CEO’s review

From Orthex Interim report for the period January-March 2022:

ALEXANDER ROSENLEW, CEO

The first quarter of 2022 was characterised by continued  rising cost and balancing between campaign sales, price increases and sales volume, on a weakening market influenced by consumer and customer uncertainty. Raw material prices continued to rise, driven by among other factors, the Russian attack on Ukraine.

During the first quarter, the second round of price increases that we communicated to our customers in the third quarter of 2021, started to have an impact and we managed to partly offset the negative effects from surging material cost. During the period between December 2020 and March 2022, the raw material price index has increased by more than 77%. This is an unprecedented pace of continued increase and therefore in our view not strategically feasible to absorb directly or with one single price correction. The time between communicating a price increase and the implementation of it at our customers is approximately 4–9 months and during this period a continued cost increase has a negative impact on the result. We are committed to make price increases as costs keep on rising. The rapid cost development had an impact on Orthex’s profitability  as the adjusted EBITA margin decreased in the first quarter to 8.8% (15.3) and the adjusted EBITA to 1.8 million euros (3.3).

In the year 2021, the first quarter invoiced sales increased by 33.5%. In 2022, the conditions have been challenging, and we did not reach the sales of the previous year as invoiced sales declined by 4.2%. As already communicated, we have held back on selling campaigns at reduced prices to offset negative cost impact. This is visible in the export sales, where sales volumes declined, as focus has been on actively defending margins instead of renewing campaigns made in the first quarter of 2021. We have not lost any customers or product distribution. On the contrary, there are interesting new customer opportunities both in the export pipeline and on the Nordic market. In the times of uncertainty, customers have been more careful in their buying behaviour, and in many markets, there seems to be a reluctancy to further fill up the stores or warehouses with goods. Our view, which is based on information and feedback from customers, is that we have not lost market share, but the demand has weakened due to uncertainty in the market.

As COVID-19 came back with a new variant, our most important trade show, the Ambiente show scheduled for February, was cancelled. This has slowed down new customer acquisition opportunities in the export markets. Under current circumstances most customer meetings are centred around price increases and off-setting cost and thus the important topic of building business together and growing consumer sales does not get the undivided attention of our customers.

All the above-mentioned factors had an impact on Orthex’s sales as net sales in the first quarter decreased slightly to 20.6 million euros (21.6).

The company’s Sustainability Report for the year 2021 was published as a part of the company’s first Annual Report in March 2022. In our Sustainability Report we present, for example, the steps we have taken during 2021 to be able to reach our carbon neutrality target. Among others, we made a comprehensive calculation of the carbon footprint of our operations and value chain for the first time and all our factories switched to 100% fossil-free hydropower. We aim to be carbon neutral in our operations by 2030. In line with our strategy, to strengthen the product portfolio made in new sustainable materials, we are expanding the range of products made of old fishing nets to involve a storage concept and some additional household products.

We are committed to implementing our growth strategy with a focus on international growth and sustainability. Raw material prices reached their highest levels so far at the end of March 2022 and currently raw material prices, freight cost and energy price are all on very high levels and future development is hard to predict. There are no immediate indications of change towards more favourable cost or market conditions. In the first quarter of 2022 we again took action that will be implemented according to the schedule described earlier. Unpredictable and fast increases in raw material prices create a profitability challenge due to the delayed effects of implementing price increases or cost savings. Despite the prevailing short-term challenges and market uncertainty, our long-term target is to deliver an adjusted EBITA margin exceeding 18%, and we are committed to ensuring that our measures are in line with that long-term target.

We are putting strong efforts on finding ways to grow sales profitably as demand development is likely to remain uncertain. We believe that the operating environment will eventually stabilise over time which will help to fully focus on actively growing profitable sales on the Nordic market and accelerate business development outside of the Nordics. I want to take the opportunity to thank all our personnel for the strong commitment to navigating wisely by taking active action in the efforts to defend the margins under the current very unusual conditions. We are all prepared and eager to continue improving everyday life with practical and sustainable products.