Nilörngruppen AB (publ) (NILB) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to the Nilörn Q2 presentation. Just for information, we will record this presentation. I know that we have a quite tough competition as it's a lot of companies reporting today. I read somewhere that this is among the most intense days during the summer of reporting. And so we'll try to keep it short, so you get time for other things as well. But I will start here by sharing my screen, and then we go through. And then as usual, if there are any questions and so on, we can take them later on. Also, I will start with the financial performance, discuss and talk about that. And then in the end, I will also highlight some tasks that we are focusing on at the moment. Order income was down 32% in the quarter and the sales 14% and excluding currency effects, 18%. The currency effect is a mixture of the different countries. You know all that the Swedish krona has been quite weak. And we -- but we are also in countries where we have even weaker currency like in Turkey and so on. So this is a mixture of all this consolidated into the Swedish krona that makes this. I also want to highlight the order income. It sounds dramatic. I'm not that concerned about the order income. The way we measure the order income is that once -- just to give you an example, we get an order from an example of an outdoor brand, we buy that labels, we put them on stock. And so far, once we buy these labels, it's counted as an order income. And once these labels goes out from our warehouse, that is then turned into turnover. So first order income is when we are buying the labels, then sales comes when we are delivering the labels out from stock. And also knowing that we -- what we faced here in -- during the pandemic is especially the outdoor and the sports brands had a fantastic development, and they ended up and ordering too much of the end consumer stock. And that's what we are seeing now and that we have quite much stock. But that also means that once they start ordering again or buying again, we have the labels on stock. So we will deliver out. And our goal is now, as I mentioned also in Q1, is to decrease the stock level in the group. So that will turn into -- generate sales, but not necessarily any order income in the beginning. So I think it's unique for Nilörn, maybe to measure it this way, but it's also important for you to understand the way we measure the order income is that when we place the order, and you can say, assume that we don't get any order income at all, 0, we will still be able to deliver because we have all the stock. So that will still generate sales. So in order for us to come down with the stock level, we will see sales, but less order income. And you can also question then why are you sitting with such a high stock level. That is -- I mean, that is a function of our client. We order goods into stock when our clients based on their forecast and most clients have guaranteed the stock level. And as Nilörn, all the goods we have on stock -- almost all goods we have on stock, except on raw material and so on, is client unique. They are branded with the clients' names on. And that is, in most cases, guaranteed by the brand owner in Europe here. So there is -- we've also proven that in history that the risk in our stock level is very low as long as the brand owner survives because they have normally guaranteed the stock level. So just for you to have an understanding about the order income. Sales went down, yes. And that what we have seen here is, as I mentioned and also especially the outdoor, the brands and the retail sports brands and that also affects our main markets where we are strong in these segments. It's Scandinavian, it's Germany and the U.K. And we expect and hope that we will see some relief here during the autumn side. It's too early to say exactly how and when their stock level will be a normal level and they will start ordering again. We see that for -- especially for some sports retail now they're coming back. Outdoor seems to me just looking what happens here, it's a little bit more slow. But we also know that we -- as a group, we have many fantastic brands with -- in outdoor. So I'm sure they will come back sooner or later. Also, as we mentioned in Q1, we have in our luxury segment and that trend is our friend there. So we continue developing well there. Italy, France and also Spain and to some extent, also U.S. is quite small numbers, but it's a good development. And I think we have done a good job, and we are into some really nice brands in this segment. And that is -- that also means that we are -- the big market like Germany, Sweden and U.K. is suffering, but at the same time, the small countries that we traditionally have been very small in, Italy, France, Spain are growing, which makes us as a group more balanced. The accumulated numbers I don't know what so much to say about this. We are looking here, we are on high sales levels. But if you compare with 2019, we are almost on the same level operating profit-wise. And then we will see how it looks at the autumn side. We've done a cost savings program. I'm coming back to that a little bit later as well. Sales we talked about already. The gross profit and the gross margin is down in the quarter. That is also related to the product mix. And we've been selling more packaging this quarter versus same quarter last year. That reflects in this margin. So I will also say that in the end of Q1, we had a very strong trend, January, February, March going up. And -- but I would say that trend here in Q2 is very volatile. It go up and down, up and down. So it's not really a trend, I would say, more volatile market. External cost has gone up in personnel costs. So here, we are reducing staff now. We launched and doing that here. We assume the cost taken here in this quarter is approximately SEK 2.3 million for redundancies and that has mainly affected our operation in Hong Kong, Turkey, but also, to some extent on the headquarter here in Europe. We have not touched sales. We think sales is the engine. We are very keen to keep our salespeople. And also in other areas that we now started to have built up a big fantastic team in sustainability and CSR and all these compliance, et cetera, we -- they are untouched. And we have no intention to moving them around either. We want to be strong. Operating revenue, most of this, I think it's like SEK 6 million is from currency and operating cost here is also 100% currency related. Net financial item has gone up. And here -- also related to the currency. We -- here is -- we hedge all the borrowings and funding within the group in the different currency, except in Turkey. So this is mainly -- except the pure interest cost here is, I think it's slightly SEK 2 million here that belongs to the currency effect in the Turkish lira. Tax rate here, 27%. It's slightly higher than in Q1, but that is also a matter of -- as we are quite in many countries, it also depending on what -- in what countries we are making the money. So different tax rate, different countries makes a different consolidated tax rate. Yes. We have as a goal in the group to have an operating profit between 10% to 12%. Here, we're down to 7%. We're hoping that now we will see the volumes coming back and also the cost savings program take into account. Yes. I think we touched upon most of this already. But here is quarter-by-quarter, you can see. So I would say that pandemic here slow after pandemic, post pandemic, we had a really strong, especially 2022. And now we're building up stock levels and so on for the outdoor. So we -- that's what the effect we see now. It's quite hard to predict the autumn side, but I think -- and what I hear is especially the nice brands we have, so they will -- I'm sure they will come back. A graph explains the same thing. Q1 last year is very strong. Q2 last year, extremely strong. Q3 and Q4 less strong. So we got more relaxed or what do we say, not that challenged comparison numbers going forward. That can be seen here also in the profitability that Q2 last year was extremely strong. Balance sheet. Inventory level, we have now worked on that. It's decreased here if you compare to December by SEK 20 million. And if you're looking at last year, the same period, we increased actually the stock level by SEK 60 million. So here, increased by SEK 60 million here, decreased by SEK 20 million, which is good. I mean this is needed in the group. What is the optimal stock level, we should go down further and maybe around SEK 160 million, I am not sure, depending on the client we have, of course. Equity level is strong. Yes, a little bit about the key financial numbers. These here, number of employees is the average. And what we've now done is just recently now start to reduce. It will affect approximately 30 employees in the group, but this is counted as average. You will not see that here in the number at the moment, not end of June at least. Hopefully, we will see some reduction, but it is average numbers, so it takes some time. Yes. volatile market, we mentioned that, but also, I think it's here is going very rapidly up and down. We talked about the stock of finished goods. I think -- hope and see a release on this. We see a positive development in luxury segment. And our distribution units, the one that we see the volumes moving out from China, Hong Kong and with the benefit of Bangladesh, Pakistan and Portugal. And this is also the reason why we are here cutting costs. Turkey is also suffering due to the weak -- due to the high inflation. Also, we see that is not Nilörn that suffer. If you look into our suppliers that is supplying also to our competitors and in the market, they are all skimming for more volumes. They're all suffering at the moment. So that's why I think once the consumer starts to spend again, we will see the volumes coming up. Bangladesh, we also expressed earlier that we will look into a new factory here. That's a long project. It will not be ready until probably end of 2024. We have identified some land -- or our people in the Bangladesh identified some land. So that is in process now. We have not closed any deal for land, but that is in the process. Portugal, we have also now done a negotiation with some land that we will take next step. And the first step here is to buy the land in Portugal, and then there will be a project of expanding the existing factory into that land. Vietnam, we have employed a lady that will be our country manager working with setting up Nilörn in Vietnam. That will be ready during the autumn time to set the local warehouse and sourcing and so on. The stock level I already mentioned, we have done a cost savings program of SEK 50 million on a yearly basis. That is mainly from Hong Kong and Turkey, but that also consists of -- we will do more consolidated shipments to Europe, negotiated freight prices, also from our supply side, decrease the purchase price. We have a really strong team here in sourcing now working very systematically with this. Bally Labels acquisition we made at year-end contributed by SEK 2.4 million turnover in the quarter and a loss of SEK 300,000 in Q2 and accumulated was, yes, SEK 48 million and SEK 0.9 million, sorry. Yes, we continue our journey and to be really strong in the different -- as I mentioned, also in the previous presentation here in all these areas. We see the sourcing side, we're working very much differently now than we've done in the past, more centralized to be more partner with our suppliers and also to be able to push and that is also part of the CSR because we cannot work with too many suppliers. We need -- you lose control. So you need to concentrate on that. And compliance is -- also we have a department in the group now helping our client in compliance. This is also the CSR-driven because we see the demand from the different countries in Europe like Spain now we see for plastic, Norway, we see and all different countries. this is a jungle for our client. And we said that here, we see an area. So we want to be -- support our clients because it is on the labels that this will also be branded or information should be included in this. So we -- this is part of the package we offer to our clients, support them with this. And that material to be sustainable material give them opportunities. And then it's also -- here's also a concept we have developed what we call Nilörn:CONNECT. That is a solution to help our customers on the journey for this DPP or digital product passport that is coming now in Europe. So it's a huge demand for our client to fulfill all this, and we see this as an opportunity for Nilörn to be part of and support our clients in this area. This is what we are now selling. This is part of Nilörn:CONNECT, part of -- as end consumer, you receive this QR code, you scan that, you get information about -- the example here. But that is -- the information you see here is up to the brand owners, what they publish or choose to publish. And this is also the Nilörn:CONNECT side that we will launch -- have a here basic solution, and then we have add-ons for our brands in the different options here. Yes. As I mentioned, the operating margin, at least 10%. We said 10% to 12% is -- so we -- that is the goal, even though we are on 7% at the moment this year. And yes. I see it's already soon 20 past. So if you have any questions that you have.

We have received one question, and it is about the investments in the digital product offering. If this will change the growth and margin dynamics of the overall business?

I mean, it's very, very early to say. I think this is an opportunity for us to grow further. I think there will be very -- from just being a label supplier that we have been in the past, we've now taken the step to be a solution provider to be covering much, much wider range and much more connected to the client. And I think this will be some difference between the major suppliers and small suppliers. It will be difficult for everyone to join this journey. And so it's -- there's a rapidly development also from the demand from all the countries, CSR, and European Union and so on. So I think we -- doing this right is a good opportunity for us.

Yes, I agree. And that's pretty much all of the questions we got and considering time.

It's perfect. Thank you very much, and thank you for listening. Have a great weekend and a great summer and see you again after the Q3. Thank you. Bye.

Bye.