Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

Welcome to Altia's Q1 presentation. My name is Tua Stenius-Örnhjelmin, and I am from Altia's Investor Relations. Due to the COVID-19 situation, we are taking special measures and follow the authorities' restrictions and this is why we use Microsoft Teams today. We hope that everyone can see the presentation and hear us well. In this new setup, we kindly ask for your understanding and patience during the presentation. Before handing over to the speakers, I will go through a few technical remarks and explain how we run today's event. You can see the instructions in the presentation as well. [Operator Instructions] Please note that we are recording this presentation and an on-demand version will be available later on your website. I will now hand over to CEO, Pekka Tennilä; and CFO, Niklas Nylander to discuss the Q1 results. Pekka, please go ahead.

Thank you, Tua, and good morning, everybody. Q1 2020 certainly turned out different than any of us could anticipate. The outbreak of COVID-19 into a global pandemic, the lockdowns of societies and travel restrictions have affected our operating environment significantly. Our important contribution to the society is to provide denatured ethanol for hand sanitizers to the critical fields such as the medical and health care sectors. In Q1, we do not see the full negative impact from COVID-19. On the contrary, we have seen some tailwind towards the latter part of the quarter. I will discuss the impacts on -- and uncertainties later in the presentation, but I'm pleased to say that during the first quarter, our operations have run without any major business disruptions. In Q1, net sales declined in constant currencies by 6% to EUR 68 million. Profitability improved with comparable EBITDA increasing by EUR 1.2 million to EUR 5.5 million. EBITDA margin improved from 5.8% to 8.1%. Moving on to Page 4 and the market development. Following the COVID-19 lockdowns and travel restrictions, we can say that in Altia's home markets, the on-trade and travel retail sales channels have been close to 0 since mid-March. Following this, we could see consumers shifting their purchases of alcoholic beverages to the monopolies, which can also be seen in the monopoly volumes. For the Nordics in total, the market volumes grew by 9%, spirits volumes grew by 7% and wine grew by 9%. This is a big uplift. This big uplift is likely to be short term. And after the Easter and 1st of May seasons, the volumes are likely to stabilize. With respect to product mix, we have seen that consumers have purchased more, for example, bag-in-box wines and basic spirits brands. In Finland, most of the spirits categories have got a positive uplift, and the spirits category grew by 3%. The big vodka and viina category grew, driven by growth in viina. Gins and whiskeys grew as well together with VSOP Cognacs and brandies. Liquors have declined in Q1. In wines, the whole category grew by 7% with the big red and white wine categories driving growth. The growth in rosé wine continued. Sparkling wines and champagne declined. In Sweden, the strong development in spirits that we saw in 2019 continued in Q1, and the category grew by over 9%. This is partly explained by the weak Swedish krona and less people buying in border trade and travel retail during the first months, but also with COVID-19 restrictions, for example, consuming more at home than in restaurants. Whiskies, vodka, gin and rum showed strong growth. Liquors grew as well. The wine category grew by 7%. Here, we see all wine categories growing. In Norway, the total sales volumes grew significantly. One important factor impacting here is the closing of borders and Norwegians shifting purchases to Vinmonopolet. Spirits grew by 9% with all spirits categories growing. Gins, whiskies, aquavit and vodka show strong growth. Red, white and rosé wines show good growth. Sparkling grew slightly. So all in all, a strong Q1 in the monopolies, mainly driven by COVID-19. Next, we look at our net sales and segments. We move on to Page 5. In Q1, our reported net sales declined by almost 8% to EUR 68 million compared to EUR 74 million in the previous year. The headwind from weak Swedish and Norwegian krone is significant. In constant currencies, decline was 6%. The group net sales decline is primarily due to decline in Altia Industrial, where net sales declined by almost 18%. If we look at group beverage sales, we can see both spirits and wine net sales declining. FX is impacting reported figures. And in addition, spirits decline is also due to sales drop in travel retail. I will now move on to Page 6 for a closer look at Finland & Exports segment. In Q1, net sales in Finland & Exports were down by 4.6% to EUR 24 million from EUR 25 million previous year. The decline in net sales is mainly related to the sales drop in travel retail. Since mid-March, the COVID-19 travel restrictions have affected all travel retail channels, border trade, sea traffic and air traffic. The Finnish on-trade channel was closed in mid-March and the impact of that is slightly negative on the first quarter net sales. Altia's net sales in the monopoly were above last year's level following the increase in sales of both spirits and wine during the latter part of the quarter. Exports were below last year's level. The grocery trade has shown stable development. And in Baltics, local grocery trade channels showed stable development as well. On the slide, you can see some of the innovations we launched in Q1 in the wine category. We had several tender wins in the monopoly. Of this, I wanted to highlight 2: our own wine brand, Chill Out, was extended with a South African red wine, a Fair Trade certified wine in a PET bottle. The other is a launch from our long-term partner, Fresita, a new aromatized sparkling produced on white strawberries and with less sugar than the original. From the spirits category, I wanted to highlight a new flavored spirits under the Koskenkorva brand, Rhubarb Pomegranate. This is a product with 15% ABV. In the growing liquor category, we have strengthened our position with a new pineapple cocktail liquor from our partner, De Kuyper. And last, we have launched new low-alc RTDs in the grocery trade. To mention a few, first, we have Koskenkorva brand's first organic ready-to-drink, called Koskenkorva Green. The second example is for Leijona brand, where we launched new packaging design and 3 new products to build our ready-to-drink portfolio. With this, we move on to Page 7 and the Scandinavia segment. In Scandinavia segment, the good development that we saw already last year has continued in the first quarter. Net sales grew in constant currencies by 6.7%. The FX headwind is significant as the reported net sales grew by 1.4% to EUR 22 million from EUR 21.7 million in the previous year. In the Swedish monopoly, we saw a significant uplift, particularly in spirits sales during the latter part of the quarter following the COVID-19 restrictions. Contrary to Norway and Finland, the on-trade channel in Sweden has been open with certain restrictions, but the drop in sales at the end of the quarter has been significant. In the Norwegian monopoly, our sales were above last year's level. This is mainly driven by consumers shifting purchasing of alcoholic beverages from border trade and on-trade to the monopoly. The on-trade channel in Norway has been closed since mid-March. In innovation, I would like to highlight a couple of examples in the growing gin category in Systembolaget, both launches under our own brands, responding to the pink gin trend we launched in Explorer Pink Gin in a PET bottle. And the next one is an extension to our iconic O.P. Anderson brand with an organic dry gin. In Vinmonopolet, we have launched 2 whiskeys, for example, the Woodford Reserve. And in line with our long-term packaging development target, we have extended several of our spirits brands such as Koskenkorva, O.P. Anderson and Explorer with listings of PET bottles. Let's now continue to discuss Altia Industrial on next page. In Altia Industrial, net sales have declined by 17.5% to EUR 22 million from EUR 27.1 million last year. The decline is as expected due to phasings of contract manufacturing volumes and the barley price normalizing after the previous year's high price level. The demand for denatured ethanol, which is the raw material in hand sanitizers, has been exceptionally high since the outbreak of COVID-19. Our production facilities have been running at full capacity, and we have temporarily reduced our safety stocks to meet the high demand and deliver denatured ethanol to the critical sectors in society. The demand peak has only partly offset the decline in Altia's Industrial net sales. For Altia Industrial, one of its key priorities during the crisis is to secure the availability of raw materials like bulk wine, partner goods and dry goods, and to secure supply chain operations and productions continuity. As mentioned in the beginning, operations have run without any major business disruptions in Q1. With this, I will hand over to Niklas for the financials.

Thank you very much, Pekka, and good morning to all also from my side. If we look on the first quarter net sales and profit generation, we know it is always lower in the beginning of the year driven by lower volumes. Like last year, this year we had Easter in Q2, so 2020 and 2019 are comparable in terms of the Easter. On the left-hand side of chart, we see the net sales development. Group net sales was EUR 68.2 million, down by 7.6% versus last year. As Pekka already said, the negative deviation to last year in group sales relates to Altia Industrial where we could see lower contract manufacturing volumes related to phasing, normalization of barley costs decreasing our sales price to customers and a negative impact from paper industry's strike in the winter as well. Of the consumer beverage segments, Scandinavia continues on a solid path and was 6.7% above last year with comparable FX rates, driven by solid monopoly sales in the countries. Both Sweden and Norway performs better than last year's sales-wise, while we have a negative impact from changed business model in Denmark in terms of sales. Finland export was down from last year with travel retail taking a significant hit from the COVID-19 already in Q1. Market Finland overperforms last year with monopoly sales offsetting the on-trade shortfall as a consequence of shifting the volumes between sales channels in Finland. Also, Baltics is performing better than last year, driven by Estonia, while travel retail is really impacted most of the sales channel by the COVID. Export is down due to overstock in distributors' warehouse in Asia and the slowdown of local sales during the Chinese New Year due to COVID-19 as well. Profit development was strong in the first quarter as we can see on the right-hand side chart. Comparable EBITDA amounted to EUR 5.5 million, up 1.2% from last year's. Let's move to the next slide and look on the profit development for the individual segments. As said, comparable EBITDA improved by EUR 1.2 million and amounted to EUR 5.5 million on group level. From a group perspective, the main contributor to the profit improvement is coming from the normalized barley prices as expected and by the high demand for technical ethanol volumes for hand sanitizers. In Finland & Exports segment, comparable EBITDA declined to EUR 2.8 million from EUR 3 million previous year. EBITDA margin was 11.7% and basically on the same level as last year. The higher monopoly volumes have largely offset the negative impact we see from the volume losses in travel retail and on-trade due to the COVID-19. In addition, there is a negative impact on EBITDA due to internal organizational transfers that were implemented in the beginning of the year. In Scandinavia segment, comparable EBITDA was close to breakeven for the first -- lower volume first quarter, so to say, being EUR 0.1 million negative, improvement from EUR 0.3 million negative last year. Also in Scandinavia segment, solid monopoly volumes offset shortfall in on-trade sales channels. And without the headwind from the weak SEK and NOK, we would have reported a positive EBITDA figure for Scandinavia segment in the first quarter. As for Finland & Exports segment, the Scandinavia segment's on-trade will take a hit from the COVID-19 despite that we have some activities in the Swedish on-trade, where the on-trade scheme is operating to a certain extent, but with limitations. Profitability improvement impacted positively by price adjustments and also a solid volume development. The profit driver for the group, as mentioned already, is Altia Industrial segment where the profitability improved by EUR 1.2 million to EUR 2.2 million. The margin improved and was 9.7% of sales versus 3.5% last year. The normalizing of the barley price impacts profitability but also the boost in technical ethanol volumes due to the high demand from the hand sanitizer business. So all in all, the first quarter, we saw a solid profit development in the group. Then if we move on to the next page, our balance sheet main KPIs have developed very favorably compared to last year Q1 closing. Since approximately mid-March, the operating environment has changed a lot with a lot of uncertainties going forward, which are challenging to fully predict. In this situation, securing a solid liquidity position has been a key priority for us. Starting with cash flow. We had a good development in net cash flow from operation, which was negative by EUR 15.5 million versus negative by approximately EUR 29 million last year Q1, driven by seasonality factors in this line of business. But nevertheless, a significant improvement. And the significant improvement is related to the net working capital management and development. Account receivables and account payables show a positive year-over-year development, while inventories were on last year's level in terms of cash generation. On the accounts receivable, in Q1, there were no significant bad debt provision booked. But going forward, and of course, depending on the length of the lockdown of societies, we see a risk that the aging structure of our accounts receivable portfolio might develop in an unfavorable direction for the upcoming quarters with potential bad debts occurring. Net debt, as we can see on the chart, was approximately EUR 49 million versus EUR 87 million last quarter end -- in 2019 quarter 1 end. This gives a net debt to comparable EBITDA ratio of 1.1 versus 2.2 last year Q1, so a solid development. Our liquidity position is strong. We are pleased that we have had access to funding sources in a challenging market environment. We have issued commercial paper to further boost and secure the liquidity and outstanding commercial papers amounted to EUR 55 million versus EUR 10 million last year. The funds have been maintained as liquidity reserves, and hence, the commercial paper issues have no impact on the net debt position or the gearing. The balance sheet total has increased to EUR 423 million from EUR 380 million last year, impacting the equity ratio negatively. But the gearing ratio is not impacted by the increased commercial paper issues as this is not impacting the net debt position. And last, a quick summary on our financing. We have backup facilities consisting of committed revolving credit facilities amounting to EUR 60 million and an overdraft facility of EUR 10 million. The revolving credit facility is part of the syndicated loan arrangement valid until January 2023. The backup facilities have been unused during the quarter 1 this year. We will, going forward, focus on net working capital management and securing the group's liquidity position in these uncertain times. With this P&L and balance sheet overview, I will now hand over to you, Pekka. Please go ahead.

Thank you, Niklas. On Page 13, we have described COVID-19 key impacts and uncertainties. As mentioned earlier, COVID-19 restrictions and lockdowns have a significant impact on our operating environment. First, we look at the uncertainties in Finland & Exports and Scandinavia segments. Sales in travel retail, on-trade and exports account for about 20% of our consumer beverage net sales. We expect these channels to be at or close to 0 in Q2. We expect sales to monopolies to remain stable. Despite consumers shifting purchases from the closed channels to the monopolies, we are not expecting monopoly sales to compensate shortfall. The uncertainty in the monopoly channel relates to 2 factors: first of all, the opening of the monopoly stores and the continuing of their normal operations. The second factor is our ability to deliver the products. The recovery of the consumer beverage sales depends on the duration of the governmental restrictions, limitations in movement and traveling as well as the recommendations on social distancing. The pace of recovery is difficult to estimate, and we expect it to vary across the sales channels. On-trade channels could be expected to recover faster than travel retail. In Altia Industrial, uncertainty is high, both for industrial products and services. We expect the stable volume development on starch and feed components to continue. In technical ethanol, we expect the demand for denatured ethanol to stabilize. In industrial services, we expect volumes to be negatively impacted by COVID-19. The availability of products and raw materials such as bulk wine, partner goods and dry goods affects our ability to deliver to the open sales channels. Uncertainty in production is related to the health and safety of our personnel and to the availability of machinery spare parts and maintenance workforce. These were the key uncertainties we see today, and I will now discuss what kind of measures we have taken to the crisis and turn to next page. Our key priorities are the health and safety of our people and business continuity. We follow the recommendations and instructions from the governments and health authorities of the countries where we operate. Those of our people who have the possibility to work remotely have been doing so since mid-March. At the production facilities where personnel is needed on site, we have further strengthened the hygiene measures and routines. We are continuously in close contact with our partners and suppliers to ensure the availability of products and raw materials. Furthermore, we have taken immediate measures to adjust our cost structure. These measures include cost savings in operational costs. We have frozen marketing activities in the closed sales channels, travel retail and on-trade. And further, we have implemented strict cost savings in all functions. We have also implemented temporary layoffs and part-time work in Finland, Sweden and Norway. The visibility for the rest of the year is poor and forecasting is difficult. And -- on next page, we go to our guidance. Looking forward, the visibility for the rest of the year is poor and forecasting the COVID-19 impact on the operating environment reliably is difficult. And this is why we are today suspending our 2020 guidance. The recovery of the consumer beverage sales depends on the duration of the governmental restrictions, limitations in movement and traveling as well as recommendations on social distancing. The pace of recovery is difficult to estimate and is expected to vary across sales channels. On-trade channels could be expected to recover faster than travel retail, for example. We will provide a new guidance if the visibility improves and the impact of COVID-19 on Altia's operating environment and business conditions can be assessed in a reliable manner. This was the last slide in our presentation today, and I will hand over to Tua for the Q&A.

Excellent. Thanks, Pekka and Nik, for the presentation. [Operator Instructions] So let's start with the questions from the chat. I will quickly repeat the questions and then let Pekka or Nik answer. So we have a question from Harri Wallenius from Nordea. Have you had any delays in the supply chain? What is your estimate going forward?

Yes. Thank you, Harri. Good question. No major delays. No major order stocks. We are talking about few products with maybe 1 days out of stock. So we have managed the situation, in my view, extremely well.

And then further question, how much receivables do you have from travel retail, on-trade and export channels? And where you -- where do you see the biggest risk for write-downs? Follow-up on that is how large part of the Scandinavia sales comes from on-trade? So I think Nik will start.

Yes. If we give -- I mean, on the total receivables in these channels, I would say that approximately EUR 5 million is the total receivable. We have to remember that it is pretty well diversified. So we have a lot of, so to say, customers there as well and of course, where the potential write-downs can come from. Of course, there are risks in all of these channels, depending on how long the lockdown of the societies and the restrictions will remain on the market. But we are, of course, monitoring. We have imposed restrictions on our sales as well to maintain a control over the receivable positions. On the on-trade part of Scandinavia, I would say approximately 10-ish percent of the total sales is related to the on-trade.

Good. Okay. Then the next question is -- once again, Harri from Nordea. Can you quantify the cost savings you have implemented due to COVID-19, marketing costs, staff cost, et cetera? So I think Nik will take this question as well.

Of course, we are, I mean, following this very carefully internally. This is nothing that we will go out with, but we expect in the coming quarters the sales to go significantly down. This will impact our gross profit contribution, and we are fighting back on the OpEx side. We have take a look on all the other operating expenses, marketing, project costs, everything basically. And in addition, we have also agreed on layoffs in the different markets. But we have not and will not quantify these measures, but we are fighting back.

And then there is follow-up questions from Joni Sandvall, Nordea. How much of the drop in industrial sales was due to lower barley prices?

So the Industrial segment net sales decline was driven by barley prices and then the service volumes, and they are both significant, without going into further details on that. So they were significant, but they were also as expected. And this is something we communicated on the barley price, on the service sector volumes we communicated already earlier. So they are as planned and they both have a significant impact on the net sales decline.

Okay. And a follow-up, are there any planned larger shutdowns in Koskenkorva during 2020?

Normal maintenance shutdowns, we already had one in Q1 and then the other one are then later in the second half of the year.

All right. And then we have one question from [ Tiger Fund ]. How does the phasing of contract manufacturing look in the industrial segment for Q2?

We expect the same trend to continue. We were below in the first quarter. We expect exactly the same development to be below last year's Q2 for this second quarter as well. There are, of course, a lot of uncertainties related to this, and we have not given out any precise, so to say, numbers, but the trend will be the same as for the first quarter.

All right. Good questions. Thank you. So far, we don't have -- there is one follow-up questions from Joni. How does the M&A pipeline look like?

Yes. I would say no major difference here versus the last time we discussed. We continue to monitor the market for opportunities. But as I said, we're focusing in the Nordics on brands that would strengthen our mainly spirits portfolio. Outside the Nordics, we are looking into new market entries with interesting sprit growth potential. So as I said, continue to monitor the situation, but I wouldn't say there is a major difference happened now versus the time we discussed before.

Okay. [Operator Instructions] Okay. I think that was -- that were all the questions for today. And I will hand over to Pekka to summarize.

Thank you, Tua. Thank you for the good questions. Here are the key takeaways. Profitability improved in the first quarter, driven by the normalizing barley prices, positive channel mix and the exceptionally high volumes of denatured ethanol. Our liquidity position has remained stable, and we're pleased that we have had access to funding in a challenging debt market. And last, as mentioned, as of Q2, we're facing the full impact of COVID-19 and the visibility for the rest of the year remains poor. And then we go back to Tua for the final remarks.

Yes. Thank you. This will now conclude our Q1 results presentation. If you have any feedback, comments or questions, please don't hesitate to contact us. We are happy to set up follow-up calls to discuss further. And as a reminder, the half year report is published on August 19. We wish you all a great rest of the week. And Happy Walpurgis, 1st of May, for those of you in the Nordics. Bye.

Thank you. Bye-bye.