings around the heater for enhanced safety, or switch from a wall-mounted heater to a free-standing one with an embedding flange. Adopting a control unit often necessitates purchasing a new heater compatible with control systems. The value of these accessories can be significant in relation to the heater itself. According to some industry experts’ estimates, purchasing safety railings could increase the total value of a purchase by 1.5 times, while adding an advanced control unit could potentially double the value compared to buying just a heater.
Distribution Network - Some Geographic Differences
In terms of distribution network, the bulk of Harvia’s sales come from retail & wholesale and integrators & sauna builders. Harvia has also established long-standing relationships with several construction companies. In addition, it engages in selected direct sales to large end customers, such as hotels and fitness club chains, particularly in Finland and across Europe.
Most of the company’s agreements are one-year contracts or framework agreements, where deliveries are made based on customer orders. These agreements typically do not include purchase quotas, and buy-back obligations for unsold campaign products are rare. While the agreements are usually for fixed terms or based on individual orders, customer relationships are generally long-lasting.
Exhibit X highlights the different distribution channels, with the US being similar to the German market.
Exhibit X - The Compounding Tortoise
Looking at the competitive landscape, one has to make a distinction between the heater and component manufacturers on the one hand, and the sauna builders and integrators on the other hand. These two groups operate differently. Heater and component manufacturers produce the equipment, while sauna builders and integrators typically do not manufacture their own heaters or components, but source them from manufacturers like Harvia for use in their sauna installations.
Today, we have four leading global sauna and spa companies with Harvia, TyloHelo (now part of Masco), Klafs, and Saunaking. In terms of profitability and organic growth, it’s fair to say that none of the larger competitors can match Harvia’s KPIs.
Turning to the regional competitors, there are approximately 20-23 players that typically have a narrow product offering, such as doing only professional, steam saunas, infrared or traditional saunas (e.g. EOS (which then became part of the Harvia family), ThermaSol, Almost Heaven Saunas).
And lastly, there are more than 2,000 smaller companies with revenues below 3 million, including niche premium players (e.g. Sauna-Eurox which supplies the world’s best sauna stones).
Overall, the competitive environment creates an opportunity for Harvia to steadily expand its market share without being challenged by competitors on pricing, their technological advancements and the like. Many of Harvia’s larger competitors operate with an EBIT margin of between 0 and 5-7% (during the good times). There’s not much of an economic incentive for them to invest for future growth.
Part III - Harvia’s Financial Performance
For Harvia, the three pillars for profitable growth are:
Increasing the average purchase value;
Geographical expansion;
Productivity improvement
We argue that the Harvia of 2024 shouldn’t be compared to the Harvia of 2018. The group has become much more diversified across different distribution channels and geographies by covering many more product categories, both on the entry-level as well as high-end spectrum (e.g. for professionals).
All of the elements that we’ve talked about above are translated into its rock-solid financial performance.
Top Line, Geographies, and Product Mix
Starting with the top-line performance, product mix and geographic footprint.
Prior to the pandemic, Harvia used to grow organically by 4-5%, slightly outpacing the broader market, and thus gaining share. During and following the COVID-19 crisis, the average (not compounded) growth rate has been 14% per annum.
There are several puts and takes the year-over-year growth rates for Harvia:
Timing of M&A impacts the growth rate in the product and geographical area, as Harvia acquired companies that were predominantly regionally concentrated.
Pent-up demand during and following COVID, during 2022 and 2023, there was a clear difference between the sales performance for entry-level and high-end products.
Exiting the Russian market, which was quite an important one for Harvia in terms of heater sales (wood-burning) with decent profitability. It was a 4.4% headwind to sales growth in FY23.
The Kirami hot tub acquisition got completed during FY21, but since the beginning of Q2 2022, sales for this highly discretionary category have been sharply lower.
On that pent-up demand, management commented in February 2022:
After analyzing the market and its dynamics, we maintain our general outlook for the market and estimate that for the next few years the market growth will exceed the historical average. However, we continue to estimate that part of the growth is so-called advance demand, which is normalizing for the residential market while the professional market is gaining momentum. This is not expected to affect the long-term expectations of the sauna and spa market.
It’s also true that Harvia had a thick order-book during 2021, which it then pushed forward, thereby smoothing out some of the sales volatility early 2022.
Exhibit XI - The Compounding Tortoise
Nonetheless, the organic growth rate has accelerated vs. when Harvia IPOed in 2018, which the management team expects to continue.
Geographically, mature sauna markets Northern Europe and Continental Europe used to make up 80% of Harvia sales (and 90% including Russia), whereas that’s now 65%. As the faster-growing sauna markets continue to gain traction, so will the overall top-line growth, supporting our investment thesis and assumed exit multiple.
While Europe looks challenging on a two- and three-year stack basis, it’s mainly on the entry-level segment and because of a pull-forward in demand following COVID. It takes some time for a heater, heater stones, benches to be replaced.
In FY24, Harvia renamed its operating segments to better reflect the dynamics within each region.
Exhibit XII - The Compounding Tortoise
Talking about the product groups. Growth in the US has boosted the performance in sauna rooms and hot tubs, as the sauna penetration is still very low with customers reaching out to Harvia for full-sauna solutions. This go-to-market strategy enables Harvia to sell various products and somewhat secure replacement that starts to occur within 6-10 years.
Steam generators was still a small business, but will gain traction with the ThermaSol acquisition. Additionally, Harvia has developed a strategy to tap into the infrared saunas soon, as they make up 35% of the US demand.
Exhibit XIII - The Compounding Tortoise
Profitability and Adjustments to EBITDA
Despite the faster growth in read-made saunas and inflationary shocks, profitability hasn’t been much pressured over the past few years. A full breakdown of the gross margin and expenses is shown in exhibit XIV.
On the sauna rooms, they typically have lower profit margin than on individual heater equipment and component sales, though it’s never been exactly quantified by the management team, and we think that the strong growth in US has created meaningful savings on the COGS.
For instance, in FY23, sauna rooms continued to outgrow other segments while Harvia’s gross margin reached an all-time high. Some of the margin expansion came from deflation in raw material prices relative to FY22, but the other part should have come from economies of scale (bulk purchases, more sourcing opportunities) and premium interior offerings.
Exhibit XIV - The Compounding Tortoise
Gross Margin
Harvia’s gross profit margin has steadily increased over the past few years, driven by several key factors:
Optimized sourcing of raw materials for both its acquired and existing subsidiaries.
Pricing power in 2023, which was maintained despite softer top-line performance.
Supply chain optimizations, ensuring direct access to all critical raw materials.
Productivity improvements that have reduced waste and improved operational efficiency.
These positive margin drivers have been partially offset by negative mix effects, notably the decline in the relative contribution of heater equipment, components, and control units to overall revenue.
It’s also important to note that Harvia’s products have a low risk of obsolescence or degradation during long-term storage, which minimizes the risk of inventory write-downs. However, in 2022, Harvia did face delays in sales of sauna rooms and control units due to supply chain constraints, though these issues appear to have been temporary.
Staffing Expenses
In terms of staffing expense, Harvia’s personnel in Finland are offered performance-based pay, with most of the employees at the Muurame production facility having the opportunity to participate in a motivating direct piecework payment system. For years, it’s been implementing this piecework compensation scheme at the Muurame facility to encourage and reward employees for their productivity and performance.
Harvia’s business experiences seasonal fluctuations, and it operates with a relatively short order book (couple of weeks), requiring it to quickly adapt to changes in demand. To manage under-capacity, it can increase shifts at production facilities. However, this response is constrained by labor availability, employment laws regulating work volume, and the availability of critical raw materials, such as electrical components (which happened during 2021). To handle demand fluctuations and keep service levels, it maintains a sizable inventory position.
Unsurprisingly, inventory turnover was lower in FY22 and FY23, while staffing expenses were higher due to operating deleverage. The assembly workers at the Harvia’s Muurame and China production facilities mainly work on piecework agreements, asa result of which efficiency of production is maintained at a good level and employee benefit expenses are flexible and vary with production volumes. Because of this, we believe that a sales decline would hurt margins, but not by as much as thought initially, given the combination of fixed and variable staffing costs.
Adjustments to EBITDA
Prior to and following the IPO, Harvia booked non-recurring costs. Additionally, due to its limited scale, the impact of one-time development projects (upgrade of operations systems) and M&A expenses used to be quite significant at 11% of adjusted EBITDA.
Exhibit XV highlights the management adjustments made to EBITDA.
Exhibit XV - The Compounding Tortoise
Note: in FY22, Harvia booked an impairment of 0.95m EUR related to the sale of EOS Russia, which was a non-recurring headwind to reported EBIT (but not within the scope of reported EBITDA).
Financial Expenses
Turning to the financial expenses, we have to make a distinction between the IFRS accounting for changes in the fair value of swaps and the cash interest charges Harvia pays every month, quarter, year. Right now, Harvia has a swap agreement to cover some (targeted 60%) of its variable interest-bearing debt, maturing in December 2026. The net financial result in FY23 was adversely impacted by higher borrowings due to the purchase of the EOS minority shares.
Exhibit XVI highlights the net interest costs, earn-out revaluations, and the net change in fair value of interest rate swaps.
Exhibit XVI - The Compounding Tortoise
The IPO proceeds were used to repay shareholder loans that were accruing 8.5% interest annually. Prior to FY17, these intra-group interest expenses were non-deductible, thereby increasing the total tax expense to well above the standard Finnish corporate tax rate (now at 20%).
Underlying EBITA vs. EBIT
Exhibit XVII shows Harvia’s depreciation and amortization, which includes amortization of acquisition-related intangibles (fair value adjustment to brands, technology). These are pure non-cash charges, whereas depreciation of tangibles and capitalized R&D reflect ongoing and thus recurring investments.
When adjusting for these purchase price allocation effects, the difference between adjusted EBIT and adjusted EBITA was 110 bps in 2023. The gap between EBIT and EBITA is set to grow with the acquisition of ThermaSol, Harvia’s second-largest acquisition to date.
Exhibit XVII - The Compounding Tortoise
Financial Position
Regarding Harvia’s net financial position, we have reconciled the adjusted net debt and leverage ratios to account for the implementation of IFRS-16. Starting in FY19, Harvia’s reported net debt has included lease liabilities. The net debt-to-adjusted EBITDA ratio, as defined by Harvia, excludes M&A-related liabilities such as put/call options and earn-outs, while the total net debt-to-adjusted EBITDA ratio includes all debt items.
Harvia’s target is to maintain a net leverage ratio (excluding M&A-related liabilities) of 1.5-2.5x adjusted EBITDA on a last twelve months (LTM) basis. This provides flexibility for growth while maintaining a healthy balance sheet and financial stability.
Exhibit XVIII - The Compounding Tortoise
Capital Investments
On the CAPEX front, Harvia remains a capital-light business, and we appreciate how quickly its growth investments have contributed to NOPAT. The total investment requirements, including rental agreements, are detailed in Exhibit XIX. We've reconciled the depreciation of right-of-use assets (RoU) prior to IFRS-16 implementation, as these should be considered maintenance investments, referred to below as implied depreciation of RoU assets.
In FY21, Harvia experienced a surge in investment activity, with an estimated 70-75% of these funds allocated toward expanding production capacity. However, following the normalization of the sales environment after 2021, much of this capacity remains unused.
Based on our short-term growth assumptions and the existing capacity, we estimate that Harvia will not need to make significant investments until mid-2025. This extended runway for capacity utilization provides flexibility for the company to focus on operational efficiency and strategic growth without requiring dramatic capital expenditures in the near term.
Exhibit XIX - The Compounding Tortoise
Working Capital
In terms of working capital, there’s nothing major to be called out. FY22 was a year of two halves with increased inventory in Q1 and Q2. Despite the softer sales backdrop, we argue that Harvia did a solid job in managing working capital.
Exhibit XX - The Compounding Tortoise
Notes: the change in working capital on a cash flow basis; negative figure is a cash outflow (increase in net working capital). Revenues are not a pro-forma basis, so the ratio NWC-to-sales adjusted for the realized revenue contribution from EOS and Kirami in FY20 and FY21 respectively is lower than what’s shown in the above graph.
Free Cash Flow
Despite fluctuations in sales, CAPEX, and working capital over the past few years, Harvia’s capital-light business model has consistently generated positive free cash flow every year since FY15. However, free cash flow can experience quarterly volatility due to factors such as the timing of tax payments, seasonality in working capital, and larger one-time CAPEX investments.
This underlying stability in annual cash generation, despite periodic fluctuations, underscores the resilience of Harvia's business and its ability to fund both ongoing operations and future growth initiatives.
Exhibit XXI - The Compounding Tortoise
Harvia has a formal policy of paying a progressively increasing dividend, distributed in two installments each year (in May and October). Previously, the payout ratio was set at 60% of EPS or adjusted net income, but this guideline was removed during FY21.
Given Harvia's significantly higher ROIIC vs. when it IPOed, we believe a more nuanced dividend policy in the range of 35-40% would better align with the company’s growth ambitions.
In essence, Harvia’s robust cash flow is well-positioned to support future expansion, including potential mergers and acquisitions (M&A). This approach ensures that the company retains flexibility for growth investments while continuing to reward shareholders with a sustainable and growing dividend.
Part IV - M&A Track Record
In recent years, Harvia has made several strategic acquisitions to expand its product portfolio and achieve its goal of becoming a "one-stop shop" for sauna and spa solutions. While some of the acquired companies lacked strong profitability initially, Harvia’s focus on three key paths to profitable growth has allowed it to significantly enhance the operations of these businesses. This has, in turn, helped lower the effective acquisition multiples over time.
Harvia’s ability to improve the performance of acquired entities highlights the scalability of its business model and the challenges smaller, independent players face in sustaining solid profitability. Simply put, companies outside of Harvia often struggle to create significant value for their shareholders, emphasizing the competitive advantage Harvia brings through operational improvements and synergies post-acquisition.
Exhibit XXII - The Compounding Tortoise
Sentiotec (Closed in November 2016)
Business Overview
Strategically, the acquisition of Sentiotec was a significant move for Harvia, solidifying its position as the number one player in the German market. At the time of acquisition, Sentiotec’s profitability lagged behind Harvia’s, which contributed to a noticeable year-over-year EBITDA margin compression between FY16 and FY17. However, we believe the acquisition enhanced Harvia’s organic growth potential, with profitability improving substantially in the years following the deal.
Based in Austria, Sentiotec specializes in the premium segment, offering high-end sauna heaters, control units, sauna rooms, and accessories. As a result of the acquisition, the contribution of control units and spare parts to Harvia’s total revenues grew significantly, with control units increasing from 6% to 11% and spare parts rising from 12% to 15%.
Before the acquisition, Harvia already had a strong presence in Germany, but it was primarily in the entry-level and mid-priced sauna categories. The Sentiotec acquisition allowed Harvia to expand its product portfolio into the premium market, boosting both its market share and its ability to cater to higher-end customer segments.
Consideration Paid
Exhibit XXIII depicts the key information on Sentiotec, with the hypothetical ROIC standing at 8.3% (book value) and 6.0% (at historical cost).
Exhibit XXIII - The Compounding Tortoise
Post-Acquisition Performance
There’s not a detailed breakdown of Sentiotec’s profitability post-acq available, but one of the main advantages was the up-sell opportunities. In the first quarter of 2018, Harvia introduced its new premium brand, SENTIO by Harvia. This brand encompasses high-end heaters, control units, and select accessories, which got available on its target markets. The launch was phased, offering advanced heater technology and modern design solutions for both family and commercial saunas. Through this piece of branded innovation, Harvia wanted to combine the strong Harvia heater brand and its extensive sauna expertise with the high-tech knowledge acquired through the Sentiotec acquisition, creating a unified, comprehensive premium sauna and spa product line.
Almost Heaven Saunas (December 2018)
Business Overview
At the end of 2018, Harvia closed the acquisition of Almost Heaven Saunas (AHS). The company's primary products consist of entry-level outdoor and indoor saunas (these typical barrels) manufactured in the US. It’s important to consider the decent portion of business between Harvia and AHS, as the latter had been a Harvia client since 2013. In FY 2017, Harvia’s revenue from North America totaled approximately 3m EUR, of which coming about half through AVS (or 2.5% of its total company sales back then).
Exhibit XXIV - Almost Heaven Saunas
Exhibit XXV gives an overview of the key financials, highlighting the rapid growth in revenues, but no meaningfully positive profitability. To us, it confirmed that in order to be solidly profitable in the sauna business you need to have two things: 1) scale, and 2) a combination of entry-level, mid-priced, and premium offerings.
When thinking about the execution risk for this acquisition, the former CEO Tapio Pajuharju stated that, at the closing, they already knew quite well what the game plan was:
taking immediate action on the purchasing synergies on components and wood material, under the stewardship of George Chesebro who simultaneously became VP of the US operations;
rethinking the existing product offerings with new product launches;
terminating business with one customer/dealer because of too low profitability;
focusing on increasing the average purchase value, by adjusting pricing and targeting medium-range price point. This had gotten traction quite rapidly (a sizable portion of the pricing strategy was already effective at the end of Q1 2019), ahead of expectations.
Consideration Paid
The deal was implemented by an agreement, based on which no compensation was paid to the AHS owners (Mouw family). Instead, Harvia assumed responsibility for the liabilities of the acquired business.
There was a payable at closing of approximately 1.5m USD. Additionally, there was a transfer of liabilities to the tune of 3.1m USD, of which 0.4m USD interest-bearing debt, with the remaining 2.7m USD in ordinary trade payables and some other liabilities to the former holding company of AHS which wasn’t part of the transaction. As such, the total consideration was 4m EUR.
After the closing of the acquisition, Harvia paid 1.03m EUR of assumed liabilities of the AHS business. In our cash flow overview (consideration paid, incl. net debt) for M&A, we’ve assumed that the net financial impact was 2.8m EUR, given that AHS’ trade payables are part of a normal going concern working capital situation and got mixed up in Harvia’s total trade working capital.
Exhibit XXV - The Compounding Tortoise
Post-Acquisition Performance
Assuming AHS’ COGS were 60% at the time of acquisition, Harvia accounted for 32.4% of these. With the intra-group eliminations to sales and COGS (no impact on actual EBITDA), we arrive at 20.6% adjusted EBITDA margin (our estimate, not an officially communicated figure). FY 2019 represented the first full year of AHS being part of the Harvia group, which demonstrates the fast pay-off on the sourcing and pricing management actions taken just after the early January 2019 consolidation.
As shown in exhibit XXVI, the combined EBITDA margin increased by 130 bps in FY19, despite a mix headwind (lower share of control units, sauna heater sales, and more US with stronger growth in entry-level products). However, these mix headwinds were caused by the AHS acquisition.
Breaking the FY19 EBITDA margin for Harvia ex. AHS vs. AHS down, we estimate them at 24-25% and 11-12% respectively. The year-over-year margin improvement for Harvia was roughly 400 bps (driven by new product launches), while AHS came in at +1,250 to +1,350 bps (driven by strong top-line growth leading to operating leverage, and the optimization of sourcing (e.g. on the wood materials).
Exhibit XXVI - The Compounding Tortoise
You probably have noticed the flattish performance for Harvia’s North American business on a stand-alone basis. For FY18, there were no official numbers on which part of the total sales used to be business between Harvia and Almost Heaven. Also, throughout FY18, growth for Harvia in the region slowed as the managers were working on the acquisition.
The sales picture got even more complicated because of some timing-specific accounting. When Harvia’s North America business was still stand-alone, it registered sales to AHS when the goods were exported from its factory in Muurame. Following the acquisition, with AHS becoming part of the Harvia group, sales are now being recorded when they’re sold out of Almost Heaven’s inventory. This makes a ton of sense, but it creates some delay in sales performance and profit generation for Harvia’s Finnish factory doing business in the US via AHS. On the other hand, in FY19, most of the North American business (roughly 90%) came from AHS selling directly to US end customers.
Since FY18, Harvia has continued to expand the US business through cross-sell with its other brands (such as EOS, see below), and increasing production capacity. For instance, during April 2019, it purchased the production and storage facility in Renick (West-Virginia) from the Mouw family for a total of 0.7m EUR. More investments followed later, of which the biggest CAPEX plan was completed during FY21. And in Q1 2024, Harvia purchased a sizable land plot to support future expansion opportunities.
EOS (April 2020)
Business Overview
In March 2020, Harvia announced an 78.6% stake in EOS, a technology leader for professional and premium sauna & spa products. The acquisition complemented Harvia’s professional and premium sauna offering well and strengthened its leading position as a professional global sauna and spa experience brand. Having more exposure to the commercial segment increases sales visibility stemming from replacement (as discussed early).
Based in Driedorf (Germany), EOS is a leading brand in the premium and professional sauna market, backed by over 75 years of industry experience. Its extensive product portfolio includes professional and high-end sauna heaters, gas-powered heaters, control units, steam generators, infrared equipment, and a range of related accessories. With Spatronic, its in-house control unit manufacturer, EOS also possesses strong expertise in electronics.
Exhibit XXVII - EOS
Consideration Paid
Exhibit XXVIII gives an overview of the key financial information, including the hypothetical ROIC for EOS with our estimated EBIT growth from January till April 2020. When taking the FY19 results as the baseline (with the balance sheet items at the end of April 2020), the ROIC (book value) comes in at 28.7%; or an ROIC at historical cost of 22.2%.
Exhibit XXVIII - The Compounding Tortoise
Initially, Harvia acquired 78.6% of EOS and 80% of EOS Russia. The remaining 21.4% for EOS (Germany) was being valued at 9.5m EUR by means of a put/call liability that would be revalued based on the EOS’ performance post closing. The put/call liability was reflected as a reduction in equity attributable to Harvia owners, and an increase in other non-current liabilities. The redemption liability for EOS wasn’t included in the preliminary purchase price allocation.
As Harvia had the majority shareholding, EOS got fully consolidated into Harvia’s numbers. Because of EOS’ strong performance following 2019, the redemption liability got revalued positively. However, the revaluation of put/call debt or earn-outs doesn’t impact the initial goodwill figure. Goodwill is calculated at the time of the acquisition with an annual impairment test.
The revaluation of the put/call debt affects retained earnings/reserves directly via the changes in equity; earn-out revaluations are recorded in the income statement, thereby not affecting the initial goodwill number.
Post-Acquisition Performance
Given EOS’ product (leading player in gas-fired premium heaters) and country mix (relying on Russia and Germany), it shouldn’t come as a big surprise that the external factors of 2022 posed severe headwinds.
Exhibit XXIX - The Compounding Tortoise
There are several puts and takes here. EOS is positioned at the high-end sauna offerings and was able to capitalize on strong US demand in 2022 and 2023, while the energy crisis in Europe (DACH area) and especially the exit from Russia resulted led to a notable reduction in the EBITDA. At the same token, the steam and infrared business held up well during 2022, as these segments cater almost entirely to professional and luxury end-customers (hotels, spa clubs).
Given that we’ve now lapped the tough sales comps, and most likely the peak in interest rates and inflation, we believe the performance for Harvia’s main European markets will gradually normalize over the course of FY24 and FY25.
Kirami (May 2021)
Business Overview
In May 2021, Harvia purchased 100% of the shares of Kirami Oy, which had a stake of 51% in Kirami Ab. The 50% stake in sister-company Metagrupp OÜ was reflected as an investment in associated companies (under the equity method).
Kirami is a family business founded in 2001, and it’s the leading player in still-water hot tubs. Back in 2020/2021, roughly 42% of the sales were destined to exporting with Central-Europe and Scandinavia being the key markets. The rationale behind the transaction was to combine Harvia’s and Kirami’s product offerings to create the ultimate "backyard experience".
Exhibit XXX - Kirami Oy
Consideration Paid
Exhibit XXXI depicts the financial terms of the deal. You’ll notice the fast growth during and just after COVID. We estimate that at the end of 2021, Kirami was at a sales level of 27-28m EUR with approximately 4.2m EUR in EBIT. The NOPAT number used in the ROIC calculated is based on a weighted EBIT of 2m EUR (not the LTM 3.2m EUR at the time of the acquisition).
Initially, Kirami’s probability-weighted earn-out payout (measured at present value) after 3 years was measured at 2.92m EUR (total consideration of 9.92m - 7.00m EUR). Eventually, Harvia ended up paying an earn-out of 2.50m EUR (while the provision at the end of FY22 was valued at 3.74m (undiscounted)).
Exhibit XXXI - The Compounding Tortoise
Post-Acquisition Performance
The performance of Kirami is included in the sauna rooms and Scandinavian hot tubs segment, meaning that the performance difference between the two isn’t easily visible. During 2022, Kirami’s sales essentially collapsed by close to 70% in Finland during Q3, given highly discretionary nature (as the Harvia CEO said during the Q3 2022 call: "it’s not a must for the people"). The dramatic decrease is merely a consequence of the high bar set after COVID given unprecedented pent-up demand.
The first half of 2022 was still quite good (especially Q1), but we argue that this segment is most sensitive to changes in consumer confidence and interest rates. Simultaneously, the installed base isn’t yet large enough to generate replacement sales. Right now, we believe Kirami is on a steady recovery forward with sales being roughly on par with FY20 (and a NOPAT of 1.2m to 1.5m EUR) by year-end. All in all, this acquisition is still at a NOPAT yield (based on enterprise value) of 15-18%.
Other M&A
In August 2021, Harvia acquired Sauna-Eurox, which has a 30-plus year experience in the supplying sauna stones. These are sourced from responsible suppliers within Finland, often derived from valuable by-products of larger stone materials utilized in the construction sector. In 2020, the consolidated revenue from the acquired companies reached approximately EUR 3.2 million. Sauna-Eurox's product range is designed to meet the diverse needs of both consumers and spa professionals. The purchase price was 0.56m EUR (cash flow effect), and we view the acquisition as strategic (vertical integration).
ThermaSol (August 2024)
Business Overview
More recently, Harvia announced the acquisition of the Texas-based ThermaSol. It specializes in steam rooms and steam showers, offering a variety of products such as steam generators, steam and shower heads, digital control units, smart shower components, and accessories. Additionally, the company distributes indoor and outdoor saunas, along with traditional sauna heaters.
Prior to the acquisition, ThermaSol was a customer of Harvia in these product categories. We don’t consider any intracompany activity to be significant. The two are no strangers to each other, given that there were already some preliminary talks about a potential collaboration three years ago.
ThermaSol’s standalone financials are solid with 14.4m to 15.0m USD in revenue and minimal CAPEX intensity (D&A 0.3m USD), thus confirming a mid-to-high-teens percent EBIT, even as new construction activity has been soft over the biennium.
Exhibit XXXII - Harvia
Based on a 60% share of sauna equipment and accessories (with the remaining 40% labour) in the total US market size, ThermaSol most likely has a 15-16% market share in steam saunas. We estimate that, at the end of FY23, Harvia had roughly 25% share in traditional saunas and 10% overall.
If we didn’t get ThermaSol, then there wouldn’t be much left to go after. - CEO Järnefelt
Long story short, the leading position has been cemented, and can now be further enhanced. The ThermaSol acquisition and the scarcity of good deals elsewhere also confirmed our thesis on the challenges many smaller players (2,000 in 2016) face to remain competitive/profitable.
Consideration Paid
Given that there is no detailed information on the purchase price allocation as of yet, we’d summarize the deal as follows:
Harvia acquires 100% of the shares for a total consideration (no earn-outs) of 30.4m USD or 27.9m EUR, subject to the normal closing adjustments.
ThermaSol will start contributing to Harvia’s financials in Q3, beginning in August.
As a result of the transaction, Harvia’s net debt (incl. IFRS-16 lease) will increase from 37.6m EUR at YE 2023 to 64.9m EUR (excl. cash performance in 1H), implying an EV paid for ThermaSol of 27.3m EUR, as such, there’s some acquired cash (0.6m EUR). Of course, there are some moving pieces just before closing an acquisition, so we’ll have to see what the final outcome looks like (shouldn’t differ much).
At 31 December 2023, ThermaSol’s total assets and total liabilities were 9.4m USD and 1.9m USD respectively. This implies an ROIC, pre-synergies, of 23.9% for ThermaSol.
Post-Acquisition Performance
The annual run-rate synergies are projected to be 1.7m EUR by FY2027 (on COGS, cross-sell, shared management team), with one-time costs of 1.4m EUR over FY2024-FY2026 (transaction costs, closing costs (e.g. legal).
As CEO Järnefelt stated:
We see significant potential in, for example, leveraging Harvia’s volume selling capabilities to expand the current steam offering across price points, as well as utilizing ThermaSol’s capabilities in digital offering, such as advanced control units. ThermaSol’s location near Austin also offers us an attractive hub for our commercial and customers operations in the region.
We’re positive about this M&A deal as it brings in several new strategic strengths at a reasonable valuation (18x EV/NOPAT pre-synergies, 12.7x NOPAT post-synergies (50%), with no assumption on organic growth at ThermaSol.
Exhibit XXXIII - Harvia
Part V - Reconciling NOPAT & Organic ROIC
In order to model properly, we have to reconcile our steady-state NOPAT, which is a proxy for underlying free cash flow assuming no growth and assuming the company is being full-equity financed.
We calculate NOPAT as underlying EBITA based on maintenance CAPEX and amortized development costs, after which we subtract normalized taxes (not cash taxes, which can lead to more volatility). In the case of Harvia, we reconcile net operating profit after taxes as follows:
Adjusted EBITDA is the baseline, as we view management’s definition as reasonable (excluding non-recurring transaction, integration, and post-closing expenses for acquisitions, but also extraordinary charges linked to winding down Russian operations).
All non-cash amortization on acquisition-related intangibles should not be subtracted from the adjusted EBITDA figure.
We deduct amortization of capitalized R&D costs of 0.8m EUR in FY23.
In terms of maintenance CAPEX (incl. depreciation on right-of-use assets), we set the figure for FY23 to be between 1.5-2m EUR. Whenever possible, Harvia also upgrades existing production lines, which we view as add-on investments and thus small growth investments that support productivity and improved profitability. The aim of calculating a steady-state NOPAT is to cancel out the impact of any profitability-enhancing initiatives. Hence, we don’t view add-ons as recurring investment needs.
Normalized taxes based on EBITA are defined by the Finnish corporate tax rate (20%), plus any other recurring tax difference (e.g. geographical mix, non-deductible expenses, income that’s not subject to taxation). Prior and just after the IPO (FY17 and FY18), Harvia’s P&L experienced a special tax treatment regarding intra-group interest expense (as discussed above).
Exhibit XXXIV - The Compounding Tortoise
Note: we didn’t calculate a weighted invested capital number due to the 2022 special events in Russia, and the reduction in working capital off exceptionally high levels.
To calculate the historical cost of the assets, we have to add back accumulated depreciation on property, plant and equipment. Aside from that, when a company gets acquired by Harvia (e.g. EOS in FY20 with the purchase price allocation detailed above), the increase in the historical cost of PP&E will be reflected a change in scope of consolidation, but only for the book value of the acquired entity’s assets.
Consequently, there’s no information on the historical book value of the acquired entity’s assets. This is different from, for example, Lifco’s practice (where there’s a breakdown of the historical cost of all assets and booked depreciation).
Therefore, for Harvia, we’ve assumed that the book value at the time of acquisition represented 50% of the historical cost, and we went back to FY15 to make these reconciliations (the first full year after the new Harvia Group structure got established).
Exhibit XXXV - Harvia
After incorporating these adjustments, the above return of 25.2% gives us an idea of the historical cost (excl. any investment cost inflation) of Harvia’s organic invested capital, but on a group level as it’s difficult to parse regional differences out. As discussed above, the US market has experienced significant growth while the domestic and Central-European market normalized after the COVID boom.
This growth dispersion forced Harvia to ship volumes from Muurame to the US, resulting in some lost efficiency (longer lead times). At the same time, Harvia invested quite a bit in additional capacity during FY21, also in Finland, meaning that production capacity is still not fully utilized. This presents upside to the reconciled ROIC (and ROIIC) calculation.
Given the specific accounting for M&A, ROIIC should be measured on the basis of growth in NOPAT and the total cash outlays for all capital investment decisions, as shown in exhibit XXXVI.
Exhibit XXXVI - The Compounding Tortoise
Factoring in these moving pieces, and when looking at the incremental NOPAT per unit of incremental invested capital since FY18, we believe Harvia’s organic ROIIC to be somewhere near 30% to 35% (on a group level). Still, depending on the region and changes in product mix, ROIC is likely to differ. We believe it’s likely that the US region (fixed assets, working capital and work force) is delivering in excess of 40% ROIC, while other more mature markets could be closer to 25%.
Over the past few years, the biggest driver behind the much improved ROI(I)C has been the growth in NOPAT profitability, because of:
more economies of scale (sourcing, leveraging fixed costs, expanding the distribution network (more density));
solid plan for increasing the average purchase value without sacrificing healthy profitability (complete sauna offerings have lower relative profitability than selling individual heater equipment and related components incl. control units);
leveraging existing infrastructure to manufacture saunas very efficiently;
keeping its finger on the pulse of proactive working capital management;
extending its competitive lead (even during FY22 and FY23, Harvia didn’t want to reduce its service levels)
Part VI - Recent Performance & Emerging Trends
Q2 2024 Performance
Going over some of the highlights in Q2 2024.
Revenue up 20.7% to 43.2m EUR; organically, growth amounted to 20.1%. In Q1 2024, Finnish political strikes led to a deferral of shipments to the second quarter (estimated to be 1-2m EUR worth of revenues). No revenues were lost. It’s not uncommon for Harvia to experience some delayed shipments (it also happened in Q1 2018).
Adjusted EBIT was 9.4m EUR or 21.8% of total revenues, up 18%.
Operating free cash flow (according to Harvia’s definition, which is EBITDA - CAPEX - working capital changes) stood at 5.5m EUR with cash conversion dropping to 50.0% (from 96.1% last year when the unwind in working capital was still ongoing).
Growth in North-America and APAC & MEA (used to be called "Other countries") continued, and in fact, growth accelerated on a two-year compounded stack basis. Year-over-year growth turned positive, driven partly by easy comps, very strong growth in emerging sauna markets, and some renewed momentum in some parts of Europe.
Exhibit XXXVII - The Compounding Tortoise
As we look at Harvia’s recent quarters, and compare those to other sectors like pool installations, home improvement, paint stores… Harvia has shown more consistency, while the underlying macro trends are now much more challenging than in mid-late 2022: pricing tailwinds have faded, post-COVID tailwind is gone.
To us, it demonstrates that Harvia was a bit of a victim of its success during COVID, while it’s now showing company-specific strength. As CEO Järnefelt emphasized during the Q2 2024 call, Harvia operates in a very exciting specialty business. In the US, there are roughly 1 million saunas, implying that even as Harvia continues to grow (by a mid-teens percent rate, not the current >40%) its market share, the overall penetration rate will still be quite low (now 1 sauna per 340 people).
When looking at Harvia’s two-year stacks (cumulative growth off 2022 base), North America accelerated sequentially to 64.4% (although we don’t make explicit quarterly estimates, Harvia’s performance came in well ahead of our expectations).
Exhibit XXXIIX - The Compounding Tortoise
Ramping Up SG&A Investments
EBIT growth in Q2 was a bit less than the top-line (18% vs. 20.7%) or a 50 bps in margin contraction, driven by a few factors:
On COGS, gross margin declined 20 bps (there’s likely an impact from higher freight costs on goods that are transported from Muurame, get into Almost Heaven Saunas’ inventory and are then sold on the US and Canadian market).
The ramp-up in strategic investments, and building out the professional footprint
On freight, CEO Järnefelt called out that delivery times for Asia haven’t changed notably. However, we do believe there was a headwind to profitability as it takes time to price it through (freight costs related to sales are recorded under the Sales & Marketing expenses).
Overall, we’re not concerned about slight margin contraction in Q2, as it’s overcompensated for by accelerating sales growth. Harvia has proven its ability to effectively scale up (or down) operations. Management confirmed that if profitability were to drop below 20% in any given quarter (barring M&A that would initially be dilutive), they’ll take immediate actions to correct such drop.
ThermaSol Acquisition
After getting exposure to steam saunas and showers, the question is: what about the opportunities in infrared? We’ve got a comprehensive answer to this one from the CEO (paraphrasing):
Thank you. I’ll take it as a very positive reaction to our ThermaSol acquisition. I fully agree that it’s a great acquisition and that we can deliver strong value by scaling the business up. As you pointed out, it has great profitability and under Harvia’s wings, using the brand for mid-price point in the steam sauna sales (also with direct-to-consumer offerings to bring new dynamics).
On the infrared side: long story short, we’re constantly looking.
We’ve now decided in the short term to prioritize steam saunas, as the organic opportunity is pretty much out of question. When we’ve analyzed the potential deals, there really weren’t many players left. If we didn’t have ThermaSol, then there wouldn’t be many alternatives left. The discussion with ThermaSol started two years ago, which became more vivant 6 months ago, and now we’ve closed the deal. We have ongoing dialogue with many players.
For infrared, there’s more opportunity to grow organically. Unlike in steam, which is driven by the professional recommendations (i.e. building a brand, reputation), infrared is very fast-moving. You can order an infrared cabine (after seeing it on social media), and within two days it’s delivered on your doorstep. Most of the US market is being served by competitors offering Chinese products. We want to market West-Virginia/US made products.
Even over the short term, CEO Järnefelt indicated there’s a lot of room to optimize the ThermaSol’s COGS.
Strategic Growth CAPEX Continue
So far in 2024, Harvia has continued executing its strategic growth initiatives. A notable development includes the purchase of 8.7 hectares of land near its existing production facility in West Virginia, positioning the company for sustained long-term growth. In Q1, total capital expenditures (CAPEX) reached 2.2m EUR, with approximately 0.5m EUR attributed to maintenance, based on historical analysis. North America and Canada remain key growth regions, but Harvia is also seeing strong potential in emerging markets like Australia and India.
Emerging Sauna Markets - Growth in Japan
Japan has emerged as a promising growth market for Harvia, particularly since the company signed an exclusive distribution agreement with Bergman on October 12, 2021. This partnership aims to boost awareness and demand for Harvia’s sauna and spa products among both commercial and consumer customers. In the first year of operations, Bergman expanded its presence with over 20 local representatives and opened 15 showrooms, with an additional 7 in development.
By 2023, the plan was to grow the number of Harvia Sauna & Spa showrooms in Japan to over 40, enhancing the brand's visibility in the market. The joint venture, which focuses on sales and marketing, has recently become fully operational and is expected to further accelerate Harvia’s growth in Japan.
We believe that the APAC-MEA region, including markets like Japan, will provide a significant source of growth for Harvia over the next decade or more.
Part VII - Base Case Valuation Model
Turning to our base valuation model.
Our base case assumptions are shown in exhibit XXXIX. As it is impossible to factor in all optionality, we stick with our common-sense approach of ROIIC, reinvestment rate, and an exit multiple that reflects the underlying business quality and growth prospects beyond the defined 10-year period.
Notes: the expected CAGR is based on a 44.00 EUR entry price. A positive NFP represents net debt, a negative number is net cash. The opening/beginning NFP for FY24 is based on Harvia’s adjusted net debt at the end of FY23.
Exhibit XXXIX - The Compounding Tortoise
Let’s review our input:
Our exit multiple is set at 19x terminal NOPAT, which we view as reasonable considering Harvia’s proven strategy of delivering solidly profitable growth, the industry dynamics, and growth acceleration in emerging sauna markets that’s proven to be sustainable. A 19x multiple represents a de-rating from today’s 24.0x and is based on common-sense: fading top-line growth (from a low-teens percent to HSD) equals lower multiples.
As pointed out above, we argue that the increased ROIIC, faster top-line growth, and recent M&A merit a higher valuation multiple compared to when Harvia IPOed in 2018.
Our revenue growth expectations imply that by FY34, Harvia would command 13-15% market share in the global sauna and spa market (based on equipment, accessories, and sauna room sales, excluding Russia, and excluding labor) vs. approximately 9-10% at the end of FY23.
We expect EBITDA margin to reach 28.9% by FY34, driven by economies of scale, synergies between Harvia and ThermaSol, offset by a mix headwind (ready-made sauna rooms growing faster than heater equipment). As such, we expect the EBITDA margin to remain 80 bps below the all-time high of FY21. There are some puts and takes on the profitability development, and we don’t want to be overly optimistic in terms of operating leverage.
Underlying interest expense excluding changes in the fair value of the swaps is projected to be 2.8m EUR.
We’ve assumed some one-off costs related to the ThermaSol acquisition.
As can be deduced from our valuation model, we expect Harvia’s mid-term high-single-digit organic growth and >30% ROIIC to result in additional cash build-up. 22.4% of our estimated total equity value comes from the excess FCFs (cash flow after WC changes - growth CAPEX) during FY25-FY34. As such, we judge Harvia has the financial scope to continue with bolt-on M&A to complement its existing product and country mix.
Based on the 10.3% CAGR (close to IRR) and the other factors discussed above, we reiterate our positive view on Harvia and maintain our overweight rating (for us, it’s a top 5 holding).
Part VIII - Risks and Uncertainties
Concentration in Distribution Channels
In 2017, Harvia’s largest customer was a retail and wholesale chain operating across the Nordic and Baltic regions, serving both corporate and consumer clients. This partnership, governed by a group-level framework agreement, accounted for approximately 17% of Harvia’s total revenue that year. Having spanned over 30 years, this relationship has been pivotal to Harvia's sales performance. At the time, the five largest customers contributed 32% of the company's overall revenue.
This illustrates the concentration within Harvia's distribution channels, a trend that persists today (e.g., partnerships with Wayfair and Home Depot in the U.S.). In Q1 2024, one of Harvia's key distributors in Sweden initiated a comprehensive reorganization of its retail operations. Management anticipates that this will impact sales for the rest of 2024.
To mitigate distribution channel risk, it's important to consider the scarcity of high-quality sauna and spa manufacturers. Harvia's strong brand equity, superior service, and innovative products are essential drivers of its ongoing success and profitability. By the same token, Harvia continues to extend its distribution channel with existing and new partners.
Consumer Confidence
Economic fluctuations can influence consumers' or contractors' decisions to proceed, delay, or cancel projects involving sauna installations or renovations. Additionally, the purchasing power of end users, such as customers of hotels and fitness centers, affects demand for saunas and related components. The amount these businesses are willing to invest in wellness services is closely tied to consumer interest and financial capacity.
That said, Harvia’s exposure to macroeconomic factors is somewhat mitigated by its focus on premium customers, geographic diversification, and growing global awareness of sauna culture.
Pressure on ROIIC and Cash Flows
The primary risks for Harvia, like many companies, are potential declines in returns on invested capital (ROIIC) and cash flow volatility. In recent years, Harvia has significantly improved its profitability, driven by growth across all regions. However, rising interest rates and a normalization of post-COVID demand have slowed growth in Europe compared to the US, and to a lesser extent, the APAC and MEA regions. For Harvia to exceed market expectations for profitability, it will need to achieve steady, sustainable growth across all regions.
Part IX - Conclusions
In conclusion, Harvia occupies a niche market, a favorable position given the current macroeconomic conditions for consumer discretionary sectors.
Harvia’s Q2 results suggest that the European market may be beginning to recover, while U.S. demand continues to accelerate, despite high interest rates. With the Federal Reserve now cutting rates aggressively, Q3 and Q4 performance will be telling.
In the U.S. alone, the sauna market is estimated at 800m USD, growing at 10-15% annually. Following the ThermaSol acquisition, Harvia holds a 14-15% market share in the U.S. If Harvia doubles its U.S. revenue by FY 2027 and maintains 5% annual growth in other regions, the company could achieve mid-teens percent annual NOPAT growth, coupled with strong cash flow thanks to its high ROIIC. Furthermore, Harvia has unutilized capacity from recent upgrades made during and after COVID.
Is this potential already priced into the stock? We don't believe so. The market seems to be factoring in moderate U.S. growth and stagnation in Europe, while underestimating opportunities in other regions like Japan and Australia, as well as Harvia's impressive ROIIC.
Based on the 10.3% CAGR and the other factors discussed above, we reiterate our positive view on Harvia and maintain our overweight rating (for us, it’s a top 5 holding).
Absolutely wonderful, thank you.
Great artickle!