Orthex Oyj (ORTHEX) Earnings Call Transcript & Summary

[Audio Gap] report session. Together with me, I have Saara Makela, our CFO; and Hanna Kukkonen, our CMSO. We'll take you through the last quarter and of course, at the same time, the first half of the year. I will start with just a short recap of what we are. We're a European household company with strong brands, strategic brands, SmartStore, GastroMax from Orthex, 3 production facilities where we produce almost 90% of everything we sell. Then in addition to that, we have a strong presence throughout Europe, which we are aiming to make our home market. That in very short about who we are. We make functional products, long-lasting for an enjoyable and organized home. It's key here that the products are usable. They all serve a purpose. In that purpose, the storage category is our biggest range or biggest category under the brand SmartStore. It's about 70% of our sales in the kitchen category, where we also have kitchen storage products. We have baking utensils and whatnot to make the life of the home chef easier. Then we have the last category, which is Home & Garden, 11% of sales. I think the main idea here is to provide products to enjoy in your home that last long, that's part of our sustainability story. We do products that you can enjoy many years and don't have to throw away. The design is nice as well, so you don't get bored of them. We launched a lot of new products, and we are quite happy to to win some awards as well for the nice design of the products. Then if we jump into the result and the second quarter, and I would say it's been an interesting ride. We had at the beginning, a situation where raw material prices had increased sharply. We had a situation where, I would say, demand in the Nordics started to rise. I think the whole quarter was somehow in terms of activity around making sure that we are very sharp and very quick on reacting on the unprecedented rise in raw material prices. That tells quite a lot of the story. We've shown resilience. We've been probably the first or at least among the first to react with price increases. In the Nordics, where our brand and our market position is strong, and we have a very close cooperation with many partners. I think the understanding was there from the beginning that this was something that we had to do. In the Nordics, growth continued very nicely, whereas in Europe, where we are pushing for growth, where we are still a challenger in many places and where campaigns are not necessarily agreed many months in advance, most of the discussions were around price increases, and we had to put some of the initiatives on hold and just get through so we could operate under okay conditions and also ensure that we get the raw material that we need. We were very decisive and yet to say that I'm extremely happy about the efforts that our commercial team made during this period because it's not easy to be extremely quick. We learned from the last time the raw material went up that you have to react fast. I think also good here is the cooperation with raw material suppliers and the good work that our teams has made to ensure that raw material has been available throughout the period. Some nice sales growth in the Nordic helped us, and that also helped to improve the margins a bit. We've been, of course, under these kinds of very special situation, you have to have a good cost control and you have to know exactly what you're doing. I'm I'm fairly happy with the outcome in general with the strong sales growth in the Nordics and then showing good resilience in adapting to extreme increases in raw material prices. If we look at the sales situation, net sales grew by 5.2%. This came mainly from the Nordics where we have as good as a growth as 12% growth traded on increasing prices in rest of Europe and campaigns and rollouts of activities had to wait before we had this in place. This translates into a decline of 10.5% in rest of Europe. But I have to say our strategy remains the same to grow Europe. I think now that we the focus on price increases is behind, we can continue to build our momentum on growing distribution with major retailers in Europe. On the EBITA level, we managed to land at EUR 1.4 million EBITA, which is roughly EUR 300,000 down from last year. There, you can see the resilience regardless of the very high jump in raw material prices. That's a 6.3% margin. In terms of cash flow, [Technical Difficulty] strong cash flow at EUR 1.8 million. If we go into the details here by geography, as I said, Nordic up if we first look at the quarter. Considerable growth in the Nordics in the second quarter, which also takes then the first half of the year into nice growth in the Nordics. Then we had a decline in rest of Europe of around EUR 500,000. Still on a half year level, we are ahead of last year. But of course, we want to accelerate that. Hopefully, we can now concentrate more on growth than on increasing prices. In that sense, a situation which now is good to build on further. In terms of product categories, the storage category, our biggest category grew nicely, and that's the main driver also when we think about increased distribution in Europe, the storage category together with the kitchen storage products and so on are those with good traction. Then the other categories, not much to mention. We have for the first half year, I think, quite a flat situation on kitchen. On Home & Garden, we have a small increase on the half year level -- sorry, small decrease on the half year level. In that sense, we are progressing. We would like to progress faster. When it comes to strategy, not a major change. Our ambition is to be category leader in Europe and the benchmark in quality and practicality with sustainable solutions and especially in the storage category. To do this, we have to build consumer preference. We have to succeed with the big accounts in Europe. We have to accelerate online growth, and we have to work further on our capabilities as a category captain in the Nordics. In addition to this, staying current, launching new products is part of the strategy. Also, of course, since we are operating our own factories, it's quite key that we do it in an efficient way and keep the production park modern. This is the strategy in a very short nutshell. I will now hand over to Hanna Kukkonen.

Thanks, Alexander. Here's a few examples of implementing our strategy. So in some -- as you know, the stores are a very important place for us to build our consumer preference and our brands. There's a lot of things being going on during last quarter, and here's a few examples. These pictures are from France. Here in the left, you see a shelf takeover from competitors, and now it's nicely branded with our products and SmartStore and with a very inspiring pictures and shopping environment. Then in the middle, a picture of a campaign for our latest novelty, SmartStore Module for storing shoes and then an example of the SmartStore [ Track ] campaign that are going on all around Nordics and Europe. Then in the second page, some pictures from Germany, Sweden and Estonia. Left and right, you see a display that we call pallet house. This is a second placement, place or campaign or permanent place that we offer for our customers in shops, and it's also a very good place to communicate and build our brand and sell the products. Then in the middle, a nice campaign example from Sweden for our latest SmartStore Flip food containers. Then going and moving on to the innovations. We launched innovations on novelties 2 times a year in February and September. In Q2, there were no launches of innovations, but we continued to sell in to our customers the latest novelties from -- of the recent novelties from last fall and this spring and with promising and good results. Then we're also preparing for our September launches. Then moving on to sustainability. The most or the nicest thing was winning or getting the Red Dot Winner award for our SmartStore Module range. Earlier this year, we were awarded with the German Design Award. Then in April, we got an even more prestigious award, which is the Red Dot winner, and this will, for sure, help the success of this new launch. That was very quick from me and then moving on to financials and Saara.

Thanks, Hanna. Our net sales during the quarter increased by 5.2% year-on-year, and the growth was driven by the Nordics, where sales grew impressively by 12%. Sales growth in Nordics was supported by favorable foreign exchange rates and price increases had a positive effect in -- especially in Nordics. In constant currency, the total sales growth was 4.3%, so a bit less than 1% less than with the currency effect. Outside the Nordics, the necessary price increasing process unfortunately slowed down the sales growth and as the focus was on price negotiation rather than growth discussion with the customers. Sales declined by 12.9% outside the Nordics during the quarter. We, of course, expect that this is a temporary effect and expect growth to resume. As expected, the raw material prices had effect on our profitability and adjusted EBITA declined by EUR 300,000, but we have learned from the previous peak in raw material prices, and we started the price increases immediately when we saw the effects and the decline was only EUR 300,000 during the quarter. The full effect from the price increases as well as the raw material increases will be visible during the coming quarters. We also had EUR 600,000 of items affecting comparability, which resulted in EBITA, including items affecting comparability to decline to EUR 800,000. Unfortunately, I'm not able to provide further details on these projects here, but these costs were related to strategic projects supporting our long-term objectives. These items affecting comparability are part of the admin costs and excluding the one-off items, fixed costs were very well under control. Then the familiar curve regarding the raw material prices, there was a huge peak during the quarter. The highest peak was reached in May. Since May, the prices have slightly eased and stabilized on a very high level still. It's still uncertain when the markets will return to normal. Demand weakened during the price peak and remained weak and cautious and customers continue to limit their purchasing activity. Then that is the supply challenges we were having in the end of the first quarter of the year. The ongoing tensions in the Middle East continue to create uncertainty and may impact the energy and logistics and raw material supply chains during the coming times. Reduced availability of imports and ongoing logistics constraints in Europe remain as a key risk for us to monitor. Then we have the investments. Investments were EUR 600,000 during the quarter. That's EUR 200,000 higher than last year during quarter 2. Most of the investments were related to product novelty projects. Cumulatively, investments are EUR 1.1 million higher than last year, and that's due to the timing of the investments. Then our net debt, it declined by EUR 4.3 million and was at the end of the quarter, EUR 15.8 million. Our leverage stayed on a very healthy level at 1.1x. Then the long-term financial targets, they are unchanged. Currently, we are on target in the Nordics and very close to targets on total level at 4% growth cumulatively. We were very close to -- we were close to 20% growth after first quarter in the area outside Nordics, but the price increase in negotiations affected the growth initiatives and year-to-date growth declined to plus 1.8% growth outside the Nordics. But as Alex and I already mentioned, I mean, we expect that to be temporary. Profitability is currently affected by the exceptional high raw material prices, and we still have work to do to get to the 18% level. But as raw material cost pressure ease and sales growth resumes, we believe that the target remains achievable also through organic growth. Leverage was 1.1x, so very healthy level and dividend payout is in line with our targets. AGM decided a dividend of EUR 0.23 per share and EUR 0.12 out of that was paid in April and then the second payment of EUR 0.11 will be made in October. Then I'll hand it over to Alexander to summarize the quarter.

Thank you, Saara. Just a short summary. I think now it's quite evident that full focus continues on growing our European sales, of course, not forgetting the Nordics either, but according to strategy and full force, full speed ahead. Then regarding the conditions, still unpredictable what happens in the Middle East and the effects of that. But we need to stay awake all the time and react when and if needed. Then perhaps a small light in consumer behavior, we can see some good retailer reports showing that shoppers are, especially in the Nordics, finally returning to the stores and maybe buying a little bit more. Perhaps there's a small awakening in that. We are hopeful that, I would say, summarizes the presentation, and now we're very happy to take on any questions there might be. So Hanna, if you can help in facilitating that a bit.

Yes. Let's dive into the questions. Let's start with many questions about price increases first. What magnitude of price increases have you implemented in Nordics and rest of Europe? Are you able to tell?

Yes, I can shed some light on that. Of course, with the new hikes or the very high spike in raw material prices, the operating conditions became impossible. We had to react and we had to react fast, and we did it very decisively. Our aim is to be long-term when it comes to pricing. Our estimation was that we should be able to do the correct size of price increase to defend the full year results. Without going into percentages, but it was an overall situation that I think everyone in our business had to face in one way or the other. Therefore, the understanding was there where it was a bit tricky in the beginning was I think we were among the first ones out in Europe. It took a while before retailers actually realized that the situation is critical, and this is something that needs to be done fast.

Yes, exactly. Then you mentioned that the price increase negotiations were affecting the sales growth in Europe. How long will high raw material prices disturb growth initiative in the rest of Europe? What do you think?

That's a tough question, but I'm happy to say that the main part of the negotiations, if not all of them are behind us. There's full focus on looking ahead. Then again, if you look at the price of our products in general, I mean, they are not huge investments for a shopper. If, for example, the price of a storage box increases by EUR 0.50 and you buy a storage box quite seldomly, I don't think that per se should affect the consumer too much in the long run.

Exactly. Yes. Then another difficult question is that given that price increases implemented will gradually offset increased costs, when do you expect to be fully able to compensate for the raw material headwind during this year or next year?

With everything being constant, it's an easy question. But now that the world is changing fast and you don't know how many ships pass through Hormuz and so on, it's a tricky question. But our ambition is to follow it closely. Towards the end of the year, hopefully, we can have the full effect absorbed.

Regarding, by the way, still of these challenges with the Rest of Europe growth. When you paused Rest of Europe growth initiative during the pricing negotiations, did you lose any shelf spaces or listings? Or was it purely deferred new business?