Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

All right. Let's start. Good morning all. Welcome to Altia's Q3 2020 Results Presentation. My name is Tua Stenius-Örnhjelmin and I am from Altia's Investor Relations. On today's call, we have CEO, Pekka Tennilä; and interim CFO, Juhana Jokinen. Before handing over to the presenters, a few practical remarks. [Operator Instructions] We are recording the presentation and the on-demand version will be available on our website later. With this, we are ready to start, and I will hand over to Pekka.

Thank you, Tua. Before going into the numbers, I will give a short recap on the COVID-19 situation from Altia's perspective. Since the beginning of the crisis and going forward, our priority is naturally to secure the health and safety of our employees and business continuity. The health situation among our employees is good at the moment. During the third quarter, we have seen that the COVID-19 restrictions have been changing in our home markets. When restrictions were lifted in the summer, we could see some recovery in travel retail and on-trade but for a short time only as new restrictions were imposed following the rising number of cases towards the end of the third quarter. We have been activating our brands as much as possible, and operations have not experienced any major disruptions. However, we have had some out-of-stock situations, especially in wine. Consumer shifting purchases to the monopolies has continued in Q3. The demand for ethanol has been high, however, the situation has stabilized and the market situation is tight. We have continued to work remotely whenever possible, and we continue to do so for the time being. We did cost savings at the beginning of the crisis and have continued to optimize costs whenever and wherever possible. We have also continued our actions to secure liquidity, and our financial position has remained strong the whole time. Going forward, we see that the uncertainty in our operating environment remains high. We also note that with the second wave, the risk related to the health and safety of our employees have increased and also the risk for supply chain disturbances is higher. Let's now go to the next page and discuss the results. Considering this exceptional and also unforeseen circumstances this year, I'm very pleased to see good performance in the third quarter. I believe this reflects the resilience of our business and our employees who have done an excellent contribution and worked hard for these results. In the first 9 months, our reported net sales decreased, reflecting very much the negative impact from COVID-19. On the profitability side, we saw continued improvement in Q3. And during the first 9 months, all 3 segments have improved compared to last year. Comparable EBITDA improved by 33% to EUR 33.4 million. Moving on to next page. The development in the monopolies has been exceptional also in Q3, and the growth rates are at historically high level. This is due to restrictions in travel retail and on-trade and consumer shifting purchases to the monopolies. I won't spend too much time on this slide. But all in all, for the Nordics in total, volumes of spirits and wines grew by 18% in Q3 and for the January-September period by 17%. If we quickly look at the specific countries, we can see that Norway stands out. Looking at year-to-date in Norway, spirits have grown by 30% and wine by 40%. In Finland, spirits have grown by 9% and wine by 15%. In Sweden, the growth rate for spirits 19% and for wine, it's 9%. So very strong year so far for the monopolies, obviously, driven mostly by COVID-19. Let's move on to next page. Altia's net sales in Q3 grew by 2.5% to EUR 87 million, driven by the Scandinavia and Altia Industrial segments. In Q3, total spirits sales grew by nearly 5% and offset the negative impact of COVID-19. In wine, the main driver for the net sales decline are the changes in partner portfolio, which took place in Q2 this year. In January-September, our net sales declined in constant currencies by 4.7% to EUR 236 million. The decline is mainly driven by the negative impact of COVID-19 and the normalized barley price. Looking at spirits for January-September, we see that total spirits sales declined by 2% despite the strong net sales growth of spirits in the monopolies. The decline is mainly due to travel retail decline. Let's go to the next page to see more closely on the segments. In the Finland & Exports segment, we could see a momentary recovery of travel retail and on-trade when restrictions were lifted in the summertime. However, the impact of COVID-19 on travel retail, on-trade and exports is significant year-to-date and sales for January-September declined by 8.8% to EUR 83 million. Altia's net sales in the monopoly grew from the previous year, driven by the strong spirits sales, but wine sales were negatively impacted by partner portfolio changes. In the Finnish grocery trade, a stable growth continued. And in the Baltics, the stable development in the domestic grocery trade continued, whereas harbor and border trade were impacted by COVID-19. On the slide, you can see a few of the innovations we launched in Q3. Starting from the left, we have 2 new launches in the economy priced whiskeys to strengthen our market position in the segment. In the Larsen Cognac range, we have a new special edition developed in cooperation with a famous Finnish chef, Tomi Bjõrck. Jaloviina Hanki is an addition to the Jaloviina Liquor range. In wines, we have strengthened our portfolio in Finland with new distribution agreements with Erben Langguth and Leitz, both German wine producers. And finally, we have added a low-alc sparkling glõgg to the grocery trade offering, Blossa Sparkling & Spices Citrus. With this, we move to next page. In the Scandinavia segment, net sales in January-September grew to EUR 78 million. Growth in constant currencies was 4.1%. In Sweden, spirits sales growth was strong in the monopoly. We also gained market share in the important gin, rum and liquor categories. Wine sales in Sweden were negatively impacted by partner portfolio changes. In Norway, net sales growth was strong across all categories, and we have also increased market shares. COVID-19 restrictions impacted sales in on-trade negatively. In Scandinavia, many of the launches in Q3 were about Christmas. Here are a few examples. Starting from the left, we have first the annual Blossa 20, this year inspired by Marrakesh. We have further built on our sparkling glõggs with a new flavor, Classic Red, in addition to last year's successful Citrus and the low-alc mentioned earlier. A new addition is also a tender win in [ sustainable market ] with Blossa Saffran. In spirits, we have also won a tender for a new Christmas aquavit, Herrgårds Julsnaps, a good addition to our existing range of Christmas aquavits. Let's continue now to next page. In Altia Industrial segment, January-September net sales were EUR 76 million, down by 8.3% from the previous year. The decline was mainly driven by the lower contract manufacturing volumes due to COVID-19 restrictions and the phasings at the beginning of the year. The demand for technical ethanol has been strong during the period, and our volumes higher than last year. The negative volume development of starch due to weak demand for printing paper and the lower barley prices impacted net sales negatively. As part of our long-term working capital management, we have reduced our cognac inventory, and this impacts Altia Industrial's net sales positively in Q3, but impact on group EBITDA is not significant. One of the key priorities in Altia Industrial is to secure availability of raw materials like bulk wine, dry goods and partner goods and to secure supply chain operations and production continuity. As I mentioned in the beginning, operations have run without any major business disruptions during the whole time. With this, I am ready, and we'll hand over to Juhana for the financials.

Thank you, Pekka. Good morning from me as well. I will first start with a quick update on the barley situation. As you can see from the chart, the barley price has remained rather stable since the drop about a year ago after the 2019 harvest. Based on recent reports, this autumn's harvest is described as close to normal level, but materially smaller than last year. In addition, the quality of the barley is lower, so it is expected to increase our cost base for the rest of the year. That was short on barley. Let's revert to financials and have a look at the EBITDA development closer. In the first 9 months of 2020, our comparable EBITDA has improved by 33% or EUR 8.3 million to EUR 33.4 million. In Q2, we were about EUR 5 million ahead of last year. And now in Q3, we improved by more than EUR 3 million. Despite the roughly 4% net sales decline year-on-year due to COVID and the barley, we were able to improve significantly. The key drivers for the strong improvement are, as Pekka already mentioned, Altia Industrial segment; strong sales and continued revenue management and in the monopolies, partly offset in the shortfall from closed order restricted channels; and the group-wide cost savings that we achieved in Q2. And then over to segments. All segments have improved from 2019 and in Q3 as well. In Finland & Exports, we see an improvement of comparable EBITDA from EUR 13.3 million to EUR 13.8 million. The EBITDA margin was 16.6%, an improvement of 2 percentage points from last year. The COVID-19 impact Finland & Exports significantly as the segment includes also travel retail, exports and the Finnish on-trade channel. With the net sales shortfall from the basically closed or restricted channels in mind, the 3.9% improvement is a good result. The improvement is driven by strong monopoly sales, especially spirits. We have also continued being active with revenue management and implemented cost savings during the year. In the Scandinavia segment, comparable EBITDA improved from EUR 3 million to EUR 4.7 million, an increase of 59%. The EBITDA margin was 6.1%, an improvement of more than 2 percentage points from previous year. In the Scandinavia segment, the good development is from strong monopoly sales, revenue management and cost savings. The Scandinavia segment suffered from the restricted on-trade channels. We also got some headwind from the Norwegian krona earlier in the year. In Altia Industrial, we see that the comparable EBITDA has almost doubled from previous year. EBITDA improved from EUR 6.9 million to EUR 13.6 million despite the more than 8% drop of -- drop in net sales. On the EBITDA level, the normalized barley price gives us tailwind this year versus last year. The strong improvement was also driven by a good development of ethanol demand and improved supply chain efficiencies. So all in all, a strong result from all segments. Next, let's have a look at the cash flow and KPIs. Our main financing and balance sheet KPIs have developed favorable compared to Q3 last year. Since approximately mid-March, the operating environment has changed. There are still 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 the cash flow, we see a good positive development in the year-to-date net cash flow from operations, which totaled EUR 5.9 million versus minus EUR 0.8 million in Q1 to Q3 last year. In addition to the improved operating profit, the improvement of cash flow from operating activities is related to net working capital management. Accounts receivables and inventories compared to last year show a positive year-on-year development. Q3 cash flow from operating activities was, however, negative. As you can see in the graph, it's clearly a seasonal thing. All Q3s are lower. This year, in addition to the normal seasonality, we have started to buffer up the inventories for Christmas sale and also have some merger-related costs affecting the cash flow. As mentioned earlier, we have seen higher sales to monopolies. This, in combination with calendar effect has impacted the amount of receivables sold, which at the end of the period amounted to EUR 50 million versus EUR 45 million in Q3 2019. On the accounts receivable in Q3, there were no significant bad debt provisions booked. But going forward and depending on the length of the COVID restrictions in the society, we see a risk that the aging structure of our accounts receivable portfolio might develop in an unfavorable direction with potential bad debts occurring. This, we are monitoring closely. Net debt was EUR 37 million versus EUR 81 million at Q3 2019. This gives a net debt to comparable EBITDA ratio of 0.7 versus 2.0 at Q3 2019. Our liquidity position is strong. We are pleased that we have had access to funding sources in a challenging market. We have issued commercial paper to secure the liquidity and outstanding commercial papers amounted to EUR 30 million versus EUR 12 million Q3 last year. The funds have been maintained as a liquidity reserve, and hence, the commercial papers have no impact on the net debt or the gearing. The balance sheet total increased to EUR 410 million versus EUR 375 million at Q3 2019, impacting the equity ratio negatively, being 37.1% versus 37.4% at Q3 2019. Gearing was 24.5% versus 57.9% at Q3 2019 and was not impacted by the change in debt and cash positions. Last, a quick summary of our financing. We have backup facilities consisting of a committed revolving credit facility amounting to EUR 60 million and an overdraft facility of EUR 10 million. The backup facilities were unused at the end of the period. We also have a commitment for financing related to the planned merger with Arcus, should it be needed. We will continue to focus on the net working capital management and securing the group's liquidity position. I will now hand over back to Pekka.

Thanks, Juhana. First, a few comments on the Altia and Arcus merger plan and then on our guidance before we take questions. The merger of Altia and Arcus was announced at the end of the quarter. With the merger, we are forming a leading wine and spirits brand house in the Nordics, ANORA GROUP. As one company, we will be more competitive and have a stronger financial position, putting us in the opportune position to build further growth in and beyond the Nordics. We published the prospectus 2 weeks back, and it's included on our group's pro forma figures. Based on this ANORA will have a net sales of EUR 640 million and comparable EBITDA of EUR 85 million. The closing of the deal is expected in -- or by the end of first half next year. This requires approvals from the AGMs on 12th of November as well as customary approvals from the competition authorities. Then a few words on our guidance. For the rest of the year, we see that the uncertainties due to COVID-19 have escalated. We expect the impacts on our last and most important quarter to be substantial. The restrictions on social gatherings will limit the festive season and hence, impact negatively the Christmas sales. Especially in Scandinavia, the sales volumes of glõgg and aquavit are expected to be lower than in the previous year. Further, the significant negative impact on sales in travel retail is expected to continue. In Altia Industrial, the escalated uncertainties relate to the decreased demand for starch, the tight situation on the ethanol market, the lower contract manufacturing volumes and the expected higher cost base due to increased barley cost. However, despite the uncertainties in the fourth quarter, we are providing an updated guidance for 2020. Following the strong profitability development during the first 9 months of the year, we expect comparable EBITDA for 2020 to be higher than in 2019. With this, we are ready to take questions.

Okay. Thanks, Pekka and Juhana. We will now take questions and start with those through chat. So we have 2 questions from Joni from Nordea. I will repeat the questions and then either Pekka or Juhana will answer. So how much of the technical ethanol is produced with imported ethanol?

Yes. So not going into details on that, but it is true that we use both [ cost in quarter of our ] ethanol and outside purchased ethanol for technical product purposes. The split between the 2 of those, I do not want to get into at this moment.

All right. [Operator Instructions] And so the next question from Joni was, could you comment on channel mix within glõgg and aquavit?

On glõgg and aquavit, as in our business in general in the monopoly markets, on-trade covers about 10%, give and take a few percentages on different categories. But for glõgg and aquavit, that's the ballpark 10% to maybe 15%.

Good. And then we have the next question from Jussi Mikkonen at OP. So what was the effect of cost savings on Q3 '20 comparable EBITDA?

The Q3 strong results were driven by gross margin, not cost savings. Cost savings are there, but it's more related to overall efficiencies in supply chain, obviously. And then obviously, if channel is closed or partly closed, we will adjust our spending. But if you look at Q3 results, that's driven by strong business results and gross margin.

Okay. And then a follow-up from Jussi. Can you further quantify the impact of lower barley price on Industrial's EBITDA?