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

Good morning, and welcome to Orthex's Interim Report Presentation for the period January to September. With me, I have Saara Makela, our CFO; and Hanna Kukkonen, our CMSO. I'm Alexander Rosenlew, the CEO of the company. So I'll take you through what has been going on, starting with a short introduction and then jumping into the fresh results that came up this morning at 9:00 Finnish time. So this is repetition for many of you. We are a Nordic houseware company focusing strongly on Europe and growing in Europe and becoming the #1 brand in storage throughout Europe. And this is done by producing in our own factories, which are located in Sweden and Finland and then distributed through our warehouses in the Nordics and then one in Germany. So this very shortly how we are set up today, local presence in the biggest European markets with the highest potential and then, of course, our markets in the Nordic countries. Our mission is to make everyday life easier. So all the products are designed to help you with something in your home. They are timelessly designed, and they are all designed to last tens of years in use. So no single-use products. Storage is our biggest category, helping to organize your things in all kinds of rooms around the home and garages and so on and storage represents about 69% of sales under the brand SmartStore. The Kitchen category is also slightly above storage because there's a lot of food storage products in the kitchen category, which represent about 20% of sales. And then we have the last one, which is Home and Garden, where you can find everything from flower pots to mailboxes and children's products, et cetera. So a big variety of different products that makes everyday life easier and nicer. Functional award-winning designs and of course, since many, many years already, a very strong focus on sustainability and choosing sustainable materials starting from producing quality products that don't break when using them. So going into January and September, I think just in words, sales improved slightly. The market was still, I would say, hampered by quite careful consumer activities and also customers being fairly conservative in terms of offering and action. But having said this, I think the commercial tactics that we have adopted to these conditions worked fairly well, even though investing quite a lot in activities in the store in activating our commercial offering doesn't come for free. So there's been quite a lot of, to say it very bluntly of pushing our goods in front of the consumer in the stores because this is the only way we can ensure sales when consumers are sitting very tight on their wallets. In addition to this, I think quite tight cost control and fairly stable, steady raw material prices, maybe even slightly, slightly declining towards the end of the period, gives us quite a good uplift in profitability. So jumping into the numbers. Net sales grew by 2.5% overall and then rest of Europe grew by 3.3% compared to quite a strong quarter last year. In the Nordics, where I think consumers are, of course, influencing our action the most because our market share in Nordic is so high, we still managed to grow by 2.5%. And the EBITA up to EUR 3.3 million from EUR 2.9 million last year. Still some way to go to reach our long-term targets, but on the right path. And then a fairly stable and good cash flow at EUR 5.9 million, not a major change towards the same period last year. Then if we look at year-to-date numbers, so the full year until the end of Q3, net sales decreased 1.4%. So we managed to close the gap a little bit, but we didn't manage to close it all the way. And it was mostly in Q1 of this year that we were behind in sales for specific reasons. So still some way to go to reach growth in total. And then on invoiced sales level, this means 1.8% decline. So I would say that another quarter, of course, our ambition is to grow a bit faster. But given the conditions that we have seen, we are quite satisfied with at least the Q3 result. And then that, of course, brings the overall performance a bit forward. So there's some catching up to do on the EBITA as well. We're now at EUR 6.8 million when we were at EUR 7.2 million last year. And on the margin percentages, we are getting closer to last year's levels at 10.4%. If we take a look at the geography, even though I've said most of this, I think it's nice to show you pictures as well to the left, the third quarter and to the right, we have then the year-to-date numbers. So there, you can see that both the Nordics grew and the rest of Europe grew. Then a comment on rest of the world where we have one big customer in the U.S. and that customer is not at the moment, doing particularly well. And the overall sentiment in that direction is a bit tough towards the U.S. when thinking about doing business overseas. So I would say the main focus today, which we have is actually on keeping Nordics at a steady, small growth, and then we are looking to further accelerate rest of Europe -- that's the ambition. So I think we can jump the September -- the year-to-date September figures and go into the categories, storage, our flagship, I would say, the one which is opening doors throughout Europe grew quite nicely, both in the Nordics and in Europe. So that's on the positive side. Our campaigns worked well. We were, I would say, more active than ever when it comes to putting product in front of consumers in the stores. And I have a few pictures about that later on in the presentation. On the Kitchen side, however, I think that even though we did campaigns, they were not as successful as last year. And then on the Home & Garden development, worthwhile mentioning is that flower pots made of recycled material performed particularly well during the period. So that in very short terms. Then year-to-date, a bit on the same. So growth in storage, Kitchen, slight decline still. And then Home & Garden, we have a well, 600,000 is a small category. So -- but worthwhile mentioning the -- still the recycled material going well in this category. Takes me to the strategy, which we are still in, let's say, in major parts, committed to, and I would say the most important part in the strategy is the growth in Europe while performing solidly in the Nordics. And the target for us is very clear in Europe. It's to become the #1 storage brand throughout Europe. And then, of course, as an additional building block, we have the e-com business where we are active, shooting photos, making films, investing into being high on the search engines and being a good partner with the e-com channels, the e-comm platforms and also the multichannel players. So progressing nicely as we also gain experience and knowledge in how to operate efficiently in that environment. An additional part, which is, of course, on the agenda for us is actually the market consolidation bit. However, nothing to report at this stage. So very clear category focus, very clear focus on sustainability and then, of course, a high innovation rate to keep our products up to date to launch new relevant products, which Hanna will talk a little bit more about later on. I promised you some in-store pictures. These kinds of exposures in the stores, we are working a lot with, and these actually drive consumer behavior, shopper behavior in the store. When you go in there with your shopping list, it's not necessary that you have boxes or storage or recycling products on that list. But when you walk the eyes of the store, we hope to catch you with your wallet in your guard down and hopefully, you come up with 1 or 2 excellent SmartStore products from your shopping. So there's a lot of innovation going on that we've been doing, getting permanent spacing with in-store materials, building all kinds of shelves and exposures to make shopping both easy and organized with our SmartStore products. So this in very short, some evidence of high pressure in the stores. Hanna, I give it over to you now.

Thanks, Alexander, and thank you for our incredible sales and marketing teams for the active work with the in-store implementation. So very, very active campaigns in the shops during the Q3. So moving on to the sustainability and novelties, things happened also around sustainability in Q3. So we were awarded with the NASDAQ ESG Transparency Partner badge for the fourth year in a row. And then what was especially nice, we got a silver medal in the EcoVadis ESG assessment. So there, we participate the third time a row. And now we can say that we are among the top 10% of companies globally assessed by the EcoVadis. So quite proud of that. Then during the whole year, we have actually continued the active work of putting efforts on novelties, and we launched novelties in 2 launch windows in February and in September. So this quarter, we launched quite a lot of novelties. So here are a few examples. On the left, you can see our new SmartStore Comfort. It's a really nice new stylish storage box or basket range, 2 sizes and 3 colors and a really, really nice matte surface. And then the second one from the left is SmartStore Flip, a new very handy box for storing your dry food, so your rises and flowers and corn flakes and it's very tight. And in addition, you have a really handy lead where you can pour easily the content, so opens and closes easily. And then the 2 pictures on the right-hand side are our SmartStore Module, a new range which helps in storing vertically, so you can stack them on each other. You can use the shelf in between and a very, very practical storage solution, for example, for shoes in the entrance. And very, very good start with all of these products at the moment. And we continue the work with novelties. So now we move on to Saara on the financials.

Thanks a lot, Hanna. Quarter 3 was another stable quarter for Orthex. So net sales increased by 2.5% and were EUR 23.4 million compared to last year's EUR 22.8 million. As Alexander already said, the growth was driven by very active campaigning, and we got also some support from a bit earlier phasing of some campaigns. Currencies had a positive effect on the net sales. And in constant currencies, the net sales growth was a bit lower. It was slightly below 1%. Last year, we achieved a very strong growth of 20% in the area rest of the Europe. And this year, we managed to grow on top of this strong quarter by 3.3%. So even if the growth percentage is not that high, but in absolute value, it's a big quarter for us in the area, rest of the Europe. On the other hand, rest of the world declined by EUR 300,000. That's not the focus area for us, and there are also trade uncertainty in the -- especially in the United States. In general, the conditions are still challenging and growth is a result of very high commercial activation. I mean right now, it's not visible in sales and marketing costs. I mean we haven't been having a lot of media or anything like that, but we've been pushing the campaigns a bit and have been having a bit more aggressive prices in some campaigns. So due to that, the gross margin didn't improve despite the positive raw material effect. Tight cost control on the other hand, is visible on the fixed costs and lower fixed costs were driving the profitability up and our EBITA increased by EUR 0.5 million. There's no drama in the fixed cost. So I mean, nothing sort of non-healthy sales or anything like that. One thing maybe to mention is employee bonuses. We are currently not in line with our sales targets, and we've been decreasing the accruals for employee bonuses, for example. But in general, it comes from many small items. Next, we have the raw material price indexes. Supply has remained good on the market during the reporting period. Index prices have declined slightly. And it seems that the European production capacity is closely matched to the orders, but imports are strengthening the supply currently. Increase in the freight costs might be affecting the prices, but also a stable quarter regarding the raw material prices for us. Investments during the quarter 3 were exceptionally low, only EUR 200,000. We haven't been holding back or put any plans on hold. It is just related to the investment phasing that is more phased to the last quarter of the year. We are finalizing a lot of projects during the quarter 4. Net debt at the end of the reporting period was EUR 14.5 million and leverage was 1.0x. Cash flow has been strong and also the lower investment level is visible in the net cash flow on a year-to-date level. Then we have the long-term targets. There are no changes to the targets. And currently, we are behind in both sales and in adjusted EBITA due to the very challenging market conditions. Leverage was low, as I said already, and the dividend payout has been high. The latest payment was done in October, EUR 0.11. Then the last slide regarding the financials are the reporting dates, which we have just published. So the full year results will be published on the 5th of March next year. And the Annual General Meeting is planned to be on 14th of April. And the annual and sustainability report will be published during the week, which starts on the 16th of March. Otherwise, our quarterly reports are quite much in line with the reporting times during this year. So 7th of May, 18th of August and 5th of November are the dates next year. This was the financials, and Alexander will now summarize the key takeaways from this quarter.

Thank you, Saara. So just to summarize and meanwhile doing that, I remind you that there's a chat where you can place some questions, and we are happy to take them straight after this short summary. The -- I think the Q3 was a lot about strong sales activation on all the markets. And at the same time, we had to do it because still customers and consumers are quite careful. And I think we were fairly successful in the tactics of activating our products, which is shown in the small growth we have and also a small comment on profitability, where I thank everyone involved in our organization for good cautious cost control, not overdoing it, but doing just enough to ensure that we have a good result. So in these words, that's the summary and happy to go to questions and answers. So Hanna, will you help us?

Yes. Let's move to the questions. So if we start with the timing of the campaigns and the Q3, so can you quantify how much the earlier timing of seasonal campaign deliveries boosted your sales in Q3? And does that affect any way Q4?

Yes, I can take that one. I think towards the end of Q3, we had really good deliveries, and it's also -- and always a question mark, where does the month end and when does the next one stop or start. No big comments on future things. But obviously, we've been successful in Q3, and we'll keep on working the best we can to implement our strategy of growth.

Then Saara, you talked about the costs and expenses already. I don't know if there's anything you want to add to this question. So how sustainable is the drop in your Q3 sales and marketing expense and administrative expenses? Are there some one-offs? Or should we expect a lower level going forward?

I think I covered it mostly, but I mean, there are no significant one-offs or sort of unhealthy savings. The focus in campaigning has been more in a price-driven campaign, so not that much sort of media or in-store investments there. Employee bonuses is one thing what is affecting, but it actually comes from very many small, I mean, EUR 20,000 items, the savings compared to last year. So no drama and no expectation that it would be going downwards on the longer-term.

Thanks, Saara. Then let's move on to the commercial strategy. So what does update in your commercial strategy mean in practice? Can you give some concrete examples?

That's a good one. And I think it's really important that you critically always look at how you're performing and what you want to achieve. And in terms of commercial strategy, I believe that we are doing quite many things in the right way, and Europe is still our target #1 to get growth. Then how that growth is achieved and what kind of resources you put behind the different pieces of growth is something that we are looking quite closely at how to organize ourselves, which are the exact targets, which are the exact product groups that are -- or subproduct categories that are in focus. And then, of course, when you've operated for -- actively for, I think, almost 6, 7 years on locally and some of the big European markets, all that learning needs to be accumulated and then you need to refine your doing with the learning you have while learning more and following consumer behavior. So really sort of trying to get the edge of what makes an impact and doing more of that and less of the activities that are not that value creating.

Thanks. Then let's move on to the Kitchen category sales that has been declining. So can you explain a little bit where the decline in the Kitchen category sales comes from?

Well, as I said, we haven't been as successful on the campaigns on the Kitchen category as we have before or the year before in the comparison period. And at the same time, the kitchen category weight is the highest in the Nordic countries. And as we know, the Nordics from a growth perspective for us has been perhaps more challenging than Europe. So when there are tough times in the Nordics, it usually hits the kitchen category more than the storage category. So that could be one of the reasons.

Yes.