The purpose of this report is to analyse the Nordic consumer durables or durable goods industry and to assess its investment potential. The report also aims at identifying specific companies in the industry that are candidates for investment. These candidates will be analysed in a separate more company specific analysis. To make the industry analysis more specific and relevant, 13 consumer durables companies in the Nordics have been included in the analysis. 

During the period from 2013 to 2022 the median return on capital for all 13 companies has been 15.2%. The median operating margin (EBIT) has been 7.7%. The operating margin thus fall short of my initial hurdle for investment consideration; long term historic return on capital and operating margin above 10%. However given that the average operating margin during the 5 last years have been just above 10% and that several companies have an operating margin well above 10%, I have decided to still go ahead with the analysis of the industry. 

The structure of the report is as follows: 

- The first chapter of the report, after the introduction, is a summary of the main conclusions and recommendations for the industry. 

- The next three chapters aim to give an overview and better high-level understanding of the industry. First there is an introduction of the 13 companies, that are being analysed, including revenue and a high-level description of their business. After that follows an overview of the industry and its history as well as an overview of the industry value chain.    

- As there are many voices being raised about the sustainability of the ever-growing personal consumption in our society a separate chapter has been dedicated to the consumerist society.

- This is followed by an in-depth analysis of the financial performance of the industry. 

- The consumer durables market dynamics and the factors that are likely to impact future industry growth have been analysed in a final chapter of the analysis.  

 - The conclusions from the analysis are summarised in the chapter Investment Considerations. In this chapter the rational for and against investing in the industry have been made. It’s important to point out that the investment horizon considered in this chapter is long term or at least 5 years.

The investment attractiveness of the consumer durables industry depends very much on the segment of the industry. Segments for products aimed an active lifestyle, outdoor and/ or mobile living look attractive. On the other hand white goods and electronic products are very competitive, low margin segments and less attractive. The companies in the industry that are likely to do well in the future are the ones that can combine as many of possible of the criteria convenience, active lifestyle, mobile living, electrification and being truly sustainable with a strong financial performance. There are in total 6 companies that, in an initial assessment, match these criteria although the sustainability of the companies has not been analysed in detail. These 6 companies are thus candidates for investments and should be analysed more in detail. 

The return on capital is strong for the majority of the companies in the industry. The median return on capital during the last 10 years has been 15.2%. The median return on capital has been in an upward positive trend during the period analysed. Margins are generally low to average but are compensated for by relatively low capital intensity operations which allow for high returns on capital in spite of low margins. Most companies show strong historic growth albeit not all of it has been organic but achieved through acquisitions. 

The biggest challenge for the industry is how ESG focus will impact the business in the mid to long term. As consumers are giving more and more importance to the perceived sustainability of a brand in their purchasing decisions getting the ESG issues right is becoming a bigger priority for the manufacturers of consumer durables. The E in ESG is probably the one that is getting the biggest attention due to its importance for global warming and climate change. The S and the G are however gaining importance both among consumers and shareholders. The question is how this will impact product demand mid to long term and consequently sales and profits. 

There is more and more evidence that companies that have a strong focus on ESG also have a better financial performance. This may be less controversial than what it appears at first sight. A company that cares about the environment is likely to have a strong focus on economizing resources in general, a company that treats its employees well are likely to attract competent people over long time, a company that is acting ethically is likely to have strong governance principles in general,…etc. 

To conclude there are several companies in the industry that are well positioned to respond to the future trends of the industry and that have also demonstrated strong financial performance. To invest in such a company will also require them to have a very strong ESG ethos integrated in their corporate culture. 

It’s said that one should never try to time the market but it’s very possible that consumer demand will fall further (from current levels in September 2023), due to the increased cost of living before it recovers. Markets are therefore likely to punish the consumer durables with falling share prices. The prudent investor may therefore be better off to keep some of his powder dry until it one can see a clear trend shift in consumer demand.

Consumer durables or durable goods are a category of consumer goods that have a long life length. They do not wear out quickly and do therefore not have to be replaced or purchased frequently. According to the U.S. Department of Commerce they are considered durable because they last for at least three years. Examples include appliances such as washing machines and refrigerators, small appliances such as computers and other electronics, furniture, tools, sporting and outdoor equipment but also boats and caravans. 

There are in total 13 companies listed on the Nordic stock exchanges that fit this definition. These companies cover many different subcategories of the consumer durables industry and should give a good picture of the different aspects of the industry. The 13 companies have been listed in table 1 below in order of revenue 2022. The nationality and the company’s business have been indicated as well. 

Some of the durable goods or consumer durables, such as tools, are as old as humankind. Others such as furniture rugs came later as humans gave up their nomadic lifestyle and started living in more permanent settlements. The real breakthrough for consumer durables with the invention of electricity. Thanks to electricity many of the household chores such as cleaning, washing, cooking and food storing became much easier and quicker to carry out. This gave birth to the household appliances industry. What is common for these products as well as others such as the bicycle is that the purpose was to let machines carry out work that was previously done by humans and to make life easier and more convenient.   

Over time fewer people had to do manual jobs, working time was reduced and we got more holidays. We simply had more free time and we didn’t have to spend all that free time washing, cleaning, cooking or recovering from being physically exhausted. As a consequence the need for more past time activities such as sports, hobbies and outdoor activities increased, which became another great market for consumer durables. As technological development advanced more and more electric appliances for leisure and convenience appeared, from early inventions such as the radio and the TV to recent days smart phones and peloton bikes.  

As people in the western world got wealthier and wealthier we had more income to spend on consumer durables. To make the products more affordable the manufacturing of many products moved offshore to low labor cost countries such as China. This allowed us to buy even more consumer durables. As manufacturing costs don’t really vary that much between different companies making the same consumer durable the way companies try to distinguish themselves, sell more and make bigger profits is through brand equity, e.g. that the company’s products have (perceived) better quality or that it’s equipment will make you a better performing athlete.  

What started as a humble pursuit of making life easier for hard working families has evolved during the last 100 years to become a multi-billion dollar industry which in the US for instance makes up 9% of the GDP (2019). All this has led to consumerist societies in the western world and questions are being raised today about the sustainability of this way of life as it contributes to the depletion of the earth’s resources and generates high amounts of waste. 

As has become clear the main purposes of consumer durables are convenience and entertaining us during our free time. This means that we can certainly live without most of them and we can in most cases avoid or delay the replacement of them when a new version or model is being launched. As a consequence consumer durables are very dependent on the business cycle. During a business boom and when times are good people tend to spend a lot on consumer durables but during a recession and when times are tough, consumer goods spending is one of the first things people cut down on.   

The Nordics have perhaps traditionally not been seen as a major hot bed for consumer brands. Nevertheless there are some of them which have global recognition and success such as IKEA furniture, Husqvarna chain saws, Bang & Olufson HiFi equipment and Electrolux vacuum cleaners. These examples show that Nordic companies have the ability to develop global brands, recognized both for high end premium priced products like Bang & Olufson and low cost products like IKEA. IKEA has a bit of a special twist as it also introduced a completely new business model.

The industry’s high level value chain can be seen in figure 1 below. The Innovation & Product Development step is a very important step as it will lay the foundation for the commercial success of a new product. Different and sometimes conflicting objectives such as functionality, appealing design, quality, safety and costs have to be considered. To remain competitive it’s crucial that the company gets this step right and as many times as possible. The products may also need to be patented to prevent any replication or copying.

The manufacturing process must be established and suppliers sourced prior to starting full scale production of the new product. Depending on the complexity of the product the number of components and parts included may be several hundred. The manufacturing of many of the components is therefore likely to be done by external suppliers. These suppliers will in their turn have material suppliers for resin, metals, chemicals,…etc.  Many of these suppliers will be located in China or other Far East countries. This adds more complexity to the supply chain and longer lead-times. This was exacerbated by the various lock downs during the pandemic as supply chains were severely disrupted with delays and cost increases for the manufacturers as a consequence. Many manufacturers are therefore looking at reducing the exposure to Far East suppliers.     

Once components have been manufactured they will be delivered to an assembly plan/ line where the final product will be assembled. Testing will take place and documentation prepared. The product will also be packed. The packed product is typically stored in a warehouse or shipping area before being shipped to the customer. Many consumer durables manufacturers will store the products in a regional distribution center. The products would then need to be transported from the factory to the distribution center. From the distribution center it will then be shipped to the customer when ordered. Bigger products such as a caravan or a small motorboat are likely to be shipped directly to a dealer of reseller. 

Typically the consumer durables manufacturer doesn’t sell directly to the consumer but will sell its products through different sales channels. The exception to this is online sales. Through the advent of online shopping many manufacturers have created their own sales portal where they sell directly to the consumer. This puts different requirements on distribution capacity as it requires piece picking and distribution. The more common sales channels are to sell to a distributor, a specialist retailer, a wholesaler or a dealership. Some companies such as Dometic would also sell to OEMs. They would then be a component supplier to that OEM.      

Product branding and product marketing are very important activities for consumer durables. It’s all about creating a connection to the consumer and giving him the arguments and desire to choose the company’s product over the competitors or instead of using the money for another purpose. Products are generally made to stock which means that accurate product forecasting is essential. The forecasting process is being complicated by the fact that the demand depends so strongly on the business cycle. It makes it very difficult to get the forecast right with risk of either producing too much and creating obsolescence or not producing enough and losing valuable sales.     

After the product has been sold and delivered to the consumer they will occasionally break. If it’s a valuable product it’s likely to be repaired and the manufacturer will have to hold a stock of spare parts for this purpose. Depending on the type of product the manufacturer may also have an Extended Producer Responsibility (e.g. electronics) which means that the manufacturer has end-of-life management responsibility, including collection and recycling of old products.

There are more and more warnings raised about the untenability of the consumerist society. Increase in spendable income has led consumers to consume more and more. Manufacturers have responded to the increased demand by making product life cycles shorter and increasing the frequency of new models. They have also invented completely new products. As a consequence consumers replace their products more frequently and discard the old ones. On a global scale this ‘over’ consumption leads to the gradual depletion of the earth’s resources as well as contributing to CO2 emission and global warming. From an environment perspective there is thus a need to: 

• ‍Reduce:
  ‍Use less resources and material when developing and producing new products but also reduce the number of new products we buy. ‍
• Reuse:
  Instead of throwing away an old and replaced product it can be reused by someone else. It’s also possible to share the same product between different users. ‍
• Recycle:
  When products can no longer be reused any more they should be recycled so that the material can be used as input material in the production of new products. 

In this context it is also important to remember the positive impact consumer durables have on our everyday lives. Not many people want to go back to a situation where we have to wash our clothes by hand or keep our food in a cave in the garden with a huge ice cube in it. Some consumer durables allow people to live a more active and healthier lifestyle. Others allow people to enjoy the sea or listen to music. 

Consumer durables thus bring value to people in many ways. The problem is that the one enjoying the value product doesn’t necessarily have to pay for the externalities that the product is causing. Such an externality charge would increase the price of the product and likely make the consumer limit his purchases and the frequency of replacement. If for instance the consumer durable company had to pay for the impact the sea freight from China had on the environment they would have to increase the price to the consumer which would have the desired effect of reduced overall consumption. 

The challenge lies in the establishment of a fair and easy to implement charging mechanism for the externalities. The work to establish such mechanisms or methodologies is still in its infancy. Such methodologies allow experts to assess the costs of externalities and make it transparent to the participants in the value chain, even to the consumer.  

It’s likely to take time before the price the consumer actually pays reflect the true cost of the products. If the price, including the externalities, was at least made available to the consumers they could make a better informed decision about which product that is the most sustainable and make a voluntary restrictions in the purchases of consumer durables. The awareness in our society about the issue has certainly increased and most people have at least a basic understanding of the necessity to limit personal consumption. The question is how much that will actually impact consumer behaviors? Will it make consumers buy less?  

I don’t believe that it’s realistic to expect that people will voluntarily give up conveniences they have already gotten used to having in their daily lives. There are also millions of people entering the middle class in the emerging markets. These consumers want to experience the same conveniences, past time activities and entertainment that we are enjoying in the West. 

What I think is realistic is that consumers will more and more demand companies to be truly sustainable, i.e. that a sustainability ethos is well integrated into the company’s culture. As consumers gain more and more knowledge it will become more difficult for companies to hide behind big words about sustainability or so called ‘green washing’. It is possible that consumers will think harder about the need to replace an existing product with a new version of the same product that is just marginally better. Consumers may be more open to share or rent or buy items second hand.

To get a better understanding of the industry’s long-term financial performance a selection of financial ratios has been calculated for all the 13 companies over a 10-year period, from 2013 to 2022. Tables with all the details as well as calculation methods can be found in Appendix 1. This period should be long enough to compensate for the exceptional pandemic year 2020 and short enough to make it relevant for giving an insight into the industry’s future potential. The 13 companies operate in a wide variety of different segments in the consumer durables industry, which should give a good representation of the financial performance of the industry. 

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Profitability: 

To assess profitability Gross Margin and Operating Margin (EBIT%) have been used. The average gross margin for the 10-year period 2013 to 2022 can be seen in graph 1. The gross margin varies a lot depending on the type of company. 

Kabe has the lowest gross margin of 14.1%. They act as the exclusive importer for the Adriana Caravan brand in the Nordics on one hand. On the other hand they purchase a high number of components from suppliers for the products they produce inhouse, and mainly focus on assembly. 

Mips which uses an ingredient brand model has the highest gross margin at 70.1%. They don’t have any own manufacturing but charge the customer a license fee per (customer) product. 

The gross margin thus varies very much depending on the company’s business model. The median gross margin for all 13 companies is 39.6%

If we instead look at the development of the median gross margin per year during the same 10 years (2013 – 2022) for the Nordic companies, see graph 2, one can see that the gross margin per year varies within the range of 37.1% to 40.5%. without any clear trend. Gross margins were the highest during the first year of Covid pandemic, 2020, which surprising as most companies had lower sales that year than in 2019 or 2021. The likely explanation is that many companies   

Had big supply chain issues during the lock downs and had to sell from stock without always being able to reproduce what was sold. Production volumes were lower and consequently the cost of goods sold as well. In 2022 we start seeing the impact of increased supply chain and material costs whereas the companies haven’t yet been able to fully compensate with increased prices. The gross margin of 2022 is more in line with the outcomes of the years prior to 2019.

If we move on to the average operating margin (EBIT), graph 3, we can see that we have big variations between the various companies also for the operating margin. The median operating margin is only 7.7% where Bang and Olufsen have the worst performance with a negative operating margin. More than half of the companies have an operating margin below 10%.  

The companies that have an operating margin well above 10% are outdoor/ life-style companies such as Dometic and Thule. GN Store Nord is partly helped by its hearing aid business which as a medical device tends to have high operating margins. Embellence that is selling premium home décor products and Marimekko, who are also selling premium home decor products and accessories have margins just above 10%.

As for gross margins it’s also worth looking at the development of the operating margin during the last 10 years. In graph 4 the median operating margin per year for the period 2013 – 2022 has been shown. The operating margin varies from 5.9% in 2014 to 12.4% in 2021. Although the margins fell in 2022 there has been a positive trend throughout the period. 

By looking at the difference between the gross margin and the operating margin we can also form a view of the size of the Sales and Administration costs (S&A) and the Research and Development costs (R&D). The average margin difference during the 10 years varies between 7.4% for Kabe and 52.3% for Marimekko. The median difference is 27.1%, meaning that S&A and Research cost makes up 27.1% of the revenue. 

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Growth: 

Growth measured as the Cumulative Annual Growth Rate, CAGR, for the 13 companies have been shown in graph 5. The CAGR varies enormously between 1.9% for Bang & Oloufsen and 57.6% for Mips, with a median CAGR of 8.8%. Mips benefits from their business model of only selling licences which allows for rapid sales increases. Nimbus and Gullberg & Jansson have gown their business partly through acquisitions but also seem to have benefitted greatly from the various lock downs during the pandemic. It would seem that a lot of people spend their holiday budget on a new swimming pool or a new motorboat when they couldn’t travel abroad.  

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Leverage:

The leverage ratio measured as Net Debt to EBITDA in 2022 for the 13 companies is shown in graph 6. Leverage is generally low and 4 of them even have negative debt. It’s mainly the big companies such as Electrolux and GN Store Nord that have a high leverage. Both companies as well as Husqvarna increased their debt substantially in 2022 and saw their EBITDA falling at the same time. 

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Capital Efficiency: 

To assess capital efficiency, or how good the companies in the industry are at allocating it’s capital, the return on capital employed (ROCE) has been used. As can be seen in graph 7, the ROCE varies a lot between the companies. The average return of capital per company for the last 10 years goes from 2.3% for Bang & Olufsen to 34.5% for Mips. The majority of the companies, or 10 to be exact have a ROCE well above 10% and the median ROCE is 15.2%.  

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If we look at the trend for the ROCE for the last 10 years the picture we get is that the ROCE is in an upward trend. Graph 15 shows the median ROCE for the 13 companies per year for the last 10 years. ROCE seems to have peaked in 2021. ROCE took a dive during the pandemic year of 2020 as expected but recovered nicely in 2021. It has since come down a bit in 2022.     

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Conclusions:

The overall financial performance, measured as return on capital, of the consumer durables industry is good. The majority of the companies have a return on capital well above 10%. Margins are generally relatively low to average. They vary substantially depending on the segment of the industry the company is operating in and the company’s business model.

The low operating margins are compensated for by relatively low capital intensity compared to other industries and help many of the companies to achieve good returns in spite of low margins. 

Growth is strong overall, though in some cases it is mainly driven by acquisitions. Some of the companies have been helped by unusually high consumer demand during the Covid Pandemic for products aimed at outdoor activities and home improvements.  

Leverage is generally low. Several companies have no or negative net dept. There are some cases with exceptionally high leverage due to poor financial performance (low EBITDA) and increased debt in 2022.

Technological innovations, increasing disposable income, urbanization, less physically demanding jobs, more free time and humans’ insatiable need for convenience have led to the strong growth that the consumer durables industry has seen for many decades. The purchases of a consumer durables are discretionary and rarely urgent. We can easily delay the purchase of a new robot vacuum cleaner for a year unless the old vacuum cleaner breaks down. The disadvantage with this is that in an economic downturn the first thing people will cut down on is discretionary spending. The industry is thus very dependent on the business cycle. 

The recent covid pandemic also demonstrated how sensitive the industry is to consumer behavior and preferences. In the early days of the pandemic during the first lockdown demand slowed due to fear and delays in the supply chains. As people had more free time they started exercising more and bought a new bicycle or peloton bike. Then they were not able to travel abroad during the summer holidays so they stayed home and built a terrace, went camping or hiking instead. This meant that the demand for several consumer durables products increased substantially. This in turn led to problems getting goods from the suppliers which led to everyone in the supply chain increasing their inventory. Eventually everybody got their new bicycle and demand dropped during 2022. All dealers, wholesalers and retailers then stepped on the breaks and stopped ordering from the manufacturers. As a consequence the sales for the manufacturers suffered which has led us to the situation that we are in right now (September 2023) with reduced sales for many manufacturers.    

Another important factor for the market is the brand. It takes a lifetime to build a good reputation but you can lose it in a minute as the saying goes. If for instance safety is part of your brand identity it may only take one accident to destroy that brand image. You need thus to treat and nurture you brand as it was your most valuable asset. An example of a company who seems to be managing their brands very well is the Husqvarna group. The Husqvarna brand is associated with high quality premium motor bikes and chain saws. The group recently acquired Gardena which makes low end garden products. In order not to dilute the Husqvarna brand they have let the two brands live as independent brands.

One of the surest way to ruin a brand is to stop innovating. History is littered with brands that were considered number one in their industry and then fell from grace and got overtaken by a competitor with a new innovation. Some recent and famous examples are Nokia, Kodak, Blackberry, Toshiba and Atari. The stronger the brand is the better pricing power the manufacture will have towards the customers such as the dealers. The brand equity is thus crucial to succeed in the industry. 

If we look at the expected growth of the industry for the next years the picture is very good. The various segments of the industry are expected to have a CAGR in the range of 5.0% to 11.5% during the next 5 years. The forecasted CAGR per segment has been shown in table 2.

Some of the trends in the society that are expected to drive this growth are: 

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Increased leisure spending:‍

People have more free time and live longer and more active lives with more exercise, sport and outdoor activities

Humans crave convenience:‍

We humans seem to be hardwired to search for ways to make our lives more and more convenient. This has been one of the main driving forces for the growth of the consumer durables industry during the last 100 years. This urge for convenience is unlikely to change 

Electrification:‍

Garden tools and equipment is a good example of how the electrification of society is driving the introduction and demand for new products. The tools and equipment used to be manual or petrol driven. Then they became electrical with long and unpractical electrical cords and now they are becoming autonomous through the use of battery technology.    

Increased spendable income:‍

As the people in emerging markets gradually get more spendable income they will have more money to spend on consumer durables. 

Sustainability:‍

Consumer preference for buying sustainable brands and willingness for paying a premium for sustainable products is increasing. Most consumer goods companies therefore claim that they are sustainable. It is, however, very difficult for the consumer to assess to what extent the company and its products are truly sustainable. The risk is that the press and social media influencers will get too much power to make that the decision for the consumer. 

The other issue is the contradiction in the consumption as such. The biggest impact on the environment would come from reducing the consumption which is not really in the interest of the manufacturer. 

What is clear is that there is more and more evidence showing that companies that focus on ESG activities also perform better financially. A recent study by Bain & Company and EcoVadis shows that positive ESG outcomes are a trait of successful companies and that sustainability measures correlate with better financial performance. In another report the NYU Stern Center for Sustainable Business and Rockefeller Asset Management examined 1000 research papers from 2015 and 2020 and found a positive relationship between ESG and financial performance in 58% of the cases.

Conclusions: ‍

Several consumer durables manufacturers have seen their sales fall during the 2022 and 2023. This is a consequence of inventory adjustments in the supply chain aftermath of the Covid pandemic. Spendable income for consumers has also been reduced due to increased cost of living. Once inflation has fallen to acceptable levels and mortgage rates start falling consumer spend is likely to recover in the mid to long term. 

There are several factors that are expected to drive further growth in the industry and forecasted growth looks very promising for many of the products in the industry.

So, should one invest in this industry? 

To make the characteristics of the industry more visible the information gathered so far has been summarised in an Industry SWOT analysis, see figure 2.  

Most of the companies analysed are dependent mainly on the European market and to some extent on the US market. Many consumers in these markets have seen their spendable income reduced lately due to inflation and increased mortgage rates. This has already started to impact the sales for many of the companies in the industry. Some of them are also benefitted from an unusual high demand during the pandemic which is now abating. The near future is therefore likely to be challenging for many of the consumer durables manufacturers. 

In spite of that the various segments show high growth rate for expected global sales during the next 5 years, made by different market research firms. Emerging markets are likely to play an important role for these growth rates to be achieved. However, given the current importance that Europe and the US have for the global sales, these two markets will have to grow as well for the high growth numbers to materialise. Given the current outlook for these markets the growth numbers look quite optimistic. It would seem prudent to expect a more moderate growth-rates, at least for the near future

The companies that are likely to do well in the future are the ones that can combine as many of possible of the criteria convenience, active lifestyle, electrification, mobile living, being truly sustainable with a strong financial performance. 

All companies have been assessed on how well they are likely to respond to these criteria, in table 3. The companies that are expected to do well on these criteria have been marked with a ‘Y’ and should be analysed more in detail. True sustainability is quite challenging to assess without a more detailed and in-depth assessment, which should be done during the company analysis.

For the companies that have been excluded a brief rational has been given as well.

So to answer the question if one should invest in the industry the answer is yes but only in specific segment of the industry and in those companies that are truly sustainable and have strong financial performance. 

It’s said that one should never try to time the market but it’s very possible that consumer demand will fall further (from current levels in September 2023), due to the increased cost of living before it recovers. Markets are therefore likely to continue punishing the consumer durables with falling share prices. The prudent investor may therefore be better off keeping some of his powder dry until it one can see a clear trend shift in consumer demand. 

Having said that, share prices often start recovering already before the company starts showing clear signs of business starting to improve. Share prices are normally driven by future expectations and once investors start expecting that the companies performance will start improving they will start buying.

Appendix 1: Percentage each business segment makes up of total revenue. 

Appendix 2: Financial ratios and methods of calculation 

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Calculation methods: 

1. ROCE, Return on Capital Employed, illustrated for 2022 =
   EBIT 2022/ ((Capital Employed 2022 + Capital Employed 2021)/2)
   Capital employed = (Total Assets - Short Term Liabilities – Deferred Tax Liabilities)
    
2. ROE, Return on Equity, for 2022 = Net Profit 2022 / ((Equity 2022 + Equity 2021)/2)
   
   
3. EBITDA = Earnings Before Interests, Taxes, Depreciations and Amortisations. Any non-recurring costs (e.g. restructuring) or non-cash profit (e.g. revaluation of forest assets) are eliminated from the costs/ earnings.
    
4. EBIT = Earnings before Interest and Taxes. Major non-cash profits (e.g. revaluation of forest assets) are eliminated from the earnings.

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Appendix 3 – Detailed analysis of Nordic Capital financial performance 

Business Units: 

1. Kraft paper is used mainly for packaging such as bags. 53% of revenue 
2. Grease proof paper for food, e.g., muffins. 47% of revenue 

Ownership:  

The company made an IPO in October 2020. Shanying International Holding is the biggest owner (through Sutriv Holding) with 48% of the shares and the votes. The other big owners are all institutional investors such as mutual funds. Prior to the IPO Shanying was the sole owner. They bought the company in 2017 from Holding Blanc Bleu and Petek GmbH.

Growth: 

As seen in table 6 the average growth during the 8 past years has been 9.3%. Revenue fell during the Pandemic year 2020. It recovered a bit in 2021 and increased by 44% in 2022.
In chapter 6 Industry Financials we saw that the industry revenue increase YoY in 2022 was mainly due to price increases. In the case of Nordic Paper there was also an acquisition made at end of 2021. The acquisition of Glassine Canada Inc. added approx.. 440 MSEK to the revenue in 2022 or roughly 14% of the total revenue increase of 44%.

More than 90% of the company’s revenue is exported. In the period 2016 to 2022 the Swedish krona fell against most other currencies. E.g., the Euro gained from SEK 9.57 in December 2016 to 11.19 in December 2022. That’s an increase of 16% or a CAGR of 2.5% per year. 

If we instead look at tons sold the picture is a bit different. In 2016 the sales volume was 263 ktons. In 2022 after the acquisition of the Glassine Canada the sales volume was 285 ktons or an increase with 7.5%. The corresponding CAGR was 1%. If we make a high-level adjustment for the total sales volume in 2022 would be approx. 40 tons less or 245 tons which is less than the volumes in 2016! Volumes have actually decreased.  ‍

Profitability:  

The operating margin (EBIT) was in average 13.6% during the 8 years period as shown in graph 10.

Overall strong operating margins throughout the period but with quite poor performance during the pandemic years 2020 and 2021. 

One contributing factor to the strong operating margins are the relative low levels of depreciations of the assets.     

Capital Efficiency: 

The high ROCE is driven by high operating margin (EBIT) and low capital employed. The capital employed, or the denominator in the ratio, is mainly corresponding to shareholders equity, long-term debt minus cash on hand. There has been very little change in the sum of this three between 2015 and 2019. In 2019 the company had no long-term debt. This changed in 2020 just before the IPO. The company then took a bank loan of 950 MSEK in order to pay the owners a dividend of 950 MSEK. This corresponds to almost 4 times the net result in 2020 or 40% of the market value of all shares. The ROCE has come down since then.  

If we look at the asset side of the equation one can see that the balance sheet value of the fixed assets hasn’t really changed since 2014. At the end of 2014 the value of buildings, land, machinery, equipment and ongoing constructions was MSEK 642. End of 2022 that value was MSEK 742 which includes assets of MSEK 100 though the acquisition of Glassine Canada. The company has only invested enough to cover the yearly depreciations. The value of the fixed assets in relation to the revenue 2022 was 0.17 (742/4440). The same ratio for Billerud is 0.69 or four times higher, as an example. According to an analysis of the IPO document made by Affärsvärlden in October 2020 (Svensson, 2020) prior to the IPO the company had identified a need to invest MSEK 1,200 in one of their factories (out of four). That was twice the amount of the total current value of their fixed assets. This investment hasn’t happened yet. All this points to a business that seems to have been ‘under invested’ for a long time.%. Nordic Paper seems to have prioritized high dividends to the owners and only invested the bare minimum to keep the operations running. This is concerning for the future. The MSEK 950 dividend the owners paid themselves just before the IPO would have been better spent investing in machinery and equipment. It’s also questionable how willing the banks will be to lend more money to Nordic Paper if they just use the money to pay their owners. 

Conclusions:

Nordic Paper has been a veritable cash cow for the owners prior to the IPO. The investments seem to have been neglected as most cash has been distributed to the owners. To make matters worse the company has borrowed a substantial amount of money to pay the owners a huge dividend just before the IPO.

The strong growth rate seen in the period 2014 to 2022 has mainly been driven by acquisition and favorable currency and price movements. The underlying volumes or delivered tons have actually decreased (in the period from 2016 to 2022). The price and currency factors may also act in the opposite direction for the company if the Krona strengthens or prices fall. As a consequence, profitability would take a hit.  

As profitability has been reduced in 2020 and 2021 and debt has been added ROCE has been reduced as well. If one were to add the investments of MSEK 1,200 identified in 2020 to the capital employed the ROCE would fall even further.  

As the previous owner has maintained a 48% stake and the next 9 biggest owners that together hold 31.1% are all institutions the strategy of the company is not likely to change dramatically.

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