Orthex Oyj (4QU.F) Earnings Call Transcript & Summary

Good morning, and welcome to Orthex's Half Year Financial Report Presentation. With me, I have CFO, Saara Makela; and CSMO (sic) [ CMSO ], Hanna Kukkonen, who will take you through the results and current happenings in the company. My name is Alexander Rosenlew, and I will start the presentation. So first of all, a short introduction for those of you who are not that familiar with our company. We are a leading Nordic housewares company with strong brands and sustainable products. Quality is at the heart of what we are doing, durable products, which makes life easier. We have our own production where we produce almost 90% of our products. And then we have a strong presence throughout Europe with our own sales force and organizations. Three strategic brands, SmartStore for Storage products, GastroMax for Kitchen and then Orthex for Home & Yard and the name of the company. So we're on a mission to make everyday life easier with practical, durable, functional award-winning products that are sustainably produced, long-lasting. We make -- we do a lot of new product. We enjoy bringing novelties to the market, and our aim is that about 10% of our turnover should come from new products. Storage and organizing our homes and helping to organize our homes is the biggest part of our business today, 69% of sales during the period. Kitchen products like food storage, kitchen utensils and those kinds of products are about 20%, and then what we call Home & Garden, flowerpots and all kinds of other usable and good products for the home are about 11% of our sales. So that's a short introduction. Then going into the first half year and what has been going on. So I would say the operating environment is still not that good. Consumers are careful, and this carefulness is also reflected in how the big retailers and our customers are behaving. So there's a lot of cautiousness in the air. Volumes are slightly smaller; commitments are shorter and so on. But this has been the situation for already some time. And hopefully, we will gradually see a more, let's say, consumption-friendly environment going forward. So during this period, in the Nordics, we had some really careful behavior from a few big customers dialing down on campaign volumes, dialing down on buying in products to their warehouses. And that made the Nordic performance a bit slower, especially in the second quarter. Then if we look at the rest of Europe, I think we posted good growth. There's new distribution. There's deeper cooperation with existing big retailers. And there are some, I would say, quite successful new product launches that now are being rolled out to different customers that we already have. Looking at profitability, I think cost was at -- under good control in the second quarter. And we managed despite the -- let's say, the decline in sales in Nordic, we managed to defend the profit margins and actually improve it compared to the same quarter last year. So if we go into the numbers, net sales decreased slightly by 2.3%. But what I'm especially happy about is actually the invoice sales growth in the rest of Europe, which was 22.1%, whereas in the Nordic, as explained, some tough times with a few customers, not lost distribution, but just sort of volumes being very much lower than we had predicted, probably some inventory management from our customers as well there, taking down own inventories being careful. And that resulted in a 7.4% decline in the Nordics. And then the adjusted EBITA from EUR 1.6 million a year ago to EUR 1.7 billion this year and of course, as a percentage, a bit higher. And then cash flow, no drama there according to plans, just below EUR 0.8 million minus on that side. So if we look at the full half year. Net sales still, I mean, decrease -- a decrease of 3.5%. And if we look at the invoice, it's -- invoiced sales is about 3.4%. EBITA, even though we did better in Q2, the first quarter wasn't that strong. So we are still a bit behind last year. And then the margin as well, reflecting the same situation here. If we look at sales by geographies, to the left, you have the first quarter -- sorry, the second quarter and to the right, you have the first half. And here, you can see clearly that the tough times were in Q1 in the Nordics where the sales were just short of EUR 16 million, where there was strong growth in the rest of Europe from EUR 4.2 million to EUR 5.1 million and the Rest of the World being rather flat with very small numbers. So the focus here is clearly on Europe, including the Nordics too. That's our home market. And then if you look at the same thing on a half year basis, we're still a bit behind in the Nordics. Now we actually managed to catch-up what we lost in the first quarter in rest of Europe. So we are almost flat there at EUR 9.5 million in both this year and last year, and a slight growth in the Rest of the World. So if we then look at what this means in terms of product category sales, it's quite clear that the biggest category for Storage, which is also the product category, which is mostly present in Europe, has, let's say, not easier situation, but a different situation, whereas Kitchen and Home & Garden products traditionally still are mostly sold in the Nordics. So usually, when the Nordics are not performing as good as we are not growing, then it's mostly visible in the Kitchen, the Home & Garden categories. And that you can see from these slides in both quarters and half year. Having said that, Home & Garden on a half year level is up a bit from EUR 6 million to EUR 6.5 million in sales. And then Storage, slightly up on the quarter, but slightly behind still on full year. So this is the situation. So the good sales in Europe, of course, mainly Storage brought a growth to the Storage category in the second quarter, whereas, of course, in the Nordics, it was more challenging. Then if we go to the strategy, which is quite straightforward, at least the ambition and that's to become the #1 storage brand in Europe. And I think we have identified the ways of doing it in quite a good way, even though we are at the moment gradually refining the strategy and looking at how to accelerate further. But for now, on, and at the moment, I think this is the best way of describing what we are trying to achieve and will achieve, and that's the European #1 storage brand and then keep growing, keep leading the Nordic houseware market. So the boxes of growth in the Nordics, then [indiscernible] box growth is actually to do very well with the European customers and do very well means increasing distribution, increasing number of stores, increasing how many meters of shelf space we have in each store, et cetera, et cetera. So that's probably one of the biggest opportunities we have. And then we are also quite focused on growing e-com platforms, e-com sales, not our own web shop, but the platform of others where consumers are keenly buying all kinds of products. And then we have the opportunity of consolidation as well. So this is very clear for us how to do it and focusing on innovation, sustainability and the clear category strategy in the 3 categories where we operate. So I'll give over to Hanna at this stage.

Thanks, Alexander. Continuing on sustainability activities during the first half. So we conducted a materiality assessment during the spring. So the last material assessment has been done in 2022. So it was time to redo it. And we did a really thorough questionnaire and assessment asking our key stakeholders, so our customers, consumers and then our employees and suppliers. And the purpose was to then make sure that we really concentrate on the right sustainability topics in our sustainability strategy. And with the help of these results, we are now refining and looking at our sustainability strategy to make sure that it's aligned with the results of the materiality assessment. And then in May, Orthex joined the UN Global Compact. So it's the United Nations initiative to encourage businesses and to adopt a sustainable and socially responsible business practice. And what it means to us that we will -- and we have our strategy -- sustainability strategy aligned according to these principles, and then we will report annually on our progress with these matters. And then moving on to the innovations and novelties. So during the first half, we've launched a lot of new products. related to Storage and Kitchen items. So here are some examples in the picture. If you look from the left to right, first one is SmartStore Compact Access, which is a new product that allows to use the storage base vertically, so you can stack the products on top of each other. And then the next one is SmartStore Compact Storage, a range of 5 different containers that help organizing the drawers. Then the third one is SmartStore Compact Square, a new design for our Square compact range. And then the last one, we have launched a really nice new color for our bio-based kitchen utensils range. So just to mention a few examples of the novelties from this year. And this is very short from me, then I give the word to Saara on financials.

Thank you, Hanna. In general, quarter 2 was a stable quarter for Orthex. And our net sales decreased by 2.3% to EUR 20.5 million compared to last year's EUR 21 million. And the currency some positive effect on the net sales. And in constant currency, sales decline was a bit more. It was minus 4.8%. Despite a very careful consumer behavior, we were able to grow over 20% in the area outside Nordics, and it takes us to par with the last year on year-to-date level on those markets. So overall, the market conditions have remained -- mainly unchanged compared to previous quarter and consumer confidence has remained very low. Credit insurances still are not available for certain customers, and we have made limited sales to some customers outside Nordics. Especially considering this, we can be particularly pleased with the growth in Central Europe. And despite the decline in sales, we were able to slightly increase profitability compared to last year to EUR 1.8 million and EBITA margin increased by 1.1 percentage points. Profitability improvement was driven by efficient cost management. So we've been really careful with the cost in operations and with the fixed costs, and also a slight decrease in raw material prices help with the profitability. On year-to-date level, we are unfortunately still EUR 700,000 below last year in EBITA due to very challenging first quarter of the year. Here, familiar raw material price index graph, it has been stable lately. So during the reporting period, raw material index prices decreased slightly, but fluctuation has been on a very normal level and market has been stable. Geopolitical uncertainty and balancing of the capacity at our suppliers might be affecting the pricing during the coming quarters. Then our investments. Investments during the reporting quarter were mainly related to product novelties and they were actually quite low, only EUR 400,000. This is mainly related to phasing. So we are planning to invest -- do investments still at the coming quarters, we mainly investment focus will be in product novelties, but there will be some safety improvements to the factories. We are, for example, updating the sprinkler systems at the biggest factories during the fall. Then the net debt at the end of the reporting period, net debt was EUR 20 million and leverage 1.4x. So the strong balance sheet and healthy cash flow will places us in an excellent position to be ready for potential strategic investments. Then on next page, we have our long-term financial targets. They've been unchanged since the listing of the company and targets will be reviewed during the strategy process at the end of the year. In sales and profitability, we are currently behind the targets due to challenging market conditions, leverage and dividend payout ratio have been in line with the targets. The second payout of the dividend, so EUR 0.11 we'll pay on the 8th of October. And as a reminder, our next reporting day is on the 13th of November. And now Alexander will summarize the quarter before we go through the questions.

Thanks, Saara. I would say, very short summary. I think the highlight, of course, being the strong growth in Europe as it's been something we have worked hard to achieve. And the other one is a bit counterproductive because the consumers are still careful, which means the customers are still careful and that makes growth a bit tough, and that was especially visible in the Nordics during the second quarter. Otherwise, another quarter we'll push forward and hope for consumers being more on our side in the future. So I forgot to say that we would be very happy for any questions you have, and we'll go through what's already in there, and you can post new questions as well. So Hanna will facilitate the questions, and we'll try to answer the best we can.

Yes. Thank you, Alex. Let's move on to the questions. So let's start with the profitability. So how does Orthex's profitability differ between the Nordics and the rest of Europe on a gross margin and EBIT margin level? Who want to take that?

Well, I can at least first comment on that. I mean we are not sharing openly the customer profitability figures, of course. But transportation costs from our factories to customers Southern Europe is higher. And still, we have a lot more smaller customers in Central Europe than in Nordics. So it differs. But the biggest difference is, I mean, between the campaigns and between the certain products. So customer profitability in general is not the big driver for profitability improvement during the quarter.