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

Good morning, everybody, and welcome to Nilörn Q3 presentation. It will be possible to ask questions through the Q&A. So just write questions there, and we will try to reply to them during or after the presentation here directly after. This presentation will also be recorded. So we will let that be out in our web later on for the one who wants to see it later on as well. And also, except me, there is also Maria Fogelstrom, who is our CFO, also joining this. So she's helping out if there are any questions and so on. But I would start here by sharing the presentation. Just a second. So now we should be here, I think, do you all see the presentation? Good. And we will as normal start with the financial performance and then also make an update later on what we're doing at the moment. The order income was down 21% to SEK 182 million versus SEK 230 million in the quarter, not cumulative in the quarter. It sounds dramatic, but it's also the way we're measuring the order income. I just want to highlight that I mentioned that in the past, but also good for everyone to know. The order income we measure is when we get an order from a brand owner. And what we do then once we got that order, we buy the goods, buy the labels, put them on stock or produce them in-house and put them on stock, then we build up the stock level. And then from the stock, we -- when we got an order from their vendors who are the one who produce the garment, we ship out the labels and invoice. So the order income is actually, first, we get an order income. We measure the order income. That's what the number you see here. We buy the labels, put them on stock and then later on, then it turns out to be shipped out and invoiced to the client and that got the turnover. So when you measure the order income, you also need to take consideration of on the stock level, and that is something that we have worked on quite hard this year. Coming back to that also later in the presentation. Sales is down 7%. If you look at the quarter and adjusted for currency effect, it's down 10%. What we see, if you're looking at the client level, we have different kind of clients. We have clients in the retail sector. We have clients in the luxury segment, and we have clients in the Outdoor and Sports segment. And especially in the Outdoor and Sports segment, if you just list all the clients we have and it's so significant for these clients that they have too much of stock, all our Outdoor and Sports brands have reduced the sales. And talking to them, they think it will come back here in Q2 next year in just general terms. But the Outdoor and Sports client, they consist -- they are around 30% of our total turnover in the group. And if you're looking at them specifically, they are down between 30% and all up to 90%. So a dramatically decrease among the outdoor clients. It's not that we have lost client, but it is dramatic. And the reason for that is during the pandemic, there was a really boom. Everyone want to go out hiking, sporting and so on. So it was a fantastic demand for the garment and the outdoor brands and sports brands produced and demanded to build up stock. And that's what we see now. They're suffering from too high stock level and they're working on reducing the stock and it's still going on. And as I mentioned, we think talking to them that they will come back again in Q2 next year. So it still takes some time for them to reduce stock, but that makes a big impact on us as a group. We can also see that packaging in the group is around 18% now of the turnover. So that has increased and we do more and more packaging. Operating profit, SEK 20.8 million versus SEK 37 million last year. I should also take into consideration last year was an extremely good year. Accumulated here, we had an operating margin of 16%, and we were up accumulated 34%. So we are comparing now this year with extremely good 2022 years. And if you're looking at the operating profit of SEK 20.8 million, that is in line with what we had in 2019. 2019, we had 19.3%, so slightly more than that. So yes, in line with 2019. And also looking at the trend in the quarter, we can see that from July, August to September is getting better and better. And -- but it's quite volatile market. So I cannot say too much about that what's happened in the Q4. But I can just say that in Q3, there was a positive trend during the quarter. Accumulated numbers, order intake is down 24% here. Sales, 10% versus 14% if you adjust for the currency effect. As you all know, the Swedish krona has been very weak. And we are selling in a lot in Asia. There, we have the Hong Kong dollar, U.S. dollar, but we also have the weak Turkish lira. So it's a mixture of currency. And then if you mix that altogether, it ends up with this currency difference of between 10% and 14% currency effect. order income, I mentioned, down 24%. A positive side of that is that we have been working on reducing the stock level, as I mentioned, the way we're measuring the order income. And as you can see from the year-end, we have reduced the stock level now by SEK 30 million, and that's excluding the currency effect, so SEK 30 million. And if you compare that to the same period, the first 9 months 2022, stock increased by SEK 67 million. So it's a big shift here and the reducing stock level, which is good. Operating profit, SEK 53.8 million and almost in line with 2019. And as I mentioned, in 2022, looking at Q3 accumulated numbers, the operating profit was -- margin was 16%. As you can see here, yes, 16.4% here. And now we have 8.1%. And the goal for the group is to have an operating margin set by the Board between 10% to 12%. And that is also where we're coming from in the previous years. We have been here since 2010 around -- between 9%, 10% up to 12%. So what I will say with that is in 2022 was extremely good margins. And you can see in this quarter, a slightly higher operating profit versus the accumulated numbers. Tax-wise, taxes we book here, that is a mixture of different countries where we operate in. So here, the tax rate will be -- we assume here for the full year between 25% to 26%. Tax rates are higher in countries like Bangladesh, India and China and lower in Hong Kong and in Europe. We did -- looking at the cost level here, it's -- the cost has gone up, both in external costs and in personnel costs. Here is a mixture, both you have a currency effect, but also that we have increased costs to meet the high volumes that we had last year. Last year, we had probably too much volume to the organization we had in place. And we have seen that in the past also that it goes in thresholds increased cost and the volume comes and then we have to increase the organization again. We have done some cost cutting now. As we mentioned in the previous quarter, it taken into consideration effect now in Q3, but more in August than in earlier. So -- and that is -- we will see also -- that is due to volumes moving out from China, Hong Kong into other countries where we are in, like in Bangladesh, India and Pakistan. We also see volumes moving to Europe and to Portugal, our factory in Portugal. We are also setting up -- not a factory, but a sourcing and distribution organization in Vietnam, and that will be ready here soon. We start to employ people and the legal entity is up and running. Yes, here, you can see quarterly-wise, gross margin is slightly higher in this quarter. if you compare to previous Q2 and the gross margin here, as I mentioned earlier, that was affected by packaging. Packaging has a lower margin. And so it's a product mix, but also that we, within the group has been working consistently now to reduce the buying prices. Our supplier also suffers or has much lower volume. So that has been a negotiation, and we try to concentrate the volumes now with less suppliers. And so we get the purchasing power out of that. So here is a mixture of both client and product, but also that we are working on reducing the buying -- purchase price. And you can see the operating margin follows here up now in the Q3 of 9.7%. Here is the quarter comparison graph. Here, we have the sales, the turnover. And the dark blue here is 2022 and then the dark gray here is now this year. And as you can see, the dark blue has been very, very much higher here compared to last year. And we -- that was extremely good year, '22, as I mentioned, '23 here, slightly lower. But also I want to mention here in Q4, we had quite tough Q4 last year. So the comparison numbers will not -- will be more and more released. And if you compare to here also the operating profit, you can see here in Q3 2022, very, very strong operating profit and also here in Q4 was much less. And if you're just looking at the 12 months rolling numbers, you're taking these accumulated numbers here, we have the gray and adding on the Q4, we will end up in an operating profit of SEK 68 million. That is just -- that is not a forecast. That is just a pure mathematical saying that if we do the same in Q4 as previous Q4, we will end up in SEK 68 million operating profit. Balance sheet, we already talked about down quite much here in -- during the year from SEK 212 million to SEK 181 million, so down by the SEK 30 million, if you compare with last year, up from SEK 145 million end of 2021 up to SEK 213 million. That was a reflection of the outdoor, especially the outdoor and also some new clients. Cash we have, we have quite a strong balance sheet, strong cash situation. We have quite much cash in some countries. So that's both in operating cash we have in countries like India, Pakistan, Bangladesh and so on. And we, therefore, have some interest-bearing liabilities. We also have cash in Bangladesh. The intention is, as we mentioned in the past, is to build a factory here in Bangladesh. So instead of just taking out the cash and paying tax on that and selling the cash back, we will -- the intention is to use that for the future factory building. That will -- you will not see the effect of that cash going out this year. But most likely and hopefully, we will start with the factory building in Bangladesh next year. And yes, most likely, it takes -- it's a long process to buying land and so on, and we are in the middle of that evaluation of the land at the moment. It takes some time, but hopefully, we can reach a decision and go in the beginning of next year. Financial indicators. We will not go through these in details. I think we touched most of them. We have a net cash or net liability position of SEK 21 million, but that is including the IFRS 16 effect that is SEK 24 million we booked up here. As you probably know that for the lease, especially that our -- we are renting like in Hong Kong and in other countries we are renting that we have booked as a liability and booked that as an asset side. So that has affected this effect. But if you adjust that, we are in a net cash position of like SEK 3 million. Also want to mention the average number of employees has gone down, not much, but slightly. Where we don't see more here is because we are talking about the average number of employees. So we're starting an average from the year-end and the reduction of the employees we have done was done in July. So we will see more of these reducing in the future here, but this is the average number of employees. Just a short from the CSO summary also from the Q3 report. Still large stock for the outdoor brands. And what I mean by large stock of finished goods that for the outdoor brands, they keep on holding stock and they are now selling it out, and there will be -- I think you will see a lot of sales now coming up to the Christmas. We have seen -- I did mention that earlier, but we have a positive development in the luxury segment. We saw that earlier, and that continues that trend. We have some good luxury brands in Italy and in France. They are demanding. But also, I think the beauty with that is that once you get in and become and proving that you're a good supplier, they tend to be very loyal to you. So that is good, but of course, demanding. And I think that fits Nilörn quite well because we are very keen on quality and on service level and on the CSR, especially within the CSR, it's a thing that we are -- so I think we feel well treated within Nilörn. And due to the outdoor sports brand, we have seen a weaker development in the Scandinavian, U.K. and Germany, where we mainly have the clients. I mentioned earlier that we expect the outdoor to normalize during Q2 next year. Our distribution units, we see volumes moving out from China, Hong Kong, and that also means that we need to adjust our organizations and that benefits from -- in other countries like Bangladesh, Pakistan and Portugal, and we also see volumes moving to Vietnam. Turkey is a quite weak market due to the very, very high inflation they have there. And yes, Vietnam, I mentioned already and also mentioned about the operating profit and the decrease in stock level, I talked also about that. We continue to build and focusing very strong on our fundamental within sustainability and CSR. In the past, Nilörn has been, by tradition, extremely good in design, and that has been our core competence. We're moving more and more into the sustainable area. I'll come back to that a little bit more on what we're doing. Packaging is also an area that we are focusing on, building up a packaging organization within Nilörn, sourcing more global sourcing team, not individual countries, but to take care of the big client and working on a global sourcing team. Compliance is an area that we have started 2 years ago, and we will see -- I think we will see more of this. This is client-driven purely, and we will support our clients in this area. And that is also due to all the regulations that we see now in -- especially in Europe in sustainability and CSR and clients here have a tremendous challenge to meet all this, and that's where we see the possibility for Nilörn to be part of that and support our clients and see that as a potential. Material. Also guide our clients in new material. We have a material team finding out and that is mainly for the labeling side, finding out what is sustainable and give them alternative. IT also spends quite much energy on this supporting the organization to build up all this for them to be efficient in their work, they also need support from the IT. So that from just being a pure ERP system, we need really to get out of reports and so on for them to do and measuring with the key performance indicators and so on. So that's an area. I mentioned that last time also about Nilörn: CONNECT, that is solution to help our clients on the journey towards the digital passport. And I have a few slides about that. It is a tremendous demand from Europe and legislation on in the CSR and to meet all this and our clients now struggling within this or not all, but many see this as a huge challenge. So here, we see all from the design, the production distribution and where we see also a market coming up for repair, reuse and recycle where we have collection and yes, so Nilörn, attention here that Nilörn will be part of this supporting our client. That's why we have a system. And this is purely -- this is mainly driven by legal requirements. EU has what they have zero emission of greenhouse gases by 2050 EU Green Deal. And to support that, they have set up a surplus organization to support that. And then we have the digital product passport. That is a structured collection of data that they need to provide, not only about the labeling, but of course, for the whole garment. That is there -- we see Nilörn as being part of that process. We will work together with other companies, but we also see that the strong -- we have a lot of clients around Europe, and we have the label and the QR code. We have the messenger behind that. So through this, this reflects a mobile phone with a QR code. The QR code will be in the garment. And when the end consumers scan the QR code, there will be a lot of information presented to the end consumers about the carbon footprint, certificates they have and production countries and recycling instructions, whatever the brand owner wants to put into this. And we will here be a solution provider for our brands and help them with all this collecting, making -- helping them with the supply chain mapping and be part of this process. And more of this will come in the future. We will present more about that in the near future. Yes. So far, I presented this last time, just to give you an idea of what it could look like when they scan the QR code. Here is the jacket and the information about the jacket and it's up to the brand owner what they want to present. And here can also be a loyalty program where once you bought the jacket, you can go in here, scan the QR code, here can be care instructions. So instead of reading all the labels, you can look into your mobile phone. It can also be information about how to repair, ordering zippers, buttons and so on to repair the jacket. It can also be -- if you want to resell the jacket, there can be information about that. And it can also be once you recycle the jacket or the garment about what material the garment contains. So this, we see Nilörn part of this process as well. As I mentioned in the beginning, the revenue, the goal and set by the Board is to have a growth in Nilörn of excess of 7%, operating margin of at least 10% and a strong balance sheet where net debt should not exceed EBITDA by 2x. Yes, the goal is that to make a satisfied client and satisfy also the investors to see the potential in Nilörn and see that it's a long-term right investment. Good. That was our presentation and see here if we have any questions.

Yes. Thank you for this, Krister. You gave us a lot of good insights and some details behind the figures. So I hope you all appreciate this. We have received some questions, not so many, but the first one is about the order bookings. And as you could see in the report, they seem to have stabilized now as the Q2 numbers came in 9% better than Q2. Do you assess that Q2 and Q3 level order bookings should be maintainable going forward?

Absolutely, absolutely. And I think also I mentioned earlier regarding the outdoor and sports brand here, we will see they coming back again. That's mainly then we are suffering from at the moment. that also can be seen by the stock we are reducing. We're coming down to more healthy levels now. So that is good.

That sounds reasonable. We also had a question about the gross margin and that it was strong, but I think you gave us a good explanation to the strong gross margin in Q3. And finally, we have one question as well about the thoughts on potential price increases and how well you think that they could be received by clients?

Yes. Actually, I don't see that we can make such a big price increase, not in current market. We are working, as I mentioned earlier, that quite hard on reducing the purchasing prices and working harder. We have set up now a global sourcing organization. And it's 2 effects of this. First of all, we need to concentrate our supply base due to the CSRs and to meet the requirements to have a control of supply base. We are coming from a situation where we were extremely decentralized, ending up with too many suppliers. It was impossible to have control of that. And now due to the CSR requirement and to meet all the demand we have here, we need to have control of our supplies more in detail. That's why we need to reduce the number of suppliers. But that also means that we are giving them higher volumes, working more as a partner with them, and that also gives us higher purchasing power and hopefully then a high margin that we have seen the effect of that. We've done a program focusing on our 10 -- the biggest client we have within the group for the different countries, reducing their purchasing price to increase the margin.