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

Good morning, everybody, and welcome to Nilörngruppen's Q2 Interim Report Presentation. And as usual, we will record this presentation and share later on our website. So I hope that is okay with everyone. And together with me today is Maria Fogelström, Nilörngruppen's CFO. So I will start sharing my screen. Yes, Nilörn Q2 presentation and starting up with the financial performance of the quarter. It has been a quarter with ups and downs. So coming back to that a little bit in the reporting here. First of all, the order income was down 1% in the quarter to SEK 205 million and the sales was down 10% to SEK 237 million. It's a big currency effect in the quarter, spanning SEK 24 million or 10%. It's a big impact of the currency effect. And that is, as you probably already know, by this stage that all sales are outside Sweden. We almost -- it was nothing in Swedish krona. Everything else in U.S. dollars, Hong Kong dollars or in euro and other currencies, Turkish lira and so on. But all our invoicing is done outside Sweden. It has been a quite volatile market. We have seen still a comeback on the Outdoor segment going really well, but the Luxury segment is suffering. And for Luxury segment, they are mainly in the packaging the luxury segment, that they can also be seen in the different categories that we are selling. We've also seen that the European clients are a little bit hesitant, especially the clients that are exporting to U.S., due to the tariffs and uncertainty in the market. And some clients are more cautious. That means that they are placing the orders later in the season to be more safe. So we also see a change in the ordering pattern to be more later in the season. We also have had in the quarter a few clients that have gone into administration. So we've been cautious and made provision on that. And all this has been affecting then the operating profit. So this quarter operating profit was SEK 16 million compared to SEK 25.6 million last year same quarter. We continue to doing investments, but I'm coming back to that to show what kind of Nilörn we are building going forward and the strength that gives us in the future. Accumulated numbers. Order income (sic) [ intake ] up 7%, was a really strong order intake in the Q1, as you remember. Sales down 1%, and adjusted for the currency effect, the accumulated sales is up 3%. Operating profit, SEK 39 million versus SEK 48 million. And why it's so big impact in the currency effect is that in the profit and loss, you calculate the currency effect with the average rate. And what happens in the end of Q1 was that the Swedish krona strengthened a lot, but the impact of the Q1 was low due to the way they calculated. It's calculated with an average of -- so even though the Swedish krona strengthened at the end of Q1, the impact was low. But as also mentioned in the Q1, there would be a big impact in the Q2, which we have seen as well. So even though there would be no turnover at all in one quarter, and the whole P&L is recalculated based on the average currency effect of that quarter, and as I mentioned, as all turnover and so on is outside Sweden, that has a big impact when the Swedish krona strengthened. Here's the P&L. And you can see that gross profit is strong -- still strong. The gross profit is a mixture for Nilörn, but I must say that our sourcing operation has done a good job. We set up a global sourcing team since 2020, built up that. That means that we are much stronger now when we have global tenders. Instead of each local sales companies going out and doing the sourcing, now we have a global tender sourcing, so much stronger and that impacting and making sure that we have consistency in pricing and so on with the different sites, but also impacting the gross profit makes the product group and the clients. So product group like packaging and so on has lower margin, and other programs has higher. So it's also a different product mix that affects the gross margin. And then the third one that affects the gross profit or gross margin is own production. The more own production we have, the higher gross margin and, of course, higher investments and so on. So there should be higher margin on that one. And as you know, the big 2 sites we have production is Portugal and Bangladesh, and those are going really well. We can also see that personnel cost has gone up in relation to total sales and that also depends on the own staff that goes in own production here. We increased the staff a lot in Bangladesh, but also in Portugal. We're also going into new countries like Vietnam, where we now have 22 employees, relatively low production so far, but it is to come. And here is, when you're moving, as we are doing now, moving volumes from one country to another, we're moving from China, Hong Kong, into Vietnam and other countries. That takes time also to adjust the cost, because we increase in one country and it takes time until we decrease in other countries. We also employed people now in U.S. So coming back to that also, I think we have seen a really nice trend in U.S., and therefore, it's worth investing more in that to ride on the trend there. We are now 681 staff. So the number of staff has increased. But as I mentioned, the big number of increase in number of employees is in Vietnam and in Bangladesh. Tax rate is 24% for the quarter, and that is depending on the different countries where we make the money. We are in so many countries and some are high tax and some are very low tax. So this is a mixture. And this is booked tax, and at the year-end, we will see the actual tax rate coming up. [ Distribution by ] product group, '24 and '25. And as you can see here, packaging has gone down from 21% to 18%, even though packaging is an area where we spend resources now and we think there is a good potential for Nilörn growing. As you remember, we have now our own packaging manager for the group, and we see big efforts going in here, though the packaging is going down. And the reason why packaging goes down is linked to the luxury market where we have big sales in packaging. And that is not that we have lost any client or anything like that, but it's just that they are overstocked. So we've been told that it will be slow this year for the luxury market, and it will come back 2026. Gross margin, as I mentioned, has gone up. So we see quite strong gross margin, but the operating margin is not that strong. The aim is that we should be back on 10%, 12%. That is the goal. And so we will look into that. We've done some investments, coming back to that later. And so the aim is to be back here at 10%, 12%. Turnover-wise, slightly lower turnover, as you already know now about the numbers, but also here in the graph for the Q2. We can also see the trend that in the past, always Q2 and Q4 was the strongest. Now the trend is that it's even out very much. And that is due to the change of ordering pattern. So it's the seasonal change and that also the quarterly comparison of the operating profit. And here we can say that, I mean, volume is important, volume matters. If the volume goes down, the profit follows with that. So we have the cost now for the different departments and so on. So when the volume comes, we also see a big increase in profit and vice versa. Balance sheet is strong. As you know, we have done -- the dividend this year was quite low -- relatively low compared to what it used to be. And we are now being prepared to doing the investment in Bangladesh. We got now everything formalized to take over the land in Bangladesh, so that will be the next step. So the investment in Bangladesh will start from now on. And the goal is to have the Bangladesh production up and running end of 2026. Also here in the equity has a big impact of the currency translation differences during the year, SEK 28 million almost. That is from -- yes, all the equity we have around in the group. When we convert that into the Swedish krona, we get less than we would get in the past due to the strong Swedish krona. So this is just translation differences. But I just wanted to show you that it has a big impact on a group like Nilörn, where we are in 19 countries international. Key financial indicators. In the bottom here, you can see the number of employees. We are now at 681 from year 2020, where we were 500. So we increased quite a lot. That is, I would say, mainly number of employees is in Bangladesh here. We increased also in Portugal and in other countries as well, but the main is in Bangladesh, and also mentioned like Vietnam. As a summary of what is said in the report is that as predicted in Q1, big currency impact, as we knew that at the end of Q1 that was a big -- the Swedish krona strengthened, but that was not seen in the P&L as much at that time, but that has now come. And volatile market. Luxury is down, but the Outdoor is still strong. Uncertainty due to tariffs, a couple of clients in administration. We don't see -- we still see strong sales in U.S. for U.S. clients, and that's why we spend even more -- doing more investments now in staff there, but we see uncertainty from European clients selling into U.S. Operating margin of 7% in Q2. The goal is, as I mentioned, 10% to 12%. So 7% is below what we are targeting towards. We've done in the quarter cost savings in Turkey. Turkey is a country where we still have a super-high inflation, even though it's coming down, but it's still very high. And then there's a market that we have been suffering and also the whole textile market in Turkey is suffering at the moment. So we decided to size down in Turkey in order to save cost. The concept, and we have seen this and we're building it for the future. It's all about selling a concept. In the past, it was all about selling a label. Now it's so much more about supporting clients in CSR, in compliance, new material for packaging and so on. So it's so much more nowadays than only selling label. So what we see is that the small players have tough in the market and all the big players are gaining. We've done investments to be in the forefront, but it's also, as you can understand, important for us to monitor on the cost levels. And here is some areas where we've done big investments in. Bangladesh factory, as I mentioned, we now signed a contract, and that we'll be starting now to do all the groundwork and architect and so on. So that is really good, and we've reached an agreement. We have taken a long time to go through the agreement for the land, but now we are finally there to be signed within a week or 2. Portugal factory, we're going in for the LEAN production. We're also expanding with more looms and moving out their warehouse to get more space in the factory. So that is also going according to plan. Expanding in U.S. We employed initially 2 more people in U.S., and now this quarter we also employed a third one. We think we find the right people, also catch the momentum there. And we have a momentum in U.S. We said that -- we decided that this is the moment where we should expand. We know that it's not cheap. It's quite expensive in U.S. to expand, but we think the market is huge. So we have so much more to be done there. Sri Lanka, we signed up and just employed persons there to set up. It will be a very small operation in the beginning, but we need to be there to serve our client, client that now going into Sri Lanka as well. The Nilörn:CONNECT. We've done quite big investment in Nilörn:CONNECT. I will just show you a few slides about that. It is the door opener for the client, and it will be supporting clients on the DPP journey. Production is still strong and Nilörn is well equipped to handle both challenges and opportunities. So for us, it's a matter of opening the throttle and also pushing the brakes at the same time, finding where we should invest in. See the time is flying, but I will just mention here for you. I've mentioned this in the past, but I want to make sure that you understand the Nilörn:CONNECT. And we see the 3 different areas. One is the legal compliance where we support the client now, where the client has a challenge and where we can support them. The other one is circular solutions, repair, recycle, to be more sustainable. And the third one is the consumer engagement to drive sales where they can have a loyalty program and acquire new customers through the QR code and so on. So this is an area where we have invested quite a lot in. I think we are there. We don't need to invest that much, but it is for us a really good door opener to be and getting a reason talking to the client. Yes, the financial targets, yes, it's still the 10% to 12% operating margin. We are aiming to come back to that. Good. I see the time is flying, Maria. And do you see -- do we have any questions?

Yes, we have received 2 questions. I think we can take them. The first one is, could you please provide some color on the clients that have entered restructuring? Which segment are they related to and which countries are they from?

Yes. Of course, we don't release any clients' names and so on. It's in the U.K. market, and it's also in Germany. And yes, it's brand owner and retailer.

Yes. And the second question is, does the market momentum for packaging versus other product groups differ?

It differs. And I think here the beauty with the packaging is that we have the client and we are selling very little packaging. Can we be strong here? We're talking to the client and we can help them also with the packaging area. But the momentum in general for packaging is that -- the reason why we suffer for -- packaging was lower is mainly due to the Luxury segment where we have been selling quite a lot of packaging, and that has decreased now in this quarter. Not that we have lost any clients, but it's a slowdown, and we expect that to come back again in 2026. So for us, I think packaging is a nice area for us to expand in. And instead of just chasing new clients, we can also add packaging into that. So that is a good view for us, good momentum, I would say.

Thank you. And as we are running out of time, I think we'll have to leave the questions there.

Very good. Thank you all for listening. Thank you, and see you next quarter. Thank you. Bye.

Thank you.