Suominen Oyj (SUY1V) Earnings Call Transcript & Summary

Good day, and welcome to Suominen's Q4 2020 (sic) [ Q3 2022 ] Results 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 result. And after the presentation, there is time for questions. So please, Petri.

Thank you. Good morning, everyone, and welcome. If we look at the third quarter for Suominen, our net sales increased significantly so by 34% and reached a record quarterly level of almost EUR 132 million. The comparable EBITDA improved to EUR 5 million, and cash flow from operations was minus EUR 10.8 million. Toni will comment more in detail about the third quarter and perhaps this churn that we are seeing it's interesting to hear what Toni will say about it.

Very good. Thanks, Petri, and good morning also on my behalf. So Q3 sales, actually the highest quarterly sales in the history of Suominen at EUR 131.9 million and a very nice increase from the comparison period, over EUR 30 million. And you could say in rough terms that of this increase, 1/3 came from volumes, 1/3 from prices and 1/3 from currencies. So happy with the sales performance, as such. Share of new products continued on a high level, clearly over 25% of sales. So very good achievement also there. Then if we go into the results and specifically EBITDA. So we stood at EUR 5.1 million, and positive things that impacted the results were higher sales and production volumes compared to the comparison period. However, margins were still under pressure. So while sales price increased, the input costs increased even more, raw material and also energy costs. We did implement an energy surcharge in late March, but the energy costs increased even more. And hence, we have published now another round of energy surcharges in Europe. So of course, good to see that the result has at least now turned for the positive. It was impacted by certain onetime tax credits and incentives from Brazil and Italy. But even excluding those, we were above the previous quarter, i.e., Q2. And perhaps good to mention that this turn in the result performance, it happened during the quarter. So early part of the quarter was still very difficult results-wise. But then, let's say, August, September were clearly better months.

And of course, that in practice means that the demand improved at that stage because, of course, prices and raw material costs don't actually change typically during the quarter. But we saw really the demand now, which has been one of the anchors pulling us downwards, now it really picked up during the quarter, as Toni said.

Yes. And to be more specific, this was especially in the United States, where we have been suffering from lower volumes. If you look at the whole profit and loss statement, so again, not that much to comment. Of course, nice to have positive operating profit after a couple of negative quarters. Other than that, nothing special. Costs are higher, that is driven solely by the stronger USD. As you know, we are now at or even below parity when it comes to the USD exchange rate. The underlying costs in local currencies are very much under control. And there you can see on the other operating income this impact from these onetime tax incentives. Cash flow, unfortunately, negative and the main driver was higher net working capital as the sales increased towards the second half or the latter part of the quarter. Obviously, receivables also increased. Also, inventories increased mainly due to raw material build for higher production. There are still some, as we have reported previously, availability issues with regards to raw materials and that also drove us in building a bit more safety stocks on raw materials. Then perhaps a bit more minor item that in these receivables, they were also impacted to a lesser extent then from the sales, but these tax incentives they are receivables. Obviously, we did not get cash refunds, but rather credits that we can use for few various future payments. I think that's it quickly for the results.

Thanks, Toni. If we then again look at how we are proceeding with our strategy implementation, here is the summary slide of Suominen's strategy. And if we look at then some of the examples. So for the first time, we were assessed by EcoVadis and we reached a pretty good level of silver-level rating in this first assessment and that bodes well going forward. We now started our solar panels in Spain, which came, of course, into use at a very good moment since we all know that the energy costs have been significantly higher than what they used to be. So the timing of this was very good, then, of course, from a sustainability point of view. It's very, very nice as well. And we have had a very good year when it comes to safety. So in the first 9 months, we are on target when it comes to lost-time accidents. We haven't had a single one so far. And perhaps worth mentioning that we have internally also celebrated our Brazilian plant who reached 10 years without LTAs now in late summer. When it comes to outlook, there are no changes in that. And I think now would be a good time for your questions.

Yes. Thank you, Petri, and Toni. And now it is time for questions. So operator, do we have any questions?

[Operator Instructions] The next question comes from Harri Taittonen from Nordea.

Yes, just you said quite interestingly that there was a turnaround during the quarter. And I don't know, but looking at, for example, the U.S. growth in the quarter, it looks like the organic growth has been something like 25%. And if it's right, what you're saying, half of that would be price and half of that would be volume, so something over 10% volume growth. But if one thinks of the run rate, like at the end of the quarter compared to the beginning of the quarter, I mean, can you give some sort of feel, I mean, on this turnaround at the scale to give a feel of what the run rate will be when we are entering into the last quarter. I think the question also -- yes. Okay. Well, I'll let you sort of attack that.

Yes. But otherwise, we forget what your questions might have been.

Yes. Sure.

No, it's rather significant because we've been struggling since summer of last year with very high inventory levels of especially this hard surface disinfectant products, which our customers created. And therefore, the demand for our material has been then very low. And in the U.S., there typically is a back-to-school campaign, which boosts this HSD demand because all the pupils, the school kids, will have to have a number of these kinds of wipes with them when the school starts. And that took place. Then, of course, the supply chain needs to prepare for that. And our customers really they were a bit uncertain on how it would go, and this demand in this back-to-school campaign really surprised them very positively. And we have, of course, been then following, asking our customers at how do they see their inventory levels. And of course, it is not exactly every customer, which has exactly the same situation. They are, of course, somewhat individual, but we have been now hearing and thereafter also then seeing in the demand for our products that some customers really started to report that their inventory levels have normalized and others are now saying that they are normalizing. So I think suggestively, we will really be back to where we used to be when it comes to the demand-supply balance also in that product. And we have really been seen that when it happened basically during the third quarter and now we, of course, see our order books for Q4. The change for us is significant. So those production lines, which were struggling have much a better utilization rate. And it's also part of this whole story is that one of those HSD lines that we have, we have been transforming to produce a completely other type of product and that has proceeded well. And that will also give then more business and more product to be run on that line. So Q4 and going forward looks significantly brighter than what still the early part of Q3 did.

Okay, okay. Yes, I remember you talked about this, the transformation of the line to other type also already half year ago or something. So I would imagine it has now gathered pace and kind of acceptance in the customer base as well so...

Exactly. So we have now several customer qualifications and are now running continuous commercial runs for that moist toilet tissue product that we transformed that line partly to.

Okay, okay. Now I mean, just if one continues there, I mean, how much are roughly the volumes now in the U.S. and Europe if you compare the current -- well, or sort of say, the Q3 volumes compared to the pre-COVID levels just to get that perspective more or less right.

Yes, if we look at -- yes, it seems -- it was an eternity ago the pre-COVID volumes, and of course, there have been other changes as well. But if we think about the -- what is perhaps more interesting is what does the demand look like and going forward. So we have been saying that we expect the demand -- the end consumer demand to be above the pre-COVID levels, and that is indeed the case. We have seen reports from our customers and reviews that we are above the pre-COVID. So it went up significantly. For example, HSD product, it went up significantly in 2020 then it came down from the peak in '21. And now it has stabilized above the COVID levels, but that now includes the very weak first part of the year and the expectation in the customer base is that this is not, let's say, still the new normal after the pandemic. But we would still a bit recovery on a higher level before we get back to the regular growth track.

Okay. And how about from the capacity utilization point of view? I don't know, I mean, like how much there would be sort of upside potential for -- or as much as you can say about it, but I mean rough to get a feel that how much there is like available capacity that you could produce more compared to normal? Or I mean you are not running flat out yet, so just to get a feel of that volume kind of potential.

Yes. We see -- we are mainly -- or we have spoken about HSD and MTT as product groups. But we see the demand picking up also for other grades. So if we compare now how we were running in the latter part of Q3, we were already on a higher level overall in our North American operations. And Q4 then starts to look -- we still have some open capacity on this. As I mentioned, this HSD inventory melting is somewhat customer-specific. So not for all customers will it yet mean in Q4 that they are back to such demand levels as they used to be. But other lines then, that have a very good utilization rate in Q4.

All right. Okay. Excellent. And then finally, just on the color on the cost side. I mean you mentioned that sort of it's not cost deflation yet, but I mean some of the cost burden easing. But I mean just like where do you see the kind of declines or where do you see the kind of the main kind of developments in the main raw material components of the basket, so to say.

It's really across the board.

And that is -- when we have, of course, anxiously been waiting for the turn for Suominen, a couple of the building -- main building blocks have, of course, been, firstly, this demand that we just spoke about. The other, of course, has been the raw materials, which have been increasing since beginning of 2021. And now that is the other aspect, which is causing the turn, which is the fact that the raw materials in Q4 now no longer really go upwards. And therefore, that turn didn't really impact our Q3 yet, but will be something that we look forward now in Q4 and going forward.

I can perhaps tell an anecdote on these stats. We, of course, follow up the price development in the various raw material categories. And when these started, these challenges, for us in late 2020, early '21 and we looked at these review reports, there is that raw materials by grade and then the following quarter and outlook for the rest of the year. So first, we had a color coding that everything above 5% is red, 5% increase. Then we had to change...

Quarter-on-quarter.

Then we had to change it than only anything above 10% is red still is cash for us...

And still quarter-on-quarter.

Quarter-on-quarter. Now for the first time, when we look at the dashboard, it's all green. There is not a single category, which would have an increase.

And no, there are some which are black, which is in our color coding, it's then black. But there was no red all the time. First time in, as said, witnessed in late 2020. And really, it is significant, of course, for.

And really, it is...

Very significant, of course, for us.