AS MADARA Cosmetics (MDARA) Earnings Call Transcript & Summary

[Audio Gap] Appointed member of the Management Board and the CEO, Gunta Sulte, accompanied by the member of the Management Board and CFO, Tatjana Nagle. 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] Let me now hand over to the management of the company.

So hello, everybody. Thank you for introduction, Ieva. As mentioned, my name is Gunta Sulte, and I'm 3 months now privileged to be CEO and also a member of the Management Board for MADARA Cosmetics. So welcome, everybody. I hope sun is shining same in Riga as everywhere else. So with me today is Tatjana, and we will guide you a few semester 1 results. So I hope it's going to be insightful and delightful for you to hear. Let me -- just a moment. So agenda is quite brief. So together with Tatjana, we will guide you through the highlights of semester 1, key financial results and then also some other key events that we would like to highlight that happened from January to June. Just a brief intro from my side because I am the new face on the screen. You're used to seeing [ Nagle ] before. So it's been 3 months around since I joined MADARA team, and I can with all honesty say that, it's been nothing but just a fulfilling really experience to experience the growth of such a beautiful brand. And I can truly emphasize that -- what I said 3 months ago that I'm standing behind is that I do see potential behind the brand, the product. And with the hereness and the agility of the team, I'm very confident we will achieve that. So that's it, a brief intro from my side, and let's kick it off. So if you talk really about the 3 things, I would like to emphasize and take away from the semester 1 of this year. Like I said, I joined really the last month of semester, but I already experienced the volatility and the dynamics of the business. And I really must emphasize, when we speak about growth, yes, we do almost 1% growth, but it's a growth coming from double-sided emotions. And then on one hand side, I can really emphasize and be joyful about the fact that we really grew above -- significantly above market average in our focus markets, which is France, Germany, but then in other markets, for example, Czech Republic, Estonia. But on the other hand, we really experienced a one-off steep decline in one of our biggest export markets, Finland, which Tatjana will touch up on in literally a couple of slides. So yes, it's been quite dynamic here. On the other hand, what I'm very happy about is that we are establishing ourselves as makeup experts, specifically in skin-tinted categories. So these are the products like SPF with the coverage and others. We also see dynamics of these products that they are increasing share within our portfolio. So in semester 1, makeup increased its share within MADARA Cosmetics portfolio by 2 percentage points. And last point to mention of highlights semester 1 is that despite the growth equation, I'm very proud of whole team, really with high agility managed the whole P&L equation. Really with prudence and agile cost management, we still delivered very satisfying operating margin numbers. So just to prove that we are here for sustainable profitable growth model, not only in order to grow the company, but also to deliver predictable results for our investors. So I will give now floor to Tatjana, who will guide you through the key financial indicators of the company.

Thank you, Gunta. Hello, dear shareholders. So let me speak about our key financial results. So in the first half of this year, we operated with revenue of EUR 10.2 million, which is a very small increase of 0.07% (sic) [ 0.7% ], which I will elaborate on briefly. Nevertheless, we operated with growth in operating profit and also pretax profit. Our operating profit was EUR 1.32 million, which is plus 3.5%. And our pretax profit was EUR 1.31 million, which is an increase of 2.85%. And as Gunta already mentioned, our operating margin stood at 13%, which is a 1 percentage point increase in comparison to the same period last year. And now I'd like to look at the key events of the first half of this year, and we will start with our geographical split by countries. So as Gunta already told there are some markets that we are really proud about and some markets we are not that proud. So in France and Germany, which are one of our biggest key strategic markets in Europe, we generated revenue growth of more than 15%. Also, we opened 60 new doors in France, which definitely helped to increase our revenue. On a negative note, Finland, one of our biggest markets, delivered a decline of 40%, which, of course, negatively affected the overall revenue growth of the company. And the revenue decrease in Finland is related to the fact that our distributor adopted a new stock planning system, which led to an unexpected overstocking in the previous year. So as a result, orders were lower this year due to accumulated stock in [ partners warehouse ]. Let's go to the product group. As for the product groups, the first half of this year is definitely associated with acceleration of tinted makeup products. We achieved double-digit growth in this segment and therefore, also makeup group, as such, increased by 2 percentage points in MADARA revenue share. And we also introduced the 7 product sets, which contain our best-selling products in full size and small size. And also, it is important to note that MADARA revenue share increased in the first half of this year, while MOSSA brand experienced a decline because of already explained situation in Finland as such. And now let's talk about e-commerce, which is a very important revenue source for our company. So direct e-commerce revenue in the first half of this year increased by 17% and also the share of direct e-commerce increased by 5 percentage points in our parent company's revenue. If we speak about new customers, then in the first half of this year, we attracted of our total customers, 29% were newly-attracted customers. And the rest, 71% came from already acquired customers, who generated return purchases. Also, it is worth noting that direct e-commerce is very important and profitable business segment for us. And of course, we plan to grow and strengthen our direct e-commerce channel in the next years as well. And now I'm giving the floor back to Gunta.

Thank you, Tatjana. So I will speak about 2 other, which I believe are very important events or platforms for our company that happened over the first semester. So we invested in 4 new machineries with the help from Latvian's investment agency and Norwegian funds. So we acquired mixing -- a machine for bulk production of powder mixing mills, powder press and sachet filling machine. So all of this was acquired and installed and set in motion for semester 2 and onwards. I want to highlight one word that has appeared here on the slide, which I think is very important to stress out. So this is powder -- pressed powders. So that means we are entering -- with these machineries, we are entering a new segment, which is pressed powders. So it's starting from any base color to bronzers, highlighters, you name it, which is quite interesting category or a segment to be in, which [ MADARA ] hasn't played before, obviously, offering a product that is Ecocert, again, where we see much bluer ocean that is with conventional products. So innovation is to come in the following months and really looking forward. And another platform that I want to talk is about our owned white label called selfnamed.com. With pleasure, I announce that we continue to deliver growth within selfnamed.com. Obviously, I have to emphasize that we are quite cautious about the numbers that we are starting from a low base. So any percentages that you're going to see, obviously, will look beyond impressive, but still we delivered beautiful growth of almost 700% in terms of revenues. With that kind of the fact that we acquired new -- 50% of registered users increased. And then another important point that we completed the integrations with WooCommerce and Shopify, which will further amplify the customer experience on the platform. Having said that, so the revenue achieved in the first semester was almost EUR 0.25 million. However, we consciously continue to invest in marketing and ad spending. So overall, selfnamed [indiscernible] numbers when we talk about the profitability also in semester 1. Yes. And that, just to give a hint of what's coming next. We call the slide anticipation of semester 2. And I can sum it up in one word, so that's acceleration. And that's acceleration for 2 reasons. So first of all, yes, we would have expected semester 1 at a higher growth rate. So it means we have to accelerate and push the paddle in semester 2. But then also, we are looking forward to some quite important events ahead of us. So that's why management's guidance for total year revenue growth remains the same of EUR 22 million, where we see the growth will come from. So it's 3 fundamental pillars. So we will quite aggressively continue investing into new business-to-business and business-to-customer or B2C acquisitions, both in our focus markets and then in our e-commerce channel already now since July actually. So that's -- we are in the semester 2. So that's reality already [ of the shelves ] and our e-Com platform. So we have launched 2 very strong and high potential innovations on the market. So the #1 is Botanic Retinol Serum. So that's the purple product you see in the images, which we believe is a high potential product, delivering quite substantial revenue growth. And the other product is [indiscernible], which will be a fundamental product to our turnaround Finland's performance. And then the last bit is that we are also doing a new concept introduction for our retail stores in Latvia. So we just recently in end of August opened the first new concept store in Galerija, Riga, which is on Zeltinu Street in Riga downtown. And then we will facelift other stores in Latvia as well. So please come and visit the new concept stores as well in Riga if you happen to be by. So that's it from our side today in terms of highlights of semester 1. We hope you have some questions or comments. So we'll be happy to answer those.

Thank you for sharing the updates. Let's now continue with the Q&A. We have received a couple of questions in advance. [Operator Instructions] So the first question, how are your sales in the 2 other Baltic countries, as Estonia and Lithuania compared to Latvia? Will it make sense also to sell the products as Baltic products and not only Latvian products and there, through expanding the [ home bias ] in the consumer mind from Latvia to Baltics.

Yes, I'm going to take this one. So it's 2-level question, so I will tackle the first part in terms of growth in other 2 Baltic countries. So indeed, we see high double-digit growth in other 2 countries, Lithuania and Estonia, where Estonia is a higher base market and Lithuania smaller base market, but still it's a high double-digit growth in both of those. And the growth is coming purely from our e-commerce, direct e-commerce. So brand awareness is doing its part in attracting really new customers in these 2 markets. If you talk about would it make sense to position the brand or set the brand as the Baltic origin? It's an interesting point. So I think here is the speculation of how much the origin per se matters. We can give an example of Sweden, where -- sorry, in Finland where I was just recently on last Monday visiting Finland and MADARA perceived as almost a Finnish brand. So I will really say here the key proposition of the brand is that it's clean, that it's the performance and function of its product. My take on is that it's less so the importance that it is specifically coming from Latvia or from Baltics, but it's really about the functionality and performance and the [ DNA ], which is clean Ecocert formulas. I took this one.

Which products are the best-selling products abroad? And is there any difference compared to products sold abroad and those which are best-selling products in Latvia?

Yes, I will answer this one. So overall, that product basket does not really differ when we compare one country with another, with another. What differs is for [indiscernible], which is quite clear for tinting segment. The shades differ quite a bit. And if we are speaking about best-selling products, unfortunately, I cannot disclose the list, but the categories are moisturizing and anti-aging skincare creams and also tinting segment, which we mentioned in the presentation. So these are the focus areas that we try to achieve growth and which we focus on.

Thank you. Question to the CEO, Gunta. What is your vision about MADARA Cosmetics further developments? What do you expect to change in the company? And what do you expect to continue doing?

Thank you. So I've now been 3 months with MADARA team and MADARA journey. What can I say from my 3 months in the company really working closely with the team is that we definitely see and we already shaped 2024, '26, '27 strategies, so a 3-year plan. And definitely, what we are going to continue on doing is -- and here, the keyword is focus on big European markets, and I call it big 2, so France and Germany. So that's not changing in terms of geographical expansion strategy. With that matter of fact, we are not also changing where we want to be excellent in terms of product proposition. So that means it's skin care. And now we are really establishing ourselves, especially in tinted products. So in terms of biggest innovations coming and resource allocation that's going to be on those 2 categories, so France, Germany and tinted products and skin care. What's going to change? it's a bit, let's say, one question for sure. When we speak about the growth at this stage of the company, again, I'm coming to the same word as focus. So it means we -- yes, we are quite present across the geographies. But I think we have reached a phase where we really have to change the resource allocation, how we approach those markets. So that means what you will going to hear and see in the nearby future that we are going to much more vertically focused in these 2 geographies in Germany and France. That means physical team, physical team widening to cover these 2 territories, both to capturing new B2B customers. So it means investing in sales team. But then also, I am a fundamental believer of customer acquisition for our brand on digital channels. We are digitally with high affinity brand in the digital environment and digital channels, which will mean in the nearby future. And already now, we will fundamentally strengthen -- e-Com, but then also other third-party platforms and then to also acquire B2C customers through digital channels. That's important.

Thank you. This was really insightful. Could you please share your company's strategy for balancing product discounts and coupons with the retention of your premium brand image?

I'm going to take this one as well. I think it's never an easy one. And I guess, what we have observed is that MADARA is a very responsive brand when it comes to promotions, and we see we really attract new customer base on these promotions. On the other hand, I understand where the question is coming from at what point do you stop or where is the saturation of those. And then we have really gone already now market by market and established a clear promotional guidelines, so let's say, frequency and depth of campaigns. And just to say, we will also in line with these focused market strategy, readjust and refocus our promotional strategies for different geographies. So it means in some markets, we might go lighter in terms of frequencies, in some markets, for example, like home markets. Lastly, we will continue with similar strategy like we have done before because we really see it's -- the brand is responding well, and it's delivering results. So it's different approaches by geographies.

Could you kindly remind us given the growing trends towards eco-friendly and natural products in the markets and the increasing number of competitors moving towards natural products, how will you go about maintaining a distinct brand identity in the future?

Here, I fully agree to the message [ building ] the question. If 10 years ago we were unique or somewhat unique with our Ecocert and clean formulas, nowadays, it's a pre-requisition or it's a right to play. So I'm fully there. And I think when we talk further about brand's importance and brand's distinctiveness, I'm 100% persuaded, or I believe internally that it comes really from nothing but excellent formulas in terms of performance. So the product, it doesn't matter if it's natural or if it's not natural or semi-material formula and obviously, MADARA is playing in a natural playground, but it has to deliver functionally. So hence, again, I will mention the example of tinted products, but I truly believe our laboratory team working on product has developed exceptionally performing products. And that's why it's responding so well with customer base that it's not only [indiscernible] to organic skin care. So it's functionality, same with Retinol. We just launched alternative Retinol Serum without the negative side effects of Retinol, which is outperforming conventional Retinol. So again, yes, we have a checkmark of Ecocert or clean formulas, but it's ultimately the performance that is driving the brand and building the credibility across customer base.

Thank you. All questions are now answered. The recording of the webinar will soon be available online. Please follow MADARA Cosmetics announcements to stay up-to-date with company's news. Thank you for joining the call today.