Suominen Oyj (SUY1V) Earnings Call Transcript

Good day, and welcome to Suominen's Q2 and Half Year Results Publication. My name is Emilia Peltola, 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. Petri, please.

Very good. Thank you. So welcome also on my behalf to this Suominen H1 Financial Report Event. Second quarter, our sales reached EUR 113 million, and that compares to the year before of EUR 122 million. We had also a negative impact from currency exchange rates, which was EUR 6.5 million in the second quarter. The comparable EBITDA was EUR 15.3 million, and cash flow from operations was EUR 1.2 million. If we then look at the entire first half of the year, our net sales were EUR 229 million, which compares to EUR 232 million the year before. The EBITDA, EUR 33.8 million. And cash flow from operations, EUR 17 million. And Toni, if you go more into the details of the numbers.

Hello, good morning from my side as well. So looking at the net sales, as said, we reached EUR 113.6 million in Q2 versus EUR 122.2 last year in the same period. Currency impact, as Petri mentioned, was pretty significant. So excluding that, we were close to same level. Sales volumes decreased from this very high comparison period. But then on the other hand, as we have communicated, we expected the raw material costs to increase, our sales prices also increased following those. Then if we jump a bit ahead and look at the volumes in light of the sudden softening in demand of our customers, which we communicated yesterday. So this had not much of an impact in Q2. So this was more or less a regular fluctuation, the volume changes. Share of new products continued on a very nice level, around 25% of net sales. Then EBITDA, even though it decreased a little from the very high comparison period, was still on a very respectable level at EUR 15.3 million. Looking at our history, one of the best quarters ever, currencies had much more limited impact on the profitability than sales. So cost flow is slightly negative, but close to 0, the currency impact. And as I said, raw material and logistics costs were higher and also this mentioned slightly lower sales and production volumes impacted the results. But then this mentioned higher sales prices, especially compensated for the higher costs. Also raw material efficiency continues to improve. So we could compensate partially these higher raw material logistics costs. The full profit and loss beyond the sales, EBITDA, not perhaps that much to comment. Costs well under control, even below the comparison period. EPS at EUR 0.11 per share. And finally, cash flow. So cash flow declined from the comparison period to EUR 1.2 billion. The main driver was the fact that a higher amount of money was tied up in working capital. This was especially in inventories, where there were 2 main reasons. First of all, as the raw material costs increased, of course, this leads to an increase in the value of both raw material inventories and finished goods inventories. Secondly, these logistics issues as we have communicated, it's not only about the price, also the availability. So these logistics issues led us to increase also levels of inventories, especially raw materials. So we had both higher value and higher volumes to some extent, increasing the inventories. I think that was the numbers, very short. So Petri, back to you.

Thanks, Toni. Then about our progress overall in the first half. Our investment project to upgrade and restart an idled line in Cressa, in Italy, neared completion and will be finalized now during this ongoing third quarter. And also the other 2 investment projects, another one in Italy and the third one in the U.S., are proceeding as planned and will be finalized as we have said during the second half of this year. By the end of June, we have launched 9 new sustainable products during this calendar year. And in June, we issued a senior unsecured bond of EUR 50 million with a coupon rate of 1.5%. And as we published yesterday, there is a change in -- since the yesterday published guidance of Suominen, and we expect that our comparable EBITDA in 2021 will decrease from 2020 due to the slowdown in the demand for our products in the second half. And of course, this volatility of raw material and logistics markets has not gone away either where the expectation early in the year was that the freight markets, as well as the raw material markets, would stabilize around midyear, but that has not happened. The raw material side has seen somewhat of a stabilization. But on the other hand, the freight markets have perhaps had even more of a turbulence than what was already seen in the earlier part of the year.

Thank you, Petri and Toni. And now it's time for questions. So first, we take the questions from the line. So operator, do we have any questions?

[Operator Instructions] Our first question is from Harri Taittonen of Nordea.

Well, just on the -- I mean, still, the margin resilience is quite sort of encouraging if we look at this Q2 result, I find, I mean given that power prices are up by sort of 60%, 70% and all. Is it really that you've been able to kind of push through the cost increase in product prices or what's kind of driving this sort of margin resilience up until now? And the second question is, of course, maybe more important on the second half and what you are seeing in that in this sort of demand. And if you can give a little bit sort of color like what are the areas where you are seeing this sort of restocking. Is it sort of throughout the whole kind of supply chain? Or is it certain areas? And sort of what's your feel of -- what sort of products are in question? I mean if you can give some color on that, on the reasoning for the demand weakness in the wiping side anticipated?

Thank you for your questions. Let's start with the question about margins. So as we have said most part of our sales prices are based on mechanisms, which means there is a pass-through then of cost increases. But at the same time, as we have said, there is also a time lag in then exercising the changed cost to the sales prices. And as we said as well during last year, we changed a bit the contractual models or business models, especially in Europe and increased quite significantly the number of mechanism-based business, which in these turbulent times, of course, we have been very pleased about. Traditionally, already, we had a high share of our business based on mechanism prices in North America. But similarly, so we increased then the mechanism pricing also in South America. Your second question was about the demand part. And...

Perhaps just to add on these margins and the mechanisms that as we have stated that the certain volatility continues. So it is critical to understand that it is a catch-up game that we are playing with the mechanisms. So there is always a lag, and all the impacts generally come with a lag.

And when I said that some -- we have seen more of a stabilization in the raw materials, unfortunately, it doesn't mean that they would have actually yet stabilized. They are still on the way up, but less steeply than earlier this year, whilst the -- especially the sea freights have seen, after the very steep decreases earlier this year, even steeper increases now. About the demand side. So you had a number of different angles to your question and let's start...

Yes, those came to mind.

Let's start [ there ] and say that biggest impact for us we have seen in North America. The least impact we have seen in South America and Europe is a bit in between. And the situation has been -- we are, of course -- we are dependent on the demand signal, the orders from our customers. And the situation and the signal that we have been receiving has been, of course, a bit fluctuating in the last months, couple of months. But now it suddenly, after the -- our holiday period, it changed. After the fluctuation, it changed now. And we have analyzed that what are the reasons behind this sort of log jam that has been created then and there seem to be really several things in that complicated supply chains that have occurred and resulted into this. They were the retail chains, when the demand during the COVID was extremely high and the shelves of the branded products continue to be empty regardless how much effort that was put in to try to live up to the demand, the retailers then sourced all possible type of wipes products from wherever they could get hold of those. And then in the second quarter, the brand houses were suffering because the shelves at the retailers were full of these unknown products, unknown to consumers, which actually were not very much desired by the consumers. So they didn't move out of the shelves, but they were blocking the way from the branded goods. But demand signal from the retailers continue to be very, very high. And therefore, the entire supply chain was then preparing themselves for the continued very, very high demand. And then at the same time, there was also this kind of unemployment support available in the U.S. due to COVID, which led then to lack of workforce at our customers' plans. So they couldn't run their converting lines, which again caused somewhat of more stockpiling of raw materials. Then the demand softened once the vaccinations increased, so it didn't collapse. And compared to pre-COVID level, it was still on a higher level, but it was no longer on an explosive level. And finally, also these complicated logistics issues, they led to then also to the brand houses not being able to ship when -- towards their customers. So they had local logjams at their plants. And also these many drastic sourcing efforts that have been done by the different parties in the entire supply chains, they led to a fact that a lot of finished goods and raw materials were sailing after the Asian Chinese New Year and arrived more or less at the same time then in the latter part of the second quarter. So really a perfect storm from many, many data points causing this kind of jam that you have at the motorway, sort of a [ queue ] phenomenon that everything gets sort of stuck before it starts to release again.

And perhaps to add color on that is that our customers did not see this coming. So it was still by -- in late May, early June that they were pushing us for maximum volumes, what can you ship as we need more fabric, we need more fabric. And then...

The visibility of this because they were basing still on the very high level of demand signal that the retailers were. So there was -- they had no visibility, and therefore, they were maximizing the output. But then suddenly now it came to a halt.

Yes. And it's really been really volatile for the past time. So it has not even changed weekly. In some cases, the demand and orders have changed daily. That tomorrow's demand is completely different from yesterday's demand. So visibility during this time has been less than perfect.

Yes. And in both directions or in any direction, there's been changes.

No, understood. I mean, yes, I appreciate it's complicated, and it sounds like pretty widespread and throughout that -- throughout the sort of supply chain for now.

Especially North America. So as Petri said, so Europe has been less affected and Brazil has not been more or less affected at all.

Our next question is from Rauli Juva of Nordea.

Yes, Rauli here from Nordea. Actually continuing pretty much on the same topic, just on your kind of outlook comments for Q3, specifically. You are mentioning that the demand or the volume outlook looks weak at the moment. So kind of compared to what that should be interpreted is that we're comparing to the quite strong levels during the pandemic. Or is it weak also compared to the, let's say, pre-COVID levels? That's the first question.