Anora Group Oyj (ANORA) Earnings Call Transcript & Summary

Okay. So good afternoon, and a warm welcome to Anora's Q1 Pre-silent Call. My name is Milena Haeggstrom. I'm the Head of IR here at Anora. And in today's call, we have our CFO, Sigmund Toth discussing the recent events and talking to you through the Q&A. So please keep your phones muted unless you have a question, and you can also post questions through the chat. So now please note that we record this discussion, and we'll post it on our website after the call. And now please, Sigmund, go ahead.

Thank you, Milena, and welcome, everyone, to this call. I should actually mention that, of course, we are still in early April, so although the quarter has ended, obviously, we are still working on putting together all of the figures, which will be published in a while, but we can, of course, say some things about the quarter that we have put -- just recently put behind us. I think it bears reminding that the Q1 is the smallest quarter of the 4 ones in the year. We have a high degree of seasonality in our business with a relatively high part of fixed costs. And as you know, the Q4 is the biggest quarter, with the Christmas season being a big one, especially on the Spirits side but also, to some extent, on the Wine side. And then the first quarter of the year with the -- what is the expression? The dry January and white months in January with lower consumption and, in general, fewer, let's call it, festive occasions. This means that in terms of the seasonality, this is the smallest one of the year. That being said, of course, one element which can influence it is the timing of Easter because there are seasonal effects and an uplift related to Easter, especially on aquavits in both Norway and in Denmark. So the timing of Easter can sometimes have effects either positive or negative, depending on the placement of Easter in the previous year. What I can say in this year is that those effects are probably not very significant. Easter was a bit earlier than last year, which, on the one side, meant that there were some shipments that were happening a bit earlier in March, but at the same time, it also meant that the last 3, 4 days of March, which were shipment days last year, were not shipment days this year. Of course, in the big picture or for the totality of the year, this doesn't really have an importance, but in terms of the quarter, on the whole, I would say that the impact was relatively small. In terms of other macro effects and total market volumes, I would say that on the whole, volumes in the markets and sales in the monopolies are relatively on the soft side. There is some further degree of, let's call it, post-COVID normalization happening in Norway, where, as we may have mentioned in previous calls, 2023 was still, in terms of total volume for the market, about 10% above 2019 levels. And now we have seen some further, let's call it, normalization in the first quarter towards the 2019 levels but still above what the level was in 2019. And in general, I would say, across our markets, as you know, consumers have been feeling the pressure in terms of inflation, and the salaries not increasing to the same extent as inflation or many costs being higher than what they have been used to. Our industry, as you know, is less cyclical, typically than others, but I would say that on the whole, this probably has put somewhat of a damper on the consumption also in our categories but, obviously, not big numbers given the stability of the business in which we operate. Of -- continuing a little bit on the macro environment, I would say that last year, as you know, was a year of significant headwinds in terms of foreign exchange. Especially, we were hit hard by NOK and SEK depreciating versus the euro, and that was kind of going on pretty much continuously at least for the first 3 quarters of the year. I mean there is obviously a full year impact in the sense that if you look at the NOK and the SEK versus the euro where were they in Q1 '24 versus Q1 '23, they're still at the lower level. But I would say, on the whole, that this quarter compared to last year, it's been more stable from that point of view from the FX. There has been -- there was at least a while of a little bit of weakening of the NOK over the last few weeks. But on the whole, I would say that things are more stable than they were last year. In addition to that, for our business, I would remind you that we should now be less impacted by -- in the NOK or SEK versus the euro because we have implemented, as of the beginning of the year, a new hedging policy, which is covering a much more significant part of our ForEx exposure. And the logic behind that coverage is that we essentially cover a very, very high percentage of our exposure during a pricing period at the monopoly, thus stabilizing our gross margins for that period. So we set prices based on a calculated and hedged foreign exchange rate, and that's then providing stability for us during the pricing period at the monopoly, of which, as you may recall, there are 3 in Norway and 2 in Sweden and in Finland. So that is then also providing a bit more stability in terms of the profitability. On other input prices, I would say that they have not necessarily come further down, but they have also not increased. There are some exceptions. I would mention that on our Globus Wine business in Denmark, we have seen some positive impacts on operating expenses, at least in the first 2 months of the year. Some of them are specific to us simply that we have less inventory. So we have less demurrage costs in the harbor for storing wine, and then there are also some energy surcharges that have gone away due to the decrease in energy prices. And there are some other such impacts, although, of course, on the opposite side. The month of January was a very, very cold one across our entire region, so energy costs for that month in isolation were a bit higher. But I would say that on -- again, it's a bit the same theme, as I mentioned on FX, is that input prices now are stabilizing at a certain level, not necessarily coming down and giving us a tailwind from the cost of goods in isolation, but also not providing a headwind as they were last year. And then there is, of course, in the opposite direction, I mean, we did a number of price increases last year throughout the year, right, at the various price periods, and they are now getting their full year impact. So I mentioned the currency, of course, being in absolute terms at a more negative level for the NOK and SEK versus last year during Q1. But the opposite is then true of the prices, right, where the prices we took, for example, in Norway on -- in the 1st of May, 1st of September and 1st of January last year and 1st of January of this year, they have now come into effect. And we have a full quarter of those, which then, given the stability of the input prices, means that what we see at least so far is an improvement in terms of the gross margins, thanks to the fact that we have now taken sufficient pricing to recover the cost of goods hits. And also that, obviously, a bigger part of the cost of goods hits is part of our base. And that, to some extent, will be true throughout the year is that as, for example, FX was deteriorating throughout of last year, there will be, for the subsequent quarters, more and more that is part of our base. Talking about our base. And this is something just a reminder also for both investors and for analysts is that, of course, in terms of the base, net sales and profits for Q1, these big partner losses, which we suffered on the Wine business in Sweden, one of the larger ones, we still had some sales and profits for that in the first quarter of 2023. So in terms of the base impact, that is still a drag or a negative effect for the comparables for Q1, but it is then out of the base for Q2, Q3 and Q4 of 2023. And then in terms of comparables, things will be more apple to apple for '24. So just to mention that in terms of the Q1, that, that is an impact in terms of the year-over-year improvement, it's a bit more difficult in Q1 than in some of the other quarters of the year. Further important thing to mention, although that I think we have also communicated it publicly that we, of course, announced a restructuring program that was touching several parts or several segments of the business Wine and Spirits and, to some extent, Industrial in terms of head count reductions. And that program, the last, let's call it, parts of that which were being negotiated, those negotiations have also concluded, right, I think, as we have announced publicly previously. And the effects of that are then gradually making it -- making their way into our P&L. Further moving then on from the P&L to the balance sheet. As you know, last year and especially the second half of the year, we were making big efforts to reduce our inventory after a strong increase in the inventory during 2022, and we were successful with that, especially in the last quarter of the year. We are continuing with that work. I mean, I think that the -- let's call it, the initial reduction is the one that is the simpler one. And then as we go along, the harder and harder it gets, but it does look like in Q1, we have been successful, also with the -- with some further reduction in the inventory on a year-over-year basis compared to what we managed to achieve in Q4. And then, of course, there is a onetime effect of the sale of Larsen Cognac, which is then also reducing the inventory levels very significantly, but I'm now talking about like-for-like effect. So they have continued in the first quarter of the year freeing up cash for us. Cash position also looks positive in year-over-year, at the end of March, although I should mention that although these inventory reductions have continued, the major part of this cash improvement is most likely due to cutoff effects and the timing of Easter rather than any underlying effects. But it does look that in terms of our net debt leverage and cash at the end of the quarter, this will be quite positive year-over-year. But again, I don't want to exaggerate that or present that as a sort of a structural improvement. The structural improvement is coming in the inventory reduction and that is a smaller amount than what we have managed in cash. And then I'm coming to the end of, let's say, my prepared remarks. And one point that I wanted to mention as well, is that, of course, we will have, in this year, although they have no cash impact, lower depreciation levels due to those rather large impairments that we did of both owned assets and right-of-use assets at the end of last year. And there have been questions about what is the annual impact of this on our depreciation level, and it is something in the order of magnitude of EUR 5 million to EUR 6 million on an annual basis. That depreciation will be lower going forward than what it was last year due to this impairment. So again, obviously, no cash impact, neither positive nor negative, but simply due to the fact that we wrote down then many of our assets at the end of last year. That then means that we have a lower level of depreciation going forward. And that was what I wanted to share. As I said, still early days, and we are still closing our books for the month of March and Q1. But on the whole, a small quarter, as it always is in seasonal terms, some headwinds in terms of the consumer, in terms of the consumer demand, but we are pursuing the -- our efforts to control what we can and improve our gross margin and control our costs. And one thing that I mentioned -- I forgot to mention that I'm sure that there will be questions about as well is that you may know that there have been quite significant strikes in Finland, including recently of dock workers. And I'm happy to say that we have managed for our business, thanks to the great efforts of mainly our supply chain employees to mitigate those impacts. So I can't say that there has been a very significant impact from those strikes in Finland on our business. So still relatively different -- difficult or though more stable macro conditions, but we are doing what we can to continue this focus on improved gross margins and strong cost control and freeing up cash to reducing net working capital. So that was -- those were the remarks that I had.

Okay. Thank you, Sigmund. And we are now ready for questions. You can post questions through the chat or then ask them live. [Operator Instructions] And I see that we have one hand here already. Joni Sandvall, please go ahead.

Do you hear me?

Yes, we do.

Yes.

Perfect. Thanks, Sigmund, for actually a pretty good presentation, answered most of my questions, but maybe getting back on this, still, partner deals. Can you give us any implication, what level of these sales were in Q1 '23, what were lost in Sweden? And then the second question related to this, how new partner deals are coming together. Now I think you have been speaking quite a lot of getting, how would I say it, better deals with the partners from your side. So if you can give any color on that.

Yes. I think we haven't disclosed the exact -- the amount of the losses. So I think probably I will not go into too much detail on that. But in terms of the partner, in terms of the new partner deals, I would say that we are having some successes, but on the whole, this quarter, I also wouldn't say that we have sort of moved the needle, right? I mean there has -- I think that we are net positive. So we are gaining more than we are losing right now but not in a way that would sort of materially shift the things in either the positive or the negative sort of direction. And of course, the gaining of the partner business in terms of the bottom line, profitability is always a bit of an uphill battle because when you are trying to win rather than build new business but win an existing business from one of your competitors, obviously, you have to be very competitive on the margin, right, that you are proposing to the partners. So in the beginning, before you have sort of proven that you are adding value and making the business grow to the mutual benefit of the partner, it's typically the way that the partner business that you lose is somewhat more profitable than the partner business that you gain. But I mean, I would say on the whole, it's not a major factor, right? We have some successes. We are gaining some partners, but I don't think -- we don't have any massive ones where we can say, hey, we just won a big, big partner that's really shifting the needle versus the previous year. I think that's unfortunately the correct picture.

Yes. Then maybe a question related to price increases. You have implemented quite many. So have you seen any deviation from the competition side from your price increases and how your market shares have developed during the Q1?

This is a good question. I would say that there are -- in the big scheme of things, no. And in the big scheme of things, I would say that our products support the price increases pretty well. Then there are variations, of course, with this. Again, as a general note, I would say that the big traditional Spirits brands, typically, they really support the price increases quite well. The -- some of our own brands online, we have discovered that maybe the price increases were a bit too aggressive. And then we are sort of gradually playing this game of correcting things and fine-tuning things. But the macro picture of it is that, no, I think that competition is also increasing their prices. Sometimes we were leading. Sometimes they were leading. And in some segments, we took too much and they, too little and vice versa. I would say that, obviously, with our latest kind of, let's call it, more aggressive corrections, maybe on balance, we were taking a bit more than the market in the last few rounds, but this sort of tends to even out over several price windows. So no massive impact, I would say.

Okay. And then going still on the working capital impact. You said that inventories continue on the right direction. How -- when we are taking into consideration the sold receivables, how these are impacting? Because I think in -- was it Q3 or Q2? It was a big negative impact from this. So can you elaborate a bit on that one -- on this?

Yes, you have a very good question, Joni. So on the sales of receivables, we have now a full year's worth of those, so it is in our base because we implemented the expanded sales, a receivable program, as of March last year. So now it is kind of like apple to apple, so you could sort of say that typically now -- and you can arrest me on this; if I try to use this explanation at a later point in time, you can use my words against me. But from now on in a normal case, accounts receivables should not be an explanatory factor in variations in working capital because we are selling such a large part of our accounts receivable, and we have -- sort of at the end of each quarter in the base year and in the current year, we sort of sold what we could last year, and we are selling what we could this year. So then there will be some cut-off effects, and this is not a fully automated process. So it may be that one day of invoices, we somehow didn't manage to sell it with the bank, and this is ending at the very end of the quarter. So there may be some variations. But in the big scheme of things, the accounts receivable are somehow now stable and more stable at a lower level than they were, well, in '22 and about at the same level as they were in 2023. And this impact that you were talking about, a negative one, this was because, of course, when accounts receivable was kind of varying and going up and down from quarter-to-quarter, in some quarters, it was positive, in others, it was negative and then when you had sold them, then on the one side, you didn't get the capital -- or sorry, the cash being consumed in one quarter. But then in the next quarter, you also didn't get the positive impact of the cash being freed up. Now it's kind of like flat on a more stable level. So net working capital should also be less volatile due to this factor. But year-over-year, it's no longer an explanatory factor. So that's for accounts receivable. As for inventory, inventory, again, obviously, it's sort of it varies year-over-year due to seasonalities, right? You preproduce ahead of big seasonal events like Easter or especially Christmas, so the lowest point of inventory is at the end of December. But then when I'm talking about underlying improvement in inventory, I'm always comparing apple to apple, so I'm looking at what was the value at the end of March last year, what's the value at the end of March this year. Again here, there may be cutoff effects. You know that Easter is moving here or there, right, in one quarter or one month or even within a month. But on the whole, what we are seeing on an apple-to-apple basis quite consistently is that, again, versus the relevant apple-to-apple comparison, we have made a further improvement, right, in the inventory levels. It has gone down on a comparable basis. Again, so I'm not only adjusting for seasonality but also for the Larsen sale, right, which is a big onetime gain. I hope that was clear.

Yes. Very clear. Last question from my side relating -- you were speaking quite, how I would say it, positively on gross margin, and it was up in -- I think, in Q4, some 1.2 percentage points or something year-over-year. So should we expect something similar impact on the gross margin?

Well, I mean here, I think that it's probably -- I think it would be imprudent of me, right, because, of course, we have some data, but we are also still closing our books. So let me not comment too much on that, but maybe that's not too far off in the sort of the order of magnitude. But I mean, again, no commitments yet at this time. There are also other impacts such as promotions for restaurants or even in the open markets. A big part of our business now is in Denmark and in the Baltics, where there are also trade discounts and big promotions for Easter, also being big discounts, and also there are kind of elements that can impact the gross margin and make it not kind of fully apple to apple, but in the big scheme of things, maybe you are not too far off. Although again, I make no commitments here. You will get the numbers when we publish them a bit later.

Thank you, Joni. And we also have a question from Rauli Juva.

Thank you, Sigmund and Joni, from going through most of the things that I also had in mind. But maybe just to follow, following-up on the prices and the gross margin issue. Can you elaborate if you still have or had price increases in the pipeline like for the spring window? Or did you make the most of it already in the last year or in the January?

It is a continuous process, right? So there, I would say that we now have -- and let me just be careful in how I sort of word myself because I don't want to talk specifically about kind of future price increases. But it is something which is ongoing. I would say that most of it is kind of behind us in terms of, okay, us having to catch up to the raw material sort of input, but then pricing is kind of bread and butter thing for us. So we are kind of always looking at which are the products which deserve to have a better margin, which are the products that require to have a better margin because structurally, there is something which is off and, also, which are the products which consumers have told us that we are charging too much because they are moving away from it, especially in an environment where consumers are feeling the pinch. So I would say again that the main topic here is one of more stability, right? I think that the massive price increases, I hope, knock on wood, with the raw material price inflation and all that is behind us. But it's something that we are consistently fine-tuning as we go along.

Yes. I was just wondering, since your main competitor in the Wine side posted maybe a bit weaker margin on Q4, and they were kind of saying that the Q1 will still be weak for them and then there will be uplift in Q2 onwards. So that's not the kind of dynamics that you are expecting in your price [indiscernible]?

No. I would -- again, I do not talk too much about our competitors, but no, that's probably not it. And maybe if I were to speculate, I would say that maybe the lower margins is somehow correlated to the higher market shares that they have gained and then, I don't know, maybe the ones -- maybe price and demand somehow is correlated.

That would be rational.

Okay. We still have a follow-on question from Joni Sandvall.

Maybe still a follow-up. You said you have managed to do some progress with the Globus Wine operating expenses. And I think for the last 2 or 3 quarters, you have been a bit behind your initial thoughts on the program. So can you give a bit more color on that, how it's going now? Is it something that's going to stick? Or is it just short-term benefits?

I think the honest answer is that it's a bit too early to tell. What I was talking about here are things which are quite tangible and that were very specific factors that were dragging down last year. So one element was that there were energy surcharges, right, because energy prices were high. They have now gone away because energy prices have come down. So this one, I think, is -- will it stick or not? Well, if energy prices stay low, then it will stick. If they don't, then it won't, right? Another element is what I was talking about, the so-called demurrage charges, right, which means Globus Wine is one that is -- its business model is based on taking in bulk wine, bottling it and selling it. And sometimes when the wine comes from overseas, for example, such as from the U.S., it's quite difficult to find the balance between ensuring that you have enough wine to be able to fill it and still deliver many of the heavy promotions, especially in Denmark and keeping a low inventory. Globus Wine, just like the rest of Anora, we have put a lot of emphasis on having an improved sales and operations planning process and trying to predict demand better and trying to adapt the safety stocks to the expected demand so that we have a lower inventory without having more out of stock in stores. And I think that this is something, especially that Globus has focused on because these demurrage costs basically where you are paying rent for a container that is filled with wine in the harbor of Copenhagen is very expensive. And I think that they have made very successful efforts at getting this down. Is this a permanent improvement? Or can you have, let's call it, setbacks in this area? I think that it is, objectively speaking, quite a difficult thing to get right. I hope that these are now permanent kind of improvements, and I believe so. But time will tell because it is a bit difficult to sort of get it right, and it's an intrinsic thing a bit to their business model. But these -- I hope that the improvements will stick. And then there are other elements of the -- let's call it, the Globus operating model or the profits where the team there is working very hard to sort of get them right. And there, I would say that there is still further improvements to be made. I don't think we can declare victory there quite yet. But there have been, as I said, in the first 2 months of the year, some positive signs.

So do we still have any more questions among the audience? At least we don't have any in the chat. So I guess we can thank for all the great questions today, and thank you, Sigmund and everyone online, for joining us today. And please remember our next scheduled event, which will be the Q1 interim report on the 7th of May. So we look forward to seeing you on the call then. Have a great weekend.

Thank you. Bye.