Orthex's revenue, earnings, and consequently its share price have been treading water for the past four years. What on earth is wrong? Before we get started, please leave a like on the video and subscribe to the channel if you haven't already. But hey Thomas, what has actually been wrong with Orthex for the past four years? Looking at that chart, the share price hasn't moved anywhere at all. Okay, of course the macro environment has been extremely challenging. We've had all sorts of inflation shocks and interest rate spikes along the way, but is it all due to external factors, or how would you sum that up?

I would say mostly external factors. Indeed, as you said, the macro environment has been bloody difficult. If we go back four years in time, it is a plain fact that the weakening of consumer purchasing power we have seen in the Nordic countries has been really brutal. I mean, we genuinely went back almost a decade in purchasing power really, really quickly. And in addition to that, Orthex is of course very Nordic-driven. Nearly 80 percent of revenue comes from the Nordics, so it's hard to escape something like that. And at the same time, the company has a strong market position in storage solutions here, around 20 to 25 percent. So growing by taking market share from there is difficult, and at the same time, this is a category that does not structurally grow particularly fast, so we can perhaps expect a few percent growth. Normalized across the cycle.

Well, certainly those factors, but in addition to that, quite exceptionally we have seen two such raw material inflation spikes in such a short time, which is certainly frustrating for the company, frustrating for investors, and something I wouldn't have been able to expect myself. Namely the first one right around the war of aggression in Russia. The prices of oil and plastic raw materials shot through the roof in a really, really short time, but they also started to drop quite quickly afterwards. And now this latter inflation spike, which we are seeing again. Surely it has made achieving growth more difficult, because when you try to win more shelf space, it's hard to start negotiations by saying that we also need to raise prices on these products. I believe the macro explains the vast majority of this.

At the same time, of course, it's always relevant to also consider what the company itself could have done better. And perhaps one thing that comes to mind for me is whether the company could have been more aggressive in terms of product development and new product launches, for example. Orthex has managed its product portfolio very tightly, which is typically a good thing—usually companies go wrong when their product offering starts to branch out too much, going outside their own core strengths, so to speak. But perhaps in Orthex's case, it is quite realistic to also consider whether we are being overly strict about this. And whether that has perhaps limited our success to some extent.

Well, the same thing was seen with Harvia, for example, that Harvia's Kirami didn't go entirely smoothly. Steam products grew a bit there too, and are treading water. You also alluded just to the fact that the last 10 years, or sorry, now in the current decade, consumer purchasing power has clearly been put to the test, but before that, when we lived in a zero-interest-rate era, purchasing power was completely different. Indeed. Does this boil down in part to the fact that if 80 percent of sales come from the Nordics, there are a lot of variable-rate mortgages here, which makes this a much more interest-rate-sensitive market? Yes, absolutely.

So that is in the background. Another thing that is good to keep in mind is that Orthex's main product category is storage solutions. They are bought in connection with moving, and the housing market has been down for the count for quite some time now. That surely has an effect as well. As an analyst, it's hard for me to quantify how much more growth headroom that would bring to Orthex if the housing market and migration activity picked up a bit from the current situation.

Exactly. Well, if we turn our gaze forward, you are forecasting that earnings will only return to growth in Q2 2027. So now we have to patiently wait for several more quarters here.

Indeed, it is unfortunately a waiting game. We are in a waiting state with this investment case right now. And the only reason is that increased oil price. Or also the price of plastic raw materials. Driven by the fact that if we think about Orthex's demand environment, when you look at the figures for Nordic retail sales, for example, they look really encouraging. So I feel that we have good preconditions to turn revenue into quite good growth in this story. Now that demand environment looks positive in that regard. Hopefully it stays that way.

But at the same time, since the raw material price has risen so steeply, it has only shown in the company's own figures as of Q2, and with these current price levels, it will surely undermine profitability for the coming quarters. And of course, let's hope that the situation in the Strait of Hormuz, for example, could be resolved quickly. Now it feels like, for example, regarding the United States, it is not at the top of the US priority list, and consequently this sort of difficult limbo in which the entire chemical industry finds itself threatens to drag on, which naturally is difficult from Orthex's perspective. And with Orthex too, it's good to keep in mind that as long as there is this inflation pressure in raw materials, advancing the European growth strategy is considerably harder. Over there, you try to win new shelf space, find new distributors to bring your own products into. And when you can't really run campaigns and you are forced to raise your own prices, it slows down, which was just seen in Q2, for example.

And when you pull all these things together, in practice, positive drivers are pretty much conspicuous by their absence in the short term. So okay, even though you can get a 5 percent dividend yield from the share, it's not enough for a positive stance right now, as we've now shifted to the reduce side.

Yes, well summed up, and at the same time, I also encourage investors to pay attention to that interest rate development, that indeed today interest rates are also, so to speak, genuinely, fixed-income products are genuinely a viable investment target. Back when I also started as an analyst and we lived in the zero-interest-rate era.

Made me chuckle, yeah.

There was no point in putting money into fixed income. It was kind of a necessary evil by some regulated investors who were forced to put cash there. But today, like it can

You get pretty respectable returns from short-term interest rates.

Exactly, exactly, and at the same time they now genuinely compete with various equities as well. And I personally see that in the short term, this development puts pressure on acceptable valuation multiples. And that can be a pretty brutal combination if the market's return requirement goes up. At Inderes, we also raised that risk-free rate return requirement in our DCF models, and at the same time the company's earnings are weakening. I can well imagine a situation: the market doesn't look too kindly upon that, and sort of the accepted valuation level may come down a bit as a result.

The positive thing about Orthex is that we have talked a lot about this plastic raw material price inflation and the impacts on profitability. But the positive thing about Orthex is that the company's profitability is nevertheless at a good level on a normalized basis, and even in shocks like this, the company remains profitable—so this year as well, a profitable result is still expected, from which the company is well able to pay a dividend too. And the second thing is that since the company has a strong balance sheet, there is no risk here of some kind of liquidity shocks forcing the company, for example, to strengthen its balance sheet through equity financing or take out really expensive emergency loans.

That's all we'd need.

Yeah, yeah. But indeed, I want to emphasize that there is no such risk in this story, and consequently the investor has the prerequisites to patiently look through a shock like this.

But what sort of makes me as an investor perhaps limit my enthusiasm is that when you look at the valuation on a normalized profitability level across the cycle, Orthex has generated an adjusted EBIT margin of around 10–12 percent. If you start relating this to the estimates for the next few years, the valuation level looks roughly neutral, let's say. That feels a bit thin in my opinion. The compensation you get when you look through this inflation shock. Otherwise, you could sit back with a clear conscience and wait for the raw material price to come down and thereby profitability to rise and reach that normalized earnings level.

Perhaps. Another thing I wanted to bring up as well, when you mentioned that 5 percent dividend yield. If we use a working assumption that Orthex's cost of equity requirement is 10 percent, then clearly, the share is also pricing in earnings growth, the achievement of which has been challenging in recent years and will continue to be challenging in the next few quarters.

Indeed. Actually, a quick teaser for this intermission. Petri and our economist Marianne are planning to record a video specifically about our recent increase in the required return. Keep that in mind. You just referred to the company's strong balance sheet. Well, should that balance sheet then be put to work? On the corporate front or the M&A front, it has been a bit quieter recently.

Yes, I feel that the market has a rather expectant atmosphere regarding this, because the company strongly highlighted this sort of acquisition opportunity and industry consolidation potential, but nothing has happened in that regard yet since the IPO. I buy the point that when these raw material price developments are very volatile, it is difficult to reach an agreement with the seller on what the normalized profitability for the target is and what an acceptable valuation level is. If we think about these valuations back in 2021, they were certainly considerably higher on the unlisted side as well than they are today. And I can imagine that for many, it can be mentally difficult to adapt to the change that, hey, the reality now is that the value of the company is no longer the same today as it was a few years ago.

On that front, it has been quiet. I believe that these factors have made it more difficult. As an analyst, I am always interested in whether this challenging operating environment could lead to a situation where someone is essentially forced to sell their company. For example, to avoid balance sheet risks. Such possibilities can also exist. So far, it seems that at least these have not materialized among the companies that Orthex is interested in. To my understanding, the company is nonetheless interested mostly in slightly higher-quality companies, so they are not looking to buy any complete turnaround case.

And I think it is a good thing that they are selective about what is bought and at what prices. Because, after all, according to academic studies, the majority of

Most M&A deals fail to create value.

Exactly, exactly, so that is why I would rather see management being really selective, cautious with these and striking when the right opportunity comes along. As an analyst or investor, I would not want to put too much pressure on the company that these must be executed now. I believe there would be certain benefits, specifically that you get closer to your key customers in Europe in terms of production capacity as well, but at the same time, I also do not believe that it is kind of the solution for how to accelerate revenue growth sustainably.

We have seen good examples of this year. Even the Revenio case and the Visonic acquisition, investors punished them heavily for not being enthusiastic there, and they were not very enthusiastic about Kone's acquisition either. It is not necessarily a shortcut to happiness, not necessarily.

In Orthex's case, I hope at least that any transaction they would execute would be smaller relative to their own size than, in particular, in Revenio's case.

Yep. Well, now we have been on a pretty cautious stance during this video, but if we were to paint some slightly more positive scenario, what could it really look like in your books then?

I think there are several, but if we start perhaps with the fastest and most concrete one, it would be that for one reason or another, the oil price is driven down and along with it, plastic raw material prices are also brought down. That could very quickly change the company's growth picture and at the same time its profitability outlook. This is in my view the most obvious one, and even if it were known that one or two weaker quarters are coming, I genuinely believe that the market will proactively price in that positive development in the macro environment. At the point when we get visibility that things are heading for the better.

Well, perhaps the second one would be precisely these corporate transactions. We went through here that if the company could negotiate such a home-run deal, I believe the market would get a certain monkey off its back regarding the fact that, hey, this company is genuinely still capable of executing these corporate transactions and at attractive valuations. At that point, I believe that the M&A card might also be looked at further into the future. I do not think they will execute multiple deals back-to-back, but just the fact that if the company is able to demonstrate that they can negotiate attractive deals, it would kind of bring a new dimension to this investment case.

Well, the fact that retailers' revenues are growing in the Nordics certainly helps Orthex, but an even greater factor for this story is definitely sales in the rest of Europe. The company is. Even though revenue has stagnated in the big picture, revenue, or invoiced sales, has systematically grown in European growth markets despite that, but their weight is still so small that it is not visible from the total perspective. I genuinely believe that if the company could shift into a higher gear regarding this European growth story and be able to convince the market that they can grow here by 20 percent a year further into the future, it would certainly be reflected positively in this share price as well. But I believe those are the main ones that come to my mind from this. Especially, let us say, on a few-year horizon.

Let us keep following what comes out of there. At least we will get the Q3 figures very shortly. Soon. Right? Hey. Thank you Thomas for these comments and a very pleasant continuation of the earnings season to everyone at this point, and remember to read the research. Make good stockpickers.