Suominen Corporation commissioned research 060718

Commissioned research 6 July 2018

Marketing material commissioned by Suominen Corporation

Suominen Corporation Consumer Goods | Finland Key data

Absolute and relative performance

Source: FactSet and Thomson Reuters

Valuation approach

Source: Nordea Markets

Wiping away the valuation discount Specialised nonwovens company Suominen is a specialised nonwoven company with strong top-line growth prospects. We believe the company has the potential for a valuation rerating if clear evidence of a margin recovery from current distressed levels emerges.

Growth underpinned by market growth and investments Suominen manufactures nonwovens as roll goods for various end-user applications, such as cleaning and personal care wipes. The nonwoven market is growing ~3% in the US and Europe. The recently completed investment programme – particularly the ramp-up of the over EUR 50m Bethune production line in the US, which started production in Q2 2017 – should increase sales volumes, improve product mix and result in 8% annual sales growth, according to our estimates.

Turnaround in margins, driven by Bethune and price mix Following a period of weak financial performance (strained by high raw material cost inflation and the startup of Bethune), we now expect Suominen to show improving margins and returns for 2018-20. However, our estimates are still conservative compared to management’s target of EUR 600m sales and a 10% EBIT margin by 2021. Key drivers will be the ramp-up at Bethune and improving price mix as sales prices are adjusted for higher input costs. Suominen is also improving its product mix. We expect ~70% of sales to be generated from higher value added products, ie segments other than baby care, by 2021 (58% in 2017).

Strong value support emerging once track record builds up Earnings multiples based on this year’s suppressed earnings reflect a warranted discount to peers, while multiples for 2019E-20E show potential for rerating, as we believe this year will mark a turnaround in profitability. Against longer-term prospects, our DCF-based fair value suggests EUR 4.7-5.7 per share for the company. Based on a combination of 2019E-20E earnings multiples and DCF, our share price estimate is in the range of EUR 3.7-4.9.

Nordea Markets - Analysts Harri Taittonen Chief Analyst

Johannes Grasberger Senior Analyst

Veikkopekka Silvasti Assistant Analyst

SUMMARY TABLE – KEY FIGURES

Source: Company data and Nordea estimates

Country FinlandBloomberg SUY1V:FHReuters SUY1V.HEShare price 3.41Free float 76 %Market cap (m) EUR 203 MWebsite suominen.fiNext report date 3 August 2018

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Suominen share price OMX Helsinki Index

1M 6M 12M YTD

Absolute 5.8% -20.3% -26.8% -18.8%

Relative 9.8% -22.4% -29.0% -23.2%

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Share price, EUR

EURm 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

Net sales 455 443 402 444 417 426 461 511 538- growth -3 % -9 % 11 % -6 % 2 % 8 % 11 % 5 %EBIT (adj.) 11 17 26 32 26 15 17 26 35- margin 2.4% 3.9% 6.4% 7.1% 6.1% 3.5% 3.7% 5.1% 6.5%EPS (adj.) -0.24 -0.33 0.10 0.34 0.30 0.25 0.16 0.29 0.41- growth 38 % -131 % 234 % -11 % -16 % -38 % 82 % 43 %DPS 0.00 0.00 0.05 0.10 0.11 0.11 0.11 0.14 0.18P/E (adj.) n.a n.a 40.1 18.4 13.8 17.5 21.7 11.9 8.4EV/EBIT (adj.) 16.6 11.3 9.2 10.9 10.5 22.3 15.9 9.9 6.8EV/Sales 0.4 0.4 0.6 0.8 0.6 0.8 0.6 0.5 0.4ROE% -11 % -19 % 5 % 14 % 11 % 10 % 7 % 12 % 15 %Div. yield 0.0% 0.0% 1.2% 1.6% 2.7% 2.5% 3.2% 4.1% 5.3%FCF yield -29 % -18 % 5 % 2 % -10 % -5 % 7 % 10 % 14 %NetDebt/EBITDA 3.4 2.2 0.9 0.7 1.3 2.3 2.0 1.3 0.7

6 July 2018 Suominen Corporation

Marketing material commissioned by Suominen Corporation 2

Table of contents

Factors to consider when investing in Suominen ............................................................................. 3

Valuation .......................................................................................................................................... 7

Company overview ......................................................................................................................... 14

Business overview .......................................................................................................................... 25

Market overview ............................................................................................................................. 29

Historical financials ........................................................................................................................ 33

Detailed estimates .......................................................................................................................... 38

Risk factors ..................................................................................................................................... 44

Reported numbers and forecasts ................................................................................................... 46

Disclaimer and legal disclosures .................................................................................................... 49



Factors to consider when investing in Suominen Suominen manufactures nonwovens as roll goods for various end-user applications, such as wiping. Historically, the nonwoven market has grown ~2-3% faster than GDP in the US and Europe, and we believe this trend should continue with ~3% market growth in Western economies. Suominen is well positioned for demand growth with production in the US, Europe and South America. The recently completed investment programme will increase sales volumes and improve product mix and result in 8% annual sales growth, we estimate. Valuation multiples for 2019E-20E suggest scope for rerating if the evidence of a margin recovery emerges. Key drivers will be the ramp-up at Bethune and improvement of price mix, as sales prices are adjusted to higher input costs.

Valuation multiples for 2019E-20E suggest scope for rerating if the margin recovery emerges

Suominen is implementing its strategy to improve its product mix

Key factors when evaluating investment in SuominenSuominen’s EBIT margins have recently been below historical averages, owing to the high cost inflation that feeds through to sales prices with a lag, as well as losses stemming from the slow ramp-up at the Bethune production line, which started in Q2 2017.

Following a period of weak financial performance, we expect Suominen to show improving margins and returns in 2018-20. Furthermore, free cash flow will strengthen as a result of an increase in EBITDA and a decrease in capex.

Valuation multiples for 2019E-20E suggest scope for a rerating if the evidence on margin recovery emerges, we believe. Therefore, investor focus will be on the speed and magnitude of margin recovery, for which the key drivers will be the ramp-up at Bethune, along with improvement of price mix, as sales prices are adjusted to higher input costs, we find.

Demand growth for nonwoven products is steady and healthy, around 3% in the US and Europe. GDP/capita correlates with consumption of value-added nonwoven products, with household wipes and incontinence products at the high-end of the value spectrum. The underlying demand of Suominen’s products is non-cyclical as it is driven by everyday consumers.

Suominen’s customer relationships are long-term and often global, which creates stability for sales.

Following the largest investment in Suominen’s history, the Bethune production line (which started up in Q2 2017 with an investment cost of over EUR 50m) is ramping up, and the company is now likely to grow faster than the market. We expect an 8% sales CAGR during 2018-20. This would take sales to EUR 540m by 2020E.

Suominen is implementing its strategy to improve its product mix. We expect ~70% of sales to be generated from higher value added products, ie other segments than baby care, by 2021 (58% in 2017). The company pursues the higher-value segments by means of small add-on investments throughout its asset base, but in particular with the new output from the Bethune production line directed to the higher value added segments.

Suominen’s margins have been under pressure in 2017-18 due to the lag in sales prices compared to input cost prices, but as the sales prices catch up with the inflated raw material prices, we expect operating profitability to improve. Sales prices are adjusted up by cost pass-through clauses (with a two- to five-month lag) on contracts that account for around half of Suominen’s sales. For the remaining contracts, Suominen is applying more aggressive pricing to mitigate the cost inflation impact.



The Bethune production line incurred an operating loss of EUR 4-5m in 2017, but is starting to have a positive impact on group margins this year as the ramp-up proceeds. Achieving breakeven equals a one percentage point margin improvement for the group.

With the investment programme that was tying up cash now completed, strong FCF secures Suominen’s financial health and capability for dividend distribution. FCF has been negative in 2016-17 (EUR -21m and EUR -12m respectively), but will turn positive and reach EUR 29m in 2019, we estimate.

Suominen has revealed that it is interested in expanding its operations to the Asia-Pacific region in the future. Expansion would give Suominen a stronger global footprint and access to the fast-growing markets in the region.

The company aims to reduce the pricing power risk by shifting toward more specialised added-value markets

Key risk factors

Suominen has a concentrated customer base, with over 60% of sales generated by the top-ten customers, which increases the customer-specific risk

Raw material price risk is inherent, as the sales prices of the company lag behind raw material inflation; thus, rapid or prolonged increases in raw material prices can decrease the profit of the company.

As nonwoven manufacturing is a relatively mature industry, competition is fierce. There is a risk of intense price pressure caused by oversupply when competitors expand their production capacity.

Suominen’s revenue is vulnerable to currency fluctuations. As the USD weakens against EUR, the revenue of the company will decrease because over 50% of sales are generated in USD. However, it is important to note that EBITDA sensitivity is not material, owing to the USD-denominated costs offsetting the top-line impact.

Suominen is relatively small compared with its main customers and suppliers; thus, the pricing power of the company is somewhat limited. The company aims to reduce this risk by shifting towards more specialised added-value markets.

The ramp-up phase of the new production line in Bethune might be prolonged further and incur major cost overruns for the company. Problems with the new production line would also affect our estimates significantly.

Nonwovens as roll goods for multiple applications Suominen is an international nonwoven manufacturer that specialises in nonwovens for wiping applications. Suominen also has some sales in hygiene and medical applications, but the main focus is on wiping. Suominen sells its products as roll goods for converters, brand houses and private label producers who convert the rolls into usable end products for consumers. Suominen has eight production plants on three continents.

SUOMINEN’S PRODUCTION ASSETS

Source: Company data and Nordea

Location Suominen group entity Counterparty bought from

Nakkila, Finland 2001 Lassila & TikanojaWindsor Locks, USA 2011 Ahlstrom CorporationMozzante, Italy 2011 Ahlstrom CorporationAlicante, Spain 2011 Ahlstrom CorporationBethune, USA 2011 Ahlstrom CorporationCressa, Italy 2011 Ahlstrom CorporationGreen Bay, USA 2011 Ahlstrom CorporationPaulinia, Brazil 2014 Ahlstrom Corporation



Suominen is focused on two segments of the total nonwoven markets, both valued ~ EUR 2.4bn

Megatrends support growth of the EUR ~30bn marketThe global nonwovens market size is approximately EUR 30bn. Suominen is specialised in the wiping segment that represents around 8% (EUR 2.4bn) of the total nonwoven markets. In addition, the company has chosen to focus on niche segments in medical and hygiene markets, which the company estimates to be worth around EUR 2.4bn.

Traditionally, market growth of the nonwovens market has exceeded the GDP growth in western countries by around 2-3%, while the growth is even faster in emerging markets. In addition, market growth in certain product segments is faster than the average. Suominen has executed its long-term strategy well to be able to exploit the faster growth trend in work place and household wiping segments, for example.

Underlying megatrends are supporting the market growth in the future. Trends such as rising health consciousness, higher sanitary standards, more active lifestyles as well as growing and ageing populations are fuelling demand for Suominen’s products.

We forecast Suominen’s revenue to exceed market growth. The rapid revenue growth in 2018-20 is driven mostly by the new production line in Bethune. We estimate volumes to increase significantly as the Bethune line ramp-up continues, and we also await volume increases from the factory in Paulinia, Brazil. Sales prices are set to increase because of favourable product mix transformation, more aggressive pricing by the company and pass-through of the inflated variable costs.

Financial targets appear ambitious; our estimates are lowerWe find Suominen’s margin target of 10% to be ambitious given that the company has never reached an operating profit margin of over 7.1%. Our estimates are more conservative, and we factor in a margin improvement of 3 pp in three years, from 3.5% in 2017 to 6.5% in 2020E.

Valuation conclusionWe use relative valuation and a DCF-based fair value calculation in our analysis. Based on the assumption that the company can deliver revenue growth and an operating profit margin in line with our expectations, we estimate a fair value range of EUR 3.7-4.9 per share based on our four different valuation approaches (DCF, 2019E P/B, 2019E EV/EBITDA and 2019E P/E). This valuation range is shown by the red lines in the chart below.

VALUATION APPROACH

Source: Nordea estimates

Based on our DCF framework and WACC assumptions of 8-9.4%, we derive a fair value range of EUR 4.7-5.7 per share for Suominen.

Our 2019E P/E valuation range of EUR 3.6-4.4 per share has been calculated by taking our 2019 EPS forecast of EUR 0.29 and multiplying it by the accepted valuation multiple range of 12.5-15.5x, representing a midpoint of 14x. This P/E valuation range represents Nordea Markets’ view and it has been derived from the company’s previous years and the historical sector median figures.

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Share price, EUR



Similarly, the P/B valuation range has been calculated by taking the company’s book value from 2019 and multiplying it by the accepted P/B valuation range of 1.45-1.75x, indicating a midpoint of 1.6x. As an outcome, this calculation gives a range of EUR 3.7-4.5 per share for Suominen, as seen in the previous chart.

Furthermore, in our approach, we use a 2019E EV/EBITDA multiple range of 5.9-7.0x to calculate one component of the fair value analysis. By taking into account that we forecast the company as having net debt of EUR 59m in 2019, the respective market capitalisation per share would then be EUR 3.7-4.6, according to our estimates.



Valuation Given our expectation that Suominen’s operating margins will recover gradually from their recently depressed levels, we see valuation support for the share. This is particularly true in our DCF analysis, which indicates upside based on longer-term earnings prospects. We believe that earnings multiples for this year reflect a warranted discount to peers, whereas 2019-20 multiples point to scope for rerating if evidence of a margin recovery emerges. We estimate a fair value range of EUR 3.7-4.9 per share, which is based on our four different valuation approaches (DCF, 2019E P/B, 2019E EV/EBITDA and 2019E P/E).

Earnings multiples show value potential vs 2019E-20E outlook Suominen has been valued at an EV/sales range of 0.4-0.8x, with current multiples suppressed by the low margins in 2017-18E. Provided that there will be a recovery in operating margins, we believe there is scope for rerating in the valuation multiples.

Provided that there will be a recovery in operating margins, we believe there is scope for rerating in the valuation multiples

EV/6-MONTH FORWARD SALES, 2012-20E


Forward EV/EBITDA multiples have varied in the range of 4.5-9.5x, with current valuation pointing to upside potential given the projected EBITDA margin recovery and as the projected free cash flow improvement lowers net debt.

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EV/6-MONTH FORWARD EBITDA, 2012-20E


The price-to-book value of equity multiples has ranged between 1.0-2.65x. As return on equity has declined to below historical averages, P/B is currently at the low end of the historical range. We expect return on equity to rise in 2019-20, which has normally translated into a rerating in P/B.

We expect return on equity to rise in 2019-20, which has normally translated into a rerating in P/B

PRICE-TO-BOOK VALUE VS RETURN ON EQUITY, 2012-20E

Source: Nordea estimates. 2017 net earnings adjusted for the tax gain.

Suominen reinstated its dividend in 2014 following several years of not paying a dividend. We expect the dividend to be kept unchanged at EUR 0.11 per share for this year, and then for it to increase to EUR 0.14 in 2019 and EUR 0.18 in 2020.

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DIVIDEND YIELD, 2012-20E


Peer comparison: upside potential if margins recoverThe Suominen share is valued at a premium to the broad peer group based on 2018E distressed earnings. However, with our earnings assumptions, valuation is at a discount of 10.1% to the peer group for 2019E and at a 30.3% discount to peers against 2020E estimates.

P/E, 2018E-20E

Source: Thomson Reuters and Nordea estimates

Our forecast implies a faster revenue growth rate for Suominen compared with its broad peer group

Superior revenue growth prospectsOur forecast implies a faster revenue growth rate for Suominen compared with its broad peer group. This is justified by the steady demand growth and the ramp-up of its Bethune production line, as well as improving price mix owing to the shift to higher-value market segments and the adjustment of sales prices to the increases in variable costs.

Despite the superior top-line growth outlook, the share is valued at a discount to its valuation peers.

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Pegas Nonw ovens as 12.8 12.2 - 12.5Berry Global Group Inc 12.8 11.5 10.6 11.6Ahlstrom-Munksjo Oyj 13.5 11.1 9.7 11.4Metsa Board Oyj 17.2 15.3 14.9 15.8BillerudKorsnas AB (publ) 13.1 13.7 11.7 12.8P H Glatfelter Co 17.7 12.0 10.7 13.5Miquel y Costas & Miquel SA 17.1 16.4 15.8 16.4Essity AB (publ) 17.3 15.4 14.1 15.6Suominen 21.7 11.9 8.4 14.0Average 15.9 13.3 12.0 13.7Suominen difference to average in (%) 36.5 % -10.1 % -30.3 % 1.9 %



2019E P/E VS 2018E-20E REVENUE GROWTH


ROE lagging peers, but recoveringSuominen is substantially underperforming its peers on return metrics for this year, with ROE of 7% being well behind the peer average of 16%. As we foresee improvement in earnings, we believe the gap to peers should narrow to 4% in 2019, and we foresee ROE being in line with peers in 2020.

We foresee Suominen’s return on equity being in line with peers in 2020

RETURN ON EQUITY, 2018E-20E


Suominen is valued at a 30% discount to peers in terms of price-to-book value. This is warranted in light of the near-term earnings outlook, but leaves upside to valuation if the returns accelerate to the pace that we forecast.

2019E RETURN ON EQUITY VS PRICE-TO-BOOK VALUE


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Pegas Nonwovens as 13.0 12.0 12.5Berry Global Group Inc 38.9 30.4 25.2 31.5Ahlstrom-Munksjo Oyj 9.7 11.7 12.4 11.2Metsa Board Oyj 16.3 16.5 15.5 16.1BillerudKorsnas AB (publ) 13.8 12.2 13.3 13.1P H Glatfelter Co 6.8 9.6 9.8 8.7Miquel y Costas & Miquel SA 15.6 15.0 15.3Essity AB (publ) 19.8 20.9 19.6 20.1Suominen 6.6 11.6 15.2 11.1Average 15.6 15.6 15.9 15.5Suominen difference to average, p.p. -9.0 -4.0 -0.7 -4.4

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DCF implies a value of EUR 4.7-5.7 per share One of the most common ways to value the attractiveness of an investment opportunity is the discounted cash flow (DCF) method. A DCF model discounts all available cash flows for equity, bond and non‐equity holders against the weighted average cost of capital (WACC).

Based on the assumption that Suominen can deliver broadly in line with our forecasts, with variations in sales growth, EBIT margin and WACC assumptions, we arrive at a fair DCF-based equity value range of EUR 4.7-5.7 per share. In the terminal period, we model 2.5% growth. The assumptions behind our WACC are outlined in the tables below.

DCF ASSUMPTIONS

WACC ASSUMPTIONS


DCF VALUATION


To highlight the sensitivity of the DCF valuation, we also provide sensitivity matrices modelling variations in revenue growth, margin assumptions and cost of capital. The sensitivities in our WACC are outlined in the following tables.

Averages and assumptions 2018-23 2024-28 2029-33 2034-38 2039-43

Sales grow th, CAGR 5.44% 3.0% 2.5% 2.5% 2.5%EBIT-margin, excluding associates 6.9% 6.7% 6.7% 6.7% 6.7%Capex/depreciation, x 0.7 1.20 1.20 1.20 1.20Capex/sales 2.6% 3.0% 3.0% 3.0% 3.0%NWC/sales 12.3% 12.4% 12.4% 12.4% 12.4%FCFF, CAGR 18.3% -1.4% 2.9% 2.5% 2.5%

WACC componentsRisk-free interest rate 1.5%Market risk premium 5.5%Forw ard looking asset beta nmBeta debt 0.10Forw ard looking equity beta 1.5-1.7Cost of equity 10.0-10.6%Cost of debt 2.5-3.5%Tax-rate used in WACC 23.0%Equity w eight 80.0%WACC 8.0-9.4%

DCF value Value Per shareNPV FCFF 366 5.8-6.8(Net debt) -80 -1.4Market value of associates 0 0.0(Market value of minorities) 0 0.0Surplus values 0 0.0(Market value preference shares) 0 0.0Share based adjustments 0 0.0Other adjustments 0 0.0Time value 14 0.2DCF Value 300 4.7-5.7



FAIR VALUE VERSUS. SALES GROWH & WACC


FAIR VALUE VERSUS SALES GROWTH & EBIT%


We use a stringent valuation framework setting ROIC under WACC in the terminal period, which prevents the model from extrapolating above‐market returns in perpetuity. Around 60% of the value is distributed in the coming ten years, and 97% within our 30‐year estimate cycle, according to our calculations.

DCF VALUE DISTRIBUTION TIMELINE


We estimate a fair value range of EUR 3.7-4.9 per Suominen share

Valuation conclusionWe use relative valuation and a DCF-based fair value calculation in our analysis. Based on the assumption that the company can deliver revenue growth and an operating profit margin in line with our expectations, we estimate a fair value range of EUR 3.7-4.9 per share based on our four different valuation approaches (DCF, 2019E P/B, 2019E EV/EBITDA and 2019E P/E). This valuation range is shown as the red lines in the chart below.

VALUATION APPROACH


6.7% 7.7% 8.7% 9.7% 10.7%+2.0pp 7.7 6.6 5.7 4.9 4.3

Sales gr. +1.0pp 7.3 6.2 5.4 4.7 4.2change 6.9 5.9 5.2 4.5 4.0

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WACC-2.0pp -1.0pp +1.0pp +2.0pp

+2.0pp 6.0 6.4 6.8 7.2 7.7EBIT margin +1.0pp 5.4 5.6 6.0 6.3 6.7change 4.7 4.9 5.2 5.4 5.7

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DCF

Share price, EUR



Based on our DCF framework and WACC assumptions of 8-9.4%, we derive a fair value range of EUR 4.7-5.7 per share for Suominen.

Our 2019E P/E valuation range of EUR 3.6-4.4 per share has been calculated by taking our 2019 EPS forecast of EUR 0.29 and multiplying it by the accepted valuation multiple range of 12.5-15.5x, representing a midpoint of 14x. This P/E valuation range represents Nordea Markets’ view and it has been derived from the company’s previous years and the historical sector median figures.

Similarly, the P/B valuation range has been calculated by taking the company’s book value for 2019E and multiplying it by the accepted P/B valuation range of 1.45-1.75x, indicating a mathematical midpoint of 1.6x. As an outcome, this calculation provides a valuation range of EUR 3.7-4.5 per share for Suominen, as shown in the previous chart.

Furthermore, in our approach, we use a 2019E EV/EBITDA multiple range of 5.9-7.0x to calculate one component of the fair value analysis. By taking into account our forecast of Suominen’s 2019 net debt of EUR 59m, we estimate the respective market capitalisation per share would then be EUR 3.7-4.9.



Company overview Suominen is a Finnish nonwovens manufacturer that operates in the US, Europe and South America. It is a global market leader in manufacturing nonwovens for wiping applications. The present Suominen has emerged from several different companies and its current strategic focus is solely on nonwovens, a market forecast by industry experts to grow approximately 3% per year in Suominen’s main markets (the US and Europe). Certain segments and emerging markets are growing even faster. Because of Suominen’s strategic aim to change its product mix, combined with growth investments in the US, we believe the company is well positioned to exploit the faster growth trend in value-added segments of nonwoven markets.

Suominen has global reach Altogether, Suominen has eight factories: one in Finland, three in the US, one in Spain, two in Italy and one in Brazil. This global footprint gives Suominen an advantage over its smaller competitors, which mostly operate only in one continent. In addition, geographical diversification is positive for nonwoven producers as the demand for end products is mostly driven by consumer confidence, and economic trends to some extent.

As nonwovens are low value for volume goods, their export is unusual and each factory’s output is predominantly sold in its respective local market. We consider the fact that exporting nonwoven goods is rare as a good thing for Suominen, because the company has a strong global presence in three continents. The locality of sales also protects Suominen against competition from nonwoven producers from countries with cheaper production.

In 2017, sales in the US and Europe accounted for 51% and 39% of Suominen’s total sales, respectively. The rest of the Americas generated 8% of sales, while 2% was generated in other geographies. This sales distribution has changed in the years since 2014, with net sales generated in Europe (35% in 2014) and other Americas (4% in 2014) having grown and the contribution of US-based sales having diminished (58% in 2014). This trend looks set to change with the ramp-up of the new production line in Bethune, US. We expect the new line to increase net sales significantly by 2020.

SUOMINEN’S LOCATIONS

Source: Company data



Convenience and Care are Suominen’s business areasThe Convenience business area focuses on manufacturing nonwovens as roll goods for customers that produce wiping products for a variety of end-user applications. The fairly concentrated customer base consists of large consumer brand houses, private label manufacturers, retail chains, regional and global companies specialising in converting nonwovens into wiping products. Convenience is Suominen’s main business area, accounting for 91% (EUR 388.6m) of net sales in 2017.

The Care business area provides nonwovens for medical and hygiene product manufacturers. The end-use applications of the products manufactured in Care vary from feminine hygiene to surgical drape components. Care accounted for 9% (EUR 37.5m) of Suominen’s net sales in 2017.

NET SALES BY REGION


NET SALES BY BUSINESS AREA


Intensity of competition and demand growth outlook vary for each product segment

The company aims to keep its leading position in baby wipes while increasing sales in other product categories

Suominen has five main product categories In its Convenience business area, Suominen produces nonwovens for different end-use applications: baby care, personal care, home wiping and workplace wiping. In addition to these product segments, the company produces goods for hygiene and medical applications in its Care business area. Each segment has a different growth outlook and the intensity of competition varies significantly. New capacity has flooded markets in the low value for volume bulk segment (baby wipes and flushables) while other segments such as household wiping, workplace wiping and niche segments in medical products, which require more advanced production technology, offer more room to acquire new clients and gain higher margins.

Currently baby care products are Suominen’s largest product category, but the company is actively diversifying its product mix to include more value-added products. During 2014-17 Suominen has invested in product development and new production assets to make this diversification possible. Its aim is to keep its strong position in baby care products, while boosting the net sales of other more value-added product categories with new capacity created through growth investments.

NET SALES BY PRODUCT CATEGORY IN 2017


ESTIMATED GROWTH BY PRODUCT SEGMENT


0 %

20 %

40 %

60 %

80 %

100 %

2012 2013 2014 2015 2016 2017

USA Rest of Europe

Finland Rest of N&S America

Rest of the world

Convenience 91 %

Care9 %

Baby wipes42 %

Personal care21 %

Household wipes19 %

Workplace wipes9 %

Hygiene & Medical

9 %

0 %

1 %

2 %

3 %

4 %

5 %

6 %

7 %

8 %

9 %

10 %

Baby wiping Personal carewiping

Home Wiping Workplacewiping

North America Europe South America



Baby care is the most competitive segment in Suominen’s product portfolio Asia and South America are lucrative markets

Baby care wipes sales accounted for 41% of Suominen’s total net sales in 2017. This segment is fiercely competitive in the US and Europe, where baby wipes are typically considered low value-added bulk products, with low gross margins. Demand for baby wipes is driven by birth rates, making the emerging markets of South America (7% estimated demand growth) and Asia more lucrative markets owing to their rapid population growth rather than Europe and the US (2% growth). The market growth and more balanced competitive environment in South America is also visible in Suominen’s margins, as the line in Paulinia, Brazil, which has mostly focused on baby care wipes, is one of Suominen’s most profitable production assets.

Personal care products have a strong growth outlook, especially in South America Competition is intensifying in the flushable products

Personal care wipes generated 21% of Suominen’s sales in 2017. In this segment, Suominen produces material for eye pads, facial masks and flushable products such as toilet wipes, for instance. This segment has a better growth outlook of 6% in the US and Europe than for baby wipes, and most of Suominen’s production capacity is located in these regions. Especially strong growth of demand is forecast for the South American markets by the company. Competition in this segment is not as fierce because some personal care wipes are value-added nonwovens requiring more advanced production technology and know-how. However, excess capacity has flooded the flushable wipes markets in the US and Europe because new wetlaid production lines were set up in 2015-17, meaning that the competition in this product category intensified rapidly. Suominen has noted this change in the market of personal care products and has focused its production capacity towards other value-added segments, such as workplace and household wipes.

Home wiping is a value-added segment, with demand mainly in developed countries

Household wiping accounted for ~19% of total sales in 2017, and in this segment Suominen manufactures nonwovens for wipes for household cleaning and disinfection. Home wipes are value-added products broadly used only in Western Europe and North America. The growth outlook for this segment is stronger in the US (7%) than in Europe (2%), and Suominen is well positioned to exploit this trend, in our view, thanks to its new, state-of-the-art production facility in Bethune, South Carolina.

Workplace wiping accounted for 11% of total sales in 2017. This is a high value-added segment where the end product is sold to businesses. The end users vary from fast food restaurants to factories, making the need for different kinds of nonwoven materials wide. The growth outlook for the demand of workplace wipes is robust, especially in the US (5%), while the company estimates that demand will grow steadily but somewhat more slowly in Europe (3%). Currently, workplace wipes ‒ much like household wipes ‒ see very limited demand in developing countries.

There are robust trends driving the demand for Care’s products

Medical and Hygiene (Care business area) products constituted 9% of sales in 2017. There is demand for these products in the US, Europe and South America, and Suominen aims to achieve significant growth in the coming years. Its target is to become the leading producer of nonwovens for fluid management and to be the no. 1 supplier in selected high value-added niche areas in the medical sector. There are robust trends driving demand for the chosen segments of Care. Demand for nonwovens in fluid control is increasing in the adult incontinence segment because of the ageing populations of western economies, while the constant increase in pandemics and hospital-acquired infections is driving the demand for disposable nonwovens for medical use. Nonwovens for medical and hygiene applications require more advanced properties, so Care’s sales typically carry high added value and better margins than baby care wipes, for example.



CARE BUSINESS AREA – EUR 37.5m IN 2017


Nakkila factory established in 1898 by J.W. Suominen Suominen’s history is full of M&A

Suominen has a long historySuominen’s eventful history started in 1898 when J.W. Suominen Ltd was established in Nakkila. Suominen manufactured its first nonwoven products almost 70 years later in 1965. Lassila & Tikanoja Oyj (L&T) acquired J.W. Suominen Ltd in 1982, and after two decades, Suominen Group Ltd was demerged from L&T in 2001. Suominen Group Ltd subsequently had two main business areas: Suominen Nonwovens and Suominen Flexibles. In 2003, Suominen acquired Dutch wet wipes company Codi International. In 2011, Suominen acquired Ahlstrom Corporation’s Home and Personal wipes fabrics business area for EUR 170m. The Home and Personal wipes acquisition was finalised in 2014 when Suominen acquired a factory in Paulinia, Brazil following licensing difficulties. As a result, Suominen became the global leader in producing nonwovens as roll goods for wiping applications with a global reach thanks to factories in the US, Europe and Brazil.


Area

Key application

Key product properties

Key growth driversNorth America ~ 3% North America ~1%

Europe ~ 4-9% Europe ~1%South America ~8% South America ~6%

The increasing amount of pandemics and hospital-acquired infections is driving the

demand for disposable nonwoven goods for medical applications

Population growth and growing trend for hygiene products in emerging markets, aging population

in Western countries

Market growth

Medical Hygiene

Wound care and nonwovens for speciality patient and surgical applications

Diapers, femine hygiene products and adult incontinence products

Cleanliness, comfortability, absorption, skin-friendliness and strength

Fluid management, breathability, absorbency and comfortability

HISTORY OF SUOMINEN'S FACTORIES

J.W. Suominen(est. 1898)

C.H. Dexter & Sons

(est. 1767)

Tecnofibra / Fiberweb

(est. 1971)

Orlandi(est. 1933)

Green Bay Nonvowens(est. 1997)

Ahlstrom Brazil(est. 2008)

ORIGINS

Lassila & Tikanoja(1982)

Ahlstrom(2000)

Ahlstrom(2007)

Ahlstrom(2007)

Ahlstrom(2004)

ACQUIRED BY

Since 2001 Since 2011 Since 2011 Since 2011 Since 2011 Since 2014SUOMINEN

GROUP ENTITY

Nakkila, FinlandWindsor Locks,

USA

Mozzante, ItalyAlicante, SpainBethune, USA

Cressa, Italy Green Bay, USA Paulinia, BrazilCURRENT

LOCATIONS



Refocusing the business with divestments in 2013 and 2014 2012-14: Successful restructuring of business to strengthen the balance sheet and improve profitability

Complete focus on nonwovens and financial restructuring Following the Ahlstrom Home and Personal wipes acquisition, Suominen renewed its strategy and focused exclusively on nonwovens, divesting the Codi wipes business unit in 2013 and the Flexibles business unit in 2014. It also planned a strategy to improve its low profitability and strengthen its financial position. In early 2012, the board set a target for a 10% return on investments from continuing operations, gearing in the range of 40-80% and organic growth to exceed the industry average of 3%. This strategic phase was embodied by big cost cuts and improvements in operational efficiency. The strategy period was a success, with Suominen reaching its targets in 2014 at a 15.7% return on investments (0.4% in 2012), 34.7% gearing (100.7% in 2012) and 3.5% organic growth.

Investment programme expanded to EUR 60m in 2015

Large growth investment programme launched in 2014 Suominen’s success in turning its business profitable and strengthening its financial position during 2012-14 made it possible for the company to start its growth investment programme. The EUR 30-50m programme started immediately in 2014, but it was expanded to EUR 60m in 2015. The single largest initiative in this investment programme was to build a new production line in Bethune, South Carolina, worth over EUR 50m. In addition to this investment, which provided Suominen with the technological capability to supply a growing demand of higher value-added nonwovens in the US, Suominen also stated that it will invest significant resources in R&D to pursue its strategical goal of being the recognised product leader in its chosen segments. In particular, Suominen is focusing on household wipes, workplace wipes, niche segments in medical and hygiene products. Its investment programme is in line with underlying trends in the nonwoven markets and its strategic aim to increase the share of net sales from value-added nonwovens.

Competition intensified, especially in baby care products

Suominen faced difficulties in 2016-17 The strategy did not go as planned for Suominen in 2015-17. There was a negative development in its main markets as competition intensified, especially in baby wipes and flushable products in 2016. The intensified competition and increased production capacity in these segments drove sales prices down, hurting both the top line and Suominen’s profitability. In 2016, Suominen’s net sales decreased 6.1% to EUR 416.9m (444m) and the EBIT margin was down to 6.1% (7.1%). At the same time, however, Suominen was able to work towards its strategic goals and increase the share of value-added products to 62% of sales (53% in 2012).

SALES (EURm) AND EBIT MARGIN, %


0%

1%

2%

3%

4%

5%

6%

7%

8%

300

350

400

450

500

2014 2015 2016 2017

Net revenue EBIT margin



Startup of Bethune factory was delayed due to technical problems Gross margin was low in 2017

In 2017, net sales grew by 2.2%, while the EBIT margin fell to 3.5% (6.1%). Sales growth in 2017 strengthened thanks to increased sales volumes, while the lower EBIT margin was impacted by costs related to the growth investment in Bethune and an unfavourable product mix development towards the most competitive segment. In addition to these two factors, Suominen experienced inflation in raw material prices during 2017. The company could not implement new prices that reflected the cost inflation in late 2017 and EBIT in Q4 2017 thus was slightly negative (EUR -0.3m). The growth investment in Bethune cut EUR ~5m from EBIT in 2017, while sales of baby wipes increased to 41% of total sales in 2017 from 38% in 2016. The unfavourable product mix development hurt the EBIT margin so significantly because of the intensified competition in this segment and in flushable products.

Strategy for 2017-21 Suominen launched its new strategy at the CMD in May 2017. This represents a natural progression from the EUR 60m investment programme it executed in 2014-16. The main focus of the current strategy is to reach healthy organic growth through leveraging the investments carried out in the previous strategy period. The growth investments make it possible for Suominen to increase the amount of high value-added nonwovens in its product mix, while maintaining its strong position in the baby care segment, thus boosting its sales and profitability. The main difference is the new production line in Bethune, which increases Suominen’s capacity in nonwovens for workplace and household wipes to a significant extent. Although Suominen has not stated any strict targets for the product mix change in its new strategy, we believe the amount of value-added nonwovens will increase to 70% of Suominen’s sales when the Bethune line and the growth investments in Paulinia, Brazil and Alicante, Spain are running at full steam by 2021.

PRODUCT MIX IN 2017


ESTIMATED PRODUCT MIX IN 2021


Suominen is examining opportunities to expand operations into Asia-Pacific in the current strategy period

During the strategy period, Suominen will also examine its opportunities to expand its business operations into new regions, particularly Asia-Pacific, the largest market for nonwovens in the world. Asia-Pacific is an attractive market to consider as the growth of demand is strong there, especially in personal care and baby care wipes. Demand in baby care is driven by population growth and high birth rates, while the growing middle class consumes personal care and hygiene products in increasing amounts.

Expanding its operations to Asia Pacific would also allow Suominen to serve its customers more globally, in four continents, giving the company an even stronger competitive edge over the smaller producers of nonwovens. We believe that the ability to serve big global customers in four continents would improve Suominen’s position in nonwoven value chain, as Suominen would become a more important supplier for the big and most important customers.

In addition to expanding its operations to Asia-Pacific, Suominen still has unused production potential from its Paulinia factory in Brazil, which the company is aiming to realise during the current strategy period. We consider the South American

Baby wipes42 %

Personal care21 %

Household wipes19 %

Workplace wipes9 %

Hygiene & Medical

9 % Baby wipes30 %

Personal care22 %

Household wipes22 %

Workplace wipes14 %

Hygiene & Medical

12 %



markets attractive for the company because the nonwoven market has not yet saturated and demand growth in baby care and personal care applications is high. The higher growth in demand and more balanced competitive environment is also reflected in the profit margins compared to the margins in the US and Europe.

We believe that Suominen’s long-term strategic goal to shift the product mix towards more attractive product segments will start bearing fruit in the near future. As the capacity created during the heavy growth investment programme started in 2014 begins to show in Suominen’s numbers, sales and profit margins should increase to a significant degree.

BUSINESS STRENGTH AND MARKET ATTRACTIVENESS BY PRODUCT SEGMENT


Suominen’s board also updated the financial targets and dividend policy for the latest strategy period, measuring growth, profitability and its financial position:

Reach average ROI of 15%

Reach average sales growth of 6% per year

Keep gearing at 40-80%.

If the strategy execution is successful, Suominen will reach EUR 600m sales by 2021. In addition, the board has set a target for the EBIT margin to exceed 10% and for it to distribute at least 30% of net income as dividends.

SUOMINEN’S CURRENT FINANCIAL TARGETS VS OLD


Suominen’s sales are vulnerable to changes in exchange rates

Financials

Suominen’s sales decreased in 2014 because of the divestment of the Flexibles business unit. Sales growth in 2015 was heavily driven by the strengthening of the USD against the EUR. In 2016, the increased competition burdened sales. In 2017, the company reached an improvement in organic growth as sales volumes grew globally.

Target Current

2017 -2021Old

2015 - 2017 2017 2016 2015

Sales growth avg. 6% > 3% 2.2% -6.1% 10.5%

ROI avg. 15% > 12% 6.6% 11.6% 15.9%

Gearing 40-80% 40-80% 59.8% 39.6% 25.9%

EBIT margin > 10% - 3.5% 6.1% 7.0%

Pay-out > 30% 30 % 41 % 38 % 31 %



Suominen’s sales are vulnerable for changes in exchange rates. A weakening USD against the EUR has a negative impact on Suominen’s sales. This was visible in 2017 as FX changes had a EUR 4.8m negative impact on Suominen’s sales. Suominen’s profit margins are protected from changes in exchange rates because raw materials are purchased in the same currencies as sales are generated, so FX volatility does not materially affect the operating profit.

The growth investment programme is clearly visible in net debt and the gearing ratio, with the investment programme (extended to 2017) driving net debt up to EUR 81.4m. We consider Suominen to be in a healthy financial situation, with no need for major investments in the near future. The company is within the range of its financial gearing target 40-80%; in 2017, gearing was 59.8%.

The EBITDA margin has been decreasing since 2015, driven by intensified competition, rising raw material prices and problems with the ramp-up of Bethune production line. In addition, there was an unfavourable product mix development in 2017 that drove the margin down further. We expect this trend to change notably as Suominen’s new factory in Bethune starts producing solely value-added nonwovens, again reducing the proportion of baby wipes in the product portfolio.

NET SALES OF SUOMINEN, EURm


NET DEBT AND GEARING, EURm


EBITDA (EURm) AND EBITDA MARGIN


EBIT (EURm) AND EBIT MARGIN


250

270

290

310

330

350

370

390

410

430

450

2012 2013 2014 2015 2016 2017

Net sales

0%

20%

40%

60%

80%

100%

120%

0

20

40

60

80

100

120

2012 2013 2014 2015 2016 2017

Net debt Gearing

0%

2%

4%

6%

8%

10%

12%

14%

0

10

20

30

40

50

60

70

2012 2013 2014 2015 2016 2017

EBITDA EBITDA margin

0%

2%

4%

6%

8%

10%

12%

14%

0

5

10

15

20

25

30

35

2012 2013 2014 2015 2016 2017

EBIT EBIT margin



EXECUTIVE MANAGEMENT

Nina Kopola Tapio Engström Lynda A. Kelly Larry L. Kinn

Position Position Position Position

CEO Senior VP, CFO Senior VP, Care Senior VP, COO

Previous background Previous background Previous background Previous background

Executive Vice President,

President Europe, Dynea Oy

2008–11, Executive Vice

President, Global Market

Applications, Dynea Oy 2006–

08

CFO, Glaston Corporation

2010–12, CFO, CPS Color

Holding Oy 2009–10, Director

Business Development, Vaisala

Corporation 2007–09

Several managerial positions,

recently as Director, Global

Medical and Wipes, First Quality

Nonwovens 2003–14

Vice President, Operations

America, Suominen Nonwovens

2011–13


America, Home and Personal,

Ahlstrom Corporation 2008–11

Education Education Education Education

Licentiate of Technology M.Sc (accounting) B.Sc ( Marketing) B.A. (Chemistry)

No. of shares No. of shares No. of shares No. of shares

85,172 33,266 10,000 6,348

Markku Koivisto Ernesto Levy Mimoun Saïm Hannu Sivula

Position Position Position Position

Senior VP, CTO Senior VP, Convenience Senior VP, Global Operations Senior VP, Human Resources

Previous background Previous background Previous background Previous background

Head of Global Business

Development, UPM Raflatac

2011–16, Vice President, Bio-

composites Business Unit, UPM-

Kymmene 2006–15

Vice President, Head of

Marketing Americas, Novartis

Consumer Health, Inc. 2012–15,

Marketing Director, North

America Oral Care, Procter &

Gamble Company 2011–12


Europe, Suominen Nonwovens

2011–13, Vice President,

Operations Europe, Home and

Personal, Ahlstrom Corporation

2008–11

Vice President, HR Europe Dynea

Corporation 2010–12, HR Director,

Ship Power, Wärtsilä Corporation

2006–10, Various managerial

positions in Cargotec 1995–2006

Education Education Education Education

M.Sc (Tech) BIE (Industrial Engineering),

MBA (Marketing

ENSI Engineering M.Sos.Sc

No. of shares No. of shares No. of shares No. of shares

10,000 12,000 21,525 29,345


Nina Kopola was appointed President and CEO in 2011. She holds multiple positions of trust: she is currently on the boards of Metso Corporation and Finnish Textile and Fashion and is a member of the supervisory board for Ilmarinen Mutual Pension Insurance Company.

Our overall impression is that Suominen possesses the relevant experience in its executive management and board of directors needed to drive its development.



BOARD OF DIRECTORS

Jan Johansson Risto Anttonen Andreas Ahlström

Position Position Position

Chairman Board member Board member

Other appointments Other appointments Other appointments

Chairman of the Board, OrganoClick AB,

Member of the Board, Vinda International

Holdings Ltd

Deputy Chair of the Board of Directors,

Ensto Ltd, Chair of the Board of Directors,

Antoka Oy

Chairman of the Board, Frangible Safety

Posts, Member of the Board, Ripasso Energy,

Member of the Board, Scandinavian Biogas

Previous background Previous background Previous background

President and CEO, Svenska Cellulosa

Aktiebolaget SCA, 2007-15, President and

CEO, Boliden AB, 2001-07, Executive

positions, Telia AB, 2001, Vattenfall Group,

1994-2001, Shell Group, 1985-1994

Deputy CEO, Ahlstrom Corporation 2009–

10, CEO, Ahlstrom Corporation 2008,

Various managerial positions, Ahlstrom

Corporation 1998–2008

Investment Director, Ahlström Capital Oy

2016-, Investment Manager, Ahlström Capital

Oy 2010–16, Sales Manager for Nordic

Countries, Credit Agricole Asset Management

2006–10

Education Education Education

Master of Law B.Sc Econ M.Sc Economics

No. of shares No. of shares No. of shares

4,814 28,830 5,360

Hannu Kasurinen Laura Raitio Jaana Tuominen

Position Position Position

Board member Board member Board member

Other appointments Other appointments Other appointments

Partner and Member of the Board,

Boardman Oy, Chair of the Board of

Directors, Helsinki Deaconess Institute,

Member of the Board of Directors, Neste

Corporation, Member of the Board of

Member of the Board, Finnair Corporation

Previous background Previous background Previous background

Senior Vice President, Head of Carton

Board Business Unit, Stora Enso

Corporation since 2015, CFO, Renewable

Packaging Division, Stora Enso Oyj 2013–

15, Member of Group Executive Board,

Stora Enso Group 2008–13

CEO, Diacor terveyspalvelut Oy 2014–17,

Executive Vice President, Building and

Energy, Member of Executive Management

Team, Ahlstrom Oyj 2009–14, Senior Vice

President, Marketing, Member of Corporate

Executive Team, Ahlstrom Oyj 2006–08

President and CEO, Fiskars Corporation

since 2017, Paulig Group, Chief Executive

Officer 2008-17, General Manager,

Monitoring Solutions, GE Healthcare

(former Instrumentarium Corporation), and

Managing Director, GEHC Finland Oy

2002 08Education Education Education

M.Sc. (Econ) Licentiate of Technology M.Sc (Chem. Eng)

No. of shares No. of shares No. of shares

19,210 5,360 9,306




Suominen has a concentrated ownership base

ShareholdersThe Suominen shares are listed on the NASDAQ OMX Helsinki Stock Exchange. The three largest shareholders are Ahlström Capital, Etra Invest and Varma Mutual Pension Insurance company with 23.95%, 10.31% and 7.72% ownership, respectively.

The company has 4,048 different shareholders, but ownership is fairly concentrated among the ten largest shareholders, who together hold almost 70% of the shares outstanding (as of 28 May 2018).

LARGEST SHAREHOLDERS AS OF 28 MAY 2018


Shareholder Share (%) Shareholder Share (%)

AC Invest two B.V. 23.95 % Nordea Nordic Small Cap Fund 1.54 %

Oy Etra Invest Ab 10.31 % Nordea Life Assurance Finland Ltd. 1.44 %

Varma Mutual Pension Insurance Company 7.72 % Maijala Mikko 1.42 %

Nordea Bank Ab (Publ), Suomen Sivuliike 7.13 % Maijala Juhani 1.36 %

Ilmarinen Mutual Pension Insurance Company 6.30 % Suominen Oyj 1.35 %

Elo Pension Company 5.19 % Tiiviste-Group Oy 1.14 %

OP-Finland Value Fund 3.39 % Yksityismetsätalouden eläkekassa Verso 1.08 %

Evald and Hilda Nissi´s Foundation 1.72 % Yleisradio Pension Fund 1.04 %

Bergholm Heikki 1.68 % Skandinaviska Enskilda Banken AB 0.97 %

Mandatum Life Unit-Linked 1.65 % Others 18.04 %

Oy H. Kuningas & Co Ab 1.58 % Total 100.00 %



Business overview Suominen manufactures nonwoven wiping products for many different end markets, as well as nonwovens for medical and hygiene applications. Its customer concentration is fairly high given that many of the key customers are large global brand houses. The aim of Suominen is to increase its share of higher value-added products, ie segments other than baby wipes, as a proportion of its net sales. Suominen's main cost items are raw materials, which can cause fluctuations in earnings, despite pass-through clauses in agreements with customers.

Wiping products for many different end-markets The Convenience business area focuses on customers that manufacture wiping products for a variety of applications. The wiping applications for which Suominen’s products are used include baby wipes, household wipes, personal care and industrial wipes, travel and catering. Typical properties and functionalities required from Suominen’s products are strength, thickness, abrasiveness or softness, absorbency, differentiation, liquid retention, dirt pickup, barrier properties or visual coverage, depending on the final end use. The functionalities needed naturally vary across the end-user industries.

Nonwovens for baby wipes account for 42% of Suominen’s sales and are typically considered low value-added bulk products. Nonwovens for other end-use applications comprise 58% of sales, are more specialised and are higher value added.

Raw materials account for 60-70% of expenses

Main cost items are raw materialsRaw materials are the largest cost items for Suominen’s operations, amounting to 60-70% of total costs. Raw materials used in production include viscose (30% of volumes), polyester (30%), polypropylene (20%) and pulp (19%). Pulp is primarily used in flushable products and in certain composite structures. Viscose is a typical raw material in products that require high absorbency and is often combined with synthetic fibres, which in turn increase the softness and bulkiness of the product. Polypropylene is used to improve stability, especially in composite products.

RAW MATERIAL USAGE


Suominen sources its raw materials from fibre producers around the world. Agreements with key suppliers are typically based on framework agreements made for two to three years. As the business is sensitive to raw material prices, there are typically price negotiations with suppliers each quarter.

Agreements with large customers typically include a pass-through clause that allows Suominen to pass raw material price variations onto customers. Pass-through clauses are included in roughly 50% of sales. However, Suominen’s raw material stocks equal

Viscose30 %

Pulp19 %

Polypropylene20 %

Polyester30 %

Other1 %



roughly two to four weeks’ consumption and executing the pass-through clauses often takes two to five months, depending on the agreement, leaving Suominen vulnerable to raw material price changes in the interim.

The pass-through of raw material price inflation to sales prices takes two to five months

Raw material prices have increased in the past year and this has hampered Suominen’s profitability. In Q1 2018, raw material prices inflated approximately 5% y/y. The pass-through of raw material price inflation to sales prices takes two to five months, meaning that there is a notable lag before Suominen’s sales prices reflect the rising raw material costs. This creates an inherent raw material price risk in Suominen’s business and decreased Suominen’s margins in Q1 2018.

The raw material risk materialises particularly when there is long and constant inflation in raw material prices. This creates a situation where the pass-through clauses never catch up with the price inflation because the clauses only reflect the raw material costs at the time that the clause comes into effect. As each pass-through clause takes two to five months to execute, prolonged and steady price inflation can hurt Suominen’s margins for multiple quarters sequentially.

On the other hand, when raw material prices have trended downwards, the pass-through clauses with customers have worked in Suominen’s favour. In these cases, Suominen benefits from the lower raw material prices while sales prices do not reflect the lower raw material costs.

Many of Suominen’s suppliers are large corporates, such as Austria's Lenzing, a producer of cellulose fibres, and FiberVisions, a producer of polypropylene. Suominen has alternative suppliers for each raw material it purchases. However, the qualification processes and strict industry standards limit the use of alternative sources to some extent. The whole value chain and all of the suppliers must be accepted by the companies producing end-consumer products – and the approval process can be time consuming. Additionally, Suominen can co-operate in product development with some suppliers, which further ties the company to individual suppliers. Sourcing from Asian suppliers is more challenging due to supply chain management and time constraints. However, some raw materials are sourced from Asia to some extent, such as viscose.

INDICATIVE CUSTOMERS AND SUPPLIERS OF SUOMINEN




Suominen’s ten largest customers generate roughly 60% of sales

Suominen’s customer base is concentrated Customers of Suominen are global consumer brand houses, private-label manufacturers and nonwoven converters. Indicative customers of Suominen could be Procter & Gamble, Unilever, Rockline Industries, Reckitt Benckiser and Mölnlycke Health Care, to name a few. We estimate that the top-ten customers generate roughly 60% of total sales. The average length of a customer relationship exceeds ten years, but the framework agreements are usually made for two to three years at a time. There have not been any major changes in the customer base in recent years, but Suominen is actively looking to build a solid reputation and gain a stronger foothold in hygiene and in chosen segments for medical applications.

Suominen’s customers typically have two to three nonwoven suppliers for each product they manufacture. It is unusual for a nonwoven supplier to be the only source of materials for the end-product manufacturer. In addition to the customers’ risk policies, customers aim to maintain competition in their supplier base. The qualification practices, good reputation and the size of Suominen compared with many of its competitors protect the company and its position as a supplier to a certain extent.

The key buying criteria for the customers include high and consistent quality, continuity and proximity. Consistent quality is an essential purchase criteria as the product, delivered in rolls, must be easily adapted to converters’ processes. Customers also require flexibility and fast deliveries from their suppliers. In low-value-added bulk products, the market price for the end product is low and the customers’ buying decisions are price-driven. However, many of the customers are consumer brand houses, whose products must have specific and differentiated features. This highlights the importance of product development on Suominen’s end and in co-operation with the customers. Higher value-added products and product development bring Suominen closer to large customers and should improve margins for the company. We believe Suominen is well positioned to benefit from customers’ needs for product development because of Suominen’s investments in R&D and the new state of the art production line in Bethune.

R&D EXPENSES, 2014-17

Source: Company data and Nordea In addition, Suominen states in its strategy that it aims to create nonwovens that

others cannot, which implies that product development and innovation are in Suominen’s interest.

Suominen’s position in value chainTaking into account the intensified competition in nonwoven market in Europe and the US, along with the centralised customer base of Suominen, we consider Suominen’s pricing power with its customers to be fairly limited. In particular, the company has limited pricing power in low-value products such as baby wipes and flushable products, which do not require advanced production technology.

0%

1%

0

1

2

3

4

5

2014 2015 2016 2017R&D expenses EUR m as a % of revenues



In addition to limited pricing power with its customer base, Suominen’s suppliers have pricing power over the company in most cases. As the supply of Suominen’s raw materials is determined by a few large, international fibre suppliers, Suominen is the price taker when it comes to certain raw materials, such as viscose and pulp. In some more processed oil-based fibres used mostly in the production of speciality nonwovens, Suominen is a major client for the fibre suppliers. In these instances the company has some negotiating power towards the supplier because of its leading position in the nonwovens for wiping market.

Overall, Suominen has a quite limited position in the nonwoven value chain mainly because of its small size compared with its suppliers and customers. This is exacerbated by the fact that international fibre markets are controlled by a few large players.

R&D, market knowledge and flexible production technology are keys to improving profitability Even though Suominen’s position in the value chain is challenging, it is possible for the company to improve its profit margins in the future through changes in product mix and product development. As Suominen already has strong relationships with its customers and impressive investments in R&D compared with the industry average, Suominen is a potential partner for brand houses and converters when it comes to product development projects. When committing to a product development project with a customer, Suominen gets a unique position in the value chain. In these instances, Suominen becomes the sole supplier of the developed nonwoven material for the customer. These specialised nonwovens usually carry higher margins.

In addition to the product development projects with its customers, the company is putting effort into innovating and launching new products with its own know-how and market knowledge. If the company is able to create differentiated products with high added value, in line with its strategic intent, its profitability will improve in the future. These innovations allow Suominen to sell higher value-added products to the whole customer base, whereas the nonwovens created in co-operation with customers are often sold exclusively to the customer with which the product is created.

Primary production

Fibre producer

Converter eg wet wipe

manufacturer

Brand owner

ConsumerNonwoven producer

Retailer



Market overview Suominen’s key markets, Europe and North America, are growing around 3% annually, but certain regions and product groups are growing faster than the average. The estimated size of nonwoven markets was EUR 30bn in 2017, of which wiping segment constituted EUR ~2.4bn. The nonwoven market is fragmented and there is potential for future consolidation. The M&A wave has not emerged yet and most growth is sought through capex investments, causing temporary oversupply of certain items regionally. Suominen is well positioned in the nonwoven markets overall, with good global reach and solid production assets.

Growing and ageing populations with longer life expectancy are demand drivers for Suominen’s products

Nonwovens for wiping and hygiene have become a modern necessity

Megatrends support demand for Suominen’s productsSuominen specialises in three market segments within the approximately EUR 30bn nonwoven market: wiping, medical and hygiene. In the medical and hygiene segments the company focuses solely on certain niche areas. The company estimates that the market size of the targeted niches in medical and hygiene markets is about 8% of the total nonwovens markets, and in these niche segments Suominen aims to be the number one supplier globally. Overall, Suominen is a challenger in the hygiene and medical segments, looking to expand its client base and market share, especially in South America where the market is not yet saturated. In wiping, Suominen is the leading global supplier.

Overall, the nonwoven market comprises several different segments, where approximately 8% is nonwovens for wiping, 10% for medical application and 20% for hygiene applications. Underlying megatrends support the demand for Suominen’s chosen segments. Trends such as rising health consciousness, higher sanitary standards, more active lifestyles – as well as growing and ageing populations with longer life expectancy – are all fuelling demand for Suominen’s products. Historically, growth in nonwoven markets has been 2-4% faster than GDP growth, thanks to the aforementioned trends in demographics and consumer preferences.

We estimate that the global market for nonwovens will increase by ~4% per year, driven by Asia, South America and the Middle East. Growth in general is slower in the US and Western Europe, which are currently the largest markets for wiping applications. Underlying demand is relatively noncyclical as nonwovens for wiping and hygiene have become a modern necessity and the price of an individual end product is low. However, demand is impacted by the timing of the customer campaigns and seasonality.

GLOBAL NONWOVENS MARKET SPLIT


Wiping8 %

Medical10 %

Hygiene20 %

Technical nonwovens

10 %

Liquid filtration5 %

Air & gas filtration5 %

Transport filtration5 %

Food filtration5 %

Other32 %



We expect Suominen to outstrip average market growthThe wiping market can be divided into multiple sub-segments where the growth outlook varies significantly. Industry experts forecast that the value-added segments of wiping (personal care, household and workplace wipes), which tend to offer better margins, will have faster near-term growth than the value-for-money segment (baby wipes) in the US and Europe. This forecast is widely accepted by the companies in the industry. Suominen’s strategy is well aligned with this growth trend as the company is actively seeking to increase the number of value-added products included in its net sales. We expect Suominen to exceed average market growth and improve profitability, as these segments are estimated to grow faster than the industry average.

GROWTH IN SUB-SEGMENTS OF WIPING IN SUOMINEN’S MARKETS


Suominen has new production assets in place to benefit from the growing demand in the Americas

There is no demand for wipes in South American households and workplaces yet, but we believe that demand for these segments will likely materialise as the region’s GDP per capita grows. The personal care and baby care segments already have a healthy growth outlook in South America. In particular, demand for personal care wipes is expanding in South America owing to a growing middle class and increasing purchasing power for consumers.

Overall, Suominen has executed its long-term strategy well, aiming to benefit from the growth of the wiping markets’ value-added segments. Suominen’s foothold in Brazil, with its modern factory in Paulinia, is an essential asset for growth in South America. At the same time, the biggest investment in Suominen’s history, the new production line at the Bethune factory, increases its production capability and capacity to supply the growing demand in the US from 2018 and onwards. During Suominen’s growth investment programme of 2014-16, Suominen also invested in its European factories. The production line in Alicante, Spain was enhanced with new technology that enables the line to produce higher value-added nonwovens for workplace applications. In addition, Suominen restarted a production line in Nakkila in 2014.

Competition is intense in the EUR 2.4 billion wiping segmentSuominen is the global leader in nonwovens for wiping applications, boasting a ~15% market share (our estimate), followed by Jacob Holm (~11%), Sandler (~10%), Kimberly-Clark (~8%) and Berry Plastics (~9%).

Privately owned Jacob Holm is headquartered in Switzerland and has annual sales of roughly EUR 310m. The company produces spun-lace nonwoven roll goods for similar applications to those addressed by Suominen. The company’s main product segments are personal care, home care, hygiene, medical, technical and industrial nonwovens, making Jacob Holm one of the main competitors of Suominen. Jacob Holm has production assets in Europe and the US, with sales offices globally.

In addition to Jacob Holm, Pegas Nonwovens is a similar company to Suominen, based in Europe with sales of roughly EUR 220m. The company is headquartered in the Czech Republic. Pegas Nonwovens has production lines in the Czech Republic, Egypt and South Africa. The company is a publicly listed and specialised in nonwovens for hygiene, medical and protective clothing, agriculture and furniture and construction industries. Pegas Nonwovens is not a straight competitor to Suominen because the company’s production technology is different from Suominen’s technology. The technology that

Sub‐segment

% of sales (2017)

Key applications

Key product propoerties

Market growthNorth America:

Europe:

South America:

~ 2%

~ 2%

~ 7%

North America:

Europe:

South America:

~6‐7%

~6‐7%

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North America:

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~ 7%

~ 2%

‐

North America:

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~ 5%

~ 3%

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Baby care Personal care Household care Workplace applications

Softness, comfort, convenience,

good hygienic standards, safety

and cleaning capabilities

Absorbency, comfort and

softness

Different qualities depending on

the purpose (wet wipes, static

wipes, disinfecting wipes etc.)

Durability, absorbency,

thickness, low‐linting and textile‐

like look

42 % 21 % 19 % 9 %

Disposable wipes for baby and

toddler hygiene, skin care,

nursing, and cleaning supplies

and toys

Eye pads, facial masks, flushable

products

Wiping products for dusting,

cleaning, scrubbing and polishing,

hard surfaces and glass cleaning

Wet or dry disposable products

for cleaning, polishing and

disinfecting, and for coating and

protecting in both indoor and

outdoor



Pegas utilises produces nonwovens for different applications than Suominen’s, and so they are not competing for same customers. Pegas is still a good comparable company, as it is one of the few listed companies purely focused on nonwovens.

Berry Global (previously Berry Plastics) is a US public company with annual sales of around EUR 7.5bn and operations in the US, South America, Europe and Asia. Berry Plastics' products include nonwovens for hygiene, medical and consumer wipes applications. Roughly 32% (EUR 2.4bn) of Berry Plastics’ sales are derived from its nonwovens business, where the company is focused on medical and hygiene applications.

Kimberly-Clark’s nonwovens are not sold in the market but used in the company’s own production. As the company also converts the nonwovens to end products, it is not a perfect comparable company with Suominen because of the fundamental difference in its business model. Kimberly-Clark is still a major player in the nonwovens markets and one of the few public companies in the nonwoven business.

Sandler is a private company headquartered in Germany. The company used to be a regional competitor in Europe, but it expanded its operations into the US in 2016 with a new production line in Georgia. The investment in Georgia was approximately EUR 30m and the production line has flexible capabilities to supply nonwoven markets in the US. Sandler’s sales were EUR 328m in 2016 and the company focuses on nonwovens for construction, filtration, home care, hygiene and baby care.

Suominen also has numerous regional competitors both in Europe and the US...

MARKET SHARE ESTIMATE IN WIPING


Oversupply expected to fade away as nonwoven market grows annually

The supply/demand balance The oversupply of nonwovens in Europe has been reflected in margins and competition is intense. Furthermore, new investments are likely to impact the supply/demand balance at least regionally. During the past two years, Jacob Holm has invested USD 45m in a new production line in the US and Suominen has invested more than EUR 50m in Bethune for a new wetlaid line. There have not been any major investment announcements recently in Suominen’s main markets. As there have been no announcements of new investments in production capacity, we expect the competitive environment to ease in the future as the nonwoven market grows and old production assets are taken down.

At the same time, Chinese players are gaining market share in spun-lace nonwovens globally. Spun-lace technology is especially suitable for baby wipes and disposable cosmetic wipes, where competition is the most intense. Suominen’s new wetlaid production line is focused on producing wipes for household and workplace applications, which have more balanced competitive environment.

Suominen15 %

Jacob Holm11 %

Sandler10 %

Kimberly Clark 8 %

Berry Plastics9 %

Other47 %



Consolidation in the fragmented industry has been relatively modest

Consolidation in the industry has so far been relatively modest. Berry Plastics has been one of the most active players, acquiring AVINTIV (formerly PGI Nonwovens) in 2015 for USD 2.45bn. Low margins and the industry standards related to qualification practices have a limited the number of new entrants. The industry standards are high because most of the nonwovens that Suominen produces will eventually touch human skin making hygiene and quality requirements tight. In addition, the clients of Suominen are global brand houses and they have auditing processes for new nonwoven suppliers to make sure that the whole value chain of their suppliers is reliable and in place. The auditing process can take up to six months, creating a substantial barrier to entry for new competitors.

Suominen’s key competitive advantages include its relatively wide geographic footprint, the importance of which is highlighted by the relatively small distances that products are usually transported. The lower value added products, such as baby wipes and flushable wipes, are sold roughly within a 1000km radius from the factory, while more value-added products like niche medical nonwovens can be transported longer distances. In 2017, around 2% of Suominen’s sales were generated in other geographies. This 2% represents the high value added niche products sold to the APAC region.

Suominen also considers reliability and consistent product quality as its strengths. Thanks to its many factories, the company can also move production from one plant to another to a certain extent if needed. Customers see this as a major advantage compared to smaller regional competitors that have only one or two production lines and thus greater reliability risk as suppliers.



Historical financials Suominen’s strategic change towards being purely focused on nonwovens is clearly visible in its numbers. In 2012, sales grew by 110% due to the acquisition of Ahlstrom Corporation’s Home and Personal wipes fabrics business. In 2013 and 2014, the company divested its Codi Wipes and Flexibles business units to Value Enhancement Partners and Lonsdale Capital Partners LLP, respectively. The divestments led to a decline in sales of almost 10% in 2014 even though Suominen acquired Ahlstrom Corporation’s Brazilian business unit that year. The company experienced downward pressure on profit margins in 2016-17, and the growth investment programme launched in 2014 has weighed on cash flow.

Acquisition of Ahlstrom’s Home and Personal wipes fabrics business increased Suominen’s sales by 110% Sales negatively affected by lower sales prices, while sales volumes have been improving in recent years

Acquisition took sales to the next levelBefore the 2011 acquisition of Ahlstrom’s Home and Personal wipes fabrics business, Suominen’s sales were around EUR 200m annually. The acquisition was fully visible in Suominen’s numbers in 2012, with sales increasing to EUR 455m. The divestments of the Codi Wipes business unit and Flexibles also made their mark on the top line, with sales decreasing to EUR 402m in 2014, despite the acquisition of the Paulinia factory.

Thanks to the divestments, Suominen’s focus has been solely on nonwovens since 2014, making its financial performance more stable and comparable y/y as there have not been structural changes in the company since. In 2015, Suominen’s sales grew 10.5%, mostly driven by the appreciation of the USD against the EUR. During 2016, competition in baby wipes and flushable products intensified, which caused Suominen’s sales volumes and prices to decrease, resulting in a -6.1% impact on sales in 2016. Sales grew by around 2.2% in 2017 despite headwinds from currencies, pressure on sales prices, problems with growth investments and an unfavourable development in product mix; this was driven by higher sales volumes.

In Q1 2018, the company was able to increase average sales prices and volumes slightly, but the positive performance was not visible in sales due to a negative impact of EUR 9m from the weaker USD against the EUR. On a positive note, Suominen’s operating performance is not materially affected by currency fluctuations because the company sources its raw materials in the same currencies as it sells its products.

ANNUAL SALES AND SALES GROWTH


QUARTERLY SALES AND Q/Q GROWTH


Operating profit plunged EUR 6m in 2016, representing a drop of 19% y/y

Operating profit turned positive in 2012In 2010-11, Suominen posted operating losses, caused by intense competition and rising raw material prices during the period. In 2012, the company focused on cutting costs, integrating Ahlstrom’s business unit into Suominen and improving profitability. The strategy execution was successful, as operating profit excluding non-recurring items turned positive in 2012. The favourable trend in operating profitability

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2014 2015 2016 2017 18Net Sales, EURm Sales growth q/q



continued until 2015, driven by a positive product mix trend, cost cuts and streamlining of the business model, with the two business area divestments in 2013 and 2014. In 2015, Suominen reached operating profit of EUR 32m with an operating profit margin of 7.1%.

In 2016, operating profit plunged EUR 6.1m to EUR 25.6m, representing a drop of 19% y/y, and the operating margin dropped by 1% to 6.1% (7.1% in 2015). The decline in operating profit was mostly driven by pressure on sales prices and volumes. This pressure was created by oversupply of certain nonwovens, such as baby care and flushable products in Europe and the US. Baby care and personal care, which include flushable products, accounted for 63% of Suominen’s sales in 2016.

Because of the oversupply, Suominen’s average sales price and sales volumes decreased. As sales declined by 6.1% and the operating margin by only 1%, the y/y change in sales and operating profit was mostly driven by sales volumes in 2016; we estimate that sales volumes decreased by around ~3-4%. Even though the sales mix improved in 2016, which normally leads to rising average sales prices, we estimate that average sales prices declined by around ~1% in 2016 because of the intensified competition. Operating profit was also burdened by around EUR 3m in costs incurred by the renewal of the ITC system and the growth investment in Bethune.

ANNUAL OPERATING PROFIT AND MARGIN


QUARTERLY OPERATING PROFIT AND MARGIN


Suominen’s operating profit decreased by 41% while sales grew 2.2%

Intensified competition and worsened product mix drove the average sales price down Operating profit of EUR -0.3m in Q4 2017

Margins under pressure in 2017In 2017, Suominen’s operating profit decreased by ~41% to EUR 15m (EUR 26m in 2016) and the operating margin declined to 3.5% (6.1% in 2016). At the same time, Suominen’s sales increased by 2.2%. The EUR 11m decline in operating profit was caused by multiple factors.

The new production line in Bethune, South Carolina, reduced the company’s operating profit by around EUR 5m in 2017. In Q2 2017, all the employees were in place, but the line’s run-rate was low and depreciation of the line started in Q3 2017. The combination of personnel costs and depreciation had a significant impact on operating profit.

In addition to the problems the company faced with its new production line, there was an unfavourable development in the business environment, which pushed operating profit down by an additional EUR 6m in 2017. Raw material prices increased during 2017 at the same time as average sales prices came under pressure because of intensified competition. Furthermore, Suominen saw an adverse development in its product mix, as the share of baby care products increased to 41% (38% in 2016) of total sales, lowering the company’s average sales price further. The rising raw material prices and decreasing sales prices created a squeeze for Suominen’s margins during 2017.

The low point was seen in Q4 2017, when operating profit was EUR -0.3m and the operating margin -0.3%. Suominen has pass-through clauses for raw material price

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inflation in its sales agreements, but these clauses come into play with a lag, meaning that the increased raw material prices did not affect the company’s sales prices in the last quarter of 2017.

APPROXIMATED OPERATING PROFIT BRIDGE, 2016-17


Q1 showed positive operating profit, squeeze in margins still present Suominen’s operating profit turned positive in Q1 2018 at EUR 1.5m, representing a 75% decrease from Q1 2017 (EUR 6.3m). The company stated that raw material prices were approximately 5% higher in Q1 2018 than in Q1 2017, which was the main reason for the EUR 4.8m decline in operating profitability y/y. However, Suominen was able to raise its average sales price slightly in the quarter and thus generated positive operating profit. In addition, according to the company, Suominen was able to increase its sales volumes close to record highs during Q1 2018. With the sales volumes breaking records and operating profitability decreasing by 75% y/y, the margin squeeze is still clearly present, with the squeeze driven by raw material prices.

In addition, the ramp-up of the Bethune line was not successful in Q1 2018, as there was unexpected downtime in the production line, and so the impact from the new production line on operating profit was once again negative. According to the company, the new line ran decently during the latter part of Q1 2018, so the negative effect on operating profit in Q1 is unlikely to be material.

The total positive impact of US tax reform on Suominen’s profit in 2017 was EUR 8.3m representing ~59% of EPS generated by the company during the year Loss of EUR 0.4m in Q1 2018

Suominen’s profit turned negative in Q1 2018 ‒ the first time since 2013 Suominen’s operations were unprofitable during 2009-12. The acquisition of Ahlstrom’s nonwovens business and major restructuring of business including a heavy cost-cutting programme turned Suominen’s continuing operations profitable in 2013, as the company reached profit of EUR ~2.5m. However, there were major non-recurring items and impairment losses due to the divestments during 2013-14.

Suominen’s profit reached EUR 17m in 2015, after which the competition and costs related to the investment programme drove the profit of the company down by ~10% to EUR 15.2m in 2016.

The costs related to growth investment in Bethune, unfavourable development of product mix and lower gross profit caused Suominen’s profit to decrease in 2017. However, changes in taxation in the US had a significant one-time positive impact on the profit of the company, as the tax reform turned the income taxes of Suominen positive. The total impact on profit of the changes in US taxation was EUR 8.3m in 2017 representing a EUR ~0.16 EPS impact. As EPS was EUR 0.27 in 2017, this was ~59% of total EPS.

The EUR 8.3m is visible in Suominen’s profit for Q4 2017, which would otherwise have been negative as pre-tax profit was negative at EUR ~ 1.3m. The tax reform increased the company’s annual profit to EUR 14.5m, close to the level seen for 2016 (EUR 15.2m).

In Q1 2018, Suominen generated a loss of EUR 0.4m. The poor profitability is caused by low margins squeezed by intensified competition, driving sales prices down amid rising raw material prices.

Operating profit 2016

BethuneOrganic (volume

+ price)Currency

Raw material price inflation

Operating profit 2017

EUR 26m EUR -5m EUR -1.5m EUR -0.3m EUR -4.2m EUR 15m



PROFIT, CONTINUING OPERATIONS AND PROFIT MARGIN


QUARTERLY PROFIT


Operating cash flow will increase as new projects start generating cash Free cash flow set to surge as capex stabilises around EUR ~12m

Growth investment programme has burdened cash flowAs the growth investment programme of more than EUR 60m was officially finalised in 2017, the company is expected to start generating cash from the projects that incurred costs during 2015-17. This will have a significant positive impact on operating cash flow, especially when the Bethune production line starts to contribute positively to operating profit. Free cash flow will also benefit from the increasing operating cash flow and declining capital expenditure. Suominen’s capex was EUR 22.4m, EUR 49.6m and EUR 33.8m in 2015, 2016 and 2017, respectively. Most of the capex was allocated to the Bethune line, but improvements in the Alicante and Paulinia factories were also made during the growth investment period. In addition, during 2017, Suominen invested in upgrading its IT system, but this is not expected to increase capex materially in the coming years.

According to the company, capex for the next few years will stabilise at around EUR ~12m per year. This will be used for debottlenecking and maintenance, meaning that no new production lines will be set up using capex in the near future. In Q1 2018, Suominen generated positive free cash flow for the first time since the growth investment programme started, and the positive trend in free cash flow is likely to continue ahead.

CAPITAL EXPENDITURE PROGRESSION


FREE CASH FLOW


Hybrid bond issued in 2014 was fully converted to shares in 2017

Suominen’s financial health has improved Suominen was heavily indebted before its acquisition of Ahlstrom’s Home and Personal wipes fabrics business area. The acquisition was financed through a EUR 87m share issue, which strengthened the company’s financial position substantially and lowered gearing from 174% in 2010 to 109% in 2011.

The next major event for Suominen’s financial position was the refinancing in 2014, through which the company issued a EUR 75m bond and renewed its credit facilities. In 2014, Suominen also issued a EUR 17.5m convertible bond, which was classified as

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equity to finance the acquisition of the Paulinia plant in Brazil. The hybrid bond was fully converted into shares in Q4 2017. The latest refinancing took place in 2017, when the company issued a EUR 85m unsecured bond and renewed its bank facilities. The proceeds from the bond offering were partially (totalling EUR 59.3m) used to repurchase the old EUR 75m bond issued in 2014. The refinancing was successful, as the fixed interest rate on the new bond is 2.5%, whereas the bond issued in 2014 carried a fixed interest rate of 4.375%.

Suominen’s gearing increased from 32.8% at the end of 2015 to 63.7% in Q1 2018, mainly because the growth investment programme tied up cash. In addition, the company drew down some new debt to finance its capex. As the company is within the target range of gearing between 40% and 80% and has no major need for cash-tying investment projects in the near future, it can be regarded as being in good financial health.

The improvement in Suominen’s financial health is also visible in the distribution of dividends. The company paid out dividends in 2014 for the first time since the major restructuring of the business started in 2011. The company has a dividend policy stated in its strategy of distributing at least 30% of its profit for the period as annual dividends. The company has a solid outlook for the generation of free cash flow, so we believe Suominen will be able to increase its annual dividend in the future.

EQUITY (EURm) AND GEARING


DIVIDEND PER SHARE, EUR


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Detailed estimates We base our revenue forecast on the assumption that demand for nonwovens in Suominen’s main markets (the US and Europe) will grow by around 3% per annum, and we expect Suominen to outstrip the average market growth in the coming years. In our estimates, Suominen’s organic growth is driven by the new production line in Bethune, South Carolina. Suominen’s main cost items are raw materials, which account for 60-70% of total costs. We estimate that raw material prices will experience some inflation in the coming years. In our estimates, the operating profit margin will increase regardless of the raw material price inflation. The margin improvement is driven by the fact that the investment projects that have historically incurred costs will start generating a positive gross profit. At the same time, we expect increasing average sales prices because of raw material price inflation pass-through, more aggressive pricing by the company and product mix improvement.

Once production is running more efficiently in Bethune, we expect sales volumes to increase

Suominen’s revenue driven by volume and price The company’s target is to reach EUR 600m in revenues in 2021, which implies ~9% average annual revenue growth from 2017. The company expects to reach the target with its current production assets without any major capital expenditure or M&A needs. However, Suominen has stated that it may buy a suitable company from Asia-Pacific if the price and terms are right, with the aim of increasing its global footprint inthe attractive and rapidly-growing markets of the region.

Suominen invested over EUR 50m in its new production line in Bethune and smaller amounts in its other production plants during 2014-17. We expect the investments to buoy revenue growth significantly, especially in 2018 and 2019. We estimate the 2018-19 annual revenue growth to be 8.2% and 10.8% respectively. For 2020, we expect that most of the growth potential of the investments should be released; as a consequence, we estimate revenue growth to be a more gradual 5.4%.

We expect the rapid growth in sales during 2018-19 to be driven by a combination of increasing sales volumes and prices. Once the new production line in Bethune begins to run more efficiently and without downtime, sales volumes should increase. In addition, the growth investments made during 2014-17 will increase Suominen’s capacity to produce value-added nonwovens. This implies that the product mix of the company will improve in line with its strategy, thereby lifting the company’s average sales prices. At the same time, Suominen is implementing its strategy that was launched in 2017 and is increasing sales prices more aggressively to address the margin squeeze experienced during the latter part of 2017 and Q1 2018.

REVENUE GROWTH ESTIMATES


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Rapid revenue growth is driven by increasing sales volumes in 2019E-20E

Volumes expected to increase, particularly in Bethune, as well as in Paulinia, Brazil

The 8.2% y/y revenue growth that we forecast for 2018 is driven by increasing volumes. We expect volume growth to impact revenue by ~7.5%, while the increasing average sales prices are forecast to impact revenue by ~2.6%. We estimate that the changes in foreign exchange rates will burden revenue in 2018; for example, a weaker USD just in Q1 2018 burdened sales by EUR 9m. Overall, we forecast the negative effect from currencies at ~1.5% for 2018.

We estimate rapid revenue growth of 10.2% for 2019. Similarly, the forecast growth is primarily driven by volumes and increasing sales prices. We believe the Bethune investment will reach high run-rates in 2019, thereby pushing sales volumes and product mix in a favourable direction. We also expect a slight tailwind from currencies for the year. For 2020, our revenue growth estimate is 5.2%. We have a more moderate estimate for volume growth, as we expect that the new production line would have already reached a quite high run-rate by the end of 2019. We also expect a slight price improvement because of pass-through of raw material price inflation and product mix improvement. We do not expect an effect from currencies for 2020.

Aims to reach an operating profit margin of 10% by 2021, which we believe will be difficult

Operating profit margin expected to reach 6.5% by 2020Suominen’s financial target is to reach an operating profit margin of 10% by 2021. We consider this ambitious, as the company has never reached an operating margin higher than the 7.1% achieved in 2015. In our view, the target is difficult to reach because of the intense competition in the nonwoven markets for wiping applications. During 2016-17 new production assets were built by competitors, and this created overcapacity in certain product segments in Suominen’s main markets. This excess supply is still present and it has created downward pressure on sales prices during 2016-17. At the same time, we expect raw material price inflation in the coming years, especially in 2018. The company already stated in Q1 2018 that raw material costs were ~5% higher compared to Q1 2017, and we expect this trend to continue through the year.

OPERATING PROFIT BRIDGE ESTIMATE


However, we expect Suominen to lift its profit margin close to record highs

We still expect Suominen to be able to lift its profit margin close to record highs. By 2020, we estimate the company should reach an operating margin of 6.5%, representing operating profit of EUR 34.9m. This improvement in the operating profit margin is driven by product mix improvement and sales volume increases as the new investments will start producing nonwovens carrying higher profit margins. Also, we believe the company is able to increase its average sales prices owing to the pass-through clauses of raw material price inflation that are in sales agreements accounting for around 50% of sales, and more aggressive pricing with the rest of the customer base. In addition, we expect Suominen to be able to realise some gains from increasing efficiencies in 2019-20, especially from its new production line.

EURm 2018E 2019E 2020E

Previous EBIT 14.9 17.1 26.1Volume 10.3 9.1 5.7Price 11.1 10.6 8.7Cost inf lation -18.9 -11.0 -5.6Currency -0.3 0.3 0.0Change in EBIT 2.2 9.0 8.8Current year EBIT 17.1 26.1 34.9Change y/y 15 % 53 % 34 %



OPERATING PROFIT ESTIMATE, EURm


Tax rate affected by tax reform in the US The US tax reform in late 2017 will decrease Suominen’s tax rate significantly. Given that the corporate tax rate dropped from 35% to 21% in 2018 and that we estimate Suominen generates over half of its profit in the US, we believe its tax expenses should remain low ahead. We estimate Suominen’s tax rate to be ~23% in the future. We note that 2017 was an outlier regarding tax expenses because the US tax reform turned the company’s taxes positive.

TAX EXPENSES, EURm


Renewed financing with more favourable terms

Financial expenses expected to decrease in 2018-20 Suominen successfully renewed its financing in Q3 2017 and now has more favourable terms for its liabilities. The new EUR 85m bond has a fixed interest rate of 2.5%, whereas the previous EUR 75m bond carried an interest rate of 4.375%. We also expect Suominen to generate strong cash flow in the future, and part of the generated cash will be allocated to paying down the interest-bearing debt; thus, we expect the company’s interest expenses to decrease in the coming years.

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2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

EBIT Revenue growth

-12

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-8

-6

-4

-2

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2

4

2012

2013

2014

2015

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2017

2018

E

2019

E

2020

E

Reported taxes



NET FINANCIAL EXPENSES, EURm


We expect strong EPS growth for 2019 and 2020 We estimate that EPS will decrease in 2018 compared to 2017. Our expected drop in EPS is rooted in the positive taxes in 2017. From 2018 onwards, we estimate strong EPS growth that is driven by solid operational performance, a lowered tax rate and moderate financial expenses. In addition, we estimate that the SG&A costs will remain moderate, as the company has stated. Our yearly SG&A cost estimate is ~6% of sales.

EARNINGS PER SHARE, EUR


We expect ROE to reach 15% in 2020, as EPS growth is expected to be solid.

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2012

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Net financials

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2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

EPS



ROE %


Annual FCF is expected to surgeFrom 2014 onwards, the company has generated strong annual cash flow from operations, consistently over EUR 20m. We expect the cash flow from operations to improve in the future. At the same time, Suominen’s need for capex will decrease notably, as the growth investment programme launched in 2014 is completed. We expect capex to be around EUR 12m annually until 2020. We believe the low capex and strong cash flow from operations should result in a surge in free cash flow in the coming years. Given that capex should remain around EUR 12m per annum, we expect free cash flow to reach EUR 29m in 2020.

FREE CASH FLOW FORECAST, EURm


Robust free cash flow is set to enable DPS growth We believe Suominen will hold the dividend per share at the level of previous years and distribute EUR 0.11 per share in 2018. We do not believe the company will raise itsdividends in 2018 because the payout ratio would rise to over 70% based on our estimates. For 2019-20, we estimate that DPS will increase, reaching EUR 0.18 in 2020. Our estimates are in line with the company’s dividend policy, where it states that at least 30% of the profit for the period will be distributed as annual dividends.

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2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

ROE

-30

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2014 2015 2016 2017 2018E 2019E 2020E

Free cash flow



DPS, EUR AND PAYOUT RATIO


Net debt and gearing expected to decrease Suominen’s balance sheet has been strong since the major restructuring undertaken in 2012-13. Net debt increased notably in 2016-17, mainly because of the growth investment programme. Now that the investments are estimated to start generating positive cash flow, and given that we do not foresee any further projects that would tie up cash, we expect that net debt and net gearing will decrease, while we expect the equity ratio to increase.

NET DEBT FORECAST, EURm


NET GEARING (%) FORECAST


EQUITY RATIO FORECAST


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2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

DPS Payout ratio

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120

2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

Net debt

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Net gearing

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Equity ratio



Risk factors There are several major and minor risks related to the Suominen investment case, and in this section we highlight the main risks for the company. The following list is not exhaustive but rather sets out what we view as the key risks related to an investment in Suominen.

Concentrated customer baseSuominen’s customer base is concentrated, which makes the company dependent on its main customers. Its ten largest customers account for ~63% of total sales, which adds to the customer-specific risk. Suominen has long average customer relationships, but it runs a clear risk of losing a customer to a competitor or of the customer going bankrupt.

Currency exposureSuominen’s large share of USD-denominated sales (51% of total sales in 2017) increases the exchange rate risk. The company has a hedging policy, whereby it hedges projects denominated in Brazilian real on a case-by-case basis, but sales are clearly affected by the fluctuations in the USD against the EUR.

Raw material price riskSuominen purchases significant amounts of pulp- and oil-based raw materials annually. The raw material costs are the largest cost item for the company. Suominen sources its raw materials from the markets, and thus rapid changes in market prices of raw materials can have a significant impact on profit. Suominen has raw material stock equal to two to four weeks’ consumption, whereas it takes two to five months topass raw material price inflation through to sales prices.

Financial positionThe balance sheet contains gross interest-bearing debt of EUR 105.7m. Net gearing is 69.9%. The equity ratio is 41.2%. We consider the company to have good debt-handling capability, and so interest-bearing debt should not be a material risk factor.

Suominen recognises goodwill from the acquisition of Ahlstrom’s business operations in 2011. The carrying amount of goodwill is EUR 15.5m which represents ~12.2% of equity. There is a risk that Suominen’s recoverable amount of the assets will not cover the carrying amount of goodwill, and in the event of this the company would have to recognise an impairment loss, which would weaken its results and equity.

CompetitionSuominen has multiple regional, national and international competitors in its different product groups. There is a risk of the company losing market share and weakening its profitability through increased price pressure if competition intensifies. Moreover, competitors may come up with superior new technology to produce nonwovens of higher quality or competitors from countries with cheaper production costs could take market share from Suominen in the future.

Small sizeSuominen’s small size compared with its suppliers and customers adds volatility to future earnings. Also, the company’s low liquidity could add risk for investors, as it could make it difficult to buy or sell larger stakes.

Acquisition strategy We believe Suominen is looking to make an acquisition in the Asia-Pacific region in the future. The company’s future sales and profit growth are therefore, at least to some extent, dependent on management’s ability to complete a deal. Furthermore, there are inherent risks involved in integrating a new business into Suominen and there is a risk that the company could potentially overpay for its target company.



Development of investment projectsSuominen is currently in a ramp-up phase in its new factory, and it is continuously investing in its manufacturing facilities. There is a risk that the deployment of the investments may delay operations or that some additional costs may be incurred in the investment process.

Business environment in BrazilSuominen has operations in Brazil, thus exposing the company to the risk of significant changes in the business environment or exchange rates in Brazil.



Reported numbers and forecasts INCOME STATEMENT


VALUATION RATIOS – ADJUSTED


EUR m 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

Net revenue 455 443 402 444 417 426 461 511 538 Revenue growth -2.5% -9.4% 10.5% -6.1% 2.2% 8.2% 10.8% 5.4% EBITDA 29 34 41 49 44 34 37 46 55 Depreciation and impairments PPE -18 -17 -16 -18 -18 -19 -20 -20 -20 EBITA 11 17 26 32 26 15 17 26 35 Amortisation and impairments 0 0 0 0 0 0 0 0 0 EBIT 11 17 26 32 26 15 17 26 35 of which associates 0 0 0 0 0 0 0 0 0 Associates excl. from EBIT 0 0 0 0 0 0 0 0 0 Net financials -10 -7 -8 -5 -3 -3 -5 -5 -4 Pre-Tax Profit 1 10 18 26 22 12 12 22 31 Reported taxes -2 -8 -8 -9 -7 2 -3 -5 -7 Net profit from cont. operations -2 2 10 17 15 14 9 17 24 Discontinued operations -10 -19 -5 0 0 0 0 0 0 Minority interest 0 0 0 0 0 0 0 0 0 Net profit to equity -12 -16 5 17 15 14 9 17 24EPS -0.24 -0.33 0.10 0.34 0.30 0.25 0.16 0.29 0.41 DPS 0.00 0.00 0.05 0.10 0.11 0.11 0.11 0.14 0.18 of which ordinary 0.00 0.00 0.05 0.10 0.11 0.11 0.11 0.14 0.18 of which extraordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Profit margin in percent EBITDA 6.3% 7.6% 10.3% 11.1% 10.6% 8.1% 8.1% 9.1% 10.3% EBITA 2.4% 3.9% 6.4% 7.1% 6.1% 3.5% 3.7% 5.1% 6.5% EBIT 2.4% 3.9% 6.4% 7.1% 6.1% 3.5% 3.7% 5.1% 6.5%

Adjusted earnings

EBITDA (adj.) 29 34 41 49 44 34 37 46 55

EBITA (adj.) 11 17 26 32 26 15 17 26 35

EBIT (adj.) 11 17 26 32 26 15 17 26 35

EPS (adj.) -0.24 -0.33 0.10 0.34 0.30 0.25 0.16 0.29 0.41

Adjusted profit margins in percent

EBITDA (adj.) 6.3% 7.6% 10.3% 11.1% 10.6% 8.1% 8.1% 9.1% 10.3%

EBITA (adj.) 2.4% 3.9% 6.4% 7.1% 6.1% 3.5% 3.7% 5.1% 6.5%

EBIT (adj.) 2.4% 3.9% 6.4% 7.1% 6.1% 3.5% 3.7% 5.1% 6.5%

Performance metrics

Last 5 years

Average EBIT margin 2.4% 3.2% 4.2% 4.9% 5.2% 5.4% 5.4% 5.1% 5.0%

Average EBITDA margin 6.3% 6.9% 8.0% 8.8% 9.1% 9.5% 9.6% 9.4% 9.2%

EUR m 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

P/E (adj.) n.m. n.m. 8.0 3.7 13.8 17.5 21.7 11.9 8.4

EV/EBITDA (adj.) 6.4 5.8 5.7 7.0 6.1 9.7 7.3 5.6 4.3

EV/EBITA (adj.) 16.6 11.3 9.2 10.9 10.5 22.3 15.9 9.9 6.8

EV/EBIT (adj.) 16.6 11.3 9.2 10.9 10.5 22.3 15.9 9.9 6.8

Valuation ratios/reported earnings

P/E n.m. n.m. 40.1 18.4 13.8 17.5 21.7 11.9 8.4

EV/Sales 0.4 0.4 0.6 0.8 0.6 0.8 0.6 0.5 0.4

EV/EBITDA 6.4 5.8 5.7 7.0 6.1 9.7 7.3 5.6 4.3

EV/EBITA 16.6 11.3 9.2 10.9 10.5 22.3 15.9 9.9 6.8

EV/EBIT 16.6 11.3 9.2 10.9 10.5 22.3 15.9 9.9 6.8

Dividend yield (ord.) 0.0% 0.0% 1.2% 1.6% 2.7% 2.5% 3.2% 4.1% 5.3%

FCF yield -29.2% -18.3% 5.1% 1.6% -10.0% -4.6% 6.7% 10.2% 14.5%

Payout ratio 0.0% 0.0% 49.5% 29.6% 36.6% 43.6% 70.1% 49.0% 44.1%



BALANCE SHEET


EUR m 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

Intangible assets 39 28 28 29 30 33 33 33 33

of which R&D 0 0 0 0 0 0 0 0 0

of which other intangibles 13 12 13 13 14 17 17 17 17

of which goodwill 27 16 16 16 16 16 16 16 16

Tangible assets 118 99 89 98 136 137 128 120 112

Shares associates 0 0 0 0 0 0 0 0 0

Interest bearing assets 0 0 8 8 7 3 3 3 3

Deferred tax assets 6 6 6 4 3 5 5 5 5

Other non-int. bearing assets 1 2 1 1 1 1 1 1 1

Other non-current assets 0 1 3 2 3 2 2 2 2

Total non-current assets 165 134 134 142 179 180 172 164 156

Inventory 42 32 32 33 43 44 47 50 52

Accounts receivable 45 47 52 52 54 58 62 69 73

Other current assets 13 8 7 10 11 16 18 20 21

Cash and bank 14 19 38 56 30 27 27 33 39

Total current assets 115 105 130 150 137 145 154 172 184

Assets held for sale 0 0 0 0 0 0 0 0 0

Total assets 280 239 264 292 316 326 326 336 341

Shareholders equity 96 79 109 126 143 136 139 149 165

of which preferred stock 0 0 0 0 0 0 0 0 0

of which Equity of hyb. debt 0 0 0 0 0 0 0 0 0

Minority interest 0 0 0 0 0 0 0 0 0

Total Equity 96 79 109 126 143 136 139 149 165

Deferred tax 6 7 9 11 11 15 15 15 15

Long term int. bearing debt 90 70 82 94 87 95 96 88 73

Non-current liabilities 2 1 1 1 0 0 0 0 0

Pension provisions 0 0 1 1 1 1 1 1 1

Other long-term provisions 0 0 0 0 0 0 0 0 0

Other long-term liabilities 0 0 0 0 0 0 0 0 0

Convertible debt 0 0 0 0 0 0 0 0 0

Shareholder debt 0 0 0 0 0 0 0 0 0

Hybrid debt 0 0 0 0 0 0 0 0 0

Total non-curr. liabilities 97 79 92 106 99 111 112 104 89

Short-term provisions 0 0 0 0 0 0 0 0 0

Accounts payable 64 57 60 56 65 63 68 76 80

Other current liabilities 1 0 0 0 0 0 0 0 0

Short term interest bearing debt 21 24 3 3 8 15 7 7 7

Total current liabilities 86 82 64 60 74 78 75 83 87

Liab.for assets held for sale 0 0 0 0 0 0 0 0 0

Total liabilities and equity 279 239 265 292 316 326 326 336 341

Balance sheet and debt metrics

Net debt 96 76 38 34 58 80 73 59 39

Working capital 36 29 31 37 42 55 58 63 66

Invested capital 200 163 165 180 220 235 231 227 222

Capital employed 194 158 200 232 242 247 250 253 254

ROE -11.4% -18.5% 5.3% 14.5% 11.4% 10.4% 6.6% 11.6% 15.2%

ROIC 6.2% 4.4% 10.0% 12.2% 8.8% 7.2% 5.6% 8.8% 12.0%

Net debt/EBITDA 3.4 2.2 0.9 0.7 1.3 2.3 2.0 1.3 0.7

Interest coverage 1.1 2.4 3.2 6.0 8.1 5.8 3.4 5.8 8.7

Equity ratio 34.4% 32.9% 41.1% 43.1% 45.3% 41.8% 42.6% 44.4% 48.4%

Net gearing 100.3% 96.7% 35.3% 26.6% 40.7% 58.9% 52.6% 39.7% 23.4%



CASH FLOW STATEMENT


EUR m 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

EBITDA (adj.) for associates 29 34 41 49 44 34 37 46 55

Paid taxes -2 -8 -8 -9 -7 2 -3 -5 -7

Net financials -10 -7 -8 -5 -3 -3 -5 -5 -4

Change in Provisions 0 0 1 0 0 0 0 0 0

Change in other LT non-IB -6 -1 -2 1 1 -1 -1 0 0

Cash flow to/from associates 0 0 0 0 0 0 0 0 0

Dividends paid to minorities 0 0 0 0 0 0 0 0 0

Other adj. to reconcile to cash flow -18 -34 6 -1 0 -3 0 0 0

Funds from operations (FFO) -8 -16 31 35 35 30 29 37 44

Change in NWC -13 0 6 -8 -6 -8 -4 -4 -3

Cash flow from op. (CFO) -21 -16 37 27 29 22 25 33 41

Capital Expenditure -4 -6 -8 -22 -50 -34 -12 -12 -12

Free Cash Flow before A&D -25 -22 29 5 -21 -12 13 20 29

Proceeds from sale of assets 0 0 0 0 0 0 0 0 0

Acquisitions 0 0 -19 0 0 0 0 0 0

Free cash flow -25 -22 10 5 -21 -12 13 20 29

Dividends paid 0 0 0 -3 -5 -6 -6 -6 -8

Equity issues / buybacks 0 0 0 0 0 0 0 0 0

Net change in debt 0 0 0 0 0 0 -7 -8 -15

Other financing adjustments 0 0 0 0 0 0 0 0 0

Other non-cash adjustments 40 26 10 15 0 15 0 0 0

Change in cash 14 4 20 17 -26 -2 0 6 6

Cash flow metrics

Capex/D&A 23 % 34 % 50 % 126 % 268 % 175 % 59 % 60 % 62 %

Capex/Sales 1 % 1 % 2 % 5 % 12 % 8 % 3 % 2 % 2 %

Key information

Share price year end (current) 1.8 2.4 4.1 6.2 4.1 4.4 3.4 3.4 3.4

Market cap 87 119 199 312 210 254 199 199 199

Enterprise value 183 195 238 345 268 334 272 258 237

Diluted no. of shares, year-end (m) 50 50 49 50 51 57 58 58 58


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Analyst shareholdings Nordea Markets equity and credit analysts do not hold shares in the companies that they cover.No holdings or other affiliations by analysts or associates. Fair value and sensitivity We calculate our fair values by weighting DCF, DDM, SOTP, asset-based and other standard valuation methods. Our fair values are sensitive to changes in valuation assumptions, of which growth, margins, tax rates, working capital ratios, investment-to-sales ratios and cost of capital are typically the most sensitive. It should be noted that our fair values would change by a disproportionate factor if changes are made to any or all valuation assumptions, owing to the non-linear nature of the standard valuation models applied (mentioned above). As a consequence of the standard valuation models we apply, changes of 1-2 percentage points in any single valuation assumption can change the derived fair value by as much as 30% or more. All research is produced on an ad hoc basis and will be updated when the circumstances require it

Marketing Material This research report should be considered marketing material, as it has been commissioned and paid for by the subject company, and has not been prepared in accordance with the regulations designed to promote the independence of investment research and it is not subject to any legal prohibition on dealing ahead of the dissemination of the report. However, Nordea Markets analysts are according to internal policies not allowed to hold shares in the companies/sectors that they cover.

Market-making obligations in shares or derivatives and other significant financial interest Nordea Markets has no market-making obligations inSuominen.

Investment banking transactions Nordea Markets has been lead or co-lead manager in a public disclosed offer of financial instruments issued by Suominen over the previous 12 months. Issuer Review This report has been reviewed, for the purpose of verification of fact or sequence of facts, by the issuer of the relevant financial instruments mentioned in the report prior to publication. No Nordea recommendations or target prices have, however, been disclosed to the issuer. The review has led to changes of facts in the report. Completion date 6 July 2018, 08:18 CET

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Suominen Corporation commissioned research 060718