Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Altia's Half Year 2021 Results Presentation. My name is Tua Stenius-Ornhjelm, and I am from Altia's Investor Relations. Earlier this morning, we published the H1 report and also news regarding the Altia and Arcus merger. Our speakers today, CEO, Pekka Tennilä; and Interim CFO, Juhana Jokinen, will discuss the results and also give an update about the merger. Before I hand over to the speakers, a few practical remarks. Please mute your microphones during the presentation. For the Q&A session, we invite questions through the Teams chat and feel free to send questions already during the presentation. You can also use the raise-your-hand function if you would like to ask questions personally. For those who have used the call-in option, you will get the opportunity to speak out at the end of the Q&A. And finally, we are recording the presentation and the on-demand version will be available later on our website. A legal reminder for everyone. And with this, we are ready to start, and I will hand over to Pekka.

Thank you, Tua. Good morning to all of you, and thank you for joining in our Teams call. We had a good second quarter with sales continuing to grow, thanks to a gradual market recovery. COVID-19 has obviously continued to impact our business and ways of working. However, in the beginning of the summer, we saw recovery in exports, travel retail and on-trade. Our teams were well prepared for this, and we have activated our brands and saw sales growing in all of these channels. Keeping our employees safe and ensuring business continuity remains one of our top priorities. It is great to see that our production plants have continued operations without any major disruptions. Our continued solid development is thanks to our committed and hardworking employees. A big thanks goes to everyone for these good achievements. In the first half of the year, our net sales grew by 6%, and our profitability improved by 7%. However, the second quarter profitability declined due to increased barley price and the extensive COVID-19-related cost savings in the comparison period last year, meaning Q2. The merger of Altia and Arcus to become Anora has also taken important steps during the summer and today, it has been a diligent process, and we are now very close to completion. In July, we completed the remedy process and with that, we received all competition authority approvals. We are now working towards closing the merger on 1st of September. Today, we have also announced Anora's future executive management team, and I will briefly present the team to you later in the call. Our internal planning for the integration has proceeded well, and we are very excited for Anora's upcoming day 1 and working together to ensure business continuity and that we continue to serve our customers and partners. All in all, a solid performance for the first half. So let's now look at market sales. On this page, you can see the spirits and wine sales in the monopolies. Looking at the first half, we continue to see growth in Sweden and Norway, but in Q2, market volumes declined in all 3 monopolies. Q2 last year was a full COVID quarter with extremely high market volumes and hence, a tough comparison for this year. And also, Easter sales were in Q1 this year compared to Q2 in 2020. And finally, the Q2 also reflects the gradual recovery of travel retail and on-trade. On next page, we have our net sales development. In the second quarter, our reported net sales grew by 7% to EUR 87 million, with some tailwind from FX. Net sales grew in all segments. The recovery of the restricted sales channels can be seen in Q2 with spirits growing by 12%, also Altia Industrials, net sales grew by 12%. For the first half, our reported net sales grew by 6% to EUR 158 million. Net sales grew in all segments. On the beverage side, spirit sales grew by 10%, following the change in channel mix as restrictions were lifted. Wine sales were negatively impacted by declining volumes in certain brands and the partner portfolio changes in Q2 last year. In Altia Industrial, contract manufacturing, starch and feed businesses were drivers for solid net sales growth. Strong sales performance by all segments, all in all. So let's review them closely and go to next page for Finland & Exports. Net sales in the Finland & Exports segment grew by 2% to EUR 54 million. The change in channel mix is best visible in this segment where we report exports in travel retail. With higher sales in these channels, the segment's spirit sales grew by 6% to EUR 32 million. The decline in wine sales is due to partner portfolio changes in Q2 last year. In the Finnish grocery trade, net sales grew steadily, mainly in the lower and non-alcoholic category. This is a result of new launches and improved distribution. In the Baltics, we saw the same trend as before with the domestic grocery trade offsetting decline in harbor trade. On the slide, you can see some of the Q2 launches. In spirits, we have Saaremaa cucumber and ginger gin. For us, Saaremaa is a well-known vodka brand, which recently has extended to gins. This gin won a silver medal in Spirits Business 2020 competition. In the rum category, we have a new tender win with Barracuda Tiki Shot. The Koskenkorva ready-to-serve range had a new addition with Koskenkorva Collins and the successful Koskenkorva Botanicals has a new limited addition for this year launched in Alco and Systembolaget sales to order and on-trade. In wine, we have examples of a tender win and a new partner. Lindeman's Sauvignon Blanc bag-in-box is a tender win and this is a carbon-neutral wine. And in the growing wine category of Portuguese Wine, we have the Ti Rita wine. With this, we move to next page and look at the Scandinavia segment. Reported net sales in Scandinavia segment grew by 6% to EUR 53 million. We have some FX tailwind. And in constant currencies, net sales grew by 1%. In Sweden, reported net sales growth was driven by strong sales of spirits in the monopoly, the recovery of on-trade towards the end of the second quarter and the favorable currency. The wine sales in Sweden were impacted by declining volumes in certain brands and partner portfolio changes in Q2 last year. In Norway, our net sales grew across categories supported by high market volumes. Then we look at some of our Q2 launches. In spirits, we have 2 tender wins in Norway, Casa Noble Tequila and McQueen Gin Citron. The Xante Liquor brand was extended with a new flavor of latte and pear. This was a launch through order assortment both in Systembolaget and with monopolet. In wines, we have a launch from the new partner, Xavier Vignon and the Rose wine, Kainame Swygert [ phonetic ]. Let's now continue to discuss Altia Industrial on the next page. Altia Industrial's net sales grew by 11% to EUR 51 million. Net sales growth was driven by positive development in contract manufacturing, starch and feed. Technical ethanol volumes were below last year's record high levels. Koskenkorva Distillery has run at full capacity during the period and the grain consumption reached 106 million kilos. In July, we have sold our shareholding in Chemigate to Berner. This relates to our starch business. With this transaction, we focus on more strategic and more value-adding products at Koskenkorva. With this, I am ready with the business review and can hand 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 during the period. Based on the current estimates, the crop of barley will be smaller and the quality poorer than the normal crop. The barley outlook was weak and we expect the price level to stay higher compared to last year. On the next page, we look at EBITDA development closer. In H1, Altia's comparable EBITDA amounted to EUR 20.1 million, with an improvement of 7% or EUR 1.3 million. With a 6.2% increase in net sales, we improved profitability even with higher barley prices. Comparable EBITDA was 12.7% of net sales compared to 12.6% last year. The drivers for the improved profitability were the continued strong sales and continued revenue management in all the monopolies and the partial recovery of export, travel retail, on-trade channels and good sales in industrial. During the period, we have been impacted by higher barley prices. Last year, especially impacting Q2 comparison, we implemented temporary cost savings measures due to COVID-19. When comparing quarters, we also have to remember that most of our [indiscernible] assets was in Q1 this year and in Q2 last year. In items affecting comparability, we have EUR 5.4 million cost related to the planned merger between Altia and Arcus. Therefore, the reported EBITDA, EUR 14.7 million was EUR 3.3 million below last year. Next, I will go through the segments. In Finland & Exports, we see an improved comparable EBITDA from EUR 8.3 million to EUR 8.8 million. EBITDA margin was 16.3%, an improvement of nearly 1 percentage point from previous year. The COVID-19 restrictions have impacted Finland & Exports significantly as on top of on-trade we are reporting travel retail and exports within this segment. Those channels have now slowly started to recover. With a 2.2% increase in net sales, the 6.1% improvement in EBITDA is a good result. The improvement is driven by the continuing good monopoly sales, especially spirits and the gradual recovery of travel retail and exports. We have also continued being active with revenue management. In the Scandinavia segment, comparable EBITDA improved from EUR 2.8 million to EUR 4.6 million with 67%. EBITDA margin was 8.7%, an improvement of more than 3 percentage points from previous year. EBITDA improvement was driven by the continuing good monopoly sales, especially in Norway, together with gradual recovery of on-trade channel, revenue management and the positive product mix. We also got some tailwind from currencies impacting net sales positively, but with a limited impact on the profitability. Looking at Altia Industrial, we see a decline in comparable EBITDA from previous year. EBITDA declined from EUR 7.1 million to EUR 5.7 million, despite a nearly 11% increase in net sales. On the EBITDA level, the increased barley and purchased ethanol prices gives us headwind this year, and the EBITDA margin declined to 11.1%. So all in all, a strong result from all segments, remembering also the group-wide temporary cost-saving measures implemented last year and timing of Easter sales in quarter-to-quarter comparison. Next, I will look at cash flow on the next page. During the COVID-19 pandemic, our key priority has been to secure solid liquidity position. Starting with cash flow, we see a decline in net cash from operations, which totaled minus EUR 1.6 million compared to EUR 10.3 million in 2020. In addition to the declined reported profit of the year, we also had changes in net working capital. We are still selling our receivables of monopoly sales in Sweden and Finland. The receivables sold amounted to EUR 69 million at the end of the period compared to EUR 67 million in H1 2020. Due to the increased monopoly sales in Norway, a gradual recovery of exports, travel retail, on-trade and contract manufacturing, our receivables have also increased. No material credit losses were booked, and we foresee no risk of material credit losses in the future. This is, however, something we monitor closely. Due to the continuing COVID restrictions in the society, we see a risk that the hedging structure of our accounts receivable portfolio might develop in an unfavorable direction with potential bad debts occurring. Inventories are facing more or less a normal seasonality, although we are shipping in raw material and products a bit upfront. Payables are close to last year's level. Easter sales in Q1 blurs the comparison of quarters. Net debt was EUR 11.9 million compared to EUR 29.9 million in H1 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 0.6 in H1 last year. 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 30 million compared to EUR 45 million in H1 last year. The issuances have been made to secure our liquidity position and does not affect the net debt as the money is in the bank. Gearing was 8% compared to 20% at H1 2020, and the equity ratio was 34.6% compared to 34.9% at H1 '20. The total balance sheet was EUR 432.7 million at the end of the period. This ends review of H1 2021 financial performance. To summarize, group comparable EBITDA improved from last year, recovering channels and increased sales impact receivables and a good financial and liquidity position. I will now hand over back to Pekka.

Thanks, Juhana. So let's have the concluding remarks. And before we go to Q&A, just talk a bit about sustainability. Sustainability is at the core of our strategy, and we have set ourselves ambitious targets in our Sustainability Roadmap 2030 with carbon-neutral production by 2025 as our key target. Here are just a few examples of what we have achieved in the first half of the year. In the first half, we reached record high steam energy self-sufficiency at Koskenkorva Distillery, about 69%. Low and non-alcoholic drinks is a growing category, but we also want to be a strong player. 16% of our low -- 16% of our portfolio consists of no-low drinks, and this is above our target of 10%. In Q2, we initiated a consumer survey in Finland and Sweden in this area, and we also published a blog series on LinkedIn to discuss the no-low trend. We are very proud of all international recognition that our sustainability actions get in the last couple of months. We were awarded a gold medal in the EcoVadis rating and the title of Sustainability Trailblazer in the first global travel retail industry event to focus on sustainability. And a couple of words about the merger. Like I mentioned in the beginning of this presentation, we are now very close due to the completion of Altia and Arcus merger. It has been a long and diligent process, and we are now well prepared for the opportunities ahead of us. In July, we announced that Swedish company, Galatea, will acquire the brands that we needed to divest as part of the remedy process. With this, received all approvals from the competition authorities, we are now working towards completing the merger on 1st of September. The extra dividend of EUR 0.40 per share, which is to be paid to Altia shareholders will be paid in connection with the completion. Next, I will briefly present to you, Anoro's future executive management team. Anora has a growth ambition, and I believe that with this team, we have an excellent team of individuals with strong skills and capabilities to build that growth together with our employees. Anora will be one of the leaders in sustainability and it's very important that we do the right thing in the right way. And this culture starts with the management team. Anora's future operating model will be decided later after discussions with employees and their representatives and we have an excellent base to build upon. In wine, we have a strong portfolio partner and own brands of the highest quality. This portfolio is very successfully managed by a group of smaller teams and independent agencies. And we plan to build upon that strong base in the future as well. Similarly, in spirits, our combined portfolio of iconic own brands and leading international brands will make us the market-leading player in every major segment. Our focus will be to strengthen our presence across all markets and channels and offer Nordics best route to market for all our partners. When we announced the merger last year in September, we also announced the CEO and CFO of Anora. Sigmund Toth is currently CFO and Interim CFO -- CEO at Arcus and will join me as CFO of Anora. Then a couple of words about our new management team members. Janne Halttunen will lead the planning of the merger of our wine businesses. He joined Altia in 2009 and has since led Altia's wine business in separate different roles. Before joining Altia, he had an international career in beverages and tobacco, and Janne will be based in Stockholm. Henrik Bodekaer Thomsen will lead the planning of the merger of our spirits businesses in the monopoly markets. Right now, he is leading Arcus' spirits category and has a long career in the international beer business with Carlsberg. Henrik will be based in Copenhagen. Kirsi Puntila will lead the planning of the integration of our open markets called International. Before she joined Altia in 2014, she worked for several years with Pernod Ricard global premium brands. With Altia, she's been leading the building of our core spirits brands and innovation across all markets. Kirsi Lehtola will lead the planning of the merger on the human resources side. She has been working with Altia since 2016. Before Altia, she has gained strong HR expertise from the global paper and pulp businesses. Hannu Tuominen will lead the planning of the integration of our industrial businesses and supply chain. He has been leading Altia supply chain since 2008. This team will join me and Sigmund from 1st of September on. I'm very excited about the beginning of Anora's journey and to start working together with the new executive management team and all future Anora employees. Before we go to Q&A, a quick run-through of our short-term outlook. In the second half of 2021, COVID-19 is still expected to impact travel retail, exports and on-trade. The channel mix in monopoly markets depends on the restrictions and recommendations set in travel retail and on-trade. In Altia Industrial, for the second half of '21, COVID-19 is expected to continue to impact supply chain, industrial services and products. The focus on the health and safety of Altia's employees remains high. The uncertainty in the industrial products is due to potential disruptions in demand for starch and ethanol and in supply chain due to the availability and delivery times of raw materials. Barley market prices are expected to continue increasing for the new crop season following unfavorable weather conditions in Finland and the global imbalance between the demand for and supply of grain and other raw materials. We see that the recovery of our operating environment will depend largely on the development of COVID-19, the progress of vaccinations and changes in consumer behavior. With this, we are ready for your questions.

Thank you, Pekka, and Juhana. We will now take the questions which we have received in chat. There are a couple of questions, and we'll start with Pete-Veikko's questions first. Can you give some indication about the combined sales and EBIT effect of the brands to be divested? What type of an impact is this to Anora pro forma 2020 figures? And any comments on the deal value is also appreciated.

Yes. At this point of time, I cannot give you anything more than saying that the brands that we divested, they were the brands that we expected to be divested as well. So there were basically no surprises. I think we got a fair value for our brands. And I think the most important point is that the estimated net synergies of EUR 8 million to EUR 10 million on EBITDA will remain. So this is what I can say about divestment at this point of time; as expected and net synergies as expected.

Then we have a few questions from Jussi Mikkonen. The first one, was the strong sales development in retail products during Q2 something you expected? Or was there a one-time impact due to lifting of COVID restrictions?

It wasn't related to COVID that much. I think we do expect growth from our retail business, no-low business. It's still a fairly small volume for us. And we've been investing heavily in that, and we do expect growth. I think the growth is more than anything due to our good work in the retail. We have increased distribution on some of our core products, and we continue to bring in innovations. And we start from a small base. We've been in this business for a couple of years now, and we're learning all the time. And I think the Q2 sales results were very positive, but I think it's more about our continuous good work rather than something with COVID.