AS MADARA Cosmetics (MDARA) Earnings Call Transcript & Summary

Dear participants, 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. I'm also excited to welcome Tatjana Nagle, Management Board member and CFO of the company. During the webinar, you will be introduced with MADARA Cosmetics key activities and most recent financial results. After the presentation, we will have a live Q&A session. We have already received several questions from the investors. [Operator Instructions] Now, without further ado, let me hand over to Uldis and Tatjana.

Thank you, Ieva. Good afternoon, dear participants. We are very glad to welcome you to the MADARA Cosmetics webinar on the results of the first half of this year. Today, Tatjana Nagle and Member of Management Board, and I will present to you together the management report on the unaudited financial statements of the first 6 months this year. As well, we will briefly introduce the important events of first half. As usually you are very welcome to send in your questions. Thanks to those who have done so and we will answer them in the second part of the webinar. As usually, before we start, I would like to briefly remind you of the most important elements of the company. MADARA cosmetics is 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. In February this year, we have launched selfnamed.com, which is an innovative self-service system, providing the production of private label products without minimum order quantities and we will, we will talk more detail about selfnamed.com later in later in our presentation. Innovation is an important element of our business. Important part of our business is e-commerce and the company has been listed on NASDAQ Riga First North since November 2017, offers shareholders benefits program, is retail investors friendly and prepares ESG reports. It was short about the company and now we will continue with the 6 month results. The beginning of the year has been quite eventful for our company. The global -- political and economic shocks, both directly and indirectly impacted the operations of our company and demanded adoption. The adoption process, however, showed that the company has very good diversified sales channels, and that changes in particular channels, we can cover with the growth in other channels. The competition in the e-commerce segment has become stronger, while physical sales channels are performing very well and yes, show very good results after the after the challenges caused by pandemics. We have to admit that, in the first half of this year, we unfortunately have not achieved the set goals. We are actively adapting to the new situation and have initiated series of activities to return to faster growth in next periods. And yes, so the potential is still -- we believe the potential -- that there is a big potential for further growth and yes, we will devote our efforts to make that potential in results. Now I hand over the stage to Tatjana, and Tatjana will talk -- introduce you the numbers.

Thank you, Uldis, and good afternoon, dear shareholders. So as Uldis has already mentioned, the first half of the year has been quite challenging. Nevertheless, we have achieved EUR 10.2 million in net turnover, which is a 3% growth compared to the same period last year. However, the EBITDA was EUR 1.78 million, which is a 34% decline and also profit before tax was EUR 1.27 million, which is a 46% decline. Regarding the margins, what you can see is that our gross margin was 65%, which is a 3 percentage point decline compared to the same period last year. And one of the main reasons for that is, our e-commerce share decline. As you know, e-commerce is an important part of our business. So with a decline of e-commerce share, we naturally end up with the lower average price, which at the end of the day affects the gross profit margin. And another factor was of course this general inflation, raw materials, transportation, also energy prices affected our business to some extent. Next is the operating margin. So it was 12% in the first half of this year and it is also a 12 percentage points decline in comparison to the same period last year. So key reasons, as I think you're very interested in them. So as I already mentioned, one is the decline in gross margin, 3 percentage points. Then this year, we invested quite heavily, I would say, in brand recognition. These were additional 2% of our net turnover, also SELFNAMED, which Uldis will elaborate on a bit later, operated with loss. So this loss was 1.75% of our consolidated turnover. Also depreciation was higher by 1.9%. And of course, there were higher e-commerce advertising costs. Also, we made some investments related to this direct distribution takeover in some of our strategic countries. So actually, there are quite a lot of different factors what influenced the results. And also we can go to the next slide. So I already mentioned the key figures. So regarding the turnover, so with all the information that we currently know and predict, we have adjusted our net revenue target for the next year. So we have reduced it from EUR 27 million to EUR 22 million. And we expect that the previously set goal of EUR 27 million would be achievable in 2024. Yes, we can go to the next slide.

Thank you, Tatjana. Now let's look at sales breakdowns. Here, we see the geographical sales breakdown. There are no significant changes compared to last year. The share of the European Union markets and Latvia increased by 1 percentage points. And the share of outside the EU decreased by 2 percentage points, which was largely affected by the COVID situation in Asia and related restrictions. 2/3 of our turnover is in the European Union where Finland is still the largest market with an impressive 52% growth in the first half of this year, which is related to recovery of physical sales channels as well as entry of new sales channels. France and Germany are the next largest export markets. In France, in the first half, we see very healthy double-digit growth. In Germany, however, the results are more modest. We have a few percent decrease compared to the last year. Looking at sales by category, we see some changes in proportions. The share of MOSSA has increased by 4 percentage points and accounts for 14% of the total turnover and this is a historical record. The share of contract manufacturing has increased by 3 percentage points, while the share of MADARA has decreased by 7 percentage points, but still by far the strongest business element of the company, making 81% of total turnover. So there is not much to say about the distribution of MADARA brand by product groups. The distribution looks pretty the same as before. We see that the proportion of make-up continues to grow. And in the first half of the year makes up 15% of total turnover of the MADARA brand. Tatjana, will you...

Yes. Regarding the direct e-commerce, so it is an important part of our business, our e-shops madaracosmetics.com. So what we see is that the share of direct e-commerce has declined by 7 percentage points. And in the first half of the year, it stood at 33%, which is still a very good result given the fact that also other sales channels are developing. And the reasons for the slower growth of MADARA e-commerce is, first of all, increased competition in this segment. So we saw an astonishing growth of e-commerce business during the pandemic in 2020. And now, overall, the growth has become more moderate. There are more and more competitors. So it means that we are competing both for the client and also for different marketing tools. And the second factor is physical retail. So given the fact that pandemic-related restrictions in some countries are lifted, some customers choose to get the experience of physical retail stores. So they decide to purchase the products in physical store instead of e-commerce, which is just the fact that we should adapt to. And I think that we are doing quite good.

Thank you, Tatjana. As usual, in the next slide, we will look at the most important events of first half. Continuing to implement the strategy of getting closer to end customers, we have taken over the Danish and Swedish markets in the beginning of this year. So far, we have built up a good customer base in those markets as well as we have strengthened our team with the competent colleagues who work in those markets. So also, the pipeline looks very good. So we expect that these markets will have nice growth also in the second half. In the first half of this year, we have put a lot of effort into attracting new customers, both physical and online customers, and the efforts have resulted in a number of new customers. One of the big successes is the launch of MADARA products in Galeries Lafayette and Haussmann, which is one of the most visible and prestigious department stores in France. Now let's go some of the more detailed into SELFNAMED business. And the SELFNAMED -- self-service platform, selfnamed.com was launched in February this year and is offering customers unique opportunity to create their own brands and produce private label products without any minimum order quantities. We have invested in SELFNAMED EUR 350,000 so far. Here we see the P&L statement of selfnamed.com for the first half, actually for first months of operations since selfnamed.com was launched in February. Then we see that we were able to generate EUR 35,000 turnover. And in the bottom line, we see losses of EUR 142,000. We see that the cost of goods sold are bigger than the turnover, and this is largely impacted by the rental cost of the premises of selfnamed.com. Selfnamed.com has their own premises, office, production and warehouse. And yes, this is -- this makes the gross profit margin negative. Of course, the -- we talk about -- if you talk about turnover then we talk about actually small number, but we see very healthy dynamics. And actually, I'm very happy about that. For example, turnover in July was as high as turnover in May and June together, which is influenced by more repeated purchases. Also, we see that new customers are attracted every month, which gives hope for larger repeated orders in the coming months. Here we see the growth of registered users, which is one of the most important indicators which give signals about potential growth trends. We see that the registered user trend is very, very healthy and growing actually very fast.

Now back to MADARA brand. So in the first half of 2022, we launched 11 new products. So we worked on already beloved and strong product categories, such as CC cream. We added 2 shades to that line. Also, we added 3 shades to our concealer. Also, our Time Miracle line, which is based on birch water, got a new upgraded eye cream in new packaging and with a new formula. Also, the body care line was updated. So we added a new aluminum-free deodorant. Also, we added AHA body peel and body lotion. And in make-up, we added 2 new [ vegan ] red lipsticks. And also, in the first half of this year, we worked on new products that will be launched this autumn. So new products are coming from us, nothing has stopped. And we can go to the next slide regarding sustainability. So here is a quick snippet from our ESG report for 2021. So you can also read in detail. But some of the key facts are that the company was ranked the second greenest brand in Latvia. Also regarding the product packaging that we launched in 2021, so more than half of these products contained post-consumer recycled plastics. And also, last year, we donated around EUR 71,000 to different public benefit organizations, such as MARTA Centre, SOS Children Villages and also oncological patient support organization, Pink Train and some others. And also in this year, we have already limited over EUR 60,000 for different good goals.

Thank you, Tatjana. This was in short about the 6 months results. I hope you found it interesting. In the appendix of the webinar presentation, which will be published later on the NASDAQ system, you will find full information on the financial statements. Thank you for your attention. And now we will answer your questions. Ieva?

So we're happy to take all your questions through the Q&A box that you see beneath the presentation. Let's start with the first one. Sales in the second quarter dropped by 0.5% compared to second quarter last year. What were the main reasons for the decrease?

As we mentioned then, several of our sales channels performed weaker than last year, which was compensated by the growth in other channels. And yes, basically, we see that at the moment, the e-commerce segment is -- has really high competition. And some e-commerce is one of the reasons why there is this 0.5% decrease in the second quarter.

Why are the administrative costs up by 24%? How much of it comes from permitted rent cut decrease?

So basically, we are talking about EUR 174,000, from which around EUR 75,000 is related to remuneration and corresponding social security contributions. And these are mainly new employees with new competence that we hired expecting stronger business development. And of course, it is also, to some extent, the salary increase of existing personnel, but mainly these are really some new positions. Also, another EUR 44,000 increase was related to our employee integration program. So it is not only administration, we are speaking about the whole team. So this is employee health insurance, also catering costs, different sustainability costs such as team building events, also some trainings and educational activities. I think all of you would agree that employees are one of the key pillars of a strong company. And also another EUR 60,000 were the costs related to additional office spaces. So this year, we added 2 additional office spaces. One of them is for the SELFNAMED team and another one is for MADARA. And from these 2 premises, SELFNAMED is the biggest part. And of course, both places needed some furniture. And also there is a lot of daily office-related costs. And also another thing that is important to mention that regarding our main building on Zeltinu Street, the rent was not increased. So it is at the same level as it was in the previous year.

What are the main reasons behind decline in operating margin? Do you believe this is a long-term sustainable level or do you have plans to increase it?

So I feel that I answered already to the first part regarding the reasons for the decline. And regarding the second question about the long-term perspective, so in our opinion, 10% for the operating margin would be [indiscernible] which should be achieved. And 10% is considered to be a normal level for good business development. Then 10% would be like the optimal level, although the company historically has outperformed over 15% and 20%. So let's see how it goes. I would not like to give concrete numbers, but as for you and as for us, of course, we try to do our best to achieve good margins, but also some plans, there are some really good opportunities, which involve costs and which benefits the company in the long-term. However, in short term, we could see some lower margins.

What is behind the EUR 1.3 million other interest payments in first half of this year?

I checked the stock. So basically, I think that an investor overlooked the data. So it was actually EUR 1,300. You can check at the Page 26 of the report. So it's not EUR 1.3 million.

Could you elaborate on Asian sales? How big is the waste? And what are the trends?

The Asian sales in first half of this year were, let's say, quite struggling because of the COVID situation and related restrictions. As you could see then our business outside the European Union amounts to 5% of total business. So Asia is part of this 5%. And we are waiting when the markets will open from this COVID restrictions. And then we are planning to work more actively in Asian markets. But at the moment, it's really difficult to predict when we will be able to start, implement our plans, but still the markets are struggling at the moment.

Talking about the other markets, which market do you see as the best in second half of the year?

Yes, it's of course, interesting question. So it's -- we think that our focus markets will continue to work successfully or at least stable. As I mentioned then, we predict growth in Sweden and Denmark, but because these markets are still relatively smaller in the total turnover then from the bigger markets, we expect that France will might have continued to grow similarly as in the first half. Yes, it's really -- at the moment, it's really difficult to make these predictions since we don't know how this autumn/winter season will look from this energetic perspective. And I believe if there won't be really kind of big issues than our strongest markets will -- our focus markets in the European Union, they will work at least -- they will be at least stable. Even if we do not achieve big growth, then they will work stable. But of course, we devote our efforts to achieve growth.

Investors are wondering what are the most important topics and trends now in Eco Cosmetics segment?

It is expected that the trend of natural and organic cosmetics is continuing to grow. And millennials are leading this trend since they are now starting -- entering the job market and they have kind of natural interest towards eco-friendly lifestyle and products. So millennials will drive the growth of natural and organic cosmetics in the next 5 years. What we see in the global researches, it is predicted that the global natural and organic cosmetics market in next 5 years will grow by 5% -- by 10% every year, year-by-year. We see also the trend that customers are more likely to choose those brands who are social and environment responsible. And I think here we are in quite a good position. And everyone can take a look in our ESG report and see and follow the activities we are doing. And yes, the customers in general, they are becoming more educated than clever. They choose natural and organic products that are really natural and organic. So they understand the difference. And they also choose products that really work. And so in this -- for this trend, we are in a very good position since our products are dermatologically tested and have a very good performance.

So when do you plan to reach breakeven in print-on-demand segment?

If the current growth trend continues, then we expect that the breakeven point could be reached in next 6 months. However, to prepare for the next stage, we might need to make some investments and also develop our organization. So if we talk about the current cost level, then the breakeven point might be reached in the -- if not until end of this year than in 6 months period if the growth trend continues as we see it now?

Investors are wondering whether they should be concerned about the low share price recently. Can you comment on that?

Yes. The management of the company has now direct influence on share price. And I think that the changes in the share price we see in recent times are more related to the sentiment of investors. And general appetite, I believe -- as I told, I believe the company has still very good growth potential. And we as company management will do our best. We will do our efforts, devote our efforts to turn this potential in good results.

Is management considering the view of [ SMB ] strategy, reducing geography, while increasing advertising and branding in key markets?

So our focus is still to work in European Union markets. And the main attention is on those markets where we work directly. And these markets are currently Germany, France, the Netherlands, U.K. and now also Sweden and Denmark. So these are the focused markets where we invest most and most of financial resources as well as our attention. I think it's currently it's -- the number of the focus markets is not too big. And also from the risk diversification perspective, so we need more than one market since we see that global political or economical changes can influence quite heavily one or another market. So we need definitely several focus markets. And I think currently, we are also not planning to expand the number of our focus markets. So yes, these are our markets where our resources and attention is spent mostly.

Why turnover expectations have been lowered? And how do you plan to solve it? This is something that you've covered already during the presentation, but maybe there's something you would like to add?

Tatjana, would you like to add something?

I have nothing to add at this point.

So now we're continuing with the questions submitted during the webinar. What is the sales profit target for this year? And for 2023 and 2024, you mentioned EUR 22 million and EUR 27 million sales target. So the question is about the sales profit target for this year?

So we will not give this guidance for this year and both not for the turnover and profitability level. The target for next year is EUR 22 million and for '24, EUR 27 million. So what is the -- if you talk about the expected mix by sales channels, then we currently expect that from the second quarter of next year, the e-commerce segment will start to grow. And it still will -- still be a very important part of our business. But let's see at what stage it will recover next year, but this is one of the -- one of our expectation that starting from second quarter, the e-commerce will start to grow.

And is there anything that you would like to add on the expected profitability level?

I think Tatjana already talked about profitability levels. So as Tatjana told then, 50% profitability level is something we see that is optimal to continue to grow. And see, if the competition and the market environment will allow us, of course, we will try to go above 15%, but this is something we -- that is rather difficult to predict at the moment.

So as for the factors affecting this is, as you said, the competition in the market situation.

Right, right.

Please explain more about competitive situation in e-commerce. Are there any specific companies or regions? Are there new manufacturers or only resellers?

I mean the online shops and the number of online shops and companies that operate and sell cosmetic products online has really significantly increased compared to the pre-COVID situation. And now then this year, the e-commerce is growing -- the growth of e-commerce segment is lower than it was in last 2 years. There is much more companies operating e-commerce, much more players in e-commerce. And this increased the competition as well as the marketing cost for e-commerce. And much more players are playing in the e-commerce market, which is at the moment not growing that fast as it was before, and this creates this strong competition. I wouldn't say that there is specific companies or regions, this is -- we see this overall. But in general, the competition has increased. But as I told, we believe that starting from second quarter next year, this will somehow level out and we will be able to achieve growth in e-commerce.

An interesting question about MOSSA versus MADARA. Why is MOSSA sales strong while MADARA struggles? Do you expect this trend to continue? And long-term, how do you think about the ideal sales balance between MOSSA and MADARA?

So definitely, the MADARA brand is our strongest business element and it will remain so long-term, the strongest. I think MOSSA proportion in our business in the nearest periods won't change significantly to the proportion we saw in first half of this year.

Then one of the participants would like to elaborate on the e-commerce. I understand the industry-wide struggle. Given this situation, how has MADARA competitive position changed? I imply with sales decline as long as MADARA is gaining competitive position in the long run, but how do you measure this? And then there is an additional question. Given the increased competition in e-commerce, are you seeing companies leave the e-commerce space or are there still new entrants?

Yes, it's -- I think how to give grounded answer on this. The competitive position, I really don't think that our competitive position has become weaker as such. We're still very actively investing in marketing. I think our web shop is in a very good technical position, offering the most modern e-commerce tools. I really don't believe that our competitive position has decreased. It's just -- it's the current market situation in e-commerce that is quite tough. Answering the second part of the second question. So at the moment, we do not see companies leaving the e-commerce space, but we think that the companies -- many e-commerce companies will reduce their investments into marketing. Currently, many of them who are launched recently, they still have a lot of money from investors and they are just burning the money. When the money is gone, then they will be forced to reduce the investments into marketing. And there will be -- of course, there will be also -- still there will be new entrants because I believe that e-commerce will continue to grow. Currently, the issue is that there is a really high growth in 2 last years. And now this year, when the physical sales channels opened and recovered from the pandemic, the growth is much lower, but there is still growth in e-commerce. It's much lower than it was in the last 2 years and this is creating the current situation. But I really believe that this will level out in next 6 months. There will be more.

Could you please share overall insights of how sales have been performing in the third quarter so far compared to first and second?

I won't give you any precise information since we are still in August. We see that it's good. The -- currently it continues the trend we see -- we saw in the first 6 months. However, I need to admit that July and beginning of August is in our industry the seasonal weakest period. And the main months in third quarter is September which mainly impacts the -- which largely impacts the results of the third quarter. So it's actually too early to say anything about the third quarter.

All right. Then let's talk about the activities that you're planning to do to accelerate growth. Could you talk about cost-cutting efforts to meet the weaker top-line growth? And perhaps some other action points that you're planning to take?

So there are -- we are reviewing, of course, also our costs and adapting to the current situation and allocating the resources towards the activities that can bring good results. So it means there is some changes in cost part, but it's -- currently, it's not something we could call like really drastic cost cutting. We still believe that we are implementing our activities, we can return to a good growth. And at the moment, this is our priority to understand how we can ease the current situation and invest and be able to come back to higher growth.

Are you able to disclose for the contract manufacturing customers? How much customer concentration do you have?

You mean, if I understand correctly, by customer concentration is -- you mean the number of customers or the geographies. So there are several new customers for our contract manufacturing segment, and biggest part of them are from European Union. So similarly, as for our total business, so also our contract manufacturing customers are mainly from European Union and there are new customers this year.

What is behind the lower sales in Germany? I assume that your market share in Germany is still very low, isn't it?

Yes, it's still quite low. What is the reason behind lower sales? I would say, this is a general market situation. And consumers, customers, they are more cautious about the economic situation and somewhat reducing their expenditures for cosmetics. So I would say, this is the general sentiment of the market currently.

And currently, the last question that we have received, are you able to raise prices?

Theoretically, yes. What we did is, at this moment, when we see that actually the purchasing power in European -- in most of European Union countries are probably decreasing, I'm not sure. So we will not rise the prices this year. This probably will also give us some competitive advantage to our competitors who have raised the prices already. In our opinion, at the moment, it's -- we will benefit more from not rising the prices. So hoping to gain some competitive advantage compared to our competitors.

Uldis, Tatjana, we're through with the questions. Thank you for your active engagement participants. We had a lot of interest today. I would remind you that the recording of the webinar will still be available online. Therefore, please follow MADARA Cosmetics announcements day after today. Thank you all for joining today.

Thank you. Thank you for attending.

Thank you.