Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

Good morning, all. Welcome to Altia's conference call and audio webcast to hear about the 2019 results. My name is Tua Stenius-Örnhjelm, and I am from Altia's Investor Relations. With me on today's call, we have CEO, Pekka Tennilä; and CFO, Niklas Nylander. The financial statements bulletin published this morning and this presentation material can be found on our IR website. In today's call, in addition to the business and financial review, you will also hear about Altia's sustainability road map, which was published in December. Further in today's bulletin, we communicated about our refined strategy, which Pekka will discuss in more detail. Before we start the presentation, please note that this conference call is a live audio webcast, and it is recorded. Those of you who have dialed in on the call will have the opportunity to ask questions after the presentation. To do so, please follow the instructions from the operator. We offer also our webcast followers the possibility to send questions to the management via the webcast player. In the Q&A session, we first take questions from the telephone lines and then answer questions from the audio cast. After these opening remarks, Pekka, we are ready to start.

Thank you, Tua, and good morning, everybody. Let's move on to Page 3 to start with key highlights. When we look back at 2019, I'm pleased to see that both our net sales in constant currencies and profitability improved after a solid fourth quarter. Net sales for 2019 were EUR 360 million with an increase of 1.5% in constant currencies. Profitability improved towards the year-end, and we are reporting comparable EBITDA of EUR 44.8 million. This equals an EBITDA margin of 12.4%. Cash flow from operations improved significantly. Our strong cash flow and solid financial position enables a growing dividend payout. The board has made a proposal of increasing the dividend by EUR 0.04 to EUR 0.42. Let's now go to Page 4 to look at the market development. When we look at the volume development of the total Nordic monopoly markets, we see that the spirit and wine volumes combined were flat compared to previous year. Positively, spirit volumes were up by 1%. Behind the spirits volume development, we see a strong volume development in Sweden, where spirits were up by nearly 4% and also a solid development in Norway, where spirits were up by nearly 2%. On the other hand, spirits volumes continued to decline in Finland with about 2%. In spirits, gins, liqueurs and whiskies grew in all 3 markets. Rums grew in Sweden and Norway and were flat in Finland. The vodka category declined in Finland, mainly due to unflavored vodkas, but the vodka category grew both in Sweden and Norway. In wines, the volumes of the total Nordic market were flat compared to 2018. Volumes were slightly up in Sweden and Norway, but down by around 3% in Finland. Sparkling wines or champagne grew in all 3 markets. The large categories, red and white wines, declined in Finland but showed slight growth in Sweden and were flat in Norway. To summarize, all in all, we saw a stable development with positive development in Scandinavia by the 2 largest spirits markets, Sweden and Finland, moving in opposite directions. Now we can move on to Page 5 and look at our net sales development. For the full year 2019, we are pleased to report a stable net sales development. Let's first take a look at the year-end key drivers. In the fourth quarter, the group's reported net sales declined slightly from EUR 111 million to EUR 110 million. Net sales were flat compared to quarter 4 '18 when the negative currency impact is excluded. Net sales grew in the Scandinavia segment and declined in Altia Industrial and Finland & Exports segments. Looking more closely at beverages, that is spirits and wine, we can see that the net sales in the fourth quarter were at 2018 level. The decline in spirits was driven by exports and the business transfer in Denmark. Wine sales grew in Sweden, thanks to our partner portfolio and strong Blossa season. For the full year 2019, the group's net sales grew by 1.5% in constant currencies. The reported net sales grew by 0.6% and were EUR 360 million compared to EUR 357 million in 2018. Net sales grew in the Scandinavia and Altia Industrial segments, but declined in the Finland & Exports segment. Beverage net sales were at 2018 level. In spirits, Altia's net sales in all 3 monopolies grew. The reason for the decline in spirits net sales were the same as for the fourth quarter, that is exports and the business transfer in Denmark. Wine sales grew from 2018, driven by Scandinavia segment. We can now go to Page 6 for a closer look at the Finland & Exports segment. Net sales in the Finland & Exports segment totaled EUR 129 million in 2019. There is a decline of 3.9% from the 2018 level with both spirits and wine declining. As mentioned earlier, the market volumes in the Finnish monopoly were lower than in 2018. However, in spirits, the price adjustments that we have made during the year have balanced off the lower volumes, and Altia spirits sales in the Finnish monopoly channel grew in value. On the other hand, wine sales declined following the decline in market volumes. In grocery trade, development has been good, supported by new product launches and sales grew. In the Baltics, the development has also been good in both domestic and border trade after the excise changes -- excise tax changes at the beginning of the second half of 2019. Net sales in the Baltics were above the 2018 level. Travel retail and exports were below the 2018 level. Travel retail was impacted by partner portfolio changes and lower number of Swedish passengers due to weak Swedish crown. When it comes to exports, the vodka exports to Russia has continued a good development. The cognac exports to China were below 2018 level due to pipe filling in 2018. Also, the continued protests in Hong Kong continue to have an impact on local sales. In this connection, we would also like to highlight some of our launches during the previous quarter. If we start from the left, we first have a Propeller rum. This is a tender win and a launch from our partner portfolio. This launch strengthens our position in the growing rum category. Larsen Cooper's is an innovation that aims to change the perception of the cognac category. This was the first and limited edition of Larsen Cooper's selection, and it's -- it was well received in, for instance, travel retail. The golden champagne in the middle is from Louis Roederer. We have extended partnership to cover also Estonia. Winning tenders in the monopoly is important, and here are 2 examples from the last quarter. We won a tender in the growing sparkling category with our sparkling wine, Fleur de Vignoble. The other example is a red wine from Argentina from our partner portfolio. With this, we can move on to Page 7 and the Scandinavia segment. Like I mentioned a bit earlier, the Scandinavia segment had a good year in 2019, driven by strong performance in Sweden. Reported net sales grew by 2.6%, EUR 221 million. And if we exclude the headwind from the weak Swedish crown, we see that the growth was 5.3%. In Sweden, net sales of both spirits and wine grew. In spirits, the positive development was supported by pricing and new partners. Also in Norway, the spirit sales continued a positive development. The business transfer in Denmark impact spirits sales negatively. The growth in wine is driven by partner portfolio and the exceptional Blossa season. When it comes to product launches in Q4, Blossa is, of course, an important brand to mention with several innovations. But in this connection, I would like to highlight the Blossa sparkling together with Glöet sparkling glögg. They are the bottles to the far right on the slide. Sparkling glögg is a new category where we gained a strong position, thanks to both of these brands. The sparkling glöggs have been very well received by the consumers. Continuing from the right, we have a tender win for Expedition red wine industry's monopoly. Continuing to sprits launches, we have 2 tender wins at the Norwegian monopoly for Kavalan whiskies, a good addition in a growing category. In the Swedish monopoly, we have a couple of examples of Christmas editions under our important brands, O.P. Anderson Petronella Julsnaps and a Christmas cognac under Grönstedts. Let's now continue to discuss our industrial business and go to Page 8. Net sales in the Altia Industrial segment totaled EUR 110 million in 2019 with an increase of 4.2% from last year. Growth is driven by both pricing and volumes. The high pricing followed the high cost of barley and was visible for the first 9 months. Volumes were strong in ethanol and feed components. In ethanol, we have won new clients in exports in the pharmaceuticals and alcoholic beverage industries. And in starch, we have been able to strengthen our position as a starch supplier to the paper and paperboard industry. The Koskenkorva plant has been running at full capacity and consumed 212 million kilos of Finnish grain in 2019. At the Rajamäki alcohol beverage plant, we produced 66 million liters of spirits and wine. With this, I'm ready with the segment review. But before handing over to Niklas, I would like to say a few words about our sustainability road map. So let's go to Page 10 next. We launched in December, our sustainability road map with ambitious targets till 2030. Our sustainability road map is built on the United Nations Sustainable Development Goals. Our focus areas are our distillery, which covers all our production; our drink; our society; and our people. Our key goal is to have carbon-neutral production already by 2025 without compensations. With this, I will hand over to Niklas for a financial review.

Thank you very much, Pekka, and good morning also from my side. In the fourth quarter, we saw normalized barley pricing impacting the results positively, as expected. The fourth quarter comparable EBITDA, when excluding both the IFRS 16 impact and items affecting comparability, amounted to EUR 18.8 million, which is an improvement of approximately EUR 3 million versus fourth quarter last year. The main driver for the fourth quarter year-on-year development is naturally the normalized barley pricing having full effect in the quarter. The impact of the normalized barley prices is fully visible in the Altia Industrial segment and having no impact in the consumer beverage segments. Driven by the strong fourth quarter development, the full year comparable EBITDA, excluding IFRS 16 impact and items affecting comparability, reached EUR 41 million, which is an improvement of approximately EUR 1 million versus 2018 and in line with the guidance for the year, stating better than last year's level despite the normalized barley prices in the fourth quarter. On a full year basis, the profit impact from the barley prices were negative which is visible in the EUR 1.3 million lower comparable EBITDA in Altia Industrial segment. In addition to the barley, the group was negatively impacted by continued weakening of the FX in Scandinavia and decreasing volumes, mainly related to the development in the Finnish monopoly channel. To offset the negative elements, price increases in all markets and sales channels have been implemented together with cost savings implemented throughout the organization. In 2019, the comparable EBITDA, including the impact from IFRS 16, amounted to EUR 44.8 million for the group. As already mentioned, excluding the IFRS 16 impact, the comparable EBITDA amounted to EUR 41 million, which was EUR 1 million better compared to the EUR 40 million in 2018. Of the segments, we can see that both consumer beverage segments, Finland & Exports and Scandinavia, are performing better in a year-over-year comparison. Altia Industrial is falling short to prior year, mainly from the negative barley impact. Comparable EBITDA, excluding IFRS 16 for segment Finland & Exports, amounted to EUR 20.4 million in 2019, which is EUR 1.2 million better than in 2018. To offset higher production costs in 2019 from the barley and the negative volume impact, price increases were implemented throughout the year and on a broad front in all channels and all brands. In addition, cost efficiency measures have been implemented to support the profitability. In market Finland, we saw higher sales in value in the spirit category while the volumes continued to decline, both for spirits and wines due to the monopoly market development. In 2018, a EUR 0.5 million alcohol tax provision was booked for the market Finland in Q4. But as it proved that the company's interpretation of the alcohol tax rate was correct, the provision was reversed in 2019, impacting the profit positively. Export profitability developed negatively in a year-on-year comparison due to the pipe filling effect in 2018 related to cognac to Asia. The export of Koskenkorva vodka, however, had a solid development in 2019 in terms of volumes, sales and margin contribution. Baltic countries performed well, boosted by the tax changes in half year 2 2019, while the travel retail fell short impacted mainly by the lower border trade activities driven by weakening Swedish krona. Scandinavia segment comparable EBITDA, excluding IFRS 16, amounted to EUR 11.5 million in 2019, which is up by EUR 1.4 million versus prior year despite the negative FX impact, especially from the weakening Swedish krona. Also in segments, Scandinavia, price increases have been implemented in the year on a broad front and further on cost efficiency measures implemented supported the profitability development throughout the year. We saw positive sales development in the spirit and wine categories, supported by the price increases and annualization effect of partner brands, especially market Sweden had a strong year during 2019, supported by solid volume development in the local monopoly where spirits grew by almost 4%. The restructuring of the Danish operations implemented end of Q2 2019 had a negative impact on the sales in accordance with the expectation. But nevertheless, it is expected to contribute positively to the EBITDA going forward. Altia Industrial segment's comparable EBITDA, excluding IFRS 16, amounted to EUR 9.6 million in 2019, which is EUR 1.3 million, down versus prior year. The segment had challenging operational conditions for the first 3 quarters of the year with high barley prices partly offset by price increases. In the fourth quarter, the barley prices normalized, reducing the profit shortfall versus last year by close to EUR 2 million. Technical ethanol and feed components showed positive development in 2019, supporting the business performance during a challenging year. In segment Other, there were timing effects of the internal cost charges between the quarters. The internal cost charges from central functions in segment Other to the operational segments were lower in 2019 in general and specifically in Q4, reflecting also the efficiency measures done in all parts of the organization. Then moving to Page 14. The balance sheet ratios and the financial position of the group strengthened at the year-end compared to earlier quarters and especially compared to year-end 2018. At the year-end, the reported net debt amounted to approximately EUR 29 million, including a EUR 10.5 million impact from the IFRS 16 implementation. Our long-term target for the net debt to comparable EBITDA ratio is below 2.5x. And at the year-end, the ratio was 0.6x, which is half of the 1.2x level in the 2018 year-end. Excluding the IFRS 16 change, the ratio was 0.4x at the end of quarter -- end of year-end 2019. Gearing ratio and equity ratio continued on very solid levels. Strong development of the gearing ratio compared to prior year and from the decrease of net debt position while equity ratio continues on a very stable level. As was visible on the prior page and mentioned, the net debt position of the group developed in a very solid direction. The development relates mainly to the working capital where a significant cash release was achieved in the fourth quarter. Cash conversion percentage is very strong for the full year. And when we look at the net working capital in absolute terms and as a percentage of the net sales, we can see that the group is back to a normalized level in terms of net working capital and cash flow generation. Net working capital at the year-end amounted to approximately 3.2% of net sales. The focus on net working capital will remain going forward. CapEx levels in 2019 is approximately EUR 7 million, which is slightly lower than historical periods, mainly related to timing and priorities during the financial year. This ends the review of the 2019 actual financial performance. To summarize, group comparable EBITDA exceeds the 2018 level as guided. Both consumer beverage segments improved versus prior year. Normalized barley price levels having full impact in Q4. Strong cash flow generation through improved net working capital and strengthening of the financial position of the group. Then we move to my final slide containing the guidance for 2020. The guidance for 2020 expects that the comparable EBITDA is at the same level as or higher than in 2019. The guidance for 2020 assumes that the continued decline in market volumes in Finland puts pressure on profitability growth. The uncertainties in global traveling impact border trade and travel retail regionally as well as in Asia. A normal barley price level following the 2020 harvest and industrial services are impacted by phasing of volumes between the different years. This concludes the financial review, and I will hand over to Pekka for the strategy review.

Thank you, Niklas. Like we mentioned in connection with Q3, we have reviewed our long-term strategic focus areas and growth ambitions as part of our annual strategy process. Our refined strategy is an evolution, not a revolution. We have made clear strategic choices that build on our core strengths and bring profitable growth. On the next pages, I will talk you through the elements of our strategy. Our markets are changing, and consumers want to make responsible choices. We believe that life is to be enjoyed, but not at the expense of the planet. The choices that we have made in our refined strategy will support our profitable growth ambitions towards the financial targets and strengthen Altia's position as one of the most sustainable spirits companies and a leading Nordic drinks house. We built our strategy on our 2 core strengths: the Nordic distillery that masters sustainable and high-quality grain-based spirits, and the best route to market and channel excellence for our brands and our partners. To strengthen our growth, we aim to take our brands to new growing markets. We committed to carbon-neutral production by 2025 and to develop more value-added products from barley. In the very heart of our strategy lies our company purpose, Let’s Drink Better. We want to develop better drinking experiences. We are proud to work with products that are the best choice for the environment and for the climate, promoted and consumed responsibly. We want to support the development of a modern, responsible Nordic drinking culture. Our expertise are creation of brand experiences and sustainability. We build our Nordic brands with relevance and value for new generations. With this, we need to create unique brand experiences with value in each channel and touch point. We aim to expand into new occasions, new categories and segments and to recruit new consumers. And we want to be the innovation role model in beverages from the Nordics. We are the forerunners in sustainability. As mentioned earlier, our sustainability road map reaches to 2030 with ambitious numerical goals. Our key target in sustainability is carbon-free production by 2025. Further, we aim to have 100% recyclable packaging. And that 10% of our portfolio is low-alc drinks, and that we have 0 absences due to injuries. We have made clear strategic choices that gives us the tools and the focus for profitable growth. Next, I will go through each of the strategic choices. In our first strategic choice, we want to strengthen our Nordic market leadership in grain-based spirits. For us, this means to strengthen leadership in the vodka market with a full category view. We also aim to grow in adjacent grain-based spirits categories organically and through M&A. Examples of these categories are gins, liqueurs, aquavits, shots and RTD. This choice also means to build consumer engagement through digital channels. With regards to M&A within this strategic choice, it will be a tool to accelerate our market leadership in grain-based spirits, where we target premium and craft products mainly. Our second strategic choice focuses on boosting our Nordic channel excellence. With this, we need to enable the best route to market in the Nordics for our brands and for our partner brands. We will further develop our partner portfolio offering, and we will strengthen our sales execution across all channels, monopolies, on trade, retail and travel retail. We also focus on data-driven marketing to drive sales in physical channels. Our third strategic choice is about taking our core spirit brands to new markets. We aim to establish a market position in selected attractive spirit growth markets through exports and mergers and acquisitions. We seek well-targeted acquisitions to gain market access for our core spirit brands in growing spirits markets. In the new markets, we aim to leverage cross-selling opportunities for our grain-based spirits. We aim to explore e-commerce opportunities and presence in digital channels and marketplaces. Our fourth strategic choice focuses on Altia Industrial. We continue to differentiate through our unique sustainability profile, and we continue to improve our supply chain efficiency and pursue end-to-end supply chain digitalization. There are multiple opportunities to push growth mainly relating to increasing value-add of Koskenkorva distillery site streams. Our product development investigates possible new end-use applications for site streams. This slide summarizes our refined strategy. We build upon our 2 core strengths: the Nordic distillery that masters sustainable production of grain-based spirit brands, and Nordic distribution power with best route to market. Sustainability is an integral part of our strategy to answer the needs of changing business environment and giving us competitive edge. Our brand marketing and innovation brings consumer experiences by commercializing our sustainability work. In the heart of the strategy lies our company purpose, Let's Drink Better. This gives us guidance every day to answer the needs of consumers in today's and tomorrow's world. To conclude the strategy review today, let's go through our long-term financial targets, which, as said, remain unchanged. We seek 2% net sales growth on average over time. Long-term EBITDA margin target is at 15%. Net debt over EBITDA ratio, we aim to keep below 2.5x. Lastly, we want to be a good dividend payer to our shareholders with aim of giving 60% or more of our results back -- for the period back to the shareholders as dividends. With this, we are ready with today's presentation. Operator, we are now ready to take questions.

[Operator Instructions] We have the first question from Joni Sandvall from Nordea.

It's Joni from Nordea. My first question relates to phasing impacts in industrial services. Can you clarify a little bit the impact from this?

It was -- we had solid volumes in 2018 -- 2019, sorry, and there might be some movements in the volumes going forward. It's an uncertainty factor that, so to say, we have considered there. But that is included in the guidance.

Okay. Okay. And then how do you see the monopoly market now outlook for 2020 in different countries?

Starting with Sweden, we expect the good development to continue, both spirits and wine. We expect Norway to be flattish as it was 2019, and we expect Finland monopoly to probably continue to go down, both in spirits and wine.

Okay. Okay. Then probably a little bit about the FX impacts. How have you been hedged for the 2020?

We are hedged until Q3, reflecting the current levels, so to say, that we see on the markets. But until the pricing window opening in September, we are within the guidance there, 60% to 80% being hedged of the expected, so to say, cash out.

Okay. Okay. Then a little bit about renewed strategy you are thinking for growth in growing markets. Could you clarify a little bit? Where are you seeking this? And you also spoke about some M&A. So how does the pipeline look? And what size of deals you are looking after?

That's correct. We are looking for new markets, both through exports and looking into M&A as well, as we have been. The target markets would be Northern Europe, Eastern Europe and then Western Europe. We are looking for growing spirits markets. We're looking for brands in those markets that, if we talk about M&A, we're looking for brands that would give us access, which we could then leverage with our own portfolio. If we look at the Nordics, we're probably looking more to strengthen our existing portfolio with a craft premium type of brands.

Okay. And these probably would be then quite small acquisitions.

Yes. Well, if we talk about craft and premium in the Nordics, probably would be smaller. But then if we look outside the region and for a market entry, then there's probably bigger opportunities as well.

Okay. Okay. Then a little bit about the CapEx guidance for 2020. Now it was around EUR 7 million. How do you see 2020 about -- with the CapEx?

We see that we will be in this range, so to say. We have earlier talked about below EUR 10 million. So EUR 8 million, EUR 9-ish million. So -- but we do not see any major significant investment needs for 2020 coming up on the agenda. So quite normalized for 2020.

Okay. And then about the digitalization, does it require lots of extra CapEx if going forward?

It requires investments, yes. A lot probably is an overstatement. It's in our plans. But it's a continuous improvement case. We've had really good success. If we look at, for example, our Viinimaa and Folkofolk platforms, the growth in number of visitors is 30% to 40%. So we've been really happy, really happy with the development, and we continue to push that both in the Nordics but also outside the Nordics through our e-commerce website, nordicsspirits.com or then in other e-commerce sites.

Okay. Okay. And then last from me about the cost efficiency measures in 2020, you said that went according to plans. How much is the efficiency relating to costs in 2020?

To COGS?

Yes.

We will continue, so to say, the measures that we have been implementing during 2019 and in accordance with the strategy execution that we came out with 1 year ago. So efficiency is definitely part of our everyday life and agenda going forward as well.