Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our Q1 Interim Report Presentation. My name is Petra Grasbeck, I'm from Anora Communications. CEO, Pekka Tennila and CFO, Sigmund Toth will talk you through our Q1 results. After that, we will have a Q&A. You can send the questions to team's chat already now and during the Q&A. I would also ask you to mute your mics and note that the presentation will be recorded, and it will be available afterwards on our website, anora.com. With this, we are ready to start, and I will hand over to Pekka.

Thank you, Petra and welcome, on my behalf as well. So let's start. Here is the recap of our results for Q1. Our sales growth organically, excluding Globus Wine was a bit over 2%, which is a good result considering that our core markets declined by almost 3%. In constant currencies, our sales growth, again, organically was around 8%, with all segments growing. There was a small positive impact of early Easter deliveries in our March sales. Profitability declined, driven mainly by weakening Norwegian and Swedish crowns, which had a very significant impact on especially our wine profitability. Input costs continued to increase and impacted negatively our profits. We've been negotiating the costs down, but overall, the cost level is still higher than in previous year. Price increases have been implemented as planned. Norway price increases were changed in January, Sweden only in March and Finland in April after Q1. Therefore, the full impact of these increases will be seen from Q2 onwards. The next price increases will happen or has happened in May in Norway and then in September, October in all 3 countries, monopoly countries. Our cost savings program has also started targeting at EUR 6 million savings for the full year. The impact of this plan is not yet visible in Q1 numbers or will be that from Q2 onwards. Next, we take a look at the market numbers. Market numbers are a combination of monopoly sales data and Nielsen off-trade data from Denmark. Markets declined by 2.5% on average across the Nordics with a similar development in all markets in both categories. Even with significant price increases across the markets, the value development of the monopolies were flat, meaning that there likely is a consumer down-trading, i.e., consumers buying more affordable products than they did before. Looking at the longer-term development on the right-hand side, we see the corona year's growth compared to Q1 '19, we are now still on a bit higher level in Sweden and Norway. Therefore, we have expected the market to decline for the full year, but the decline should stabilize as the year progresses. Next, we take a look at our wine segment sales. Globus Wine was obviously the main reason for the 38% net sales growth. Currency volatility had a major impact on our development. Excluding Globus Wine, our sales increased by 3% in constant currencies, but in euro they declined by 4%. Our own wines continued their sales and market share growth during Q1. Our sales growth was 11% in constant currencies in own wine excluding Globus Wine, with all markets growing, but especially Sweden is developing very, very positively. Relaunch of Chill Out, numerous new launches and introduction of Il Capolavoro in Sweden drove our positive sales growth. In part of wine, the earlier communicated partner losses drove ourselves down despite the new partners gained. Overall, our market share in the monopolies were on last year's level. So this is partner and own wine combined. And in Denmark, we grew significantly. EBITDA weakened versus last year, but is in line with our Q1 estimates. The biggest drivers of the decline was the weakening of the Norwegian and Swedish crowns, heavy input costs and partner losses. On the right-hand side, you see some of the new launches and tender wins from Q1. Skona Honan, beautiful Vin from Sweden, Lindeman's Riesling from Finland, Yoko Rose from Norway and Sangria in Sweden among others. Moving on to spirits. In spirits, our sales grew by 9%, both monopoly and international markets grew in sales, and we increased our market share across all monopoly markets. The weakening of Norwegian and Swedish crowns impacted our sales development negatively. EBITDA was lower than last year due to higher input costs, negative currency and higher marketing costs. As mentioned earlier, we have increased our prices according to our plans and local timelines. As Sweden prices changed only in March and Finland in April, we do not see the full impact of our price changes yet in Q1. Like in wine, we are active with novelties and spirits as well. Due to local legislation in Finland, we are unable to show you pictures of the new spirit bottles, but have to do with just text. And as you can see from the list, we have many exciting novelties ranging from whiskey to vodka to liquors and Aquavits. The picture below is taken from a [indiscernible] Italian vessel, where we had a very special Skagerrak Gin showroom with the big video screen. Next, we move to industrial. Q1 Industrial net sales developed positively due to increased prices, driven by higher input costs, external net sales grew by 6%, while total sales grew a bit more. Vectura sales increased in local currencies but declined in euro. EBITDA weakened due to inventory revaluation and high operating expenses. The lower demand for starch and paper for [indiscernible] will impact our Koskenkorva Distillery running speed in a negative way. And next, a few words on sustainability. Sustainability highlights from Q1 include Finland, moving to 100% renewable energy and improvement in ESG rankings. Health and safety is at the very top of our sustainability agenda, and we have successfully reduced our accidents in our facilities in the long-term. In Q1, however, our ratio has moved in the wrong direction. We've taken strong measures to turn this trend around and are targeting towards further reducing lost time injury frequency this year. We started to conduct human rights assessment and commitment in our value chain and activated and launched a number of new no and low alcohol products. With this, I would like to give the word over to Sigmund on financials.

Thank you, Pekka. So if we move to the first slide in the financial review. As usual, we have an overview on the barley price, very important input for us. And the good news from our point of view is that it has actually decreased, average barley price by 11% this year compared to the last year, although as you can clearly see on the graph, the current price is still significantly above what has been the historical level. I mean this input is something where we typically purchase at spot with no -- there are no hedging tools available, and we have around 1 month of inventory. But for now, we have not yet seen the benefits of this lower barley price simply because we do have some purchasing agreements with certain volume commitments and to purchase that volume at a given price. And now as Pekka mentioned, there has been a decrease in the demand for starch from the paper industry. And as a result, we haven't exhausted our current volume commitments. So we are still paying the somewhat higher price that you saw a bit earlier. So we will get the benefit from the lower barley price in the second half of 2023. And then, of course, a big impact on this price going forward is a harvest in August and September about which it's too early to speak at the current time. So then if we move on to the next slide. The net sales, the big increase, as you can see, is coming from Globus Wine, but there were also increased sales in spirits and in industrial. And in fact, as Pekka mentioned, in constant currency, also on the wine segment if only slightly because obviously the reported net sales were strongly negatively affected by the weak SEK and NOK. This quarter is the smallest one of ours, although this time around, there was some slight benefit of the timing of Easter. And then if we move from net sales to the next slide, please? Yes, the profitability, it was weaker in Q1, clearly not at a level that we are happy with and a lot of it has to do with the higher input cost. And here with input costs, we also have to consider the foreign exchange, especially the wine business, very heavily impacted by the weak NOK and SEK in the quarter. And in addition to that, our spending levels, the OpEx, both marketing spend and other operating costs even when excluding Globus were also somewhat higher than the same quarter last year. That's not going to be the case for the full year because there we are implementing our savings plan, but this quarter compared to last year, we were still spending more marketing funds and other operating expenses, which will then be a different case looking forward. I think another interesting picture to look at here is the comparison to prior years. I mean, again, this is the smallest quarter of the year. It's typically one where the gross profit levels, given that our other operating costs are rather fixed, have a big, big impact on the bottom line and the levels, the profitability levels the last year and the year before, they were really more the exception rather than the rule. If you look at 2019, which is sort of a base year or even in 2020, that's the more normal level for Q1 when the gross profit levels due to the lower level of sales compared to the rest of the year are lower and then our fixed costs are spread on over a lower net sales level. 2021 and 2022 were very good years to us, thanks to the higher profitability during the COVID period. And then if we move to the next slide. Here are some key balance sheet figures. And as we can see, of course, the net debt over comparable EBITDA it's higher than last year. This, as we said at the year-end presentation, it's mainly due to the acquisition of Globus Wine, which was financed with debt. And then on the other hand, the cash flow from operations is typically very weak in the first quarter because not only is the profitability levels typically quite low, but in addition to that, the working capital needs also increases, as we paid out for taxes and VAT related to the big Christmas sales, which are still payable at the year-end. And during Q1, they are then dispersed leading to cash going out and working capital need going up. This year, that's a bit different because we have sold a very significant level of receivables by essentially expanding the sale of receivables program from the ex-Altia side of the business to cover also the ex-Arcus entities. On the overall picture and looking forward, our inventory levels, they are still much higher than we would like them to be. We have plans to lower that significantly by the end of the year. And with that, I think that was my -- yes, if we move on -- sorry, if we move to the next one, yes, about outlook. So here, we reiterate our guidance for the year. We expect comparable EBITDA to be between EUR 80 million and EUR 90 million. That, of course, is something that requires further focus on those things which we have mentioned, continuing to take price increases, implementing this cost-cutting program, which Pekka alluded to and that we've mentioned earlier and then having strong cost control across the business. I mean, we do hope to have some relief from input costs, but they are still expected to be at a high level for the rest of the year. And I think that was my last slide, if I'm not mistaken. So with that, I will hand over to -- well to you, I guess, for the Q&A.

Thank you, Pekka, Sigmund. We would now be ready to take questions. I see that there are not yet questions in the meeting chat, but you can start sending them and also use the raise your hand function to talk your questions. Okay. Thank you. So we got the first question. So how much extra IT and maintenance cost in Q1, were this cost additional compared to 2022 or was this a timing issue? And continuing the question, you aim for EUR 6 million cost savings in 2023. Are you expecting to reach the full run rate already in Q2? And still, third question, how large cost inflation for 2023.

A lot of questions all in one. Maybe I can take the one on the IT and maintenance costs, altogether about 1.5, those 2 and they are not meant to be incremental versus the previous year, but it's a matter of phasing, right, that sometimes some of the projects come earlier in the year or some of the maintenance, which is due comes earlier in the year or actually, in some cases, costs were particularly low last year, and now they are somewhat higher. And then similar amounts actually for marketing and travel and representation. So that was the answer to the first question. And there the expectation is that they go down towards the rest of the year. In terms of -- what was the second question? Was it around the run rate?

Yes, it was on the cost savings. And are we expecting to reach the full run rate of that EUR 6 million in Q2?

Yes. I would say probably not entirely, but almost, right? I mean I think that the marketing spend already we should be seeing held from that in the cuts there in Q2 already and then more to come in Q3 and Q4, which are typically heavy quarters on marketing spending and were very heavy quarters last year. Third question?

Third part was how large is the cost inflation for 2023?

I guess my question back would be what exactly he means by cost inflation here or are you thinking about the pure input costs.

Joni, can you specify maybe with the audio on.

Yes. Thanks, more. On the operating expenses side, we probably know what's going to happen with the variable base, but then on the operating expenses.

Okay. So I mean on the operating expenses, our notion is to take it down as we were saying the EUR 6 million, right? That's what we mean. I mean, obviously, Globus is coming on top. But if you look at it, excluding Globus, then the idea is to take it down by EUR 6 million, mainly then in marketing and in sort of related expenses. And there might be, I would say, EUR 1 million or 2 million going in the other direction in some other operating costs, but to keep it at a very low level. So that's what we mean in the EUR 6 million is including any sort of inflation effects on the other operating expense.

Then, we could take you in the middle, one from -- raise your hand. Maria, you had raised your hands, please. You can ask.

I had 3 questions. So the first one is that, I mean, you repeated the guidance of adjusted EBITDA of EUR 80 million to EUR 90 million. And you say that Q1 went as you had expected, and now you initiated EUR 6 million of cost savings. So would I read this right that in your initial projections, you are looking to hit the high end of the guidance range.

I think that probably we need to be even more accurate in our language. I mean I don't think that I want to comment on exactly what we were expecting at what time about where in our range, we would hit it, right? That's the reason that we give a range. But I think that it's fair to say that when we gave the range at that time, we already had an idea about what Q1 would be looking like. We had an idea about how much cost cuts we could affect during Q1. And that's what we mean, right, is that we've known obviously for a while, roughly what our spending levels would be and that our savings program always takes some time to implement even when you are cutting marketing costs. So that's what we meant, right? It's not a statement about which part of the guidance range that we are expecting to hit. And from our point of view, it's not that Q1 has come in worse than we were expecting at the time that we set the guidance. But I don't know if that answers your question or not, but.

Sure. I think it can give some color. Then I wanted to touch upon a bit given that I mean you now say quite loud that you're going to cut the marketing spend. And at the same time, I hear from your presentation the push for your own brands in wine. And at the same time last year, I mean you got this quite significant partner loss that still affect your sales. So how do you make sure that you don't lose further partners because if I were your partner in wine, I would be quite concerned hearing that you are cutting the marketing spend and you are promoting your own brands.

And obviously, I mean, let me start with saying that all the partners listening in on this call, we obviously have your interest at heart, and we are not financing this marketing spend on brands through cuts in partner brand marketing. The way that it works, Maria, with the Partner Brands is that obviously the marketing spend on the Partner Brands is something which is reviewed and agreed upon with each of the partners. So that's not really a financing source for spending on our own brands. That's the case both in spirits and in wine. o what we are doing in terms of being able to support the own brands is that we are reallocating funds within the own brands marketing spend. I mean we have -- I don't know, I mean, Pekka probably can help me out here, but we have more brands than we can count. And it's quite clear that our marketing and sales teams, they are taking a very hard look at basically the portfolio, right, about how much are we spending on this on that brand and concentrating the spending behind those brands that we really want to focus on during this year. So it's a matter of us reallocating and net cutting marketing spend on our own brands and then still being able to protect our launches by focusing the remaining spending on where the priorities are. So I don't know, Pekka, if you want to add a few words on that.

Yes. To build on that with Partner Brands, sped is contractual, so any costs would then be mutually agreed. So the costs we're talking about the EUR 6 million, like Sigmund said, it's more -- it's about own brands and there, like Sigmund said it is our reallocation of the funds. We have 3 important growth areas, stated in the strategy. One is international growth, one is own brands in the monopolies, and the third one is low alcoholic brands. So those are the strategic growth items and those we are supporting fully with the rest. We are super selective.

Did you have a third question?

Yes. And I had a third question, which is trying to get my estimates right on the gross margin level. So the gross margin fell 470 basis points in the Q1, and now you have these 2 additional pricing windows opened in Sweden and Finland and then I guess, Norway in May. So how should I look at the gross margin that, are we still -- is this growth or are these price hikes enough to reverse the negative gross margin trend already in Q3 or Q2? And how should we look in the second half?

How much precise guidance we should give on that. I mean I think first one thing for the sake of good order is that there is obviously or maybe not so obviously, but there is a gross margin dilution effect from the incorporation of Globus, right? So that's obviously something that you have to take into account that quite a significant chunk of this decrease is related to the fact that Globus is a relatively sizable business with quite significantly lower gross margins than the average of the business. So that's one thing. But to answer your question on the base business. Well, I mean, I think that by the -- on average for the second quarter, maybe yes, I mean, maybe that would be at the point where the margin erosion stops versus the last year, right? Finland has had a full quarter. I mean Norway has had some additional FX impact, but that is now somewhat adjusting and then you have the May 1 pricing window, you have 2 months in there. And then Sweden has had since March, so roughly probably that's when you should be seeing this sort of stabilization. And then for Q3 and Q4, I mean, I don't know if I want to give that much specific guidance on it. But yes, we have further price windows in September and October, and we definitely intend to make the most out of those.

Then we have in chat from Rauli. Can you comment the profitability of Globus separately, is that similarly depressed as the wine segment overall and what's driving that.

Yes, we can comment that, I mean, the EBITDA profitability of Globus was weak in Q1. I mean as you know, we had some bad news on the, let's call it, the ingoing or the base level of profitability of that business that was discovered during the annual closing process. And I think that our expectation is that the profitability of Globus improved versus Q1, which was clearly not at the level that we expect it to be. It's not due to exactly the same factors as the rest of the business, which is very much around [Ftech], so in the case of Globus is not so much FX, but let's call it, the base profitability level of the business and then there were some specific elements in Q1 that depressed those earnings. But going forward, the outlook there is that the Globus management, together with the rest of the wine management have a strong profit improvement plan that goes to a number of items. It's about cost savings affecting gross margins. So there is now, I mean, they operate in a bulk wine business, and there are now some good deals to be had on bulk wine from certain countries of origin. The inbound freight is also a market -- global sea freight is also turning in the right direction. So there are savings there. Globus Wine used to have a relatively high inventory in which they were paying them large costs in the harbor of Copenhagen out of which they are now out. And then they also have a cost savings program in general on OpEx. So all of those items, we hope will return Globus to sort of the profitability level that was, let's say, announced at the acquisition time, whereas it was clearly below that in Q1.

Then Joni has raised his hand.