Orthex Oyj (ORTHEX) Earnings Call Transcript & Summary

Warmly welcome to Orthex Financial Statement Release 2022. My name is Alexander Rosenlew. I'm the CEO of the company, and I will take you through the presentation together with Saara Makela, our CFO; and Hanna Kukkonen, our CMO. Very happy to have you all online. And first of all, Happy International Women's Day. So let's move to the subject. So today, we'll, as usual, give you a short introduction of the company, then we will have an overview of 2022, a reminder of our strategy that hasn't actually changed. We'll look into some major steps in sustainability and then we'll deep dive into the financials. Feel free to put questions in the chat. We are happy to answer those after the presentation. So don't hold back. We'll answer as many as we can at the end. So in brief, Orthex is a leading Nordic producer of everyday household goods. We have 3 factories of our own in the Nordics, 2 in the South of Sweden and 1 close to Helsinki, in Lohja, Finland. And we have sales offices and sales -- own sales people in all the Nordic countries and then in U.K., France and Germany. 90% of what we sell is under our own brands. The strategic brands are SmartStore for storage, GastroMax for kitchen products and Orthex for home and yard products and the rest of the business, and of course, the company name as well. We have a strong focus on sustainability and we are proud to be close to the market, which at least for the European retailers means less transportation emissions and faster reaction times. So if we go into to our mission, it's to improve everyday life. So all our products are practical. They all have a function. They are all there to solve and need. Storage products -- products for home storage of different sizes is our main category with about 64% of the sales, whereas then products for kitchen and food preparation is the second largest product group for us, which is about 23% of sales. And then we have 2 smaller categories, especially in Finland, the home and yard categories is known, and then plant care, all our plant care products, some made of recycled -- consumer recycled plastics, which is about 7% of the sales. So functional award-winning designs and products with a focus on long-lasting. We don't do any single-use products. All of them are designed to last for decades. That in very short the product portfolio. Then if we go into the 2022 highlights, it's the second year on the stock exchange and what a, let's say, strange year 2022 was; a lot of outside influence on our business that we and I think not many other people saw coming. If we look at the sales development, I would say, that given all of the challenges we have and all the changes around us, we are quite happy that we haven't lost any customers. We haven't lost any listings. Having said that, especially in Q4, sales declined in the Nordic and that was driven by a few of our really big major customers that themselves I think limited their inventory levels and basically limited buying towards the end of the year. And that effect was quite big. I will show it later on in the presentation. Then when it comes to Europe, the strategic European growth markets, we are happy to see a growth for the full year and we are happy to see an accelerating growth towards the end of the year. But clearly, the customers' or the retailers' buying behavior has impacted the sales development that we can see. Then when we talk about costs, I think there's no surprise to anyone that the cost inflation has been high. Raw materials in 2022 peaked during the second quarter. Purchased goods, components, transports, energy, all of these have been on exceptionally high levels. And also as an additional issue has been the quite weak Swedish krona that has weakened all through 2022. So we have had to balance between these costs and how much to sell and promotion also between sales price increases and changing conditions throughout the whole year. Having said that, with a very clear focus on our long-term strategy, one could say that the raw material price has been high throughout the year and we have actively worked on a long-term pricing strategy to ensure that the pricing is correct over time and also without 2 big major surprises for our customers or our consumers. So actively working with that and catching up the very fast increasing raw material prices especially. If we look at Q4, sales down by 11.8% and EBITA at EUR 1.6 million. A few highlights here. I think I already said that the Nordics was a bit of the weak spot during Q4 when it comes to sales, and they are clearly 1, 2, 3 major customers limiting their purchasing behavior. Then when we look at the rest of Europe, which to us has been an area of focus and will be so in the future as well, the growth was 14.5% in invoice sales. So we're quite actually happy with that. And also the fact that after corona now, we have had the opportunity to physically meet our customers and show our products. And we have been participating in both customer fairs and bigger fairs, which have been for many customers. On the EBITA side, the adjusted EBITA was EUR 1.6 million. And I think here, maybe a little bit of a view on that. Of course, it's lower than last year, so is sales. But if we look at the adjusted EBITA margin, it's slightly up at 7.9%. So we can see this towards the end of the year that actually the relative profitability is rising. On cash flow side, EUR 0.3 million, not much to mention there other than perhaps the fact that the stock levels when we prepared for the fourth quarter, we thought and believed that there wouldn't be such a big impact from a few customers at the end of the year stopping or limiting buying so much. So we were actually at the end of the year with quite a high stock level in our warehouses. One could say we are prepared to continue growth after the new year. Then if we look at the full year figures 2022, our net sales decreased by 5.2% and EBITA was EUR 5.5 million. And I think I commented on almost all of these numbers already and the reasons behind them as well. If we look at the full year EBITA at EUR 5.5 million compared to EUR 11 million, of course, this is not what we had hoped for going into the year. However, having lived through very strange conditions, especially on the raw material side and done our utmost to defend our positions and not losing customers and so on, I think we are quite happy to put 2022 behind us. On the leverage side, 2.8x compared to 1.7x last year. And then the full year cash flow at EUR 6.2 million compared to EUR 9 million. A small deep dive into the geographies of our sales. And here, I think I mentioned this already. You can clearly see in Q4 here to the left that the Nordics were the weak spot and that's almost the biggest part of the yearly decline actually coming in Q4 from a few Nordic customers. So there's a clear sort of downturn in Nordic sales. Whereas rest of Europe, markets like Germany, France, U.K. and so on, which we call rest of Europe, Switzerland and so on, are actually up at EUR 4.9 million compared to EUR 4.3 million last year. And then rest of the world, small numbers, just 1 or 2 or 3 major customers there. And I think the year in that sense has been a bit tricky overseas. To find something positive here, I would focus on actually the rest of Europe number. And then to find something where we like to see improvement, it's clearly the home market in the Nordic where we believe that we should be able to do more. When we look at the product categories, it's quite obvious that they are not growing and especially the storage one is slightly or is down, one could say. And that's of course an area which we don't like being down. However, we believe and we see that storage is actually -- when we look at the growth internationally outside of the Nordics, it's actually the product group with the biggest traction. So in that sense, storage remains the most important category for us together with of course kitchen as well on an international scale. So maybe a few picks here then. Of course, the storage at EUR 15 million for the quarter and at EUR 55 million for the year and down from EUR 59 million for the year. Moving on and looking at the strategy, which we haven't changed. And it's quite clear to us the ambition we have is to become the #1 brand in the storage product category in Europe and it's meanwhile also strengthening our position as a leading houseware company in the Nordics. So all the action we do are aligned with these 2 overall ambitions. And how it's done? A very, let's say, simplified picture of all the action being done grouped in 3 or 4 categories or boxes. The first step on our growth part is actually to solidify and keep winning in the Nordics. And that is clearly done through sustainability, through innovation, through clear focus on category work. The second box, which we believe in the future and so far also has shown is really important to us is to accelerate the growth on our international markets and especially through key account work and through acquiring new customers. And that's, let's say, during this year has changed in the sense that now we're allowed to participate in fairs. There's no corona restricting customer visits or physical market visits. So we're quite thrilled with the situation that has changed a lot during the period. And then online -- an online retail is clearly a building block as well. So it's a growing channel where of course we want to be participating and where we are putting in quite some efforts to be the #1 partner in our categories to the retail that are focusing on either a multi-channel strategy where they have their e-comm store than those who have pure e-comm stores. And then of course the option of market consolidation of quite a, let's say, segmented and dividing market with many players in the industry. So that will take us to sustainability and Hanna Kukkonen will take you through the following slides.

Thank you, Alexander. So as we're talking about the full year 2022, I wanted to remind you and summarize a little bit the sustainability actions from 2022. So the first half of the year we spent doing a quite extensive materiality assessment to see and align our stakeholders' expectations with our sustainability strategy. And there we got over 500 answers and it was quite an extensive work. And then we spent the second half on refining and updating our sustainability strategy then according to the results from this materiality assessment. In 2022, we also improved our reporting and transparency regarding sustainability. So we were certified as NASDAQ ESG Transparency Partner. Then we disclosed our environmental data in the climate change program. And then in the end of the year, the science-based targets approved our CO2 reduction target. So quite many things regarding the reporting. We also got audited and granted with the ISCC certificate in the Lohja factory and that enabled us to start selling our products with the mass balance approach. And this means that in the production of the raw material, renewable raw material is added to the production. So in September, we started to sell our SmartStore Compact and Compact Clear products with a 20% content of renewable material. And in this case, it's used cooking oil. We also started a significant project to study and research the recycled plastics in order to increase the use of them. And then in the end of the year, we participated a competition of the most sustainable product in Finland and were selected amongst the 11 finalists with our fishing net bucket range. Then during the Q4, as I said, we got approved by the science-based target carbon reductions. But in addition to that, we are -- the climate disclosure project, they published their results and we achieved the B level in the CDP reporting, and that was our target for 2022. So really proud to have reached the target. We also joined forces with UPM Raflatac and introduced the world's first label made of ocean-bound plastic waste. So this was really a cherry on the pie for our fishing net product range to have even a label which is made of ocean plastic waste. We will publish our annual sustainability report in 2 weeks. So you will find much more information about last year and our refined strategy then in 2 weeks. So that was short about sustainability.

The next is finance for 2022. So our net sales declined during the quarter 4 by 11.8%, and total yearly level decline was minus 5.2%. In the Rest of the Europe, we were able to generate growth, and it actually accelerated towards the end of the year. But the Nordic sales declined, and it was driven by some key customers who were limiting the purchases to drive their inventory levels down. Also, the Swedish krona was affecting the figures. It has been weakening compared to last year. And the negative effect on the yearly level was minus 1.5% to the sales, and during the last quarter, it was even up to minus 3%. Then profitability. So quarter 4 adjusted EBITA was EUR 1.6 million compared to last year's EUR 1.8 million. And full year EBITA decreased by 50%, and it was EUR 5.5 million. Raw material prices were on extremely high level, and there were many other factors and cost items affected by inflation, and this EBITA level is clearly a disappointment for us. And we expect it to be temporary. Relative profitability increased during the last quarter, and that gives some positive signs that decrease of raw material prices is starting to be visible in the figures as well as the price increase in FX. And then the chart regarding the raw material price indexes. So plastic raw material price indexes have decreased from the peak levels, but they are still on a high level compared to long-term average prices. And the high price level is visible in our inventory level, which is on a high level currently, and it's something what we are working on during year 2023. Supplier margins have stabilized and now they've been for a couple of quarters already on a stable level. Demand is hard to estimate. So our suppliers don't really have a visibility to demand. So unpredictability is unfortunately still high. We don't have availability issues. We haven't been having lately any issues with the availability, and we expect that to be on a good level also during this year. Then our investments. So in 2021, investment level was high. We did some significant investments to capacity for biggest SmartStore boxes, and now in '22, we are back on a more normal level. So investments were EUR 3.6 million and back to 4% to 5% level of the sales, which we have communicated in our strategy. Net debt at the end of the reporting period was EUR 26 million, and leverage was 2.8x. And leverage is now on a higher level than our long-term targets are. And as said, I mean, we expect this to be a temporary. '22 was quite exceptional years in many ways for us. Then at the end of the year, we also signed a new loan contract. So the previous contract was made in 2020 and it was for 3 years but with a possibility to extend it by 1 plus 1 year. And instead of extending the old contract, we decided to bring new the contract and make a new 3 years contract with a possibility to again extend it by 1 and 1 year. And we also have in our own contract, we have sustainability linked KPIs. That's something that we had also in the previous contract, and they are aligned with our sustainability targets. Then the long-term financial targets. So Board has reevaluated and estimated the targets and the decision is to keep them on the same level, they have been even if currently, we are not on the target level. But as said already before, the expectation is that '22 was an exceptional year and we are back on them. They are going towards more normal levels. The profit was -- net profit was low during year '22. And due to that, Board is proposing a percentage-wise higher dividend to Annual General Meeting. So more than 90%. So per share, it would be EUR 0.11. And that would be distributed in bi-annual, so in May and in October. Then a reminder regarding our financial releases. So the next date for us is on week 12. So we are publishing our annual and sustainability report. And then we have the Annual General Meeting on 18th of April. And there will be a possibility to vote in advance online before the meeting. And the next reporting days are quarter 1 is 17th of May. And I will hand over then to Alexander, who will summarize the year '22.

Now without the mute on, so quite easy to summarize the situation of 2022. I would say, cost inflation high, especially in raw material and especially in the second quarter, affecting the results, and many other costs as well going north. Then the uncertainty in customer purchasing behavior, especially towards the end of the year and especially in the Nordics affected our sales development. And on the positive side, we see an accelerated sales momentum in Europe. So this in very short 2022. And of course, a lot of learnings and a lot of things that we have lived through that hopefully makes us stronger now that we are already a bit into 2023. I think at this stage, before going into the questions, I would like to warmly thank the whole staff of Orthex navigating through the quite difficult times and actually keeping the eyes on the clear strategy we have for the future. So it's been an interesting year, so to speak, but as well, I think a lot of good learnings and most of all, a lot of really great spirit within the company and with the personnel. So thank you for that. So now we come to the part where we will try to answer your questions. And I think Hanna will help out on these ones.

Yes. Thank you. So the first question here is about M&A. So do you have plans for M&A in the near future?

It's a really good question. Of course, we are constantly looking at M&As. However, during times where, especially in 2022, when the market is tricky and the visibility is very low, I think you need to first ensure that you have your own things in the best order. Of course, having said that, we have been looking all the time at opportunities, the market is not that active. I think there are many companies out there with numbers, which are not what they want to show and not with meaning not at multiples where they want to sell. So it's been a tricky year in that sense. But we know more about what's out there than we had before as we have been actively studying all kinds of opportunities.

Thanks. And then about the sustainable raw materials and the question is about that there has been scarcity in the market related to the renewable and recycled raw materials, which could then lead to the increase in the prices. How do you tackle this problem or challenge?

Well, I guess, Hanna, that's maybe one for you, but I can start answering, and that is, so far, we haven't had issues in actually getting raw material. But clearly, when the price overall of raw material is going up, it can affect also the recycled ones. And I would say here, close partnerships with different suppliers is the key to find the best possible ones available and to be able to also change between suppliers, if one of them starts to price in a way which is completely out of range. But maybe you want to continue yourself as well.

Yes, I can add on that, that there's actually a lot happening around the renewable and recycled raw materials, so that they are developing and there are coming new raw materials all the time. And we are also taking part actually in 2 big research projects at the moment to really try to find new solutions and increase the use of these materials. So a lot is happening around this matter at the moment. Okay. Then what is your perception regarding the market share of Orthex? Have you lost or gained market share in the Nordics or in the Rest of Europe?

That's a nice question. I'm happy to answer that. I believe that in the strategic European markets, at least when you go around the stores and you look who is gaining presence in the shelves, I would say we have been gaining market share. Then when we look at the Nordics, I would say that we haven't at least lost market share. That's the most likely answer, we haven't measured it now in detail, but our understanding is that actually the volumes are down, but maybe the market is as much down as we are or even more. So we don't see that we would have lost market share actually.

Okay. Then you mentioned lower purchases from new large Nordic customers. Can you comment how large impact did this have on the Q4 top line? How -- and how long do you expect this destocking to last?

I think it's related to the consumer situation in some of the Nordic countries and perhaps pointing West, where the interest rates have a big impact on housing cost and disposable income, which means that perhaps the consumers is -- are not moving as much as they would. And that leads to an overall destocking and carefulness from a few major retailers, especially West from us, I would say. Of course, we hope that this situation will stabilize over time and that demand will return to normal when it comes from the customers. We're still seeing in many channels that actually the consumer takeoff is not as affected in our product groups because the price points of our products are not extremely high. And they are not the first consumables that the consumer would opt not to buy.

Thanks, Alexander. Then about costs, you mentioned in the market outlook that costs are likely to remain high. What are the main contributors there?

Maybe I can take this one. So currently, inflation is affecting almost all our cost lines. So that is visible. And of course, we are negotiating the prices and doing our best to mitigate the effect. But that's clearly happening, happening that almost all costs compared to before have been on a higher level.

And then about inventory levels, they continue at a high level, taking into account higher material prices, how much extra inventories you had at the end of Q4 and when the situation is expected to normalize?

Well, it's hard to say how much exactly extra inventory it is, I mean, it's high runners. So we were prepared for some campaigns were -- which were [indiscernible] due to the fact that some customers were they're limiting their purchases. So it's not obsolete or not even slow moving, it's the high runners. But of course, we are following it very carefully, and it's one of the key topics for what '23 to get the net working capital on a lower level. It will take some time that the lower raw material prices are visible in the inventory levels as we did the increase in inventory during the times when the prices were on a higher level. So it will take at least 1 quarter when it's visible in stock levels.

Thanks, Saara. Then moving on to investments. So have you had any changes on your investment plans, given slowdown in the market?

I'm happy to actually answer that, and Saara, you can continue on it. But I think we are back to more normal investment levels. We -- the year before, we did some extra investment in capacity when we're growing very high. And I think when the market is slowing down, looking at where to put your money strategically up, it's clear that innovation is something that can drive growth going forward. So looking at the situation we have today, I think we are clearly looking at what kind of new product, what kind of innovation we can bring to the market.

Thank you, Alexander. I think that was all of the questions this time. So do you want to wrap up?

Yes, I can wrap up. And thank you all for listening in. Have a continued good Women's Day. And we are at least prepared and ready for 2023 with a lot of learnings from 2022. So let's push ahead as a strong team at our side of the coin. So thank you so much.