Orthex Oyj

OMXH:ORTHEX

Earnings Call Transcript 2023-Q1

[Alexander Rosenlew, executive]

Good morning, everyone, and welcome to the Orthex interim report for the first quarter. My name is Alexander Rosenlew, and I have with me Saara Makela, our CFO; and Hanna Kukkonen, our CMO, and we'll take you through the most important things that happened during the first quarter.

So in very short, the plan is to give you an introduction and then go into the relevant details. So Orthex is a leading household company in the Nordics. We take pride in the fact that we produce close to 90% of the product we sell in our own factories under 3 strategic brands SmartStore for storage products; GastroMax for kitchen; and then Orthex for the rest.

And we are -- we're spreading out through Europe. We have our own sales organizations in the U.K., France and Germany and also a growing warehouse operation on the border between Germany and France. So that's in very short who we are today. We're about 300 employees in the company. Then when we look at the product offering, the easiest thing here to mention is that our mission is to make everyday life easier for the consumer.

So all the products are designed to help with something, they all have a clear function and they are all meant to last long new single-use products. And hopefully, they are all so well designed, so you wouldn't throw them away even if they doesn't -- they don't break. So design can also be a sustainability thing because you can keep the products for years and years.

Forerunner in sustainability is our ambition, and we're working hard on that as well. And then, of course, new products is part of the important plan of doing good business. Storage, clearly, the strongest category at the moment, the biggest with 67% of sales and then kitchen be smaller, and home & yard, plant care 5% and 7% of sales. So that's it.

Let's jump into what happened during the first quarter. So January to March, very briefly. One could say that market conditions are still quite tough. And during those conditions, the sales declined slightly in on the top line as a total. But then if you take currency neutral stance, actually, sales were slightly up. And of course, we are happy that our strategy works in terms of sales development and there, the European markets where we have built consistently our presence with own people shows results and shows strong growth during the first quarter.

Of course, one thing that influences that is the fact that now we are actually able to physically meet our potential customers and show our great products to them. So no problems in actually being very active on the market.

In the Nordics, I think we all know that the consumers are under pressure. We have higher costs for the consumers, interest rates are high and many other things that actually influences the inflation are basically slowing down what the consumer is doing and especially in Nordics, we can see that. And that has an impact on our Nordic sales development.

Cost inflation, as said, still high. Energy cost is still high compared to a long-term view. Transport is still quite high maybe not at peak levels, but this influence our results. And the Swedish and Norwegian krone are both weak and that has affected our profitability. So I would say adopting to still quite challenging market conditions during Q1 and especially challenging in the Nordics where we have a strong market position has been the theme of Q1.

Then of course, raw material has a significant role in our profitability. And raw material prices are still on high levels, but they are not anymore on the peak levels we saw some quarters ago.

So active work to adopt and to actually trim everything we do to adapt to the ever-changing conditions and the rising cost has been what we have been very occupied with during Q1.

So if we jump into the numbers, net sales decreased by 0.5 percentage. But in constant currency, net sales, our sales were up 2.5%. Then the invoiced sales decreased by 1.3%. So we did about EUR 21.2 million in sales when it was EUR 21.5 million last year.

And really happy to actually see the good development outside of the Nordics with a growth of up to 37%. So that's, of course, according to our growth strategy. On the EBITDA, the adjusted EBITDA was EUR 2.4 million compared to EUR 1.8 million last year, an improvement in percentage as well to 11.7%.

And the net debt is now at 2.4%. So a slight decline from last quarter and quite in line with our long-term targets. Cash flow positive from operating activities, not much to comment there other than perhaps that we've been able to reduce the inventories a little bit in the company.

So if we look by geography in more detail, the Nordics, you can see that the conditions have been tough. We haven't lost any distribution. We haven't lost any listings, but still, as said, the consumers and the customers are careful at the moment. So that influences the sales development there.

Then in Europe, I think, there for us, it's more of new customers, new distribution into existing customers and so on. And there, our market share is, of course, much smaller where it's possible to actually make growth with good products and good activities and an active approach to building business. And that has been during Q1 successful. And the rest of the world, of course, the comparison is small, rather flat on that one.

Then if you look at the categories, I think it clearly depicts the situation on the market, whereas storage is the spearhead when we sell to markets outside of Europe -- outside of the Nordics, which means that when that area actually develops nicely, it means that the storage category usually is the one that's growing well. So there, we can see a good uplift in storage category sales.

Then regarding kitchen. The Nordic markets are the biggest sort of market for kitchen products. At the moment, of course, we're trying to grow that as well outside of the Nordics. But when the Nordic has tough times, it means usually that kitchen is in a way, more affected than the storage category. Then just a small comment on the 2 smaller categories, they are declining.

And a bit of that could be put to the weather and also a bit of that could be put to actually customers having inventory from last seasonal of flower pods and so on. So it's been a bit cold and it's been a bit fall in the inventories of our customers, but small numbers still there.

This is a nice picture to show you. We finally got the opportunity to be present at fairs throughout Europe, and we had a quite big exposure at the yearly Ambiente fair, which is the biggest fair for us in terms of meeting customers from all over the world. So a good attendance there, it's one of the many highlights during Q1 when it comes to the commercial side of business.

Very happy to be able actually to be there and to meet customers in person and also the fact that corona is not disturbing us anymore when it comes to new customer acquisition.

In terms of strategy, nothing strange nothing changed in a sense on the big lines. It's working well. Our ambition is to become the #1 brand in storage in Europe and then, of course, strengthen our position locally in the Nordics and become even a stronger company in this area of our business.

And the strategy is, I would say, fairly simple. We need to continue to make great products. We need to continue with innovation. We need to continue to show the way in sustainability. And with that, we believe that solid action, we believe that the Nordics can still grow. We believe that the second box here, which is actually the growth throughout Europe, through new customers and existing customers is actually one of the biggest opportunities we have, and we are happy to actually report the growth in Q1, which is reasonable that our efforts are actually turning into the business.

The third box is about e-com selling through both omnichannel, so customers that have both physical stores and then the e-comm channel and then the pure e-comm players like Amazon and so on. We've been dedicating efforts to that one and also working hard to look as good in the virtual stores in the physical stores and clearly an area of growth, which is interesting to us.

And then we have the final opportunity or market consolidation, which is also on the table. But during tough conditions, I think, it's important to focus on your own house and make it really efficient and working well. Of course, at the same time, keeping the eyes open for potential M&A candidates. So that in short on strategy. So I'll now give the word to Hanna Kukkonen, our CMO, who will tell you more about sustainability.

[Hanna Kukkonen, executive]

Thank you, Alexander. A short update on sustainability during the first quarter. So we want to be the forerunner in sustainability in our industry and in a nutshell, how we do it is that we produce long-lasting high-quality products that can be used for years and years and then recycled after the use. We produce our products in our own factories in Finland and Sweden locally and safely.

And then we increased steadily the usage of renewable and recycled materials. We have set a very ambition goal to work towards carbon neutrality in our production by 2030. If we look at the Q1 and the start of the year, what happened, we published our sustainability report for 2022 and some of the most significant milestones from the report is that the science-based target approved on near-term science-based emission reduction targets.

We updated our sustainability strategy, and we also created the road map towards the carbon neutrality. Our emissions Scope 1, 2 and 3 decreased by 23% during '22. And what was especially good was that the relative carbon footprint. So the emissions per produced kilo also went down significantly from 2.5 to 2.2We are also very happy that the result of our employee survey improved from 14.4 to 14.6. And then during the Q1, our Lohja factory ISCC PLUS certificate was renewed, and this means that we can continue to sell more and more products with renewable raw materials by applying the mass balance approach. And the mass balance approach means that the renewable raw material is mixed to the raw material in the raw material production.

Then a few words about our road map towards the carbon neutrality. So our emissions of Scope 1 and 2 emissions are already quite small. So for example, the Scope 2 emissions are already 0, thanks to the renewable energy that we use. So we really now concentrate on the Scope 3 to reduce our emissions and the emissions from the Scope 3 mainly come from our raw materials.

So concentrating on changing to more sustainable raw materials is the key in this road map. And we have different means to do it. So we further adopt the mass balance approach. We developed together with our partners, the plastic recycling technology, and then we're going to concentrate on innovations and new sources of raw materials. So a lot of work ahead of us, but a clear strategy and goal to work. Then I give the word back to Saara.

[Saara Makela, executive]

Thank you. Thank you, Hanna. So reported net sales decreased slightly by 0.5%, but in constant currency sales, sales growth was 2.5%. In the area, Rest of the Europe, both new and existing customers were growing very strongly, and sales increased by more than 7%.

Growth in Europe was mainly driven by storage category and expansion of the product offering in our customers. In the Nordic sales declined, I mean, there's the customer uncertainty continued inflation and weak currencies increased the uncertainty within the customers and consumers. And in Sweden and Norway, some big customers continue limiting their purchasing volumes.

Our EBITDA development was positive and adjusted EBITDA grew from last year's EUR 1.8 million to EUR 2.4 million. Price increasing effect is well visible in the figures. And due to lower sales volumes, we have also had very tight cost control. Also, the cost phasing during the year, I mean, it's not exactly the same as last year. But the biggest single reason affecting the profitability is the raw material prices. On the other hand, weak Swedish krone and Norwegian krone are affecting the profitability negatively.

Next, we have the raw material price index slide. Price indexes have decreased from the highest peak levels. Now there have been a couple of quarters on a stable level. But despite the decline, price indexes are still above the long-term average levels. Currently, there are no availability issues. So availability is good. And it actually seems that demand is rather weak currently and suppliers might be limiting their production level. So uncertainty regarding the price levels continues also -- continued during the quarter and continues also in the future.

Next, the investments, EUR 0.5 million, they are on the same level as last year. And most of the investments were related to product novelties and some capacity increases as well. Net debt was EUR 24.1 million, leverage 2.4, so a slight decline in leverage and it's now just below the target level. The very tough quarter 2 last year is still affecting the rolling EBITDA figure and leverage.

Then the long-term financial targets, they are the same as before. In Nordics, we are currently below target levels in sales, but in strategic markets outside Europe, outside Nordics, growth exceeded targets. Also profitability has increased and leverage is within the target range. Latest dividend decided was percentage-wise quite high. I mean we are communicating that it's more than 50% of the result. Now it was 90%, but in absolute value, it's EUR 0.11 per share. And the first part was distributed in April and the next payout is planned for October.

Then now I'll let Alexander to summarize the quarter.

[Alexander Rosenlew, executive]

Thanks, Saara. Just a short summary here to highlight the 3 main points. So profitability clearly improved. Sales growth in Europe was strong and according to strategy. And then in the Nordics, we've been facing quite a lot of consumer uncertainty and also customer uncertainty in the sense that they don't maybe want to buy as much when the consumer behavior is uncertain. So that's what we are -- what we were living within in Q1.

So at this stage, I hope you have used the chat because we are more than happy to answer some of your questions, and that we will do together with Saara and Hanna. And Hanna if you can help with facilitating the question -- questions, it would be great.

[Hanna Kukkonen, executive]

Yes, there are a few questions in the chat. First about the Nordic market. So do you have any visibility into when certain Nordic retailers will return to normal purchasing matters? And then overall, what is happening in the Nordic market?

[Alexander Rosenlew, executive]

It's a tough question. I mean we can see many of the consumer goods companies that publish their results are also suffering from weak demand in the Nordics.

And I think especially in the countries where loans and living loans like for housing are high, the interests are higher. And I think Sweden is a lot hit by this fact. So the consumer actually has quite a little or less money to buy things. And hopefully, that will change one day, but it's a hard guess for me personally to give you a clear view on where the world economy and the Nordic economy is going and at what pace.

Clearly, we hope that buying will be back to more normal levels. And one thing that actually influenced a lot the consumer was the nervousness with the start of the Ukrainian war. And that's, of course, a bit of news, but still I think so many strange things happened and are happening at the moment on the market. So hard to say and give a clear answer there.

[Hanna Kukkonen, executive]

Continuing on the Nordics, there was just a question about the situation of the distributor stock. So what -- do you have the visibility on the situation of our distributor stocks in the Nordics?

[Alexander Rosenlew, executive]

We get the sell-out numbers, I mean, how much we sell out of the stores from a lot of our customers. And we can, of course, see that and then compare to how much we sell in to the stores or the customers. And in that sense, it's quite straightforward, I think, because things are still moving out of the stores, and our products are moving. They are not so expensive compared to other goods that the consumer buy and they are functional products.

However, I think many of the customers are careful to sit with a lot of stock. And I think the fairly sort of tough conditions 1 year ago and with the seasons last -- I think last spring, a lot of our customers bought a lot of stuff and maybe with all the changes in the economy, those things were still in the warehouse now that when this spring started. So we are hoping for nice weather, so also the flower pots and freezer boxes will start flying out of the shelves.

[Hanna Kukkonen, executive]

Thank you. Then moving on to the other markets. So what is the main growth driver in the rest of Europe currently: growing with existing customers, getting new customers or expanding the product offering?

[Alexander Rosenlew, executive]

That's a great summary of where the main growth comes from, I think, in all 3 parts. So what we need to do here is to actually increase the good cooperation with many of the customers we have managed to start cooperation with increase the number of stores where we are present in those existing customers.

But at the same time, an event like Ambiente in Frankfurt is the place to show and to be seen what we can actually provide to any customer who is interested and we are happy to have new ones on board as well.

[Hanna Kukkonen, executive]

Good. Then about the price increases. So, do you believe you can maintain your increased prices? Or have you seen retailers demanding lower prices?

[Alexander Rosenlew, executive]

Our pricing strategy is a long-term price strategy. So we don't move in extremely fast, let's say, big sort of ups and downs. Our ambition is to be on a long term on the right level. And I think there we are gradually getting to a level which is, again, sustainable. I don't think we have taken up prices too much compared to the situation we have today.

So of course, we follow the situation closely, and hopefully, in this, let's say, raw material pricing at least could be at a stable level. Now we know that the cost inflation is high in many other places. So hopefully, we can keep the price levels. So we don't need to increase that much anymore this year.

[Hanna Kukkonen, executive]

Then about profitability, short question. What is the main reason for good profitability?

[Saara Makela, executive]

Maybe I can take this one. I mean the single biggest thing affecting is the raw material price, which is more on a lower level than last year. But there are other factors like price increases and tight cost control as well. But the single biggest one is raw material price.

[Hanna Kukkonen, executive]

And then we take a couple of more questions about M&A. Are you aware of any of your competitors being active in terms of M&A recently?

[Alexander Rosenlew, executive]

That's a good question. I can't really comment on that one actually. I don't have a clear view of what is actually available information on the market at the moment.

[Hanna Kukkonen, executive]

Yes. Then I think we have asked almost all of the questions, just let me flip through. I think we have answered almost all of the questions now. So thank you.

[Alexander Rosenlew, executive]

Okay. Thank you, Hanna. So that's it for Q1, and we will, of course, be back with the next quarter later on. So have a continued nice day.