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Investor, consider these four elements of profitability

Maintaining profitability is an everyday struggle. We all know that and Suominen had to learn it the hard way during 2012 to 2014, when all Suominen employees worked really hard to turn the company back to profit. We succeeded by changing strategy, divesting in order to become 100% nonwovens company, cutting costs to get the cost structure right and, finally, focusing on cash flow, the life line of every business.

Suominen has a strong desire to continue on that route, execute growth strategy and deliver profitable growth.

When analyzing Suominen today, what investors should pay attention to? Tapio Engström, Senior Vice President and CFO, highlights four distinct elements that are vital building blocks in Suominen profitability.

1. Portfolio change drives the top line growth

“Transforming our nonwoven product portfolio – that is, increasing the share of products with higher added value – is at the center of Suominen’s strategy,” Tapio Engström says.

Suominen has been active in introducing new high value-adding nonwoven products, such as award-winning FIBRELLA® Lite for hygiene products and HYDRASPUN® Dispersible Plus for flushable wipes, to the market. The growth investment program, which is currently being implemented, is one of the key actions to enable the transformation of the portfolio. The gradual change has been evident even before the investment program was introduced.

As a rule of thumb, Suominen’s products with higher added value are nonwovens for:

  • Household wipes
  • Hygiene products
  • Medical products
  • Personal care wipes
  • Workplace wipes

Increasing the share of these products in Suominen’s portfolio should result in organic net sales growth. Combine that with the healthy market growth in these applications and we should be well positioned for the portfolio change.

2. Gross profit, SGA costs and operating profit

Over the last four years, Suominen’s gross profit has developed positively, increasing from 9% of net sales in 2012 to 13.1% in 2015. During the same time period, we have been able to keep the absolute amount of sales, general and administration (SGA) costs at bay. With top line growth this has resulted SGA, relative to net sales, to go from 6.6% to 5.7%. Both of these developments, growth in gross profit and slight decline in relative SGA costs, have helped to pave the way for our comparable operating profit margin to climb from 4.2% to 7.0%.

“Even if Suominen is executing a growth strategy where enhanced capabilities are created, which usually brings increased costs in, for example, R&D, the principle still remains: It is not the pure euro amount that accounts, it’s what you get for it,” Tapio Engström says.

3. Raw materials constitute a big chunk of all expenses

“Suominen produces nonwovens as roll goods, so in general terms we are a manufacturing company. In our industry, raw material is the main ingredient when creating value to our customers. This means roughly 60–70% of our expenses consist of raw materials. Fluctuations in the raw material prices, as the relative portion of costs shows, play a material role in our profitability development.

Customer contracts that cover roughly 50% of our net sales include a pass-through clause, meaning that changes in raw material prices are taken into account, in general, in the next quarter. This mitigates material part of the fluctuation. Further, we do not hedge raw materials because the correlation between raw material for a fiber, such as crude oil, and the final fiber, such as polyester fiber, is not predictable, as there are intermediate steps, and in that value chain, market dynamics are in play,” Tapio Engström explains.

4. EUR/USD – A factor to pay attention to

Suominen is a global company with operations on three continents. Our reporting currency is the euro (EUR) but the United States dollar (USD) is also very significant for us, since approximately 60% of our net sales is generated in the Americas, majority of that coming from the United States.

“We have estimated that 10% change in EUR/USD exchange rate should have, with current structure of business, approximately EUR 2.5 million effect on operating profit on a full year basis. The logic is that when the USD strengthens compared to EUR, it increases Suominen’s operating profit and vice versa,” says Tapio Engström.

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