Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Altia's H1 2020 Results Presentation. My name is Tua Stenius-Örnhjelmin, and I am from Altia's Investor Relations. We are using Microsoft Teams, so please keep your microphones on mute during the presentation. For the Q&A session, we ask you to send your questions to the management through the Teams' chat. You can do so already during the presentation. As a new feature in Teams, you can also use the Raise your Hand function if you want to ask questions personally. And those of you who have dialed in will have the opportunity to speak towards the end of the Q&A. I will repeat the instructions before we start the Q&A. We are recording the presentation, and an on-demand version will be available on our website later today. This meeting is being recorded. CEO, Pekka Tennilä; and CFO, Niklas Nylander, we are now ready to start the presentation, and I will hand over to Pekka.

Thank you, Tua. Before jumping into first half year numbers, I would like to start with an update on COVID-19 from our point of view. During this crisis, our priority has been to secure the health and safety of our employees and business continuity. Operations have been running during the whole quarter, and we have had no significant out-of-stock situations. Among our employees, we have had only a few cases of COVID-19, and we are today pleased to see that these persons have recovered well. However, the impact on our business have been significant and the uncertainty has been high. The important sales channels, travel retail, exports and on trade, were closed more or less the whole quarter. Due to this, consumers have shifted purchases to the monopolies, and the monopoly volumes have reached all-time high levels. In the Nordics, the uplifting of restrictions started gradually around May, June, but the recovery was still very slow and had low impact in Q2. The demand for ethanol has been high, and we have delivered large amounts of denatured ethanol for hand sanitizer and DUs. Many of us Altians have been working remotely, and this continues for the time being. In addition to remote work, our actions to mitigate the impact of COVID-19 included part-time work, temporary layoffs and cost savings across the whole organization. Our financial position and liquidity situation has remained strong the whole time. Going forward, we see that the uncertainty in our operating environment, both regards consumer products, industrial products and services, remains high. The recovery of the closed sales channels depends on the governmental restrictions and recommendations and the possible second wave of COVID-19. Let's now go to the next page and discuss first half year results. Looking at the highlights, we are very pleased with the strong result that we have reached in this exceptional market environment. Our net sales in January-June, in constant currencies, declined by some 8% to EUR 149 million. Our profitability improved significantly by 37% to EUR 18.8 million. This accounts for an EBITDA margin of 12.6%. We will look more closely at the numbers, but in short, the positives from the first half of 2020 are the significant result improvement in Altia Industrial, the strong monopoly sales in all 3 countries and we achieved group-wide cost savings in Q2. Moving on to Page 4 and the market development. The monopolies growth numbers for the January-June period are exceptionally high. This is due to consumer shifting purchases to the monopolies as travel retail and on trade were closed. For the Nordics in total, volumes grew by 16%. If we look at the specific countries, we can see that Norway stands out. In Norway, spirits grew by 23% and wine by 34%. In Finland, sprits grew by 10% and wine by 16%. And in Sweden, spirits grew by 17% and wine by 9%. In general, most spirits categories and wine categories grew. And for wines, we can see that volumes of bag in-box wines have increased. So to summarize, the monopolies had a strong first 6 months driven by COVID-19. Now let's move on to Page 4, looking at net sales development. In January-June, we can see that net sales declined by 9.5% to EUR 149 million. In constant currencies, the decline was 8.4%. The decline is due to mainly 2 factors. First of all, the COVID-19 restrictions, closed travel retail, exports and on-trade channels. And COVID-19 also had a significant impact on contract manufacturing volumes. Secondly, the normalized barley price drives top line down. In addition to these, the business model change in Denmark that was completed in Q2 last year impacts year-on-year net sales comparison negatively. For Q2, net sales declined by 11% to EUR 81 million. If we look at beverage sales a bit closer, we can see that the closed sales channels are driving the decline in both spirits and wine. The closed sales channels account for some 20% of our group beverage net sales. But in the first half, the net sales of beverage declined by 4.9% in constant currency. So the decline is not as big as we expected in the Q1 report. The tailwind from the market volume growth in the monopolies, and especially our double-digit sales growth in spirits, have partly offset the shortfall. In H1, spirit's net sales declined by 5.5% to EUR 53 million, and wine net sales declined by 6.7% to EUR 49 million. In Q2, we had a partner change within our wine portfolio, and this had a slight negative impact on wine net sales in H1 and a bigger impact in Q2. Let's go to Page 5 for a closer look at Finland & Exports segment. Net sales in the Finland & Exports segment declined by 11% to EUR 53 million. Spirit sales were EUR 31 million; and wine sales, EUR 22 million. The net sales decline is due to COVID-19 restrictions that have closed travel retail, exports and on-trade channels. These closed channels accounted for about 30% of the Finland export segment's net sales in 2019. As consumers shifted purchases to the monopoly, our net sales in the Monopoly grew, driven by double-digit sales growth in spirits. In grocery trade, our net sales grew slightly. And in the Baltics, the domestic grocery trade has continued a stable positive development. On the slide, you can see some of the innovations we launched in second quarter. To start from the left-hand side, we see Koskenkorva 7 Botanicals, which is a limited-edition trendy botanical vodka. Koskenkorva Lemon is the newest addition in the 21% liqueur range, made with natural ingredients and real lemons. We also had a few new exciting additions in the Leijona shot range. And to mention one is the Leijona yuzu raspberry shot. We have strengthened our partnership with De Kuyper as the cherry liqueur Heering moved to Altia's portfolio in June. On the wine side, I would like to mention a couple of tender wins: the Two Oceans Chenin plant, a fair trade bag in-box white wine; an organic red wine from the Argentinian producer Finca Las Moras; and the Portuguese sangria under Casal Garcia brand. Our digital platform, Viinimaa, has performed very well. During the first 6 months, we see a growth of 20%, and the site reached an all-time record number of visits in June, more than 176,000. Last but not least, in exports, we have partnered with Underberg to enter the German market with Koskenkorva vodka and O.P. Anderson aquavit. With this, we move on to next page and the Scandinavia segment. Net sales in Scandinavia segment declined by 1% to EUR 50 million. The decline is due to the new distribution business model that we implemented in Denmark in Q2 last year. In constant currencies, net sales grew by 2.5%. Also in both Sweden and Norway, our sales in the monopolies grew. In Sweden, we saw double-digit sales growth in spirits. In the strategically important gin, rum and liqueur categories, we were able to increase our sales and market share. In Norway, net sales growth was strong across all categories, and our market share developed positively. COVID-19 has impacted on-trade sales negatively both in Sweden and Norway. We have been active with innovations. If we start from the left, we have a new innovation for the traditional pear liqueur Xante now mixed with dark rum. Gronstedt Punsch is an iconic Swedish arrack liqueur, which has now been relaunched in Systembolaget. From our partner, we have a new gin, Herno pink gin, which has been a great success. We also have several listings of sparkling wine. To mention a few examples, Spanish rose Cava from Jaume Serra in Systembolaget and a pretty sparkling Gusbourne, which was a tender win at being monopoly. The organic German Riesling under our own brand, Chill Out, was launched last year as a bag in-box wine in Finland, and this summer was launched in Sweden and Norway, too. Our digital platform, Folkofolk, in Sweden has seen increased traffic to the site during the period and reached a peak of 560,000 sessions in a month. Let's now continue to discuss out industrial and go to Page 8. In Altia Industrial, net sales declined by 16% to EUR 46 million. The decline is due to barley price normalizing and the lower contract manufacturing volumes, which have been significantly impacted by COVID-19. The demand for ethanol has been strong, and volumes have remained at a higher level compared to previous year. Starch volumes were below last year's level and were impacted by the weak paper industry market. Feed component volumes were stable. Our operations have run without any major business disruptions in the first half. Koskenkorva plant distiller rate has been running at full capacity and our grain usage increased slight from previous year to 107 million kilos. Last week, we announced that Altia and Brown-Forman have renewed the Finlandia vodka production agreement. The new agreement runs until 2035. With this, I am ready with the business review and can hand over to Niklas for the financials.

Thank you very much, Pekka, and good morning from my side as well. I will first start with a quick update on the barley situation that interests all of us, especially now as we are going into the harvesting season. As you can see from the chart, the barley prices has remained rather stable since the drop about a year ago after the 2019 harvest. We have seen the first preliminary forecast on this year's harvest, which indicate that the crop would be smaller than last year but approximately in line with the longer-term average crop. What this means for the barley price development is too early to say at this point as the weather still plays a role on the final outcome of the crop. So really no bigger news on the barley yet. That will be more concrete in the August, September, so to say, turn. Then if we revert to the strong half year results and look at the EBITDA development closer. In the first half of 2020, our comparable EBITDA has improved by approximately 37% or EUR 5.1 million to EUR 18.8 million. After the first quarter, we were approximately EUR 1 million ahead of last year. And now in the second quarter, we improved by close to EUR 4 million. Despite the roughly 10% net sales decline year-on-year due to the COVID and the barley, we were nevertheless able to improve significantly the results. The key drivers, as Pekka already mentioned, for the strong improvement were Altia Industrial segment, group-wide cost savings that were achieved in the second quarter and the strong sales to monopolies partly offsetting the shortfall from the closed channels. On the next page, I will go through the individual segments. Starting with Finland & Exports, we see a slight improvement in comparable EBITDA from EUR 8.2 million to EUR 8.3 million. EBITDA margin was 15.5% approximately, which is an improvement of 2 percentage points from prior year. The COVID-19 restrictions impact Finland & Exports significantly. As on top of the on-trade, we are reporting travel retail and export within this segment. And in these 2 channels, we can see heavy decline in sales and negative EBITDA margin as well. But nevertheless, with the net sales short from -- shortfall from the closed channels, we can consider the 0.6% improvement in EBITDA as a solid result. The improvement is driven by the strong monopoly sales, especially the double-digit sales growth in spirits. We have continued being active with revenue management, pricing and assortment and implemented cost savings as well. In the Scandinavia segment, comparable EBITDA improved from EUR 1.7 million to EUR 2.8 million. EBITDA margin was 5.5%, which is an improvement of 2 percentage points as well from prior year. In Scandinavia segment, the net sales shortfall were due to the business model change in Denmark and closed on-trade channel, together with the FX impact. EBITDA improvement was driven by solid monopoly sales, revenue management and cost savings, as in the other consumer beverage segment. Headwind from -- especially the weakening Norwegian krona impacted the results negatively. Then looking at Altia Industrial, we see the comparable EBITDA has more than doubled from prior year. EBITDA improved from EUR 3.3 million to EUR 7.1 million despite nearly 16 percentage drop in net sales. On the EBITDA level, the normalized barley prices give us tailwind this year versus the headwind last year. The strong improvement was also driven by high volumes of ethanol and overall market price development of ethanol, which is increasing. So all in all, a strong result from all the segments. Then next, on cash flow. Our net cash flow from operating activities in January to June amounted to EUR 10.3 million versus a negative of EUR 4 million last year, so a significant improvement, which is related to the higher EBITDA and a positive development in net working capital. One of our key priorities have been a strict focus on the net working capital management, and we see that all net working capital items have developed positively, partly impacted also by the COVID, so to say. Then on the next slide is the balance sheet and KPIs. One of our key priorities has been to secure Altia's liquidity position and keep a strong balance sheet. Net debt was EUR 30 million at the end of Q2 versus EUR 81 million last year. This gives a net debt to comparable EBITDA ratio of 0.6 versus 2.2 last year. And this is, of course, significantly below our long-term target of 2.5 maximum. We have issued commercial papers to secure the liquidity. The value of the CPs issued amounted to EUR 45 million versus EUR 40 million in Q2 last year. Our cash position has increased following CP issues and the improved operational cash flow already since quarter 4 2019. Cash and cash equivalents amounted to EUR 101 million versus approximately EUR 28 million last year. Gearing and equity ratio are stable, with especially gearing developing in a positive direction impacted by the higher net cash position. Then, if we turn to the next page and look on the guidance for the year. As Pekka mentioned in the very beginning of our presentation, going forward, the uncertainty in the operating environment remains high, and the visibility for the rest of the year continues to be poor, and hence, forecasting is difficult. The recovery of the consumer beverage sales depends on the level and extent of governmental restrictions and recommendations on traveling, movement and social distancing. The pace of recovery is difficult to estimate and it is affected by changes in consumer behavior and is expected to vary across sales channels. On-trade channels could be expected to recover faster than travel retail. So the guidance for 2020 remains suspended. And we will give a new guidance if the impact of COVID-19 on our operating environment and business conditions can be assessed in a reliable manner. This ends this part of the presentation. And now I will give over to Tua for the Q&A.

Excellent. Thank you both Pekka and Niklas. And we have now questions on the chat, and we will start with those ones. [Operator Instructions] So let's start with the first question, which we have from Jussi Mikkonen. And I will repeat the question just to get it recorded as well. So could you provide more color on your cost savings? What concrete measures have you done? And do you see this level in other operating expenses to be sustainable going forward?

Yes. Niklas here. We have worked on the cost math on a very broad front. We have reviewed all cost items critically. We have, so to say, reduced the marketing activities, which is very logical considering that part of the sales channels have been closed. We have reduced the project work. We have, of course, reduced traveling and meeting expenses. And then we have made also temporary layoffs during this very extraordinary situation. So the cost savings, they are coming from all cost items in our organization, so to say. Then going forward, of course, it will depend on how the COVID situation will develop, what the operating environment will be. But of course, the management is prepared and ready to make necessary, so to say, decisions depending on the operating environment.

All right. Then the next question is from Joni Sandvall. It seems that monopoly sales have continued on a high level. What level are you expecting for H2? And have you seen any changes in average selling prices?

Yes. Joni, thanks for the question. I believe that at least the coming months will be still favorable for monopoly sales as it seems that traveling is still restricted. I think that will support monopoly and Alko sales for the coming months and probably towards the end of the year as well. Average selling prices, we haven't seen any major movement. The next pricing -- we made some changes in June, and the next pricing window is in October. So nothing major from the market side.

Okay. Joni has another question. How much positive effect on industrial segment's profitability from high ethanol sales to hand sanitizers and how we should view this going into H2?

I think, overall, hand sanitizer volumes increased heavily March, April, partly also May. And that is due to the fact that all the players needed to build their stock. Now that the stocks have been filled, and it's more up to daily usage of hand sanitizer. So in terms of the role of the hand sanitizer, technical ethanol used for that, it's one part of the total ethanol sales of the industrial. It's significantly higher than it was last year, but it's only one part of the total and not necessarily even a very significant part as for the foreseeable future. When we talk about technical ethanol and ethanol sales on the industrial side, we talk about totality. We have a number of customers, number of products. And basically, all of those products and customers have developed well. The average market prices have increased, and that has helped us to improve that part of the business. So for the rest of the year, a kind of -- still a stable, positive outlook, hand sanitizer being one part of it.

All right. And then next follow-up is could you comment on contract manufacturing volume expectations for H2? Have you seen pickup in demand?

Overall, as we say, the COVID-19 has had a significant impact on the contract manufacturing volumes. And I think how the situation evolves overall globally will have -- we'll decide on the second half of the year. So more than that, I do not really want to comment or cannot really comment.

Okay. And then last from Joni is regarding M&A potential. How do you see the market currently?

I see that as no -- kind of no big news. It hasn't -- from our side, at least, it hasn't really activated with COVID, if that is the question. So basically, from the M&A side, no new news.

All right. Those were all questions from Joni for time being. Then we move on to questions from Pete-Veikko. Was your performance in Scandinavia and monopolies in line with the market?

Yes. Pete-Veikko, thanks for the question. In Norway, we are gaining market shares. So overall, I mean -- and Norway is, by far, the fastest-growing market right now. So we're extremely happy about our Norwegian performance. Of course, the weakening Norwegian krone is eating up a lot of that positive development both in terms of net sales and EBITDA in euro terms. But nevertheless, a very strong performance. Good performance in Sweden as well, especially in the strategic gin, liqueur, rum categories, which if you remember from last time, we said it is something that we really push for. And we have gained market shares there. I think for the rest, I think in vodka, we see a bit of a challenge in -- we're growing in sales but not up to the market pace, and that's related to the pricing. And we are looking into that. In wine, mainly the partner portfolio changes are pushing the -- our performance to be a bit weaker than the overall market. But I would say happy about overall performance of both Norway and Sweden. And really, when you look at the Scandinavian net sales development, Denmark stands out. So there, we have the new business model. And we're using now distributors. Before we sold ourselves, and that makes a significant change in net sales but is then positive on the EBITDA level.

Okay. And then follow-up is how high is your exposure to on-trade in Scandinavia?

Yes. In monopoly countries, on average, on-trade accounts about 10% to 15% of total sales. So that's the exposure in Scandinavia as well.

Okay. And then a question about the cost level. So can you maintain this cost level also in H2 if the market environment remains as it is now?

I think Niklas already answered that question. I think we are ready to react to changing market situations. I think we've done that already. And we continue to monitor the situation, how it evolves, and we are ready to react.

Okay. And then we have still one more question from Pete-Veikko. So you mentioned expansion to the German market with a partnership with Underberg. Any more details you wish to share about this?

I think this is something that we can probably take up in coming quarters as we really start the operations. What I would like to say is that, that partnership with Underberg is very, very important to us. We are partners already in the monopoly countries. And now to partner up with them in Germany is just fantastic. And they are a great company, a strong distributor and a very important partner to us. So I believe we have a good setup in terms of distributor. What is important to understand of the German market is that -- especially the Northern Germany is a big aquavit market and a traditional aquavit market. And now we entered that market as a new player. So it's still naturally early days. And it's clear that the COVID-19 has had an impact on the Northern Germany sales as well. And -- but I would say, as we kind of really start the sales and distribution, we can open up more on that situation.

Okay. Then we go to questions from Paul Handeland. So first, we have a couple of questions. Are your current CapEx levels sustainable? They are currently significantly lower than the rate of depreciation. And what is the source of your associated joint venture income?

Okay. Then on the CapEx levels, first of all, what we have been communicated to the outside world is, on average, we expect the annual CapEx levels to be between EUR 8 million and EUR 11 million. So that is the normalized level. Of course, there are fluctuations between the quarters, between the years. But on long term, that is what we foresee. Also here, we can see that for the first half year this year, the activity level is lower in general, impacted probably by the COVID-19. But the EUR 8 million to EUR 11 million is, so to say, the level. Then on the associated and joint venture income. There, we have shares in 3 companies. Roal is one of the companies that pays dividend where we have, so to say, 50% share. Another is Papa, the recycling company that we own slightly more than 30% of. And from that, we report the associated income.

All right. And then the last question from Paul. What is your current view of the inventory situation at the monopolies? Have they stocked up meaningfully? Or is sell-in relatively similar to sell-out?

Yes. So Paul, the inventory levels at the monopolies are relatively low in general, for sure. So they keep low stocks. So of course, there's a bit month-to-month differences between our sell-in and their sell-out, but generally low stocks and their sell-out reflect our sell-in levels.

Okay. And then there was a question from Joni, which I apparently seem to missed before. So in the report, you mentioned that travel retail, on-trade and export did not contract as much as you expected in Q2. Did the market contract less than you anticipated? Or have you seen faster-than-anticipated recovery?

Yes. Thanks. Thanks, Joni. So travel retail, on-trade, export contracted just as much as we expected. So no news there. Travel retail was 0 during Q2. On-trade was very close to 0. It kind of recovered a bit in June. And exports have suffered as well. I think the positive news is the monopoly sales, which increased more than we anticipated. I think that is the one single change from the market that we see.

Okay. So those were all the questions, which we have received now through chat. [Operator Instructions] Okay. So it seems that, that were all the questions for today. So I will now hand over to Pekka to summarize.

Thank you, Tua, and thank you all for the many and very good questions. I would like to summarize our presentation with 3 key takeaways. We achieved a strong result in an exceptional market environment. Our profitability improved significantly. We are managing the COVID-19 crisis well. Our operations are running. And there has been no major disruptions or other stock situations. In all 3 monopolies, we've shown strong performance, with double-digit growth in spirits. However, the uncertainty for the rest of the year remains high and the visibility continues to be poor. Lastly, I would like to take this opportunity to thank Niklas Nylander for his great and successful efforts here in Altia. He has been a great colleague, and he will be missed. Our search for the new CFO is ongoing. In the meanwhile Juhana Jokinen will act as an interim CFO until we hire the new one. And then back to Tua for the final remarks.

Super. Thank you, Pekka and Nik, and thank you, all of you, who have joined on our presentation today. And in case you have any follow-up questions or comments, please don't hesitate to contact us. We are always happy to set up calls to discuss further. And as a final reminder, the Q3 business review is published on November 6. And with this, I'd like to wish you all a good rest of the day. Bye.