Hello InderesTV listeners and viewers. Suominen reported today their Q1 earnings and we have CEO Charles Héaulmé for the interview as usual. Hi Charles!

Hi, good afternoon.

Let's jump to the figures directly. So you reported quite steep decline in the sales as at least partially expected of course, but can you explain the factors behind the sales drop.

Sure. Thanks, Rauli. And the first thing I would say is that the sales drop is in a market that is relatively stable during Q1, continuing to grow in the category of MTT, so mostly hygiene issue, more flat to slightly declining in baby wipes, but overall a relatively stable market. So why are we seeing our sales declining? First of all, you know that we are operating at more than half of the business in the US. So we're suffering about minus 5% currency drop linked to the US dollar versus the same period last year. Second, you might remember that we have had two relatively important operational events, negative events in factories in the US in the third quarter of 2025. And because of the interruption of supply during those events, some customers, particularly a big customer, have been looking for alternative supply, which is meaning a temporary drop in our sales because they signed contracts of supply with other suppliers, particularly from low-cost countries. That's roughly explaining 7% in Q1. That will resolve over time. Half of that gap will be resolved in Q2. Then for the rest we need to continue working further in the following quarters. Then we have a minus 2% which is linked to the mix of products and customers where we have a decline in high value-added products and customers and a slight increase more into commoditized categories. And then let's remember that we have... back in the second quarter 2025, closed down a production line in Europe for focusing on the profitability. And that means that in terms of volume, it's roughly an impact of 5% year over year. We will see less of it in quarter two because that line was interrupted in the quarter two 2025. And then that negative variation will not be there in the second semester anymore. story anymore

Yeah. Good. Continuing on that, did I understand correctly that kind of you didn't have any more issues as such yourself in the US production or supply chain, but basically the customers are now using some other suppliers and hence you have been losing some volumes still?

Yeah, so the operations have restarted in these two factories after these events relatively quickly. Well, one was interrupted for two months and a half back in quarter three. The other one was much shorter interruption. But yes, it had an impact that some key customers had to look for temporary alternative supply. I would like to say, on the positive note is that the line where we had the biggest, one of the issues was a flooding, so that was not directly our equipment. But another issue, the longer problem we had to resolve was a line where there was a dramatic mechanical failure. And we used the downtime of the line to upgrade that line. To restore it to basic conditions, we have a new leadership, we have put in the continuous improvement methodology of TPM into the line. And today, as we speak, and over the last three months, we have record high production on that line. So the point I'm making is, yes, those events had a negative impact on the company, but we have used to turn these problems into opportunities also.

Yeah, yeah. And I'm still coming back to these lost volumes with the customers looking for other suppliers. Is it kind of, are they kind of willing to switch back to you when they can or what's your feeling? You commented that you will get some back in Q2, but is it kind of, is it an easy task to recover those or how do you characterize it?

No, it's never an easy task because, you know, recovering volumes always goes with some push for better competitiveness and so forth. So while we are trying to protect or improve our margins, it's not an easy task, absolutely not. What we know is that half of this gap is back in Q2 in the order intake. The other half will be transparent is not there yet, but we're not giving up on this, so this is a This is the exact situation as it has happened, but it doesn't mean that we're standing still and not looking at what else can we do. So we are also signing new agreements with new customers or customers of the past that were not into our portfolio anymore. So there are some good news to come, let's say, with projects which are starting both in Europe and in the US as we speak. So there is. better days to come based on all the actions that we are taking.

All right, great. And then you already, or let's go to the earnings side actually that of course the lower volumes did hit the. did hit the earnings obviously, but then you also had the mix effects and you commented that that had some impact to the earnings as well. Was that meaningful? Can you kind of explain that or how those compare to each other?

Yeah, relatively. So the volume is the number one problem for Q1. This is the biggest problem because of what we just discussed, but also some reduction into some higher margin customers versus more commoditized categories that has a mix impact, which is also relatively significant. and which is pushing us to work, we may discuss later about our full potential program, which is pushing us to work much more on managing the portfolio so that we increase our average margin and not the other way around. But in Q1, yes, we see a drop of roughly one point of margin, which is very much this mix impact we're talking about.

Okay, okay. Is that mix impact related to this lost US customers or are there separate issues?

Separate, separate,

Yeah,

yeah.

okay, clear. Then obviously the kind of one key development during Q1 which wasn't so much visible yet in your Q1 numbers, but in any way the Iran war and the related spike in the oil and energy prices will have also consequences for Europe's cost base going forward, so kind of, well, maybe general question first, how do you see the situation for Suominen and how can you mitigate and adapt that through your pricing or other measures?

Yes. So what we are commenting in the Q1 earnings is that Specifically in Q1, there has been very limited impact from the war that started at the far end of February. However, we saw immediately the potential impacts on the value chain. Let's remember that. We're not operating directly into that region and therefore we don't have a direct impact on that perspective. But yes, we have impacts possibly on the availability of raw material, on the cost of raw material, on the cost of energy like most companies across industries. Not affecting Q1 yet, because in March basically we were running on the stocks, but therefore going into Q2, yes, these two aspects of availability and price or cost are very much centric into our business. We see particularly the oil-based substrates increasing significantly in Q2. That's obvious. But we have mechanism for passing through, which in the end will, you know, replicate into sort of inflation into the finished products on the market in a number of months, six to 12 months probably. What we have done immediately as the war started is stop our normal pricing process, which is very much a quarterly pricing process, to adopt a more agile pricing process, not managing everything order by order on the spot, but managing at the minimum on a monthly basis. And that will allow to protect the margins in Q2.

Okay, okay. And is that kind of, does that cover basically all of your sales now or how much?

Yeah, absolutely.

Okay.

Yes, yes.

And then...

I mean, it's more, it is more, how should I say? impacting Europe than US at this point, but we have taken the, and that's linked to the new operating model that we have put in place end of January or as of first of February, and we have now a global commercial management and that means that, you know, we have a more, let's say, standardized approach and when we have revised or adopted a new new pricing approach within the month of March for the second quarter then it's across the board.

Okay, okay, and customers have been okay with that new pricing.

You know, we have seen that mechanism back in 2022, if you remember, there was even much higher inflation and Nobody's happy about this because at the end we all know that it ends up into the consumers prices, meaning some sort of inflation at some point. The inflation it might take to reach consumers, it might take more than six months,

Mm

up

-hmm.

to 12 months, but it will create more inflation. This is very obvious. And when you create inflation in the value chain, then consumption volume may... They may suffer at least slightly. So it's not good for anyone. But it's kind of a case of force majeure. The entire industry goes through the same. So basically, nobody's happy about it, but it is an acceptable or a meaningful situation that, you know, everybody has to adapt to.

Yeah, sure, sure. Uh you also also mentioned the the potential kind of availability issues. Have you seen any of that in kind of your your value chain or supply chains now or is that just a potential risk?

So what we've seen is two things and one is potentially negative, the other one is positive. The potentially negative is will we get all the raw material we need to produce? Okay, so that's availability. Okay, so that's availability. We have seen particularly for viscose some limitations which so far we are able to contain. We are not planning any production interruption. But this has been for a month, a month and a half, a bit of a top-of-the-range concern. On the positive side, we have seen because whenever there are conflicts of this kind, there is immediately kind of a localization or at least a regionalization of the supply chain. And we have seen immediately. the demand of all those increasing, how

Mm-hmm.

much of this, and we've seen roughly 10% of orders increase for the second quarter, how much of this is coming from redirecting the supply chain to a more local supply chain and how much of it is coming from stocking exercise in order to indeed mitigate the risk of availability, difficult to say at this point, but both are driving a slightly more positive outlook from a volume point of view.

Okay. That's clear. Let's then jump actually to the balance sheet. I think you had this mentioned already in the previous report and now you mentioned it again that you are negotiating the covenant terms in your loan. So I just wanted to kind of clarify that. Have you kind of concluded the negotiations? Have they been lifted or have you breached the covenants or what's the situation? What's the kind of situation with that?

So the simple answer is no, we have not breached the covenants, even though our leverage is high and actually too high. But yes, we have renegotiated our covenants with our two key banks. And in good understanding of where we have presented to them our business plan, what we intend to do with the full potential program, the profitability improvement program that we have. announced on the 29th of January. The banks support us on the long term and currently we're looking into all the potential instruments for financing the company in a more structured way if I may say to finance the program. So the simple answer is yes we have renegotiated and we are in good terms with our two main banks. That's it.

Yeah, good. Clear, clear. Okay, then looking forward you maintain the guidance of improving the adjusted EBITDA. Quite obviously the Q1 level is not kind of earnings level you would reach the guided improvement. So what will drive the improvement in earnings in the coming quarters, especially given that despite this flexible pricing, I guess you will. You will have at least some headwind from the raw materials, so how do you see that playing out?

Yeah, I mean this headwind on cost is to be very clear and starting to be visible in Q2 and obviously in Q3 also as a repercussion. We believe that we've been agile enough with our pricing process in order to mitigate any impact on the margins for Q2 and coming quarters. That's one thing now. To your question, how do we get from the... the 3% EBITDA or the 2 million that we reported in Q1 to EBITDA level according to our outlook. Number one is volume. The volume in Q2 is going to be significantly higher than in Q1 because of some of the recovery of the gaps. And also because we are starting the new capacity utilization of our new line in Spain, commercial production starts as we speak in May. So those are... important impacts on our volume. That's number one. Second, positive impact from our cost savings plan, which is in execution, done at 80% basically. You may remember the 10 million euro savings that we committed to mid 2025. We are basically not completely completed, but it's... the 10 million run rate will be achieved within 2026 and then in the new full potential program that we have established end of January, we are looking end-to-end in a comprehensive way at all the aspects of operational performance, whether it is procurement, pricing, fixed cost savings and also operational, so manufacturing efficiency for the output from our factories, and all of this will also support better the three other quarters versus Q1.

Yeah, okay, okay, that's clear then. Then finally, I think you commented last year that your kind of some kind of normal run-rate earnings quarterly would be something like 5 million on the adjusted EBITDA. Now for the past few quarters you have been notably below

Yeah.

that you just mentioned kind of the improvement levers going forward but is that still a valid statement? That kind of with these kind of today's volumes and efficiency that should be reachable or does that five million level kind of need some further measures for you.

um So we stay on the same line, but in a context that is slightly different because of the new geopolitical context, the mixed impact that I was talking about at the beginning, but we stay on the same number. And why is because despite suffering those external and also internal aspects, we have a compelling profitability program that we started. in early February and that program has three pillars. One is end-to-end operational performance improvement and we are really looking into everything. It started in mid-2025 with only the fixed cost reduction. Now we're looking end-to-end to the operational performance. Second, some targeted investments that may come more towards 2027 because we will be We will be very prudent versus the cash, of course, available, but some targeted investments which will have a direct impact on improving the profitability with low risk of execution and third some footprint optimization which means you know where do we produce what and using our new capacity in Spain will be an important tool in doing this and all these three pillars are going to support delivering better profitability going forward so we stay We stay faithful to what we said before. Absolutely.

Great. So a lot of work ahead.

Absolutely. That's another thing.

Great. Very good. Let's see how that progresses during the year. Thank you for the interview, Charles.

Thank you, Rauli.