Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Altia's Q1 presentation. My name is Petra Gräsbeck, and I am Altia's Communications Director. I'll 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, Petra. Good morning to you all. Yes. So thank you for joining in our team's call. I'm happy to say that we had a good and solid first quarter. Both our sales and profitability improved compared to a quarter last year, which was mostly a pre-COVID one. Working under COVID-19 restrictions has obviously become a norm already, but keeping our employees safe and ensuring business continuity requires a lot of work and special attention. Our production plants have continued the operations without any major delays. And for that, big thanks goes to all of our employees in the supply chain. All the rest of us have been working remote, and we have been doing a lot to improve our collaboration and working together in this type of environment. Teams have stayed in close contact, many of them on a daily basis to make sure that our various projects continue to proceed at a good speed without physically meeting one another. Especially in the high selling monopoly channel, we have managed to strengthen both our innovation work and our digital marketing platforms in Sweden and Finland. We received the results from our annual employee engagement survey, and it clearly showed that our joint efforts have paid dividends. All of our group KPIs on employee satisfaction have clearly improved. Preparations for the Arcus and Altia merger are also progressing well despite the possible small delay in timing due to competition authorities' demand for an upfront buyer. We have been able to work on the necessary preparatory work to make sure that we are ready for the day 1 and day 100 to secure both business continuity and to ensure that our customers and partners continue to be served well. In quarter 1, our net sales increased by 5%, and our profitability improved by 40%. This is a very solid performance in a normally slow and quite tough quarter. All segments performed really well, but especially the consumer sales' positive margin development helped us to reach such good profitability. Now let's look at the market sales. In this slide, we have the monopoly total sales out into 3 countries, representing the maturity of the domestic sales in 1 country. The same trend which we have seen during previous quarters continued. We see strong growth in all countries and segments. Norway stands out again with wine monopoly sales increased by over 40%. In Sweden and Finland, the growth is at 10%. This is the last quarter to compare against pre-COVID time, so one would expect the volume development to stabilize from now on. On the next page, we have our own net sales development. In the first quarter, we reached 5% net sales growth, supported by positive currency impact. In constant currencies, we grew by 3%. And as said earlier, the timing of Easter impacted the March sales positively in both consumer sales segment. Finland & Exports segment sales were down due to travel retail still being heavily restricted, and on trade as well. In Scandinavia, our good momentum has continued, especially in the spirits side. Altia Industrial sales exceeded our expectations. Good development across all industrial products was supported by nonrecurring sales of ethanol and bulk cognac. In spirit, we grew by over 6%, which is a good result. Monopoly country sales continued at a good level, while travel retail sales were heavily impacted by the COVID-19, likewise, the on-trade channel. Our persistent work on building value into our brands and continuously working on revenue management is supporting the net sales development and is a major contributor to good margin development, especially in the spirits category. In wine, our sales were declining largely due to portfolio changes, which happened in 2020. We are successfully closing that gap by acquiring new interesting wine partners in our portfolio such as Langguth from Germany, Settesoli from Italy and Xavier Vignon from France. Next, we look at Finland Exports segment. In Finland Exports segment, net sales declined, driven by sales decline in travel retail and on-trade channels by 3.5% to EUR 23 million. In Finland, the net sales developed overall positively, supported by strong growth in the monopoly channel, especially in spirits category. Further, the Finnish grocery shelves developed positively with good support from our new product launches. In the Baltics, we continued to develop well in the local grocery channel with special focus in modern trade change. The harbor sales stayed at a low level. During the COVID pandemic, we have seen a strong growth in our Viinimaa marketing platform in Finland. We have significantly increased our resource in our digital marketing and sales development, and we believe that the growth we are seeing now will continue to change the market in the future. Our own e-commerce site, nordicspirits.com, is also enjoying rapid visitor and sales growth in Germany. Then a few words about our novelties. SAY Vodka Seltzer is an alcoholic beverage growing fast in U.S. It's made with sparkling water, alcohol and natural flavors. It has a moderate amount of sugar and a fresh taste. Thanks to its low alcohol, with us, it's 4% and moderate sugar contents, 1 can contain only 89 kilocalories of energy. SAY Vodka Seltzer can be found with a good distribution coverage in both SOK and Kesko stores. Lindeman's Cabernet Sauvignon 0.5% alcohol and half bottle is an excellent choice as nonalcoholic wine in consumer-friendly package size. The wine won a golden medal in Vuoden Viinit competition in 2020. Lindeman's wines are produced in accordance with the principles of sustainable development and all nonalcoholic wines are carbon neutral. Then a couple of words about our new rum. Bill McCoy was the pioneer rum runner of the prohibition era who became a household name for selling only the best quality, unadulterated spirits known as the real McCoy. The product here, the Real McCoy is 3-year age straight rum, no added sweeteners, flavorings, perfumes or chemical stabilizers. The last one is Larsen Aqua Ignis, the first cognac in the world aged in steam toasted barrels to position the brand as a challenger in the cognac and rum sprit category. Larsen Aqua Ines was launched in U.S. this quarter. Then we go to Scandinavia. Scandinavia continued with positive sales development in Q1, with sales increase of almost 10%, supported by positive currency impact. We saw a significant sales growth in the monopoly channels in both Sweden and Norway, especially as spirits brands showed strong performance despite the decline in on-trade sales. In Sweden, our Systembolaget sales in spirits developed really well, while wine sales were impacted by portfolio changes in 2020. In Norway, both wine and spirits grew. On the novelty side, I would like to highlight the new partner, Xavier Vignon from France; and Aveleda from Portugal with who we started now in Sweden. Both have multiple listings in Systembolaget. As stated in our strategy, we continue to strengthen our position in the fast-growing liquor and rum categories. And from those categories, a couple of novelties. Koskenkorva Rhubarb liquor, St. elderflower liquor as well. Then we have Barracuda Vanilla Spiced rum and last one, Explorer clear gin. All of these are launched through Systembolaget's ordering assortment, and we are building distribution through our efficient Folkofolk platform. Then we go to Altia Industrial. In Altia Industrial, the sales development exceeded our expectations with almost 10% growth in quarter 1. All product categories performed well, further supported by significant nonrecurring sales of ethanol and bulk cognac. In technical ethanol, we saw a pipeline filling effect in Q1 2020 as COVID-19 crisis really started. This year, we saw a more stable development of ethanol sales. As stated earlier, our barley raw material prices are higher and it has an impact on Altia Industrial net sales. Despite COVID-19 restrictions, we managed to install our new bag-in-box line in Rajamaki without any major delay or other stock situation. With this, I will give word over to Juhana for 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 in 2020, 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 expect the price level to be higher until we get the first estimates of the new crop. Next, we look at EBITDA development closer. In Q1 2021, Altia's comparable EBITDA amounted to EUR 7.7 million, with an improvement of 40% or EUR 2.2 million. With the 5% increase in net sales, we also improved profitability even with higher barley prices. Comparable EBITDA was 10.8% of net sales compared to 8.7% last year. The drivers for the strong profitability development were the strong sales and continued revenue management in all the monopolies, the channel and product mix and a good sales in industrial. In items affecting comparability, we have EUR 3.2 million costs related to the planned merger between Altia and Arcus. Therefore, the reported EBITDA, EUR 4.6 million, was EUR 0.9 million below last year. Some savings has been recorded in, for example, marketing, traveling and representation, of which marketing might be used later depending on the situation with COVID later in the year. Next, I will go through the segments. In Finland & Exports, we see an increase of roughly 26% in comparable EBITDA from EUR 2.8 million to EUR 3.5 million. The EBITDA margin improved from previous year and was 15.2%. The COVID-19 has impacted Finland & Export segment net sales 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 positive general product mix and revenue management. In the Scandinavia segment, comparable EBITDA improved by EUR 1.8 million from a small negative to EUR 1.7 million. The EBITDA margin improved to 7.1%. Profitability improvement was driven by all 3 markets. In Sweden and Norway, the growth in the monopoly sales and revenue management supported profitability improvement. We also had some tailwind of the local currencies. In Altia Industrial, comparable EBITDA declined from EUR 2.2 million to EUR 2.1 million. The EBITDA margin declined to 8.7% from 9.7%. The decline in profitability was related to the barley price affecting the cost of goods sold, volume decreases in manufacturing and logistics and the declining ethanol margins. Also, the demand for ethanol, for hands sanitizers has been lower than in Q1 2020. Next, let's have a look at the cash flow and KPIs. Our main financing and balance sheet KPIs have, in a big picture, 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 improvement in the net cash from operations, which totaled to minus EUR 0.3 million compared to minus EUR 15.4 million in 2020. The improvement of net cash flow from operations was driven by a positive development of net working capital. The change comes mostly from liabilities where we have a big effect of the change in excise tax payment schedule in Finland. As mentioned earlier, the sales to monopolies have been higher than in previous year. This has impacted net working capital as there are larger amounts of sold receivables in Finland and Sweden. The receivables sold amounted to EUR 62 million at the end of the period compared to EUR 55 million in Q1 2020. On the accounts receivables in Q1, 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. Net debt was EUR 9.4 million compared to EUR 49 million in Q1 2020 with a good cash generation of Q4 and Q1 sales as a driver. This gives a net debt to comparable EBITDA ratio of 0.2 versus 1.1 in Q1 last year. As discussed in our earlier reports, we have continued to be active in the commercial paper market. And the nominal value of corporate papers issued at the end of the period was EUR 40 million compared to EUR 55 million in Q1 last year. The issuances have been made to secure our liquidity position and does not affect net debt as the money is in the bank. Gearing was 6.5% compared to 33.2% at Q1 2020. And equity ratio was 33% compared to 34.7% at Q1 '20. The total balance sheet was EUR 437 million at the end of the period compared to EUR 425 million at Q1 2020. The growth of the total balance sheet is related to increased short-term liabilities due to the change in the payment schedule of excise tax. This has also a negative impact on equity ratio. This ends the review of Q1 2021 financial performance. To summarize, group comparable EBITDA by strong, good development in operating cash flow from generation -- cash flow generation and good financial and liquidity position. I will now hand over back to Pekka.

Thank you, Juhana. So let's have -- now look at our latest development within sustainability. Go to next page. In our sustainability road map, we have set the target for our packages to be fully recyclable. During Q1, we've taken 2 big steps towards that target. I mentioned earlier our new bag-in-box line in Rajamaki. We are excited about it for many reasons. The bag-in-boxes in the Nordics overall cover 50% of the total wine market, so it is a very significant market segment. With new bag-in-box line, we can offer consumers with more shapes and sizes, but perhaps even more significant is the fact that, as the only producer in the Nordics, we can now make our bag-in-boxes fully recyclable due to the development in our plastic material usage. Another great step we have taken with recyclability is the launch of PET bottles in wine, which contain 100% recycled plastic. The first brand using 100% recycled material is our Chill Out wine. And our ambition for the future is to move all of our PETs to be using this recycled material. During quarter 1, we launched world's first regeneratively farmed vodka called Koskenkorva Climate Action. Farming is a major source of brand's CO2 footprint. And with this new farming method, we can bind carbon to soil and so reduce the CO2 footprint of this product. Then a couple of words about merger. The plant of the Arcus merger to become the Anora Group is progressing well despite more possible delay of the closing date. Both Finland and Swedish and Danish competition authorities have given the conditional approval for the merger and we will hear from the Norwegian authorities in May. All the preparations for day 1 and day 100 are progressing well. We expect closing to happen latest in autumn this year. With the closing, we will pay the EUR 0.40 per share dividend as approved by EGM. Next about the short-term outlook. We have decided to provide a short-term outlook for 2021, but no guidance due to 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 after the 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. 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, the process of vaccinations and changes in consumer behavior. With this, we are ready to take your questions.

[Operator Instructions] First, we have 4 questions from Pete-Veikko Kujala. So the first one is, should we expect cost savings to continue in Q2?

So now we're obviously going into comparing period which are more similar. So both are COVID times and the major source of our OpEx savings where marketing costs related to restricted channels of travel retail and on trade. So now the comparability is more similar, and thus, the OpEx savings, OpEx expenditure is more similar for the coming quarter as we see it now.

Thank you. Second question was do you have temporary personnel reductions in place? If yes, when should this normalize?

During Q1, obviously, the on-trade channel was restricted like was the travel retail. And we've taken temporary leaves for our personnel there to make sure that now when on-trade has opened already and is opening up, we are ready to serve our customers well for the late spring and the full summer period. So the answer is yes, and now we are back.

Thank you. Next question from Pete-Veikko was, have your barley costs changed in Q2 from Q1?

The barley costs for the year, on average, remain the same until the new crop. So no major differentiation.

Great. Next question. Looks like a very strong spirit development in Scandinavia. Any comment on what brands are driving this? Is this mostly Easter related?

Yes, Easter definitely helped us in March. We got the sales in for the Easter, while the pipeline filling after the Easter was in April. So Easter helped. But overall, if we look at Scandinavia, and I guess Sweden, in particular, I think we've had a longer term trend of positive development. I would say that the categories which are driving this are our liquor, rum, gin as well. Those are the fast-growing categories and those categories are highlighted in our strategy. Our market share there has been lower than in some other categories. And we've done a lot of innovation in those categories, like highlighted in these presentations as well. And those are driving the growth for us in Scandinavia.

Thank you. The last question from Pete-Veikko was, what is the sales and EBITDA value of the brands now suggested for divestment relating to the merger?

We haven't disclosed that. What we've said is that we are estimating net synergies at EUR 8 million to EUR 10 million on EBITDA level. And those brand divestitures have always been part of that net calculation. And as we've said before, the discussions with the antitrust and the brands in discussions are the same that we assumed will be under discussions. So I think as a conclusion, the EUR 8 million to EUR 10 million net synergies is still valid even after the development with the antitrust discussions.

[Operator Instructions] It looks like we would have no more questions. So I will hand over to Pekka to summarize.

Thanks, Petra. So we had a very strong performance in Q1, both sales and profitability group. The merger planning is proceeding, and we expect closing latest in autumn this year. Due to market uncertainties driven by COVID-19, we give short-term outlook only, but no guidance for 2020.

Thank you. This concludes our Q1 results presentation. We are happy to set up follow-up calls if you have any feedback or additional questions. And as a reminder, the half year report is published on August 18. Wish you all a great rest of the week. And for those of you in the Nordics, a happy 1st of May. Bye for now.