Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

Good morning, everyone, and a warm welcome to Anora's presentation of Q3 results. I am Tua Stenius-Ornhjelm from Anora's Investor Relations. CEO, Pekka; and CFO, Sigmund Toth, will talk you through the results. [Operator Instructions] And please note also that we are recording this event, and the on-demand version will be available later today 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. I would like to start with a short summary of Q3. This was a challenging quarter for us, but thanks to the strong performance of the newly acquired Globus Wine in Denmark and the net sales growth in Industrial, our net sales grew by 10% from previous year to EUR 182 million. We have also continued to see positive market share development in spirits in the monopolies. Our profitability declined by 22% to EUR 23 million, which equals a margin of 12.8%. Decline was due to lower volumes, higher OpEx and lower gross margin. The implemented price increases have not fully mitigated increasing input costs. On next page, we have a look at the market development. As of this report, we're now also commenting and providing market data on Denmark. It is good to bear in mind that the Danish market is so-called open market, and the market dynamics are different compared to the monopoly markets, Finland, Sweden and Norway. The data for Denmark that we show here covers the off-trade data, i.e., mainly grocery trade. Overall, we can say that the main driver for the negative development in all markets was related to the normalization after COVID consumption has returned to the -- on-trade traveling has picked up, especially during the holiday season, and border trade is open. When comparing monopoly volumes against the pre-pandemic levels, we can see that in Finland, the Q3 volumes were at the lower level, while the volumes, especially in Norway were still up to 17% higher. The -- combined for the 4 countries, the Q3 volumes in spirits declined by 8% and in wine by 7%. In wine, we can see that the decline is 3 percentage points lower than year-to-date. While the decline in spirits is still at the same level. Then we move on to segments and start off with wine. In Q3, net sales in the wine segment grew by 70% to EUR 85 million versus EUR 73 million last year. Growth was driven by the acquisition of Globus Wine. Globus Wine had a strong Q3, with net sales growing in a declining market. Globus Wine gained market share and further strengthened its position as the market leader. In the monopoly markets, net sales declined largely following a declining market and due to the earlier partner losses. The out-of-stock situation, especially [ non-wine ] has impacted net sales, but we saw that the situation improved towards the end of quarter. We have also seen a positive development in [ own ] wines in all monopoly countries. However, market shares in Sweden and Finland declined, while the overall market share decline in Norway was less than in the first half of the year. On the profitability side, the low net sales in the monopolies and high input costs have impacted EBITDA. Comparable EBITDA was EUR 9 million versus EUR 10 million last year, which gives a margin of 10.6%. Our tender winning rate has been good, and we have launched several interesting novelties during the quarter. We relaunched our own wine brand, Chill Out, in all monopoly markets with a new design and offering. The new Chill Out has been extremely well received with a positive sales start. We also won a tender for Camp Sparkling, a sparkling wine in a can, in Sweden, and for Expedition wine in tetra in Finland, and for the non-alc Blossa in Norway. Blossa has, again, a strong and diverse offering of gloggs, both monopolies, grocery trade and on trade. The novelty of this year is the Blossa Glogg Rose, which was launched -- also has a non-alcoholic variant. We continue to work hard to mitigate partner losses, and we have already been successful with gaining new partners such as Zonin and Advini. On the wine brand side, we aim to expand Globus Wine's strong own wine portfolio to the high-volume wine segments in Sweden, Norway and Finland. With this we move on to Spirits. In Q3, spirits net sales were at last year's level at EUR 53 million. This development was supported by the continued growth in international when its sales grew in exports, Baltics and duty-free travel retail. In the monopoly markets, our net sales declined following the declining market, but we gained market shares in all countries. The decline in profitability was driven by reduced gross profit due to higher input costs and higher OpEx. Comparable EBITDA was EUR 9 million versus EUR 12 million last year and equals a margin of 16.1%. I would like to mention a few examples on our launches in Q3. First of all, our premium gin brand, Skagerrak, has won full distribution in the Norwegian monopoly. The Q4, and especially the Christmas is an important season for our Aquavit brand -- brands. We have gained a strong lineup of Christmas aquavits both in Norway and Sweden under brands such as Opland, Gilde, Aalborg and O.P. Anderson. In Finland, the Koskenkorva brand was extended with a new creme -- caramel creme liquor, and in the grocery trade we launched a new brand, Brookvale Union. I'm very pleased with the market share development in the monopolies, which shows the strength of our brands and innovations. Next, we move on to the Industrial segment. The external net sales Industrial grew by 17%. Growth was driven by higher sales, prices in industrial products and contract manufacturing, following the increase in the cost of barley. Volumes in industrial products were below last year's level as we continue to run Koskenkorva Distillery at the lower running speed to mitigate the cost push from the high cost of barley. Contract manufacturing volumes were stable. In Vectura, sales declined as distributed volumes were lower. Comparable EBITDA in Q3 declined to EUR 6 million versus EUR 7 million last year and gives a margin of 7%. Decline in profitability is due to high cost of barley and higher OpEx. With this, I'm ready with the business review. Sigmund, please go ahead with the financials.

Thank you very much, Pekka. Warm welcome from me as well. If we go to the first slide which talks about barley. So a bit of a roller coaster ride as you've -- as you all know, about barley. So comparing to -- in Q3 to the same period last year, the increase was 82%. And when you have levels that are up in the 300s, 400s, this is to be compared to the 5-year average price of [ EUR 161 ]. We are really talking additional -- exceptional times. But the good news is that Q3 has been more normal or closer to last year than Q2 was, because that's really when the peak was. So as mentioned earlier, a means for us to mitigate the high cost of barley has been to run the Koskenkorva Distillery at the lower running speed. So that's something that we've done throughout the year, and also continued in Q3, which can be seen in the amount of grain that's consumed at Koskenkorva, which was 13% lower than Q3 last year. Now the good news is that the barley crop this year was good. It's up 33% compared to the previous year, which should cover the domestic demand. I mean, that's also the reason and something that you can see in the price level. So the prices have come down from the peak level seen earlier in the year. But there continues to be a lot of uncertainties, as you know, in the global grain market, and which is why we expect that total level has come down. It will remain at a high level compared to historical levels. So we have to say that this has been an extraordinary year for the sourcing team, and they've managed this very, very well by securing availability during this whole difficult period. So if we then go to the next page on the net sales. As Pekka mentioned, the net sales are about 10% versus previous year when you were including Globus Wine, but that is actually the explanation. Excluding Globus Wine, sales were somewhat down at EUR 159 million. That's still higher though than Q3. So I think that you can see on the graph, on the left, that though there is a normalization from COVID altogether, sales in Q3, they were still higher than the same period in 2019 prior to the pandemic. So really, the explanation here is that the monopoly volumes, especially in Norway, they are -- continue to heavily decline as consumption patterns return to the pre-pandemic level, border trade starts up again. And then, when you exclude the sales from Globus Wine, this is what's impacting our monopoly sales of wine in the previous business. But in the spirits, and then Globus Wine, itself here, of course, we see the full impact of their contribution, but it's important to mention that, even if you were to compare on a like-by-like basis, Globus Wine has performed better than it did last year, also in a tough market, but performing very well from a market share point of view. If you look at the spirits net sales, they were essentially flattish versus last year. They are the sort of effects of the decreasing markets. They are a bit more mixed because, of course, you have then the international business with duty-free sales picking up, and that is compensating for the decline in the monopoly markets. In addition, our share price performance -- sorry, our market share performance in the Spirits segment in the monopolies was also good, as mentioned earlier. And then, last but not least, industrial net sales development is supported by the higher prices. Moving then on to the EBITDA. I mean, here again, it's a bit repetitive, but we're facing very, very tough comparables. So this decline in profitability is related then to the normalization after COVID-19, because sales returned to a more normal level in very profitable markets to us, especially then in Norway. And then on top, you have a normalization of operating expenses. We are starting to travel again, which is a good thing to manage our business. We are starting to spend marketing again at normal levels, which is again for the long-term health of the business, a good thing. But then on top, the gross margin is being hit by the higher input costs, including then the barley price, as we saw. And we are taking pricing to compensate for that, but not able to fully compensate, especially due to the time lag that there is between when the input cost hit us and when we are able to implement the price increases, which is then leading to a decline in gross margin. So lower volumes, lower gross margin and higher OpEx due to cost inflation, and also a normalization of expenses. But again, I would draw your attention to the Q3 performance in 2019, and you can see that we are still above the 2019 performance. So that's -- it's something to bear in mind, it was good times and green comparable numbers for a while during COVID. And now we are in the year of normalization, but still above the 2019 level. Moving on to the next slide. So the -- on the balance sheet, I think the most important thing to point out here is that there is an increase in net debt, and an increase in net debt over comparable EBITDA that is related to the acquisition of Globus Wine which was financed entirely with debt. I would hasten to point out here that the net debt over comparable EBITDA ratio, which is reported at 3.6 -- If you're doing the pro forma adjustments, so including the comparable EBITDA for the full rolling 12 months also of Globus, it would be at 3.4, and then that is -- will come down over time as we generate cash both from Globus and from the rest of our operations. In terms of cash flow from operations, they were impacted by the change in working capital. We are still running with a high level of inventory, and that's due to the inventory values being higher as -- but we are also stocking more barley and ethanol and other products due to the problems that we've seen in the global supply chain with out of stock. So to protect against those, we are running with higher inventory levels that we hope will come down as things normalize on the logistics front. Moving on to the next slide. Yes. I mean, the -- our outlook for 2022, the guidance, it remains unchanged. Comparable EBITDA is expected to be between EUR 75 million and EUR 85 million. This corresponds to the pre-pandemic level. I mean, I think it goes without saying that Q4 is a big quarter for us. This is when we have a lot of the seasonal sales, be it aquavit in Norway or glogg with Blossa in other countries, especially in Sweden. And in general with the festivities, there is a lot of traditions related to our products. So it's a high sales quarter for us, and a lot of our profit is made in this quarter. So the outlook is something that we are monitoring constantly and -- but the guidance for now, it remains unchanged at the EUR 75 million to EUR 85 million level. So with that, I am happy to hand the word back over to Pekka.

Thank you, Sigmund. Before the Q&A, a few words on the merger integration and sustainability. Our post-merger integration work has progressed as planned and on schedule. The run rate of annualized net synergies was EUR 5.2 million, including the annual impact of EUR 4.6 million from the divestment of brands. The total annual EBITDA and synergy target remains at EUR 8 million to EUR 10 million, of which 80% is expected to be realized within 2 years from the closing. In Q3, we combined the former Arcus and former Altia spirits businesses in Denmark under one business unit, Anora Denmark, the distribution of former Altia spirits brands end -- by the end of this year. We also completed logistics transfers in Sweden, which means that all logistics operations in Norway, Finland and Sweden are now in-sourced. The IT system -- IT and systems integration is proceeding as planned. However, due to the complexity of the integration of finance systems and processes, is taking somewhat longer than expected. We have a detailed plan how to conclude the finance integration. Last, an update on sustainability. The acquisition of Globus Wine during Q3 supported our sustainability work and goals. Globus Wine has a strong approach in lowering CO2 emissions during a product's life cycle. Wine filling in Denmark near the end consumption and climate smart packaging, significantly lower CO2 emissions compared to transporting glass bottles. We have continued our energy savings project in Q3. [ LED ] lightning was installed at Brunna Logistics Center in Sweden. In Q3, we made an investment in the award-winning Danish non-alc company called ISH. This is strongly in line with our sustainability work. Climate-smart packaging is one of our key focus areas. During Q3, we successfully completed trials to include 50% of post-consumer recycled PET in our rPET spirit bottles. This would double the share of rPET from where it is today at 25%. In our wine portfolio, we already have an rPET bottle that is made of 100% recycled PET. Our safety work at Koskenkorva Distillery was recognized for the second consecutive year, as the distillery received the Year award from Starch Europe. Another great achievement in our safety work is that Koskenkorva Distillery has together with Rajamaki Industrial Products unit reached over 1,000 days without LTI. Now to -- over to you for Q&A.

Thank you, Pekka and Sigmund for your presentations. We have quite a few questions in the chat. So let's start with the first one that we received. So it has to do with the out of stocks of wines. So how large impact does this have on sales? And have you resolved the issue by now?

Yes. So the situation is already much better. I mean, we're not totally out of stocks, but we had some issues, especially in own wines and those have been resolved. It had an impact definitely on ourselves. It's hard to be -- put exactly the number, but it had an impact. But the situation is much better already.

Then about the partner losses. So on a running basis, how much behind last year are you when thinking about partner deals?

We are somewhat behind, and we have some catching up to do, but we had some really good partner wins. Zonin earlier, a big win in Sweden. So that definitely helps. But we do keep a close eye on winning more partners. We have a very strong platform for our partners with the strongest route to market in the Nordics, on a pan-Nordic basis like nobody else with -- especially special strength in on-trade and in digital.

Then we have 2 questions about the consumer behavior, and if we are seeing any down trading within spirits or wines. And in addition, if there's -- how has your volumes developed during other crises, like '90s banking crisis or financial crisis in 2008? So looking a bit longer in the history, and if there's any changes at the moment?

That is a great question, but there's actually another great question just before that. So if I just read it out loud and answer that. So the question is, you mentioned that international sales increased within spirits. Which product groups are growing in international? So there's pretty simple answer to that. The Koskenkorva vodka is growing fast internationally. So then on the consumer behavior, if I start with the '90s and another financial crisis 2008, traditionally wine and spirits, and I guess the alcohol industry overall, the consumption is very stable over those periods. So it's more about shift between maybe certain price groups from premium to -- maybe to mainstream, and then shift in sales channels. Whether we've seen anything now, we've seen glimpses. We've seen shifts, like in Denmark. Purchases are moving to lower price chains. We see that. We see maybe packing boxes in certain countries, I guess, Sweden, declining less than the average wine. But there's actually so much happening in our markets right now. Obviously, as you can see, the market volumes from COVID times is changing significantly. And then, obviously, the prices are up. So it's hard to kind of pinpoint what is exactly the significance of the financial downturn versus other big moves on the market. But some examples I already gave. But as I said, over a longer period, the wine and spirits consumption tends to be pretty stable.

And then we have a question from [indiscernible] about the price increases. So do you see that the impact of price increases will be stronger in Q4?

Well, I mean, I guess it remains to be seen. I don't have the market numbers. We have in every quarter increased our prices. And I think the best answer I can maybe say about Q3 -- Q4 is to say that we will most probably continue to increase prices next year as well, as the costs continue to increase.

And following up on that price increase is a question from Rauli Juva. With cost inflation leveling out and price increases coming through, should we expect the price increases to offset increased costs from beginning of 2023? Or what would be a fair assumption for the timing?

I guess the fair assumption that we probably will continue to increase our prices in the beginning of next year. There are pricing windows in Norway, in January, and then in Sweden and in Finland in 1st of April. So we will most likely continue to increase our prices then.

Then we have a question about barley and Koskenkorva Distillery. So at what barley price level would you run that Koskenkorva Distillery at full utilization again? How will that impact your profitability?

Yes. So Paul -- yes, good question. I think, it's obviously a combination of barley cost to us and our prices to our customers. So it's -- when that combination is at the right level, then we will run the capacity at full. I would expect a positive impact of that scenario for our profitability.

Then there is a question about the quality claims that we had commented on in Industrial. So there were positive impact on industrial EBITDA from quality claims. Are these related to heat recovery system? And are you expecting the system to be operational in Q4?

The quality claim was related to Blossa. We had a product issue related to taste last year, and that claim is related to that. With the heat recovery system, I think I need to come back to you a bit later, [ Joni ].

I think the expectation for the heat recovery system is to have it up and running in Q4.

That's [indiscernible].

Let's move on with the questions. So about energy. Regarding energy prices, how large impact this had in Q3? And what should we expect in Q4 and 2023?

I take that. Well, I don't have the exact number for you. I mean it was not -- it's one of the explanations, one of the items that's driving increased OpEx, especially in Industrial. I think that you've all seen the increase in electricity prices and other energy prices. I mean, I think that it's a bit difficult to separate out from the rest of the price increases. We are hit by these directly through our own energy consumption there. We have a large amount of hedging. So it's not impacting us that massively, but then part of what the cost inflation that we were talking about, is especially on glass bottles, the production of which is very energy consuming and done in Europe with gas. So when the gas prices are at levels they are, we are indirectly impacted by that. So I'm not sure that I want to -- or I can quantify exactly the impact of the energy prices in isolation, other than to say that for electricity, specifically, we are quite well hedged. And then that for the cost inflation, otherwise, that's actually one of the big drivers for '23 versus currently, is the indirect impact on our dry goods. And for that, we aim, as Pekka said, to try to price for that as best we can.

Then we have another question, Sigmund, to you. Were there something nonrecurring in depreciations?

You're talking about Q3, right? Let me -- I'll have to come back to you with more details, but I believe it has to do with the Globus acquisition and the write-down of inventories there, but let me -- or assets. So let me get back to you on that.

Then I think we take the next question from Rauli also to you, Sigmund. So the low end of your guidance indicates EUR 20 million adjusted EBITDA in Q4, i.e., below Q3 level, despite Q4 being seasonally strong. What would need to happen for you to land on that level?

Well, I mean, I think it's difficult to be sort of super specific about what exactly would need to happen. There are so many moving parts. I think that there are some elements that are -- can still potentially go the wrong way. One of them is obviously the market itself. We are in quite uncertain economic times. So it's difficult to predict exactly what will be the consumption patterns. Typically, I mean, our consumption has held up very well in previous economic crisis, but this is a new setting, I think, for many of us. So with the biggest sales season, there is a certain risk of that. Second one is then the impact of COVID going out of that, how much of an impact is that going to have for us in the high season. Third, currency rates can continue to go in the wrong direction there. We are hedged to some extent, but not fully. And then, of course, there are -- there's always a risk of operational issues. So it's -- I guess, it's a comment. I mean, the main risk, obviously, in our business with relatively strong sort of gross margins and quite fixed costs and spending plans in the short run is that in the end, the top line and the margins don't develop in the way that they normally do in Q4, and then you still have the high cost levels that you typically have with more marketing spend, for example, in Q4. So as always, the issue is the flexibility in the short run to adjust costs when -- if the top line should not be as strong as it normally is.

Then we have one more question in the chat. So if anyone wants to send in more questions, please do so. Please do so while we take the last question for the time being. So this will go also to you, Sigmund. It's from Joni about debt. So how much of the debt is fixed rate? And could you comment on current average interest rate?

Not much of our debt is fixed rate. So we are exposed to floating interest rate. I mean, commenting on current average interest rate, I don't think that I will want to do that. What I can tell you is that, obviously, we are in -- we are suffering from the same environment as everyone else. Though that being said, Anora, I think, continues to be a good name. But like everyone, we are exposed to the changes in -- to the increases in interest rates that are not protected against that through hedges.

All right. I think these were all the questions that we had -- have received for now. So I will give word back to Pekka for a quick summary.

Well, thanks, Tua, and thank you all for great and many questions to summarize our Q3. It was a quarter with good 10% net sales growth driven by the acquisition of Globus Wine and the strong performance in Denmark. Profitability declined significantly, largely driven by the normalization after COVID. When comparing against the pre-pandemic Q3 '19 level, we are ahead, thanks to Globus Wine acquisition. And when that is excluded, we were at the 2019 level, which can be considered as solid performance given the challenging conditions. And as a final note, I would like to welcome you all to hear more about our growth strategy, financial targets and sustainability road map at our Capital Markets Day next week. With this, I would like to hand over back to Tua for the final remarks.

Great. Thank you. So regarding the Capital Markets Day, you can find all information relating to that on our website. And there's also the link to the webcast, if you want to follow the live webcast. The presentations start at 10 a.m. CET, and there will be 2 Q&A sessions when it's also possible to send in your questions via chat function. So we look forward to seeing many of you in person at Gjellerasen, or then through the webcast, next Tuesday. Thank you for attending, and thank you for your questions. And as usually, don't hesitate to contact us if you have any follow-up questions. With this, we are ready, and we wish you all a very good rest of the day. Thank you.