Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

Good morning, everyone, and a warm welcome to the presentation of Anora's Q1 results. I am Tua Stenius-Ornhjelm from Anora's Investor Relations. In today's call, we have CEO, Pekka Tennila; and CFO, Sigmund Toth. Pekka will start shortly the presentation with the business update, which is followed by Sigmund's review of the financials. After the presentations, we start the Q&A. We look forward to many interesting questions from you, and you can actually start sending your questions to us already during the presentations through the team's chat. Before handing over to Pekka, as usually, we kindly ask you to mute your microphones and please note that we are recording the event and the on-demand version will be published on our website, anora.com. Without further ado, we are ready to start. Pekka, please go ahead.

Thank you, Tua, and welcome on my behalf as well. Nice to see so many of you online. Before going into Q1, a quick recap of how Anora looks like to date. We are the leading wine and spirits brand house in the Nordics, with #1 market positions. And we are very proud of also leading the way in sustainable packaging in the Nordics. Our distilleries are located in Finland, Sweden and Norway, and our main production facilities are in Norway and Finland. And we had a smaller one in Estonia and a cognac house in France. With the merger, we are much stronger and have a better platform to grow. We have a market-leading portfolio with both owned and partner brands, covering all categories and price points. We work with numerous partners from all over the world. And to them, we provide valuable insight on to the Nordic consumer, a superior route to market and a sales force locally present in all customer segments. Sustainability is at the core of everything we do. For us, this means for instance to strive for carbon-neutral production. With the merger, we have taken a step change in scale, which allows us to drive productivity further. We have strong growth ambition. Our strong financial position puts us in a good position to pursue growth opportunities, and we see that M&As will play an important role. After this short introduction, we can now move on to Q1 business review. Overall, I'm happy to say that we had a good first quarter. Despite the headwinds in the operating environment, we saw solid net sales development. Net sales were EUR 133 million, which is just slightly below last year's pro forma net sales. This is largely supported by the strong recovery of travel retail and implemented price increases. Comparable EBITDA fell short of last year's pro forma and was at EUR 13 million, which equals a margin of 9.8%. EBITDA was very much impacted by high input costs and lower wine sales. Next, a closer look at how the market has performed. On this slide, you can see the market growth rate in the monopoly markets, Sweden, Norway, Finland. In Q1, all COVID restrictions were lifted in all 3 markets, and this can clearly be seen in the monopoly numbers as well. Combined, the Q1 volumes in spirits declined by 11% and in wine by 14%. The return to pre-pandemic levels, that is the 2019 levels, that's been the fastest in Finland, where the difference between the 2019 Q1 and this year was only 3%. On the other hand, in Norway, where the COVID boost was the most significant, the return has also been very strong. But still, at the end of Q1, the volumes were 24% higher than in 2019. I would also like to remind that the timing of Easter sales this year was in Q2 and not in Q1 as was in last year. So this also has an impact on the Q1 market volumes. But all in all, a key takeaway from here is that the recovery has been rather fast. Consumers have returned to the on-trade channel and travel retail is also picking up very well. As of the beginning of this year, we work in a new operating model and to reflect this, and we also have new reporting segments. We are today, for the first time reporting with the new segments, which are Wine, Spirits and Industrial. The Wine segment includes the sales of partner wines and our own wines in the monopoly countries. The Spirit segment includes 2 business areas, Spirits and International. Within Spirits business area, we have our own spirits brand, and partner brands in the monopoly markets. And the business area International covers our operations in Estonia, Latvia, Denmark and Germany as well as travel retail and exports. The Industrial segment consists of former Altia Industrial operations as well as productions from former Arcus and the logistics company, Vectura. Next, I will discuss each segment in more detail, and I'll begin with Wine. In Q1, net sales in the Wine segment were EUR 53 million versus EUR 62 million last year. This is a decline of 14% from last year. The decline is due to normalization of the channel mix and is in line with the decline in monopoly volumes. The net sales were also impacted by the later timing of Easter sales and out of stock mainly for own wine brands. Our market shares have declined, and this is mainly due to changes in patent portfolio, which we have already largely covered. And that the back-in-box volumes have declined after the boost they had due to COVID. The positive note is that we have seen that the on-trade channel has recovered extremely well in all 3 markets. On the profitability side, the lower sales and the higher marketing costs have impacted EBITDA. Comparable EBITDA was at EUR 3.1 million versus EUR 6.8 million last year and gives a margin of 5.8%. And then examples of our launches in Q1, we started collaboration with Zonin, a leading Italian wine producer. The collaboration covers distribution in all Nordic monopolies and on-trade. In addition, new products with permanent monopoly distribution were launched for our wine partners such as Signature Rose in Sweden, Bird’s Tree bag-in-box in Finland and J.P. Chenet Ice Rose in Norway. We also launched new products for our own wine brands like Chill Out Riesling bag-in-box in Norway and Wine Tunes [ Funky Soul ] in Finland. Next, we move on to spirits. Net sales for spirits in Q1 were EUR 45 million with growth of 7% from last year. The growth was driven by the international business area where we saw strong recovery on travel retail. As was the case in why the monopoly volumes were down due to normalization of the market and channel mix, and the late timing of the Easter. Market shares have developed well in the monopoly markets, and the on-trade recovery has been very strong. In the international business area, the development has been good also in the Baltics and in Germany. The positive development in international, our lower OpEx contributed positively to EBITDA, which improved to EUR 8.1 million versus EUR 7.5 million last year and equals a margin of 18%. The divestment of brands as acquired to close the merger impact comparability both on net sales and EBITDA with the annual EBITDA impact being EUR 4.6 million. And then some examples of new listings at the monopolies in Q1. We had a very strong lineup of listings for our own spirit brands. Carlow Cutting and Carlow Counting Days, 2 Irish whiskey-based drinks, challenging anything traditional, launched in Finland and Sweden. Ein Aquavit and Glad Aquavit, new aquavits listed in the order assortment in Norway. Koskenkorva Hard Juice Red Berries, further building the successful brand expansion into the liqueur category in Finland. And finally, Arctic Gin, a novelty in the very popular gin category in Sweden. Next, we move to Industrial. Net sales in Industrial grew by 12% to EUR 61 million versus EUR 54 million last year. Of the EUR 61 million, EUR 36 million were external sales. This is a segment where we directly see that impact of the high cost of barley brought on net sales as higher sales price and EBITDA. In contract manufacturing, both volumes and price increases have contributed to growth. In starch and feed, growth was driven by price increases, while volumes have declined as we have temporarily reduced running speed at Koskenkorva Distillery. In Vectura, sales were positively impacted by the normalization of the channel mix with higher volumes to the on-trade and lower volumes to the monopoly. In technical ethanol, we have implemented price increases. But in Q1, sales were below last year's level because the Q1 '20 month included a nonrecurring volume increase. Market demand for technical ethanol has remained strong in many segments like in geothermal heating, where Anora's Naturet products are used in the heating systems. Comparable EBITDA in Q1 was more or less on last year's level, higher contract manufacturing volumes, price increases and proceeds from the sales of CO2 emission rights have mitigated the negative impact of the significantly higher raw material costs. With this, I'm ready with the business review and give it over to Sigmund.

Thank you, Pekka, and good morning to everyone joining the call. I'll start off the financial review with a few words on the barley situation. I don't think that it comes as a surprise when we say that the cost of barley has reached yet again historically high levels. We know that the barley price was already high due to the -- since the end of last year due to the poor harvest, the poor crop in Finland in the summer of '21. And then due to the war in Ukraine, the grain market supply globally, the market has been significantly affected by that. And then the constraints on supply, not only of Finnish barley, but of wheat and the other grains has increased, and this has driven prices even higher. So if you look at the price level in Q1 compared to last year, it's 77% higher. So the pricing cycle of grain is normally defined by the volume, right, and the quality of the new crop. So that's still the biggest factor for Finnish barley. But in the unstable situation that we have now, we do expect that prices are going to remain at a high level, but still, obviously, the crop in Finland is going to be important. So in addition to the high price, the availability of the grain or the crop is also extremely tight, and it will remain so until the new crop arrives in late August, early September. Now in terms of how are we handling the situation, we have different tools to secure the availability. As we've said before, one of them is simply that we reduce the capacity or the used capacity of the Koskenkorva Distillery. And during this year, the capacity reduction, it will be close to 15%. So what that means is that since we reduced the capacity or the throughput of the facility, we have been buying less barley, but also we are then producing lower volumes of ethanol and of starch. So that's one means. And then the other means is, to some extent, we can use alternative grain at the distillery to ensure continuous production. For example, we can use imported barley and we can use domestic wheat for technical products. Now I mean, I'd like to point out here to be very clear that we are for the use of Anora's own brands and other products requiring Finnish origin for the grain that's made from domestic, so Finnish barley to fulfill the brand promises, but we can use other grains for some of the technical products. And then last, for the last means, we can also use -- increase the share of imported ethanol in our technical end-use products. And last but definitely not least, we do have very long and very good relations with the farmers and grain suppliers. And in a situation like this, which is unstable, that's obviously a great benefit. So that was on barley. And then before looking at net sales, a quick overview of the new segments, and Pekka already touched on these 3 segments: wine, spirits, industrial. By sales, wine is the biggest one ahead of spirits and then Industrial. And here, we are only showing the external net sales. And then in terms of the gross margin, the wine is somewhat lower than the spirits. This is due to the higher share of partner brands on the wine side and the higher share of own brands on the spirits side. And then in terms of the margin, spirits with its higher share of own brands, it has the highest EBITDA margin that's a bit higher than 20%, and this is last year's pro forma figures. Wine at 13% and then industrial as can be expected by the nature is the one with the lowest EBITDA margin. And those are calculated on total sales for both external and internal. Moving then on to net sales. I mean here, we -- the normalization of the markets and the late timing of Easter is impacting net sales. But altogether, given the decline of the market volumes in the monopolies, we think that this is a very solid development, which is almost leading our net sales almost to be at the same level as last year. If you then look at on the right-hand side, where you can see what is the change versus last year by segment, you see that this normalization of volumes due to the COVID effects disappearing and especially then that being the case in Norway. That is impacting the Wine segment. So this is the segment that received the biggest boost from COVID and now it's seeing the biggest decline when things are normalizing. On spirits, we see the other side of the coin, right? Their travel retail is getting a boost from a lifting of COVID restrictions and our performance also in the monopolies, as Pekka stated, was good, so that's increasing. And then in the industrial segment, there is a strong growth in net sales. That's very much driven by price increases due to the value cost, but also in that quarter, good development of contract manufacturing volumes, again, somewhat a normalization post-COVID. So all in all, given the difficult external conditions late Easter, we would say that this is a solid net sales development. Moving on then to EBITDA. EBITDA was lower than last year to EUR 13 million compared to a pro forma of EUR 16.7 million last year. And then the margin was also given that the net sales were declining was also down. So there are a couple of key drivers for this decline as we saw the high cost of barley, wheat and other increased prices of input. We have taken pricing but not yet fully compensated. And then the other big driver of that, as you can see on the right, it very much has to do with the lower wine sales. We've got a big boost from COVID. Now the wine sales are declining again. And though we managed to maintain actually on the wine business, the gross margins, which is good simply then the lower sales, it flows down into a lower bottom line. On the other hand, on the spirits, as you can see a positive development from sales in travel retail and lower sales. OpEx and a very good result, again, as Pekka mentioned, when you're considering that this includes the negative impact from the brand divestment. And in the Industrial segment, there is a positive impact from the sale of CO2 emissions, right, that's about EUR 0.7 million that's contributing. If we're moving then on to the cash flow and the balance sheet. So on the balance sheet, net debt is amounting to EUR 171 million versus EUR 9.4 million last year. This increase in the net debt is due to the Altia and Arcus merger as the balance sheet of the former Arcus includes significant lease liabilities. And according to the IFRS 16 standard, those are then classified into debt. The rolling 12-month ratio of net debt comparable to EBITDA was 2.2%, but in fact, that doesn't then include the comparable EBITDA for the full 12 months for the ex Arcus part of the business. So if you adjust for that, the actual net debt level was between EBITDA was EUR 1.7 million, which is still a very low level compared to then to our target of EUR 2.5 million. So in Q1, net cash flow from operations, it totaled minus EUR 38.6 million. This is related to change in working capital due to seasonality in the late time in the Easter. So basically, as you know, if you've been following the 2 companies separately, we have a lot of cash flow coming in in Q4, and then there are alcohol taxes which are payable in the first quarter. So working capital needs increases and cash flow is typically negative in the first quarter and then that evens out during the year. And then receivables sold amounted to almost EUR 42 million, which is somewhat lower than at the end of a reporting period last year. In terms of growth capital expenditure, that was about EUR 3 million in the quarter, and that's mainly replacement investments and then related due to energy efficiency and work safety improvements. And now to conclude on my part, let's recap our guidance. So here, basically, the news is that there is no news. We reiterate our guidance at -- for 2022 on comparable EBITDA to be between EUR 75 million and EUR 85 million. That basically corresponds to the pre-pandemic level. That CapEx I was showing monopoly volumes are returning to that. And then we're also taking into account the annual impact of the EUR 4.6 million of divestment of Anora brands due to the merger. And yes, it reflects also, obviously, that the input costs are expected to remain at a high level, but then we are trying to compensate for that to increase pricing on all of our segments. So with that, I'm done with the financials, and I'm happy to hand over back to you, Pekka.

Thanks, Sigmund. So before we go to Q&A, a few words on sustainability and integration. Like I mentioned in the introduction, sustainability is at the core of everything we do. We are currently building a new sustainability road map, including new ambitious sustainability targets. For this purpose and to have a better understanding of stakeholder expectations, we have carried out a materiality analysis in Q1, and we have also started to gather data or the emission calculations for Scopes 1 to 3. Meanwhile, we continue to report on the themes that were common for both former Altia and Arcus. For more in-depth view on our sustainability work, I would warmly recommend you to have a look at our extensive sustainability report, which was published on 19th April and can be downloaded from our website anora.com. Next, an update on the merger integration, which has progressed according to plan and on schedule. Throughout Q1, we continued to focus on people processes as the new organization with new structure and the new teams came into force in January. The established teams have been engaged to build the future Anora culture. And both in Norway and Finland, organizations have merged into one office location. In Wine, work has started to create the joint entree and digital teams to serve all wine companies across all markets. In Spirits and International, the portfolio strategy work is ongoing over the combined spirits portfolio. In Industrial, we have achieved an important milestone, the insourcing of third-party logistics operations was completed in Norway and Finland, while we expect the same in Sweden to be completed during Q3 this year. The run rate of annualized net synergies at the end of Q1 was EUR 1.9 million, and this includes the annual impact of EUR 4.6 million from the divestment of brands. The total synergy target remains at EUR 80 million, of which we expect 80% to be realized within 2 years of closing. With this, we are ready for questions.

Very good. Thank you, Pekka and Sigmund. We have a few questions on the chat. So let's begin with them. So we have from Maria Wikstrom at SEB, 3 questions. So the first one is, what is the gross margin difference between own wine brands and partner brands?

Yes, we don't disclose the difference between the 2. So different types of businesses, obviously, with own brands, you own the whole value chain. While with partner brands, you get the distributor margin. So normally, there is a difference, but we're not disclosing that in more detail.

All right. Then the second question is, you mentioned that there is a lack of unpacked wine and glass bottles. Can you please elaborate?

So I think what we said is that we have faced out of stocks, and this is mainly due to logistics problems in wine. Then the glass bottles, I think that is, I guess, both in wine and spirits but maybe more in spirits side. So our procurement has worked extremely hard to get the supply and it seems like we've been managed to recover a majority of the bottle volume gap that we had. So I think an excellent work by our procurement for sure.

All right. And then the next question was about group sales. So could you please split between value and volume growth?

Well, I can take that. I mean, unfortunately, we're not doing that now. So we're not disclosing, but it's something definitely that we will consider. It's sometimes a bit in a business that is as varied as ours is right where there is wine, where there is a huge amount of price ranges, where there is spirits, again, in huge amounts of price ranges. And then industrial, right, with a completely different set of products, The whole notion of volume sometimes also gets a little bit difficult, right, especially if you're trying to do something on the group level, right, because it's a bit apples and oranges between volumes of industrial ethanol and starch and pig feed and Koskenkorva vodka. But we definitely appreciate the interest in understanding what is the evolution of pricing or sales compared to the volume, and we'll think about how we can communicate better on that point. But for now, it's not something that we are disclosing.

All right. Thank you for that. [Operator Instructions] So Joni Sandvall from Nordea asks, how long inventories do you have for barley? And how has the availability evolved during and after Q1?

I think the situation is tight, and we've been open about it. So normally, we cover about 2 to 3 months barley, and that's pretty much the situation right now. It's been more tough to get barley, to buy barley. And therefore, as Sigmund said earlier, we've been buying barley also outside Finland, which we haven't done in a long, long time. So that was purely to secure the availability and produce feeds for many technical purposes.

All right. Then the next question is, you mentioned good or even strong demand among on-trade travel retail and border trade. Have you seen fluctuation in demand due to geopolitical tensions?

Yes. The answer to Joni's question is no, we haven't seen that. Maybe a few words on the strong recovery. I think on-trade especially, this is very close to normal levels, which is 2019. I think total retail are still lagging a bit from 2019 levels, but obviously recovering fast and border trade the same. And you can see that impact very clearly, especially on our spirits brands, which is sold more in travel retail. I think the on-trade, the recovery is very strong for both wine and spirits brands. But no, I haven't seen anything on -- regarding the geopolitical situation we are in right now.

Then the next question is about the CO2 emission rights. So how much was the -- you mentioned, Sigmund, impact for Q1 this year. How much was the impact in Q1 last year?

I think I have to be honest and say that I have to double-check to be 100% sure, but I don't think that Q1 last year, we had a very material sales of CO2 emission rights, right? So this was a key explanatory reason we had them this year and not very much in Q1 last year, if memory serves me right. But let me get back to you separately on that thing.

And then on the receivables sold, so they have declined substantially year-on-year. So what's the main reason for that?

I don't think that there is a particular reason for that. Let me also check up on that. We haven't changed our policy. So I think there's some -- probably there's simply some cutoff effects when partly related I'm sure to the Easter impact that we probably had more to sell in the quarter in the monopoly. But we haven't at all changed our policy on that. We are still selling receivables in Sweden and Finland for the ex Altia business. And if anything, we are looking into the opportunity of adding also the ex Arcus receivables to that program. So there is no reason to think that, that's going to remain at the depressed level going forward.

And then about CapEx. So the CapEx was EUR 2.9 million in Q1. Is this a good run rate proxy for 2020, 2022?

So that's probably a little bit at the higher rate than what are the levels for the rest of the year, I think a good guidance to what we will be spending can be seen in the previous years of spending of the 2 companies separately. I mean, we are continuing with our CapEx program and then some of it happens in this quarter, some of it happens in that quarter.

All right. Thank you. So these are all the questions we have. There is a couple of more questions in the chat. So they come from [ Carlo Yuling ] at OP. So the first question about Koskenkorva Distillery, the capacity was reduced during Q1. Do you see further need for capacity reductions due to high barley costs during 2022 and is this possible?

Yes, it is possible. I think we will continue with the plan we have now. Obviously, if situation changes dramatically, we will revisit the plan. But as if the question is, do you see the need right now? No, we are continuing with our current plan.

And then the second question is, how do you see the Russian natural gas supply and high electricity prices affect your operations, if applicable?

The gas side doesn't impact us in a significant way, if at all, electricity prices is another input cost increase, which we have experienced and will continue to experience.

So those are now all the questions we have at the moment in chat. [Operator Instructions] Okay. So no more questions. So back now to Pekka for a final summary.

Thank you, Tua, and thank you for -- again, for your great questions. To summarize our Q1, I think we had a good quarter with very solid net sales development. And as anticipated, the channel mix in the monopoly market has normalized, and the recovery in non-trade has been strong and travel retail has picked up well too. We believe we are in a good position to manage through these turbulent times like I think we've shown, securing raw material availability. Wheat grain in bulk, wine or glass bottles is a top priority for us. We continue to focus on growth. We continue to invest in our brands and to build the market together with our partners and customers. The work on our strategy progresses, and we very much look forward to discussing our future growth ambitions, the sustainability road map with you in our first Capital Markets Day in the autumn. And now back to Tua for final remarks.

Thank you to the speakers and to everyone online for joining us today. Feel free to reach out if you have any follow-up questions or comments. From all of us, have a great rest of the week. Bye.