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Good day, and welcome to Suominen's Q1 2020 Result Publication, Audiocast and Teleconference. 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.
So hello. Good morning, everyone, and welcome to this virtual Q1 result event. Now let us try to move to the next slide. I hope you all can see the presentation well. The agenda today is Q1 in brief, the corona update, financial review, progress in our strategy implementation, the outlook for 2020, and then questions and answers. All right. The first quarter in brief. The Suominen operating profit nearly doubled to EUR 5.7 million. Last year Q1 was EUR 3 million. Our net sales remained at the same level as in the comparison period and reached EUR 110 million. Our cash flow from operations improved to EUR 9.4 million. The year before, it was minus EUR 2.4 million. Some achievements then in Q1. We signed a multiyear commercial operation agreement with Ahlstrom-Munksjö regarding our flushable products from the Swedish Ställdalen plant. We also announced an investment to enhance our production line in Italy, and we updated our 2020 outlook. I think we have the right slide. So you can see, from the left-hand graph, the quarterly net sales evolution. And as said, sort of by chance, the Q1 of this year is more or less on par with the Q1 of '19. The -- nevertheless, the building blocks behind the same number are with different -- the raw material prices have been coming down from the comparison period of last year. And our own sales prices have, of course, declined somewhat correspondingly. And again, what has then enabled the same net sales level is that our sales volumes have increased. The share of new products that we also spoke about at the time of the last quarterly results publication, so now this corresponding figure is in excess of 25%, which I think is a pleasing share as such. And when it comes to the impact from currencies, for net sales, the impact was positive and amounted to EUR 1.4 million. Let us try to move then to the next slide. As said, the operating profit of ours nearly doubled. We reached, as you can see from the left-hand slide, EUR 5.7 million, which looking back from early '18 onwards, it's a good level. And the reasons behind this were mainly due to, as I already mentioned, higher sales volumes but also improved production efficiency, improved raw material efficiency and favorable raw material prices. You remember the comment about the impact of currencies on the previous slide. So for net sales, once more, the impact was positive. But when it comes to the impact on the operating profit, the currencies had a slightly negative effect amounting to EUR 0.6 million. You might remember that last year or during last year, we commented one on the growth investment projects at our plant in Green Bay in the U.S. And now it was very positive that we had concluded it at the time we did because that was one of the factors now which enabled our higher output in the early part of this year. Then corona. And of course, it has had a lot of different types of impact on our operations, but it has also had an impact on this corona pandemic on the volumes and it has increased our -- let's say, the demand in all our markets. And this started to be visible towards the end of the quarter and especially in the month of March. And in short term, we expect this higher demand to continue. However, as to almost all aspects when it comes to corona is the uncertainty of how it will impact the future. And of course, in the second half of this year, the surge in demand may have come down. Of course, there's many different views about this amongst market analysts and the actors in this field. We believe, however, that this pandemic may lead to continued demand, also longer term, for nonwovens which are used, for example, cleaning and disinfection applications. We -- at Suominen, we took many proactive measures in this corona time. For example, in the early days of the corona outbreak, when it comes to raw material sourcing, we, of course, sourced some of our raw materials from China, which was firstly hit by corona, as we all know. And then we implemented -- due to the fact that we have plants in Italy, which was then one of the worst-hit countries outside China. So we implemented, really in the first days of the corona outbreak in Italy, very strict safety procedures. And very soon, we then transferred those same safety procedures to all our plants. And these have -- the different measures we've taken have allowed us to keep running our operations with pretty relatively limited impact. And of course, the main focus of ours has been to keep our own Suominen people operating safely in safe working environment, the ones who are present at our production side. Of course, when it comes then to all those people who can work from remote have been doing so. Also, going forward, of course, there still remains risks with this pandemic. And as for many businesses, of course, the possible risks are, for example, shortages of raw materials or delays in shipments of those. There could be potential closures of our customers' plants or of our own production plants either due to virus infections or authority decisions. But so far, even in those countries where there have been lockdown regulations for industry, these nonwoven operations have been classified as essential and have been, therefore, been able to keep operating. Then we have also, at Suominen, been taking part in fighting against the spread of this virus. And traditionally, Suominen, of course, has not been involved in products for this type of products or materials which are used, for example, for facial masks or protective clothing in a big way. But now really in the last few weeks, we have been developing materials for various health care needs, including these face masks and protective clothing. Our material has already -- or materials have already passed tests in third-party laboratory in Finland. It's VTT who has been testing this. And we have passed the requirements of this surgical mask Type 2 when it comes to filtration efficiency and pressure drop. We have already started production of these materials. In pilot scale, we have -- in Nakkila a pilot line where we can produce smaller quantities of this. And we have also already shipped some materials partly for testing purposes to different converters but also some first smaller volumes to be really then further converted to end products. And we are also investing in upgrading one of our existing production lines in Nakkila in order to enable the production of these materials in larger scale. And this production will start really within the next 14 days.
All right.
Toni, please.
Yes. So some further comments on the financials. So you can see here the profit and loss statement for the quarter. Before going into the numbers, we have made some relatively minor changes to our reporting. So we have reclassified certain manufacturing costs, which have been previously reported on the cost of goods sold. We have reclassified those into administration expenses. These are costs related to manufacturing function which are not directly plant-operation-related. So there is no impact to EBIT or EBITDA. This is mainly -- just only reclassification between rows of the profit and loss statement. You can see also in the table the restated figures for the previous quarter and for the full year 2019. Also, we have made the decision not -- to no longer report sales and marketing costs separately. For Suominen, this is not a major cost item. And going forward, we will report SG&A costs on one row.
Yes, not previous quarter, but the corresponding...
Yes, the corresponding quarter, yes. So regarding the numbers, as Petri commented, good result on the cost side, of course, driven by the factors which Petri was highlighting, most of them impacting our gross profit. So gross profit margin increased costs. Not too much to say about the cost, so some fluctuation, some impact from the currency is visible here. So as said, operating profit almost doubled. And below the operating profit, net financial expenses increased. This was driven purely by the exchange rates. So our real financing or interest expenses declined against the comparison period. On the income taxes, positive development. This U.S. coronavirus stimulus package has some tax elements in it. And for us, it meant that we recognized a net profit and loss impact of roughly 6 -- or 1.6 -- EUR 0.6 million in the first quarter. And thus, the overall tax rate was on very low level. The cash flow impact of this tax refund is higher. It will be -- when it comes, it will be in the neighborhood of USD 2 million. So all in all, profit and loss for the period, EUR 3.5 million, which is sizable increase versus the comparison period.Coming back to the cash flow. So cash flow was strong and improved significantly from the comparison period. And if we go directly to the next slide. So this is cost-driven by the improved results but also the fact that net working capital increase despite the increase of volumes towards the end of the quarter was very much kept manageable. So all in all, EUR 9.4 million cash flow from operations. Perhaps on the net working capital, one thing to mention, which is, of course, now a great concern in various industries, is the status of customer receivables, where, as we know, many companies have problems currently because we have seen very limited effect. As Petri was commenting, the whole pipeline is working. The customers are seeing increased demand. So they also have incoming cash to pay our invoice.
But of course, we are monitoring it very closely.
Correct. So we definitely look at how this is developing and are ready to react if hiccups happen at any of our customers. All in all, the cash situation of the company is strong, so no issues on this front.
Very well. Thanks, Toni. If you move then to the next slide. So we published the new Suominen strategy in early January. And let us then have a look on some points concerning how our implementation of the new strategy has been proceeding. As already mentioned in the opening slide, we indeed signed the new commercial cooperation agreement with Ahlstrom-Munksjö and Ställdalen manufacturers for Suominen, our HYDRASPUN product family mainly for European market. And you might remember from the previous slide and our strategy that the sustainability and sustainable products are really in the core of our new strategy. And these HYDRASPUN products are 100% biodegradable and produced from renewable materials, therefore, of course, fitting perfectly into our strategy. These products of ours are considered as the category leader in moist toilet tissue segment. Suominen produces these products also at our Windsor Locks and Bethune plants in the U.S. And with this signed agreement, we improve, of course, our ability to serve our customers around the world in the coming years. We also then announced the investment in Italy. And also, this investment is very much in this core of sustainable capability enhancement of ours. So with this investment, we are capable of producing something we call CPC. So it's a multilayer -- one could call it a sandwich product, where there are 2 layers of carded material. And in between them, there is this layer of pulp-based material. It's an existing line that we have. And currently, it is more limited, what kind of products we can produce it -- for use with it. But after this investment, this line will really become one of our most versatile and efficient lines. So it's not only this CPC but plenty of other mixtures of fiber, if you want, that can be produced and different types of end products and materials that we can produce with it. We have already seen a very high customer interest for these new products. And we are capable of producing these already in the meanwhile with some limited capacity, which, of course, allows us to have samples and smaller volumes already launched into the market. As said, this investment will clearly strengthen our ability to respond to this growing demand for sustainable products, and we'll be able to finalize this investment during the second half of next year. And perhaps good to mention when it comes to the moist toilet tissue product segment that Suominen was the first nonwovens manufacturer who receives Water UK's Fine to Flush certification earlier this year. And then the outlook for 2020. Suominen expects that in this year, our comparable operating profit will improve clearly from last year. But it should be noted that the result estimate for the second half of the year is uncertain due to this corona pandemic. In 2019, our operating profit amounted to EUR 8.1 million. And in 2020, as in 2019, we had no items affecting the comparability of the operating profit. I think that almost concludes the presentation part, but not to forget that we sent out the invitation earlier this morning to our Capital Markets Day, which in these corona times, we thought that would be perfect to be organized in safest possible way being virtually. And I think that this will hopefully attract even more participants than a physical event. And in any case, it is the right way, I believe, to have it organizing in these special circumstances that we are living in. And then as a reminder that the interim report for January-June will be then published on August 12. Thank you. And I think it's now time for questions. Emilia, did you want to start with a question yourself?
I think we are ready for questions. And first, we might take the questions from the teleconference line. So operator, do we have...
[Operator Instructions] We have a question from the line of Jussi Nikkanen from Handelsbanken.
Jussi Nikkanen, Handelsbanken. I was wondering about the kind of coronavirus impacting the situation rather dramatically. Where -- how do you see the raw material purchases and raw material adequacy has been impacted by the virus? And whether you are experiencing an increasing possibility to index the kind of sales prices to the customers. And another question is that with the increasing turnarounds and the Italy investment, where do you expect that -- your 2020 CapEx will land roughly?
Very good. So when it comes to the availability of raw materials, I think that it has been very much, of course, in focus for us. As I mentioned, to start with, in China and what we have done, of course, is to spread then the sourcing to a portfolio of suppliers. And now more recently, of course, the Chinese deliveries have been doing fine. But for -- as we all know, then India has been more locked down. And therefore, in general, of course, this remains a field which we have to be maneuvering and trying to cope with us as well as possible. Then of course, there are impacts also coming from the fact that textile industry globally, of course, is very much hit by this pandemic. And again, some raw materials are linked to the entire textile production chain. But again, there, as well, we have been then identifying alternative sources for raw materials. And in many cases, of course, our customers need to qualify then a new material. But in these special times that we are living also to get the customers and to qualify, needed changes is more quick than what it has perhaps traditionally been. So -- but it, of course, remains an issue for all supply chains in whatever business you are, including ours. But so far, I think that we have been doing very well. For China part, of course, we -- it wasn't only about the producing entities. It's, of course, linked to the fact also that there has to be then transportation from that producing entity to the ports. The ports have to be able to operate. There have to be ships then stopping at those ports and having then the transportation flowing then from China to the countries where we operate. So there are many chains, of course, or mini links in all of these chains. And certainly, going forward, we don't exactly know what is ahead of us, like no one does. But we have at least -- of course, with the spreading out of these things, we have been able to cope so far well with this. Then Toni, back to you.
Yes. So on the CapEx, I think we have previously indicated that our, so to say, base or maintenance CapEx is around EUR 6 million a year. On top of that then come these growth projects, but other than that, we do not comment on the CapEx figures. So when these projects then are approved, they obviously increase our CapEx spending, but as you can very well understand in these times also, the CapEx plans, we might have need to be adjusted based on how the pandemic plays out.
Next question comes from the line of Joonas Ilvonen from Evli.
This is Joonas from Evli. I would just like to make sure where you currently stand with regards to face mask supply. My understanding is that you haven't supplied nonwovens or face mask production before Q1. Is that correct?
Yes, that is correct.
Okay. So can you just reiterate what you said about these plans you have with Ahlstrom-Munksjö and with regards to -- so my understanding is you will upgrade your line in Nakkila and that will -- those -- you will supply those nonwovens for Ahlstrom-Munksjö who will then kind of refine that?
Yes. Perhaps just to recap, so we have been developing our materials, Suominen materials to meet these requirements. Now in your question, you're asking about face masks. And with our materials, we have been able to reach this Level 2, which is sort of the surgical mask level. And then we will be producing that material and shipping it into converters. Ahlstrom-Munksjö as such does not have face mask converting capability themselves. And when you specifically ask about Ahlstrom-Munksjö, there has been also then combination of materials, let's say, looked into. And that is -- that has been one possibility then to have a combination of Ahlstrom-Munksjö and Suominen material. But both Suominen and Ahlstrom-Munksjö, as such individually, have material which is capable to meet facial mask requirements. And the combination of the 2 is only, let's say, 1/3 possibility. There's so many material, the Ahlstrom-Munksjö material or a combination of the 2. But the actual face mask production will be done by further third parties.
Okay, okay. And so you don't report your product split no more, but could you maybe give color -- I mean looking last year, your share of medical and hygiene applications was like 8% of sales. So could you maybe -- would you be ready to sort of give some sort of color on how that might develop?
I think that our view of this, if we really think about these materials for either facial masks or then for the safety clothing is that it has not started from that angle that we make business and big business with that. It has really started from the fact that we have been trying to help the local authorities and the local needs in this pandemic crisis. And it is very difficult now even to forecast that what will be the -- even a bit longer-term need for these materials, we have all been following from the news about this big demand that currently exists, therefore, for this type of, for example, facial masks and the difficulty globally to get access to those. But of course, one can expect that once the biggest pandemic crisis starts to ease, probably the facial mask production will return at least to a degree back to the normal supply chain of those. And potentially, this more local production will not remain as strong as it may become now in that. But again, very difficult to forecast because, again, based on public knowledge, we have heard that there are companies now who are moving facial mask production, for example, in this case, to Finland and starting the production here. One can imagine that perhaps, they will continue then with some production here because they are investing it. But as said, we haven't started this -- from this kind of angle that we will be making big business with this. It has more started with just trying to help out in this crisis in whatever way we can.
Okay. Sure. And just one more question regarding gross margin. Your gross margin basically surged something like 0.4 percentage point. So yes, there's a lot of factors. But could you maybe just comment on this dynamic between raw materials prices and your price -- nonwovens pricing? So there was definitely a lot of good from that side this quarter, Q1? How do you see the nonwovens prices? Will they sort of adjust downwards going forward? Because it seems to me that it was maybe -- I mean quite a lot of good during Q1.
Was that over -- yes. Will you, Toni, want to answer the gross margin question?
Yes. So there was some but the sales prices were adjusting as well. So as said, we have multiple drivers behind the improved gross margin. So going forward, this -- let's say, as we have indicated, so these changes in the raw material prices tend to come into the -- our sales prices with a lag of, give or take, 3 months.
But as said, of course, it wasn't only about raw materials. It's, of course, about...
[indiscernible] performance.
Our improved efficiency really are -- both when it comes to our efficiency in operations as well as in raw material efficiency, so many things playing in.
And as there are no further questions, I will hand it back to the speakers.
Thank you. We have a few questions here. [ Matti Kaurola ] is asking, could you please open more of the positive impact of the COVID-19? For example, which product sales has increased most? What is the impact on the medical solutions?
Yes. I think that we already somewhat covered the medical solutions and that -- I think we were really able to see the increase in demand, let's say, towards the latter half of the quarter, and it came a bit step-wise even if, after China, it was Southern Europe which was hit sort of chronologically as a next place in a serious way. We saw somewhat starting in North America, the peaking -- let's say the increasing demand. But very soon, then in -- one could say in March, we started to see it in Europe. And I think when you ask here that -- how did it impact the different, let's say, products of ours, I think it was, in general, for wipes as such. But of course, then very specifically and particularly in this type of household hard surface cleaning products, which is, of course, natural. And we have also seen some then market data from North America, which clearly shows this as well that -- a bit in all wipe categories but of course then especially in these disinfection and cleaning products.
Yes. Then we have 2 questions from [ Rauli Jubba ]. Given you say volumes increased towards end of Q1 and higher demand is expected to continue in short term, is it fair to assume the positive volume impact from COVID-19 will be higher in Q2 than in Q1?
I think to [ Rauli's ] question that -- the answer is that it is fair to assume because indeed, it did start towards the latter half of Q1. And now it looks like Q2 will be still continuing on this higher pace and level.
And then the second question is how do you see the raw material cost versus selling price dynamics in Q2? Is there any negatives currently seen in Q2 versus Q1?
Of course, what Toni was saying about the time lag so that many of the raw material prices were decreasing in -- let's say, so that the outcome was lower for Q1. Now the raw material prices have stabilized. And with this time lag effect that Toni already mentioned about, that will, of course, have an impact then in second quarter. But again, it's -- there's a lot of different product mix, of course, in our total basket of things. So they will be impacted a bit, of course, in both directions.
Okay. And then we have a question from [ Mikko Vilonen ]. What is the status of Bethune unit? Is it running capacity, red or black figures?
Yes. This one, we have already commented since some time that it is business as usual and we no longer comment specifically one single production line of ours. But perhaps now for the last time, I can say that much that it is running well. And I'm very happy about the fact that we managed to sort out, as we have been discussing in these events, that -- the operational issues during last year so that we've got it, as has been mentioned, to a situation where it can be very reliably producing. And now we also see, of course, the benefit of that when the demand is high so that we can meet the increased demand.
Thank you. Now I once more ask the operator if we have any more questions on the teleconference line.
There are no further questions on the phones.
Thank you.
Very good. Thank you very much for participating in this virtual event of ours, and I welcome you all then to take part in the CMD of ours in late May. Thank you, everyone, and stay safe and healthy.
Thank you all.
Thank you.