Orthex Q2'24 earnings preview: We expect the growth strategy to have progressed, but the year-ago electricity subsidy distorts performance

Translation: Original comment published in Finnish on 8/20/2024 at 7:04 am EEST.

Orthex will publish its Q2 report on Thursday at 9:00 am EEST. We expect revenue to increase significantly from the soft comparison period when Orthex was impacted by retailer destocking. The profitability level in the comparison period was supported by a one-time electricity subsidy of 0.8 MEUR from the Swedish government, which masks the actual profitability development of the business. Orthex does not provide short-term guidance. This year, we expect the company to deliver revenue growth of 6% in line with our financial targets, but our EBIT margin forecast of 13% is still far from our longer-term EBITA target of over 17%. We will review the interim report on Wednesday in our earnings live (in Finnish) starting at 8.55 am EEST.

Nordic retailers' sales were weak in Q2

We expect Orthex' Q2 revenue to increase by 7% to 21.5 MEUR. The company is facing a rather soft comparison period in which retailers have reduced their inventory levels. We expect retail demand to have improved slightly year-on-year following the end of the inventory effect, but based on Nordic retail sales figures we expect consumer final demand to remain sluggish. We forecast the company's invoiced sales to grow 6% in the Nordic countries and 14% in the rest of Europe. Orthex has increased its growth efforts outside the Nordic countries in the past year, so we will be watching the rest of Europe with particular interest.

Revenue growth and gross margin strengthening drive earnings performance

In terms of profitability, Q2 is seasonally Orthex's weakest quarter, with sales concentrated more than usual in the lower margin Home & Yard and Plant Care categories. We expect the company's adjusted EBIT to increase to 1.8 MEUR, driven by higher revenue and a higher gross margin. We note that, contrary to the company's reporting practice, we have adjusted the electricity subsidy of 0.8 MEUR granted for the period from October 1, 2021 to September 30, 2022 as a non-recurring item in the adjusted EBIT of the comparison period in order to facilitate the assessment of the development of the company's profitability. Our reported EBIT forecast is down year-on-year due to the impact of the electricity subsidy. We expect sales, marketing and administrative expenses to increase compared to the prior year due to higher growth investments, which will limit the scalability of earnings growth.