AS MADARA Cosmetics (MDARA) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon. We are happy you could join us for MADARA Cosmetics Investor Webinar. Today, we are hosted by MADARA Cosmetics member of the Management Board, Uldis Iltners. He is also a shareholder himself. During the webinar, you will be introduced with MADARA Cosmetics key activities and financial results of the past year as well as an insight into company's future plans. After the presentation, we will have a Q&A session. We have already received several questions from the investors. [Operator Instructions] Now without further ado, I would like to hand over to Uldis, who will proceed with the presentation.

Thank you, Eva, for the introduction. Good afternoon, dear participants. Thank you for joining MADARA Cosmetics webinar. I hope, I really hope you are all safe in this alarming time for Ukraine. Our hearts are broken seeing the suffering of Ukrainian people. And we really, really hope that the war will stop very soon and situation will stabilize. Today, I will present the management report on the unaudited financial statements for the 12 months of last year. As we have already received quite many questions. I will try to present the last year's results quickly so that we can then focus on answering your questions. As usually, before we start, I would like to briefly remind you of the most important elements of our company. MADARA Cosmetics is still the leading cosmetics producer in Baltics, specialized in producing of natural and organic certified skincare and makeup products. Our core business is within European Union with our own brands, MADARA and MOSSA. And part of our business is contract manufacturing. Speaking about contract manufacturing, we have some very interesting news. Earlier this year, we launched a self-service platform called selfnamed.com, which provides Ecocert- and COSMOS-certified product without a minimum order quantity. Actually, quite a unique model in our industry. And I will talk about this more later in my presentation. So continuing about important elements. Innovation is important, very important element of our business. And we are among the most innovative organic certified cosmetics producers in Europe. Every year, we launch new innovative products. A big part of our business is e-commerce. E-commerce is a very, very important part of our business. The company has been listed on the NASDAQ Riga First North since November 2017, offers shareholders benefits. Program is retail investors friendly and prepares ESG reports. So this was in short. And now we continue with the 12 months results. 2021 has been a very good year of growth. We have achieved a 20.5% increase in turnover, mainly from our existing channels, sales channels. EBITDA increased by 10.2%, and profit before tax increased by 12.2% compared to the previous year. The increase in profit is lower than the increase in turnover due to certain increase in competition in the second half of last year and also investments in the development of the company's organization, including preparation for the launch of selfnamed.com project. Nevertheless, I believe our company maintains very good profit margins. Operating margin last year exceeds 20%. Now let's take a closer look at sales breakdowns. Geographical sales breakdown last year has not changed significantly from the previous year. The share of non-EU sales increased by 3 percentage points. And the share of sales in Latvia and the EU decreased by 2 percentage points and 1 percentage point, respectively. The 2/3 of turnover is in the European Union where biggest markets are still Finland, Germany and France. Looking at sales by categories. We see an increase in the share of contract manufacturing. The amount increased to 6% of the company's total turnover. And the share of MOSSA has remained the same as a year ago. And the share of MADARA brand has decreased by 5 percentage points and accounts for 84% of total turnover. Here is the breakdown of MADARA brand sales by product groups. We see small changes by product groups. The most important product groups are still facial care and anti-age products. We can also see that makeup, which was launched in 2019, maintains its position. And the share of makeup has increased by 1 percentage point last year. We see that actually makeup gradually is increasing the share in total turnover. And we see that there's still a considerable potential for further growth. Next slide, some more numbers. Here, we see the summary of the income statement. Let's take a quick look at the key figures. We have achieved a turnover of EUR 19.4 million. Gross profit is EUR 13 million, which is proportionally slightly less than a year earlier. And profit before taxes is EUR 4 million, which is the highest profit achieved so far. And our turnover target for 2023, the target of EUR 27 million remains intact. Yes, as we stated in the previous report, we continue to provide information on the share of direct e-commerce channels in the company's turnover. Here, we see that last year, the share of direct e-commerce channel increased by 1 percentage point and makes 30% -- 36% of MADARA brand turnover. Direct and third-party e-commerce channels will continue to be the segment we focus on for MADARA brand. As usual, in the next slides, we will look at the most important events of last year. In the previous slide, we already talked about the share of direct e-commerce channels for MADARA brand. Overall, the company's sales strategy is to move closer to the end customers. And in addition to our direct e-commerce channel, the company is successfully developing third-party online stores that are playing an increasingly important role in overall sales. Currently, we work with more than 10 leading e-commerce stores in Europe, for example, douglas.de, flaconi.de, feelunique.com and several others. We also continue to take over the distribution in European markets. Last year, we successfully took over the distribution in the Netherlands, Belgium and the United Kingdom. And the distribution in Sweden and Denmark was taken over in January this year. So yes, I will now tell more about our new project selfnamed.com. Yes, internally, we call this project the first technological start-up of MADARA Cosmetics. We have been working in the contract manufacturing segment for quite many years. And in recent years, we have seen strong increase in demand for small batch production that we are unable to produce in the current production process. For example, last year, we received more than 1,000 requests for small batch production alone. And yes, so just to give you some idea of what are the number of requests we receive for the small batch production segment. Yes, and this market demand gave the rise to the idea of selfnamed.com as a sales service platform with no minimum order volume. And yes, in addition to this Selfnamed offers Ecocert- and COSMOS-certified products, and the brand owners do not have to do the Ecocert and COSMOS certification separately, which had to be done so far. So this platform actually gives this possibility to avoid this separate Ecocert and COSMOS certification. And you can basically order one item from selfnamed.com catalog and with your own label, and you will have the Ecocert and the COSMOS label on the packaging. To ensure the production process for small batches, we have created a separate production process and organization. The production process consists of labeling, printing of labels -- labeling and also printing and preparing of boxes and, of course, the packing the orders for shipments. So far, we have invested EUR 350,000 in Selfnamed. And this year, further investments are expected. In general, the service offered by Selfnamed is very unique. So far, we have not found any other company that would offer the same services. Initially, we will focus on working in Europe. And in the near future, we will start to offer Selfnamed services also in the United States. So the product catalog is -- the product formulations and everything, it is compliant with the United States regulation as well. Yes, so we will -- it's a very interesting start-up project, and we will keep you informed about further developments. We have also been productive in developing and launching new products. We have added 16 new products to the range of MADARA brand. We are especially proud of Vitamin C cream and serum. SPF 50 sun protection stick and mascara, which is an important addition to our makeup line. Mascara is technically very difficult product in the natural cosmetics industry. And yes, thanks to our R&D team for the very good result we have achieved. Sustainability is one of the most important elements of our company. So every year, we take initiatives to make both the company's processes more sustainable and to support various activities related to environmental protection and building a better society. Over the last past year, we have continued to work actively on a number of initiatives. We have joined the Business Sustainability Council of Latvia. And I've also decided to start B-Corp certification process, which is an international recognized the standard for sustainable and forward-thinking companies. We have also continued to provide financial support for various NGOs and projects to build a better society and improve the environment around us. Yes, and actually, our sustainability is the backbone of our company. Here are several of our company's awards from last year and also a photo of our team from the company's 15th anniversary celebration last year. So at the moment, MADARA team has reached 200 employees. And I'm really grateful to our wonderful team for their work and achievements. We have a really, really great team. Yes, we have reached the end of the presentation. Please follow the news on our Investor page, and take also a look at our ESG report on our sustainability activities. Here in this slide, you see the links. Yes, and this was, in short, about the 12 months results. I hope it was interesting for you. And yes, thank you for your attention. And now we can go to the answers-and-questions session. Thank you.

Thank you. Exciting times ahead. Let's start with the Q&A session. [Operator Instructions] The first question is about the Selfnamed and in specific about the marketing plan. How do you plan to approach the potential customers?

Yes. A separate team has been set up for Selfnamed, including a marketing team with the people with technological start-up development experience. A number of marketing activities are planned for the first half of this year to promote Selfnamed. And as I mentioned earlier in the presentation, the company has received more than 1,000 requests for the production of small batches last year alone. So we already have a quite large database of potential customers to start working with. And this is also the approach now in this very beginning. And yes, what I can say the response is very good. And already in the first weeks, there are new customers, there are orders and there is production for selfnamed.com. Of course, it will take some time to make the volumes kind of, yes, bigger and so that they reach kind of also significant size. But I can say that this, if you can say, so this first traction and this first response from customers is positive.

In regards to Russia-Ukraine situation, what risk measures has MADARA Cosmetics implemented to protect its business and the potential expansion of the conflicts over these borders?

Thank you. First of all, I would like to note that the war in Ukraine has no direct impact on the company's operations. We have no suppliers in Ukraine and Russia or Belarus. Our sales to Russia and Ukraine are insignificant. They do not account even for 1% of the company's total sales. So indirect impact, the especially long-term impact, it is difficult to predict at the moment. What we have seen since the beginning of the war is that our supply and sales channels continue to function normally and that our main partners are optimistic about the future. So we see that countries that have the Soviet Union experience are more stressed than afraid from the current situation. However, we see that the Western European countries, people are still -- although they very much support the Ukraine, we see that they are actually quite calm. And yes, so in terms of business, they are not suspending anything. And at the moment, we are working according to the previous confirmed plans. Of course, the indirect impact in the longer term is likely to be related to the general economic trends. So far, we have seen that the cosmetics industry continues to operate relatively steadily even during economic crisis. And of course, we also hope that the war will not spread beyond the borders of Ukraine and that the situation in Latvia will remain safe. Eva?

Thank you. We do have a similar follow-up question in regards to the imposed both-sided sanctions. Do they have any impact on MADARA Cosmetics?

So far, we haven't recognized any impact on our business, I mean, direct impact.

Thank you. How do you evaluate the competition in Asia? Is the competition higher in Western countries or Asia?

Yes. Thank you. Yes, it is always very difficult to talk about competition in cosmetics industry since it's very high, and the competition is huge in both Europe and Asia. So far, we have more experience in the European markets. And I personally believe that it is more stable to work in the European markets where the business environment is more predictable. There are a number of challenges in Asian markets. Firstly, many countries have quite complex product registration procedures for foreign products, which can also be seen as a policy to protect the domestic producers. And secondly, the business environment is less predictable and often subject to significant regulatory changes. And yes, we work in Asian markets, and we will continue to do so. And we'll work to try to find ways how we can strengthen our position in major markets. However, in near future, our main focus will remain in European markets. Eva?

Thank you. Big corporations are well known for their practices to take over growing, developed, private European companies and either close or merge them, thus basically terminating their business. What is the risk that same could potentially happen with MADARA Cosmetics? Will you be keeping your unique identity? Or are you open to the highest bidder?

Thank you for the question. Yes. Actually, we have not considered any takeover proposal so far. And it is likely that we will continue to reject proposals as long as we have energy and plans to develop the company further. And yes, I can say that we still have both the energy and the plans for further development. Of course, I'm talking more about my personal position here, and I cannot represent the view of all our shareholders. But I think at least the founders of the company have similar thoughts than me. And yes, at the moment, there are plans which we would like to implement and to continue this MADARA unique way.

All right. Thank you. We promised participants to look into the a future bit, so here comes the question. How do you see MADARA Cosmetics in year 2032?

Yes. It's quite it's quite far away in 2032. I would like to see us move significantly closer to the big European natural cosmetic brands in terms of business size. At the same time, I would like us to continue to maintain our position as one of the most innovative and sustainable natural cosmetics brands in Europe. Eva?

Thank you. Returning back to the Ukraine and Russia topic, has any of your main competitors been impacted by the ongoing conflict? Do you have insights in that?

So far, I haven't seen that our direct competitors would be impacted. I know that several Russian brands has been delisted from certain sales channels in Latvia. I actually don't know what exactly is the situation in other European markets. But I could imagine that this kind of strict reaction is -- might be only in Baltics and probably in Poland. I don't I would not expect that this has been done also in the Western Europe. But as I say, so I don't have exact information. And there is -- there are no direct competitor from Russia. So it's most likely that there won't be any significant impact.

Thank you. Next question is about the energy and commodity prices, which now are reaching the new highs. The comment is that in year 2021, the direct e-commerce sales were slightly better than in 2020, and direct distribution took place in more markets, but the margins have reduced considerably. Therefore, the question is, in your opinion, how much this impacts your margins and also whether you are able to incorporate the energy price increase in your pricing policy?

Okay. I think this question has 2 parts. The first part is about increasing energy prices. And here, I can tell you that we are in a quite comfortable position since our production process is not energy-intensive. So I believe that even these increased energy prices will have no significant impact on our operations. Also our building office and production building has good energy efficiency. So yes, so I believe that the energy costs, they will grow. And of course, they will have some impact, but we will -- we won't see any significant changes in total. Yes, then the second part of the question was about decreasing profit margins. And yes, the reasons are that we have seen increased competition, especially in the e-commerce environment in the second half of last year. So it required some more resources for e-commerce marketing. And also, we have developed our organization, including setting up the organization for Selfnamed. So I hope I answered your question.

Thank you. The next question talks about the sales drivers. So the sales growth has slowed down compared to 2020. What will be the sales drivers particularly in 2022 and 2023 to maintain the growth to achieve the 2023 target?

Yes. So yes, I would say these might be 3 or 4 elements or drivers. The first are direct e-commerce channel. So we still see that we can grow our direct e-commerce. Then secondly, third-party online shops in Europe. As I mentioned, we have already established cooperation with more than 10 leading online shops. And here, the list of third-party online shops will -- they'll grow. And this year, we will start cooperation with several other third-party online shops. Then in the markets where we do the distribution ourselves, our target is to open new physical sales doors. I think in this setup where we work as distributors, so we are quite efficient. And yes, so we see that in all of the main markets, there is a potential to open new doors. And of course, the fourth element could be also to open new markets, which would mean that -- more new channels, which would mean that this will be mainly markets outside Europe, as I told you. Yes, so usually, these markets outside Europe, they take quite a lot of time to set up all the necessary requirements to do the product registration and to start working. So usually, it takes, yes, more than 1 year to -- just to set up a new market outside Europe. Yes, so these are the 4 elements or drivers which I see that could drive our sales growth in the next years.

Thank you for sharing the insight, Uldis. Next question is about the Selfnamed project. Are print on-demand margin is very similar or perhaps higher or lower compared to MADARA brand products that are sold through direct e-commerce.

Yes. I think on the gross profit margin level, they are pretty similar. Of course, the business model is somewhat different from our MADARA distribution and from other e-commerce. But yes, on the -- it's pretty the same, I would say.

Thank you. All further direct distribution is to be taken, will it be expanded as far as possible? And which are the next markets in mind?

Yes. At the moment, we have direct distribution in Germany, France, the Netherlands, Belgium, the United Kingdom, and since January, also in Sweden and Denmark. And then there are several other markets on the short list. But at the moment for this year, I'm not sure if we will take over any other market. I think now our main target would be to grow the existing markets. So these are already quite a lot of markets, several of them quite new. So yes, we need now to focus on growing these markets. Yes.

It was mentioned that last year, significant technical improvements were made to the website and online store. Could you expand on that? Is there anything else that should be upgraded on the website?

Yes. Since we see that, at the moment, already more than 50% of users are from mobile devices, we have improved usability of mobile devices on our web shop significantly. And yes, so we see that actually, after these improvements, also the orders that came from mobile devices have increased quite significantly. Regarding the further improvements, the next important step would be to improve the automation of the web shop, which is related to the personalization. I mean we began work personalized with each customer, prepare personalized offers based on the customer profile. Eva?

Thank you. You already mentioned several newly launched products that you are proud of. And the question is about the same. So how many new product releases are planned for this year and in which category?

Yes. So I will say that this is still a secret. But I can say that there will be a spring launch and then autumn launch. And yes, both launches will have several new products.

All right. Exciting. It was described that MADARA skincare products regularly receive recognition in international competitions. Is there an immediate and considerable demand increase in MADARA products after such recognitions?

Yes. Usually, there's no significant increase. Even if there is a significant increase, then it's usually for short term. But it's -- I think these awards, the positive impact is in the long term and -- long term for brand awareness and recognition. Yes, so there is, I would say, that there is -- usually, there is no direct significant impact on the sales.

All right. Thank you. How the automatization of production is visioned in long term?

Yes. We are gradually improving our production processes. In the same time, we need to be -- keep the flexibility of our production to be able to produce different batch sizes and different kind of products on the same production lines. So most probably, our production process in near future won't be fully automated. But yes, we are -- every year, we are improving some processes. Also last year, we launched first robotic hands in our production for packing the products. And yes, there might be added some more our robotic hands in the future to automate some manual processes. I mean I think we are in -- from the automation level, we are in quite a good position considering the size of the company and the product portfolio. And then I think we have already quite automated process, at least, comparing to other similar production, what I have seen. Eva?

Thank you. Now we can turn to the questions that we have received during the webinar online. And the first one is about the competitive environment in second half of the year. You mentioned in the presentation the increased competition in second half. Who particularly is pressuring the market? And did you have to reduce product margins due to that?

Yes. I think we need to take a look back when COVID started. And it was kind of a huge turning point for e-commerce channel. And in the -- already in the second part of 2020, quite many new e-commerce shops and channels were launched. And now in 2021, we see that when the -- we saw that when the COVID situation is stabilizing, the e-commerce market is not -- it's of course still growing, but it's not growing the same speed as it was in the first wave of COVID. And now in the market are much more e-commerce players that are competing with each other. And this means that we need to have some more resources to make the e-commerce marketing. So this is also one of the reasons why we are now more actively starting to work with third-party online shops, with big ones, so that we can maintain the e-commerce position. I don't say that I really believe that we will be able to grow also our direct e-commerce share, but it might be connected with somewhat higher e-commerce marketing expense than there were in 2020.

Thank you. Percentage of e-commerce sales up to Q3 was 43%. But now for the full year, it's 36%. There seem to be a slowdown in e-commerce sales in Q4. Is that correct? And if so, please explain the reason and outlook. Uldis, it seems you have -- you already at least partly answered the question. But is there anything you would like to add?

Yes, you're right. Yes, therefore the last -- the fourth quarter was quite difficult for e-commerce. But I think we have learned from this and made, yes, some -- there is, yes, solutions for that. And I think this year, with this improved planning, we will be in a better position. Eva?

Thank you. Gross profit margin and operating profit margins were lower in second half of the year. Is this because of increase in contract manufacturing? Please explain the margin outlook for the EUR 27 million sales target.

Contract manufacturing has somewhat lower margins. However, we don't have any sales or little sales costs for contract manufacturing. Regarding the margins for 2023 then, at the moment, we are not providing the guidance for profit margins. But yes, so I -- at the moment, so our aim is to keep similar -- to reach the result, keeping similar profit margins.

Thank you. As an addition to what we discussed right now is the next question. When you announced the EUR 27 million sales target, was the contract manufacturing already included? If not, should we think about the new targets as EUR 27 million from existing business, which includes MADARA, MOSSA, plus upside from the new contract manufacturing? In this case, what kind of sales do you expect from the contract manufacturing?

Yes. The contract manufacturing part was included, but the Selfnamed part was not included. So -- and at the moment, yes -- since as I mentioned, we have -- we're working in the contract manufacturing segments for quite many years. And these are usually middle-sized European companies that ordered more than 5,000 pieces per item. And this part was included in the EUR 27 million target. But the Selfnamed business is not included. And I think we first need to -- yes, we need some more time to see the reaction from the market, to see the sales number. At the moment time, I'm not ready to set a new target because of the Selfnamed. I hope that this will make a good addition to our business and that we will be able to set a new target. But I can't do this at the moment. So we might come with this information and review the targets later this year if Selfnamed develops according to our expectations. Eva?

Thank you. 200 employees means sales per employee of EUR 100,000. This seems low compared to other companies. How do you think about this? In the long run, where do you want to bring the sales per employee figure?

Yes. We need to take into account that our company is a vertically integrated company from product R&D to production, to making all the marketing and visual and branding materials. So all these processes are within the company. So this probably makes to look that sales per employee is lower comparing to other cosmetic companies. But I also know that we are really one of the few companies that have the vertically integrated processes. So I believe this is actually -- to be vertically integrated company, this is advantage and this is also one of our strengths and uniquenesses, so that this allows us to be -- to produce unique products and to be a unique brand. Eva?

Thank you. How big are capital expenditures are planned for next year? How much from that would be for growth and how much from maintenance of existing equipment?

So I think it's -- the question is what investments are for 2023, right, or for this year?

For next year.

It means 2023.

It means 2023, I guess.

Okay.

But maybe you can provide insight and -- yes. No, no, the investor confirms that it's 2022. So it's this year wholly.

Okay. Good. Yes. For this year, we are planning several long-term investments. Altogether, this will be between EUR 1 million and EUR 2 million, which was actually similar to the investment level which we had also in previous years. There will be investments in improving the production process, adding new equipment. There will be investments into developing our e-commerce, our own e-commerce platform. There will be investments into brand, I mean, the promoting of the brand. There will be investments into further development of Selfnamed, yes, and some other smaller investments. Overall, we -- yes, this is quite -- we see this as quite active year with, yes, several investments that could allow us to grow further. Eva?

Could you please specify what would be the margins in Selfnamed?

I'm actually not ready since it was launched a few weeks ago. At the moment, I'm still not ready to talk about the margins. The margins will depend very much on the volumes we will be able to generate. And at the moment, we are in the very beginning. But I could promise that we might come with some more detailed information in the second part of this year when we already have some more customers and the processes has reached some -- already some volumes. Eva?

Yes. On the topic, do you have fleet capacity for Selfnamed production?

Yes, we do. There is still free production capacities. And as I mentioned, we are also planning some investments, adding some new equipments for our production. So yes -- the answer is yes, we have the capacities.

All right. The next valuable comment from one of our participants is the following. As a cosmetics company, I think the most important task is to build a strong brand. In this view, I do not understand why contract manufacturing is important. Isn't it better to focus on building the MADARA brands? Please help us understand why contract manufacturing in long run results in higher competitive advantage?

Yes, it's a good question. So when we started contract manufacturing business, the idea was that the contract manufacturing part is balancing our production capacities. And I think contract manufacturing has this positive impact on balancing the -- in using the production capacities. From other perspective, very often, this contract manufacturing part increases our competence. And we are developing new formulations. We see some other perspectives from the contract manufacturing customer position. Yes. I mean one of our strengths or elements is that we do the production ourselves and we are also a production company. And I think it does not harm our own brands. And it does not take a significant -- it does not take a very significant attention to our own brands. I see this as an interesting addition to our business, which very often gives us also some new insights and ideas.

All right. Very good. Have you've seen higher customer acquisition costs recently?

Do I understand correctly, it's about e-commerce customer acquisition or?

My guess would be so, yes. Yes.

Okay. Yes, it's -- I think it's the same what I mentioned before, that we see that the competition is increasing. And it relates also to new customer acquisition, yes, for sure.

Thank you, Uldis. Let's finish with the last question. Do you plan to share profits to investors as a dividend payment?

This is -- of course, this is the responsibility of a shareholder meeting. As we know then, our practice is to pay dividends. And I think we have paid dividends for every year since already, I don't know, 5, 7 years. And yes, from my perspective, as I see it at the moment, and last year was a positive profitable year. And most probably, there will be a proposal from the management to pay dividends also this year.

Thank you. All the questions have been answered. I would remind you that the recording of the webinar will soon be available online. So please follow MADARA Cosmetics announcements to stay up to date with the company's news. Thank you for your time. Participants, thank you for your very active engagement today.

Yes. Thank you very much for your attention and for so many, many questions. I really appreciate this. And I think this is the most interesting part of the webinar.

True. True. Have a nice afternoon, everybody.

Thank you. Bye.