Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Altia's Full Year 2020 Results Presentation. My name is Tua Stenius-Örnhjelmin, and I am from Altia's Investor Relations. Earlier this morning, we published the financial statements bulletin for 2020 and also the notice to the Annual General Meeting. And if you have problems or you cannot see the presentation which we are sharing at the moment, please write about that in the chat so that we can note. All right. So it's nice to see that so many of you have joined the call today even if we are in the middle of the winter holiday here in southern part of Finland. I will soon hand over to today's speakers, CEO, Pekka Tennilä; and Interim CFO, Juhana Jokinen. [Operator Instructions] And finally, a reminder that we are recording the presentation, and the on-demand version will be available later on our website. With this, we are ready to start, and I will now hand over to Pekka.

Thank you, Tua. Good morning on my behalf as well. 2020 was indeed an exceptional year for us. With the outbreak of COVID-19 into a global pandemic, Altia and our industry in general was heavily impacted by the restrictions. Our activities and sales in travel retail, on-trade and exports have been significantly impacted as these sales channels were either restricted or entirely closed during the pandemic. During such exceptional times, it has been important for us to adapt to the changing circumstances in the short term but also to remain focused on the long term and the implementation of our refined strategy, which was published in the beginning of last year. Within innovation -- innovations, our ambition is to be the Nordic role model in the beverage industry. In 2020, we focused on creating innovations in the growing categories like gin, liquor, rum and [ ready-to-drinks ]. In 2020, we launched several successful products, which have reaped awards in a number of different international competitions. And at the end of the year, Altia was nominated Vodka Producer of the Year by the International Spirits Challenge. This is a true testament of our innovation capabilities. Our sales and marketing teams have shown agility and adaptability to the new normal, for example, in the ways we have switched our brand activations and communications with customers online. This was possible, thanks to our well-established digital marketing channels. Sustainability is a strategic priority and a key success factor for us. From the beginning of last year, we started to implement our long-term sustainability road map, and we have taken important step -- steps such as investments at the Koskenkorva distillery and Rajamäki beverage plant to help us achieve our ambitious targets. During the pandemic, consumer shifted purchases to the monopolies, resulting in record-high market volumes. In the sales channel, our strength has been our wide brand assortment from the local and iconic owned brands to the partner brands from global wine and spirits houses. In Finland, we started to work with 2 new wine partners, and we renewed our long-lasting distribution agreement with Distell covering the Nordic region. Both of these important achievements further strengthen our partner business. During the pandemic, our important contribution to the society has been to produce and deliver high amounts of denatured ethanol to our customers for the production of hand sanitizers. When the demand was at its highest, our production teams, both at the Koskenkorva distillery and the Rajamäki ethanol plant, showed strong commitment and flexibility to meet the high customer need. The most important key priority in times like these has been to ensure the health and safety of our employees. We quickly adapted to remote work, wherever possible, and implemented strict hygiene routines at our production facilities. Ensuring business continuity and minimizing disturbances in the supply chain have also been high on our agenda. I'm extremely pleased that our business and operations have run without major disruptions during last year. Going forward, we are expecting that the uncertainties in the operating environment will continue at least until after the summer. We will continue to develop successful innovations and to strengthen our partner business, and we are fully prepared to activate our brands in travel retail, on-trade and exports as soon as the channels start to recover. In the first half of 2021, we expect also to close the planned merger. We're joining forces with Arcus to form a leading wines and spirits brands house in the Nordics. Turning back to last year. It has been great to see so strong commitment from all of the employees, resulting in fantastic achievements and strong performance in such a difficult year. 2020 ended with a fourth quarter largely in line with our own expectations and COVID-19 restrictions continuing to impact travel retail and on-trade. For the full year, our net sales declined, driven by COVID-19 restrictions, but our profitability was exceptionally strong, and comparable EBITDA improved by 17%, and with this, we reached an EBITDA margin of 15.3%, which is just above our long-term financial target. Also, cash flow improved, driven by positive working capital development. Altia's Board of Directors is proposing to the AGM that we pay an annual dividend of EUR 0.35 per share for the financial year 2020. In addition to this, the Board has proposed that the dividend authorization for an extra dividend of EUR 0.40 per share that was decided by the Extraordinary General Meeting be renewed. On next page, we take a look at the market. In the monopolies, we have seen exceptionally high market volumes since the outbreak of COVID-19 in Q1 last year. In 2020, the market volumes in the Nordic monopolies grew by a total of 17%. The volumes in Norway were especially high with growth of 32% in spirits and 42% in wine. In Finland, spirits grew by 10% and wine by 15%. And in Sweden, the growth rate for spirits was 19%; and for wine, 9%. So, strong market development in the monopoly channel. So let's move on to next page. Looking at the net sales development in Q4, we see that our net sales declined in constant currencies by 3.5% to EUR 107 million, driven by Finland & Exports and Altia Industrial segments. In beverage sales, we see that spirit sales declined by 1%. This was driven by travel retail. In Sweden, we saw the lack of Christmas festivities and the restrictions in on-trade impacting our COVID sales. In wine, we had good sales development in Norway, and also, Glögg sales developed well, both in Sweden and Finland. But due to the partner portfolio changes in Q2 last year, total wine sales were down 3% from 2019. On the industrial side, net sales decline was driven by the lower contract manufacturing volumes due to COVID-19. Then looking at the full year development, we see a decline of net sales in constant currencies of 4.4% to EUR 342 million. The decline was driven by Finland & Exports and Altia Industrial segments. On the beverage side, our overall net sales in the monopoly channel grew. However, the total spirit sales declined despite the strong development monopolies, and the decline was -- by 2% was driven by the COVID-19 impacting travel retail, exports and on-trade sales. In wine, the decline was driven by the partner portfolio changes in Q2 last year. On the next page, we take a closer look at Finland & Exports. Net sales in the Finland & Exports segment declined by 9% to EUR 117 million. Spirit sales were EUR 68 million, down by 10% due to travel retail and exports. Wine sales were EUR 48 million, down by 8% due to partner portfolio changes. In Finland, consumers shifted purchases to the monopoly, and our net sales in the monopoly channel grew, driven by strong growth in spirits. In the Finnish grocery trade, net sales grew steadily as distribution improved, and we made successful product launches. In the Baltics, the domestic grocery trade has continued a stable, positive development, and this has offset the decrease in harbor and border trade due to COVID-19. On the slide, you see some of the innovations we launched in Q4. Koskenkorva Espresso is our latest addition to the growing liquor category, and it showcases our innovation capabilities within Altia. In partner brands, we have a tender win for the Rawson's Retreat in Alko and the 19 Crimes 1.5-liter bag -- bag-in-box is an example of a successful launch through order assortment. The product has today a distribution of [ 118 ] stores out of Alko's 360 stores in total. Our digital platform, Viinimaa, performed very well in 2020, and it has further strengthened its position as the leading wine marketing platform in Finland. With this, we move on to next page and the Scandinavia segment. Net sales in Scandinavia segment grew by 3% to EUR 124 million. Growth in constant currencies was 4%. Spirit sales were EUR 52 million, up by 12%, driven by strong sales development in both monopolies. In wine, net sales declined by 2% to EUR 71 million. The strong wine sales in Norway did not offset the negative impact from partner portfolio changes in Q2 last year. In Denmark, we made a business model change in Q2 2019, which has impacted full year net sales negatively. But in Q4, thanks to good development in Danish domestic grocery trade, net sales development turned positive. Within Scandinavia segment, COVID-19 impacted on-trade sales negatively. Looking at some of new products in Q4. We have made launches from our partners in the growing rum, liqueur and gin categories. Amarula raspberry and chocolate liqueur from Distell, Tobermory Gin also from Distell and a Don Papa rye-aged rum. Decreasing the amount of sugar in our products is one of the goals we have set in our sustainability road map. Here, we have 2 examples of -- from Blossa, where the sugar content was decreased by 13%. In 2020, Folkofolk.se further strengthened its position as Sweden's leading lifestyle wine and spirits and marketing platform. The site traffic to Folkofolk.se reached an all-time high, and visits more than doubled from the previous year. Let's now continue to Page 7 (sic) [Page 8] for Altia Industrial. In Altia Industrial, net sales declined by 8% to EUR 101 million. The decline is due to the lower contract manufacturing volumes, which have been significantly impacted by COVID-19. The demand for technical ethanol has been strong during the pandemic, and volumes have remained at a higher level compared to the previous year. Starch was impacted by lower volumes due to weak demand for printing paper, the lower barley price during the first 9 months of the year. In 2020, we have reached an all-time high of grain consumption at Koskenkorva distillery with the usage of 214 million kilos of Finnish grain. The distillery has run at full capacity during the period. Our key target in our sustainability road map is to reach carbon-neutral production by 2025. At Koskenkorva, we commissioned a new fuel silo, which increases the share of renewable energy in the plant's energy production. This helps us to decrease carbon dioxide emissions by up to 20% on an annual level and takes us one step closer to our key target. At Rajamäki cold beverage plant, we implemented a de-alcoholization production process. This new capability strengthens our opportunities to launch innovations in the growing low- and non-alc category. Also, this investment is in line with our long-term sustainability targets to increase the share of low- and non-alc drinks in our portfolio. With this, I'm ready with business review and can 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. After a fairly normal level of barley prices, we have seen that the global demand of grain and other raw materials has increased compared to supply. And following this, also, barley prices have increased at the beginning of this year, and we accept the price level to be higher than in 2020 until we get the first estimates of the new crop. Next, we look at the EBITDA development closer. In 2020, Altia's comparable EBITDA amounted to EUR 52.4 million with an improvement of 17% or EUR 7.6 million. After Q3, we were about EUR 8 million ahead of last year, and in Q4, we were just below last year's level. Despite a roughly 4% net sales decline year-on-year, we improved profitability. The drivers for the exceptionally strong profitability development were the Altia Industrial segment, strong sales and continued revenue management in the monopolies as well as group-wide cost-saving measures related to COVID-19. In 2020, we have a material amount of items affecting comparability. In total, IAC amounted to EUR 12.2 million, of which EUR 11.4 million were related to the planned merger of Altia and Arcus. The merger transaction costs have been allocated on employee benefit expenses and other operating expenses. Therefore, the reported EBITDA was EUR 2.8 million below last year. Next, I will go through the segments. In Finland & Exports, we see a decline of roughly 4% in full year comparable EBITDA from EUR 20.6 million to EUR 19.8 million. The EBITDA margin improved slightly from previous year and was 16.9%. The COVID-19 has impacted Finland & Exports segment heavily as we report travel retail exports and the Finnish on-trade in this segment. The negative impact of lost volumes due to COVID-19 were partly offset by good, positive channel mix, revenue management and implemented cost savings. In the Scandinavia segment, full year comparable EBITDA improved from EUR 12.1 million to EUR 14.2 million, an increase of 18%. The EBITDA margin improved to 11.5%. Profitability improvement was driven by all 3 markets. In Sweden and Norway, the growth in the monopoly sales and revenue management supported profitability improvement. In Denmark, the profitability improvement is related to the business model change in Q2 2019. The development of Norwegian krona had a negative impact on EBITDA. In Altia Industrial, full year comparable EBITDA improved by 56% from EUR 11.4 million to EUR 17.9 million. The EBITDA margin improved by more than 7 percentage points to 17.6%. The improvement in profitability was related to the positive development of technical ethanol and improved supply chain efficiencies as well as lower barley prices during the first 9 months of the year. Next, let's have a look at the cash flow and KPIs. Our main financing and balance sheet KPIs have developed well compared to last year. During the COVID-19 pandemic, our key priority has been to secure a solid liquidity position. Starting with cash flow. We see a good, positive development in net cash flow for operations, which totaled to EUR 56.1 million compared to EUR 52.6 million in 2019. The improvement of net cash flow from operations was driven by the positive development of net working capital. Net debt was EUR 4 million negative compared to EUR 29 million at year-end 2019 with a good cash generation of Q4 sales as a driver. This gives a net debt to comparable EBITDA ratio of minus 0.1 versus 0.6 last year. As discussed in our earlier reports, we have been active in the commercial paper market, and the nominal value of CPs issued at the end of the period was EUR 40 million compared to 0 at year-end 2019. The issuances have been made to secure our liquidity position and does not affect the net debt as money is in the bank. Gearing was 2.5% negative compared to 19.1% at Q4 2019, and the equity ratio was 34.3% compared to 37.8% in 2019. The total balance sheet was EUR 456 million compared to EUR 400 million last year. The growth of the total balance sheet is related to the excess cash position following commercial paper issues and a strong operational cash flow. Free cash flow and cash conversion are high. In addition to good comparable EBITDA and stable CapEx, the change in net working capital have a significant effect. Net working capital is negative. Inventories are more or less on last year's level. The amount of receivables has declined due to increased amount of sold receivables from the monopolies, which amounted to near EUR 92 million at year-end compared to EUR 77 million in 2019. Good monopoly sales in December also impacted net working capital by increased amount of excise tax and VAT liabilities. This impacted net working capital development positively. On the accounts receivable, in Q4, there were no significant bad debt provisions booked. This is something we monitor closely. Due to the continuing 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. CapEx in 2020 was stable compared to the previous years at approximately EUR 7 million. CapEx was related to investments at Rajamäki and Koskenkorva. In addition to the de-alcoholization process and the new fuel silo, which Pekka mentioned earlier, we have made an investment in a new bag-in-box line with ramp-up in Q1 this year. We have also made a number of maintenance and safety-related investments, both at Rajamäki and Koskenkorva. This ends the review of 2020 financial performance. To summarize, the group comparable EBITDA was exceptionally strong in 2020, strong cash flow generation and good financial and liquidity position. I will now hand over back to Pekka.

Thanks, Juhana. So as I mentioned in the beginning, sustainability is both a strategic priority and a key success factor in our business. From the beginning of 2020, we have been implementing our sustainability road map 2030, which has 4 focus areas which set numerical targets. In addition to the initiatives that we have implemented in production and product development over the course of last year, we have also focused on occupational health and safety, which is an area where we have been working for a long time. It has been great to see that we are making good progress towards our long-term target, which is 0 absences due to injuries. Also, in 2020, the injury frequency continued to decrease compared to the previous year, and the number of safety observations per person increased. I would also like to present an interesting new product launch for Q1 this year, the Koskenkorva Climate Action, a vodka made from regeneratively farmed barley. With regenerative farming, the goal is to convert fields from the emission sources into significant carbon sinks. And as barley cultivation is one of the major factors contributing to our carbon footprint, this would be one way to decrease the CO2 footprint in our products. I invite you to read more about our sustainability work and achievements in our Annual Report, which will be published this week. Then a quick update on the Altia and Arcus merger process. The extraordinary general meetings of both Altia and Arcus were held in November, and in those meetings, shareholders of both companies approved the merger plan. We have filed with the competition authorities in Finland, Sweden and Norway. The process is ongoing according to our expectations. All 3 authorities are now in Phase 2 of their investigations. We continue to have good dialogue with them. For the time being, we are acting as competitors, but we have initiated integration planning process so that we are ready when the necessary approvals have been received, and the deal can be closed. We continue to expect to close the combination in the first half 2021. And going forward, if there are significant news about the process such as decisions from competition authorities, we will communicate those with stock exchange releases as before. Then a recap of the dividend payments. At Altia, we pursue an active dividend policy. The Board has proposed that we pay dividend of EUR 0.35 per share for the financial year of 2020. This is in line with our dividend policy to have a payout ratio of at least 60% of the result for the period. The record date for the dividend is March 23, and the payment date is March 30. The Board has also proposed that the dividend authorization for an extra dividend of EUR 0.40 per share, as decided by the Extraordinary General Meeting, be renewed. This extra dividend is payable to Altia shareholders in connection with and prior to the closing of the Altia and Arcus merger. With this, we go to my last slide about outlook 2021. We have decided to provide a short-term outlook for 2021 but no guidance due to the continuing uncertainties caused by COVID-19 and the low predictability for the full year. In the first half of 2021, COVID-19 is expected to impact travel retail, exports and on-trade. Following this, the channel shift in the monopoly markets is expected to continue for as long as travel retail and on-trade continue to be restricted. The situation is expected to stabilize early as after this summer. In Altia Industrial, for the first half of 2021, COVID-19 is expected to continue to impact contract manufacturing and industrial products in a significant way. The increased prices of imported ethanol puts pressure on technical ethanol margins. The barley prices have also increased at the beginning of this year, and the price level is expected to be higher than in 2020 until the new crop. We see that the recovery of our operating environment depends largely on the development of COVID-19 and the progress of vaccinations and changes in consumer behavior. With this, we are ready to take questions.

Excellent. Thank you, both Pekka and Juhana. We have a few questions on the chat. I will repeat them before you guys can answer those questions. So we have the first question from Joni Sandvall. "How much contract manufacturing declined in 2020? And do you expect positive development in 2021?"

We haven't specified the actual contract manufacturing volume development. But as you can see from the Altia Industrial, the sales have declined quite significantly, and contract manufacturing plays a major role there.

Great. And then a follow-up question. "How do you view your partner portfolio going into 2021? Any major changes?" Pekka?

A good development as of late. We signed new partners, both in Sweden and in Finland, to close the gap for the losses that we had in Q2 2020. Some of those partners are already with us. Some of the partners will come a bit later. But we do expect a positive development with that.

Good. "And do you have any larger maintenance breaks in Koskenkorva in 2021?"

2021 is expected to be a normal year in terms of maintenance breaks. So we will have those breaks, but that would be more of a usual level on a year.

All right. Then we go on to questions from Pete-Veikko Kujala and the first one about Altia Industrial. "Are there some cost reductions in place in Altia Industrial in Q4 relating to personnel or otherwise? Surprisingly strong margin in industrial despite falling sales and rising barley prices."

I agree. I think Altia Industrial performed extremely well. As to cost cuts or there's nothing unusual. We do that every day, and we've been doing that for a number of years already, and it's just paying off. We are a lot more efficient than we were, take, 3, 4 years back, and that's just continuous work that our people do every day. So -- but related to COVID, nothing unusual in Q4.

All right. And then about the barley, "What was the effect of higher barley prices to costs in Q4 year-on-year?"

The Q4 impact of higher barley was limited. We will see a full impact of higher barley during 2021. So currently, we are offering to buy barley at prices of EUR 170 plus per ton, and while last year, it was somewhere on EUR 150, EUR 160. So last year was a good barley harvest, and the prices were a bit lower. Due to that, 2020 crop was a more normal level. And prices have increased, and we will be facing higher barley costs this year. But I would say they are still not significantly higher than a normal year would be.

Okay. Thank you. Then we have a question from Jussi Mikkonen about employee and other operating expenses. "Do you see employee and other operating expenses continuing on this level going forward?"

Starting with other operating expenses. Marketing expenses are a significant part of that, and they are largely related to the channels that are open such as travel retail and on-trade. And if those channels remain being closed or restricted, so will our advertising spend as well. In terms of employee costs, salaries, the base salaries, we expect to remain at the level, and then you have the annual bonuses, which obviously depend on the year.

Good. And then a follow-up question from Pete-Veikko Kujala about restrictions just announced in Finland today. "Finnish government introduced new lockdown measures today. Any general comments on the situation of your customers in on-trade would be helpful. What is the risk to your receivables?"

If we look at ourselves today in Finland, but overall, in the Nordics, the on-trade sales have been very, very limited. So for our business, as such, it will not be a dramatic change, I expect. I think with on-trade being closed, I think that will push volume more towards monopoly channel, but that's what we've seen for the last months. Obviously, there is a risk for the bad debt, and on-trade is in a very, very difficult position. And -- but overall, if we look at it from a bad debt point of view on ours, most of the customer base is very fragmented. So with that, we see that the risk for bad debt is not material from the group point of view.

Okay. Good. Then another question from Joni Sandvall regarding FX. "Regarding FX movements, could you give any indication of SEK impact on 2021 earnings?" Joni, could you elaborate on your question, please? It's -- okay. "How much impact from SEK in 2021?"

So I think that obviously remains to be seen. I mean we cannot really comment on the currency movements and how they will be in the future. We do hedging on currencies, so that kind of limits the risks. But yes, I think more than that cannot be really said right now.