Suominen Oyj (SUY1V) Earnings Call Transcript & Summary

Good day, and welcome to Suominen's Q3 Interim Report Publication. My name is Emilia Peltola, and I'm heading Suominen's Communications and Investor Relations. Today, our President and CEO, Petri Helsky; and CFO, Toni Tamminen will present the results. And after the presentation, there is time for questions. So Petri, please. Floor is yours.

Thank you, and good morning, everyone, and welcome to Suominen's result briefing. Our Q3 was poor, as we had expected. Net sales reached EUR 98.7 million, which is, of course, clearly below the comparison period. And similarly, the EBITDA reached only EUR 4.2 million comparing to EUR 18 million in the comparison period. And of course, even the cash flow then remained for reaching minus EUR 8.9 million. And the reasons for the poor performance were really the inventory logjam that was hitting the entire supply chain of nonwovens, especially in the U.S., but also to some degree in Europe. And additionally, also, we were still impacted by the increasing raw material costs, for which our own pricing, of course, is catching up with a lag, especially with these mechanisms that we have. The majority of our business locked in. There is then this time lag that we have been discussing also in the past. Toni, if you then cover the figures a bit more in detail.

Thank you. Good morning also from my behalf. So as Petri commented, sales decreased almost by 15%, reaching EUR 99 million. Currencies did not anymore have a major impact to the sales or result as we shall see. If you remember, our key currency driver is the USD to euro rate. And that the USD reduced in value in the second and third quarter of last year. So now we are more or less on the same level. And really, as Petri said, the reason for the decrease in sales both versus the comparison period and Q2 was decrease in volume. Sales prices increased following the raw materials. But as Petri said, there is always a lag and the volume drop was more significant than what the price has increased. One thing to be happy about in the sale -- on the sales front is this sales of new products, so that continued on a very good level, above 25% of our total net sales. Then if we look at the results, which of course, was very disappointing. Our EBITDA was EUR 4.2 million, again, negligible impact from currencies. And again, as Petri said, 2 main drivers in the result drop. First of all, the decrease in volumes and as in all heavy industry, when your volumes decrease, you'll get unabsorbed fixed cost and that has a significant impact to the result. Also, we have now the full impact of the very significant raw material price increases that we had in the first half. So one could say that due to the lags then in production and our own actions, we did not yet have the full impact in Q2. Now we did. And during the quarter, even if the pace of the raw material price increases has slowed down quite a bit, so the material prices continue to increase even during Q3. Sales prices, as said, also increased, but due to these lags, not enough to compensate for the full cost increase. Obviously, when you have this kind of a volume drop, you then meet -- do everything you can to mitigate, and we also looked at all kinds of various cost-saving opportunities, both in production, but also in other fixed costs. This could support the result and mitigate the impacts from the lower volumes, higher raw material costs, but there is only so much you can do in this kind of a time frame. Perhaps one thing to comment on then on the full year, if you please move back to the previous slide, that still our year-to-date EBITDA is now at EUR 38 million. So last year, of course, was the best ever in Suominen's history. And even with a weak Q3, we are still heading towards one of the best ever EBITDA years for Suominen. If you look at the full profit and loss statement, it is really the top rows that are causing the drop. So lower sales, cost of goods sold hit by both the raw material cost and of course, then, in a sense, unabsorbed fixed costs, leading to a decline in gross profit. But below the gross profit, I would say that our fixed costs very much under control even below last year. Not too much to then comment on the financial items or taxes. Cash flow also weak, negative, minus EUR 8.9 million. Two main drivers there. We had more cash tied up in working capital. And in practice, this was due to lower payables. If you remember, our inventories, especially raw material inventories, increased already during Q2. Now with the drop in volumes, obviously, we also make changes to our purchasing. So purchases went down and hence, when you pay that vendor invoices and purchases go down, you have lower payables, and as a result, hit from that net working capital. And obviously, the result was weaker than in the comparison period, so that hit Q3 as well. So I think that's about the numbers.

Very good. Thanks, Toni. Some positive developments that we had in the quarter, these investment projects that we have been running, the upgrade and restart of this production line in Cressa, in Italy, that came to its completion. So the project went very well, and we run the projects, first of all, in budget and a bit even ahead of time it was completed. We are very happy with the outcome. And also the 2 other investment projects that we have, another one in Italy and the one in the U.S., they have been proceeding very well as well, and they will be finalized before the end of the year. And the -- one can say, for example, about this other investment project that is near its completion, that we have already been able to run samples on that line, which we have been then shipping to our customers. And the feedback that we have received has been very good when it comes to these new products. Then a very positive thing when it comes to our sustainability efforts is that we are shifting entirely to fossil-free electricity in all of our European plants during this year. And this will have, of course, a significant impact on our carbon footprint. And we have been launching 13 new sustainable products during this year, so far. And there, our target for this strategic period is to launch 10 new sustainable products a year. So on that front, we are even ahead of the plan for the current year. Then what comes to the outlook, we kept the outlook as such unchanged, but we thought that because of the very turbulent ride and the huge drop in Q3, we thought that we ought to give some more insight into the full year results. And therefore, we came with a bit of more detail and added the range now that we believe that our comparable EBITDA will land between EUR 47 million and EUR 53 million for the current year. In 2020, the comparable EBITDA, as we saw from Toni's figures, was EUR 60.9 million.

Okay. Thank you, Petri and Toni. And now it is time for questions. If we start with the questions from the lines. So operator, do we have any questions?

[Operator Instructions] And we have our first question from Joonas Ilvonen from [ Regalik ] (sic) [ Evli ].

This is Joonas Ilvonen from Evli. I have a question about the current nonvolume's pricing outlook. So I think raw material prices, they remained relatively flat in Q3, at least from -- compared to the situation in Q2. And if we just assume that raw material prices will remain flat quarter-on-quarter in Q4, I mean, obviously, your pricing will adjust upwards in Q4, but if we assume that the raw material prices stable, they will remain pretty flat in Q4 quarter-on-quarter, would you say that there's still some catching up to do in your pricing when you go into Q1?

You are already in Q1.

Yes. Yes. First of all, I think it's -- Toni was mentioning that we saw still some raw material increases in Q3. As Toni said, the pace of the increase has slowed down, but nevertheless, they were still moving upwards. Now when we look at Q4, it's a bit of a mixed bag, some raw materials we expect them to slightly come down, whilst others are still increasing. So it's -- before we are in Q1, we'll see. But typically, with the lag, and I would say, with our raw material portfolio, we believe that the -- but first of all, as you said, with the way our pricing works, yes, the prices will be higher for Q4 versus Q3 due to this raw material development so far. And then we'll see, of course, where we finally land for the Q4 total portfolio of our raw materials. But it is likely that the raw materials are still slightly on the way upwards in total for us in Q4.

Yes, as a general comment, of course, we will have catching up to do so as long as the raw materials continue to increase. And then when they start to decrease, that is then when their balance tilt, so to say, in our favor.

All right. Maybe one question about Europe. So you say that the situation in U.S. is normalizing and you didn't see that much, these supply chain issues in Europe before. And any comments on the situation in Europe that -- has there been any kind of -- any sort of problems at least when I look at the European revenue, it doesn't seem to be -- I mean, it was pretty much as I expected.

Yes. As we have said, we saw some, of course, this kind of inventory situation, logjams also affecting Europe, but less -- much less than in the U.S. And therefore, Q4 for Europe looks to be, again, already higher in demand. So the recovery, therefore, is already quicker in Europe than in U.S. as well. But perhaps to add a bit color into this U.S. situation. There, we, of course, have the general logjam situation. But of course, it varies a bit, customer by customer. And we can clearly see that also in the U.S. for some customers, the recovery is already doing very well on a good pace, whilst for some other customers, they still suffer more from this logjam.

So we have another question from Harri Taittonen from Nordea.

Yes. On then the sort of destocking, it will be just interesting to hear your thoughts and color on what happened in North America? How the sort of destocking was that quick? And how did it happen that it was over or sort of turned -- seems to have turned to better also so quick? What kind of products were kind of jamming the sort of the supply chain? And how can we know that it's now out of the way?

Yes. I think that we've -- there's, of course, quite a bit of even published material around this from our customers, and we, of course, have then had plenty of discussions -- further discussions with our customers about this. And we spoke about this at the last quarterly result publication as well, that it was -- the main reason for the logjam was really the huge amount of imported products, which by the industry had been called now junk products, which they filled the shelves, which had been remaining empty because the demand had been so high, but this unknown products, which then were filling the shelves, they were to a high degree, rejected by the consumers. So they finally did not want to have them, but they were still taking the shelf space and there was no or very limited space then for the traditional known brands. Additionally, of course, and to some degree, these problems continue with the problem of labor force. So our customers are really struggling to run all their lines as well because in the U.S., the labor market is rather overheated, difficult to find workforce. And similarly, we saw with all these supply chain issues, which are linked to sea transports, but also especially in the U.S. to lack of truck drivers and log jammed also rail yards. It -- there's a lot of logistics issues, which impact this. But to answer that what was then, nevertheless, to a rather high degree solving this logjam is the underlying good demand. And of course, we have all heard about this new Delta variant, for example, and the COVID, but also the learned patterns to how to keep places clean and take care of the hygiene and using wipes to a higher degree, has of course, had its positive impact to melting of the inventories. And also, we have a lot of data, of course, that during this pandemic, there were numerous, numerous new households, which started to buy wipes. And of course, many, many of those households which have then started to use wipes, they continue to do so also after the pandemic. So the demand everyone expects really to remain higher than what it was pre-COVID and this bottom has shown that to be the case also in the U.S.

Okay. No, that's helpful and interesting. On the other question is -- I mean, have you seen any kind of supply side changes in behavior? I'm just interested in the sort of [indiscernible] sort of announcement from July. Just what's the update? Have you seen any kind of changes in the kind of competitive behavior or supply picture? I mean from that direction.

Not really, no. No, not really.

Yes, yes, yes. And then finally, I mean, you talked about the cost picture quite accurately. So it sounds like you have a fairly good visibility to the full Q4 cost level. Of course, there will be some surprise elements towards the end of the quarter, but it sounded like you have a pretty good visibility now already to the cost in Q4?

Yes. Of course, with our purchasing sourcing of raw materials, we have different price setting for a bit different raw materials. Some are based on a quarterly price, others are based on monthly price. And therefore, we don't know it for sure at this stage of sort of late October, where it exactly will be landing. But yes, we have a pretty good picture, of course, of how it will turn out.

Okay. Okay. And listening to lots of companies, I mean it seems that energy is kind of a very big topic, but that's -- can you just remind how much that is affecting your cost or roughly, I mean, how much is it in your total cost? And is there any sort of points you can make on the energy, electricity, sort of fossil fuels, things like that?

Yes. Well, the total cost, it is not huge, huge amount. So the key driver is in our variable cost is raw materials. And really, with regard to this energy crisis, especially in Europe, we are more or less covered for this year. The next year, there probably will be some impact. But this benefit -- and regarding this fossil fuel -- sorry, fossil-free electricity, that does not have a material impact on the cost, so.

Yes. What's then remains to be seen is that how the increasing energy cost will impact again, for example, on the raw material side, but then also on the -- a bit on the total nonwoven supply chains, how that will affect the different players in different regions because energy cost is extending to increase not only in Europe, but also elsewhere, especially in, for example, China.

So we have another question from Antti Viljakainen from Inderes.

Antti from Inderes. Could you please discuss a bit what kind of ramp-up curve are you expecting and targeting in Cressa?

Yes, the -- I said, the project now being completed, so the ramp-up curve, of course, is such that we are already having certain volumes now in Q4 from that line. But relatively compared to the full capacity, we are not at the full output level yet. But then during, let's say, beginning of next year, I think we plan already to have relatively significant lines. And of course, the ramping up of such a new line before you are at full capacity, it takes a number of months, also not only from a technical point of view, but we are, of course, adding also that -- the manning to run the line over time. So before we have -- it's running in 5 shifts every day, every week, there's a ramp-up curve. But technically, it's running very well. And the volumes will be increasing starting basically from yesterday onwards, not physically yesterday, but recent past onwards, over the coming months.

That's clear. And the second one about costs. Does these gross savings that you mentioned continue in Q4? And could you anyhow quantify magnitude of these savings that you had in Q3?

So to a certain extent, yes; to a certain extent, no, because, obviously, especially the production actions, you can utilize temporary layers and various other measures, which, of course, then when the volumes return, you will reverse, you need to have the people running the shifts. So some of them will continue, but perhaps most will not.

Yes, I think that really is the case. And the fluctuations are really very big. Thinking of a single production line, it -- during the summer when the demand was as its weakest concerning this specific production line I have in mind, it was mainly standing still now that -- and we had, of course, then the people, the operators furloughed or doing other things, maintenance tasks. But now that specific line is running flat out. So it's really on and off type of world that we have been living in, in the last months.

Yes. And on the magnitude, what should we say, 7 figures, but not a big first number. So some millions, perhaps EUR 1 million to EUR 2 million in Q3.

So we have no other question for the moment. [Operator Instructions].

Thank you, operator. We have a question here from Rauli Juva. What is your understanding of the end demand development in U.S.A. and Europe separately? Is your volumes being more related to supply chain inventory issues? Or has there been a drop in the underlying demand?

Okay. Thanks for the question. I think that I already, at least, partly answered this. And perhaps to repeat still, that it really is not in the underlying demand, but it is in the supply chain inventory, the reasons for this drop. And that's why it has also been recovering on this high pace as it has. Perhaps good to mention, perhaps at this stage, what we have been seeing, especially in Europe, is now that once this SUPD, the single-use plastic directive, was or did come in to force on July 3, the market in Europe has been really to a high degree, switching from more traditional fiber blends to bio-based fibers. And that has an impact on -- of course, on the industry as such. I think that we are well placed at Suominen to serve this, but it also has typically an impact on the output levels of the capacity, so to run these. For example, then viscose or Lyocell products, typically, you need to run your lines slower, which then has an impact on the total tonnage that we, as an industry, can produce.

Thank you for your questions. It seems that we don't have any more questions. And before we close this session, I want to remind you that our full year results will be published then on 3rd of February next year. Thank you for participating, and have a good day.

Thank you, everyone.