AS MADARA Cosmetics (MDARA) Earnings Call Transcript & Summary

Good morning. Welcome to MADARA Cosmetics investor webinar. We will start with company's presentation and continue with a live Q&A session. [Operator Instructions] This session is being recorded and will be available for rewatch shortly after the call. Let me now introduce you to our host, the member of the Management Board and CEO, Gunta Sulte, and member of the Management Board and CFO, Tatjana Nagle. Ladies, the floor is all yours.

Thank you very much, Ieva. Good day, everybody, and thank you very much for joining today. So we start. So yes, so today, we will discuss the performance of MADARA Cosmetics of 2023. We will guide you through key financial results as well as some other important events that we experienced last year and then also give you a sneak peak of what to expect in 2024. Of course, you have full access to management report and unaudited financial statements on our Investors section under madaracosmetics.com. And as mentioned, today, we are here with Tatjana Nagle, our CFO, and me, myself, Gunta Sulte, CEO of the company. So we start. So describing 2023, I would -- I use the word dynamic. And it comes with many meanings of word dynamic. And of course, we are very pleased and happy to say that we generated 8% in revenue growth in 2023. However, we also must admit that the first half of the year has been a slowdown that we did not expect while kicking off the last year. And that was a few reasons behind. One of the biggest, of course, was our partner in Finland not performing to the level expected, which definitely led to us generating almost flat revenue growth. However, second half was very much of acceleration. So we grew almost 18% in the second half of the year by various reasons, and we will touch upon those also a bit later. We grew in our -- most of our export countries. We introduced new products -- successful products to the market. We strengthened our team. So I'm happy to report 8% growth. One of these growth driving engines, for sure, has been also the winning momentum we have had in tinted makeup. So that continued to increase faster than the average growth that we saw on, let's say, general portfolio. And makeup category in our portfolio increased its share by 2 percentage points compared to previous year. And it's also going to be one of pivotal engines on which we will generate also growth next year and years to come. And last, but not least, I'm also happy to report that we delivered sustainable profitability margin. So EBITDA was at 14% level, which was on the same level as last year. And also what is important that second half of the year, we increased our profitability indicators compared to the first half of the year. So with that, I'm giving the floor to Tatjana who will guide you through more in depth of our financial performance.

Thank you, Gunta. Hello, dear shareholders, and let's dive in our key financial results. So as Gunta pointed out, our revenue was EUR 20.23 million, which is more than 8% increase. And in fact, as also already mentioned, growth in the second half of the year was roughly 18%. And it was due to success of several markets where we performed very well, and I will touch upon these markets a bit later. Also speaking about profitability, we had EBITDA of EUR 2.9 million and pretax profit of EUR 1.9 million. And our pretax profit has increased by more than 24% in comparison to the previous year. And speaking about the margins, we see an improvement in margins as well, especially if we look at the second half of the year, they are much more healthier than it was in the second half of 2022. And yes, there is a slight increase in gross profit margin. Then again, EBITDA margin is stable now for 3 years at 14% level. And the reason for that we keep investing in the markets because we want to achieve higher growth and to drive development of the revenue of the company. So investments are inevitable. And now to elaborate more on key events. We will start with geographical split. And here, first thing I want to mention is that we did great job in a number of markets. So we had no negative surprises in the second half of the year, and our stable big markets is Latvia and Finland, which, of course, helped not to drop. And also, we had positive tendencies in our growing markets. So in France, we had plus 15% in revenue growth in the second half of the year in the B2B segment. And overall, at the end of the year, we had around 200 new retail doors opened in this country. So this year, we will definitely continue to spend more time in developing this market. And also an interesting fact is that at the moment, the Czech Republic is among the top 10 biggest markets of the company. And in the second half of the year, Czech Republic generated plus 50% in revenue in comparison to the second half of 2022. And if we look at the sales distribution across the big markets, so EU -- outside EU and Latvia, what we see is that there is no huge change in any direction although a small share decrease is in Latvia. So the share of Latvia decreased by 1 percentage point. And I think it is quite clear that to grow a stable market, we need much more resources than we need in markets where we are just at the beginning. So I think this trend is quite clear, and it could continue in other periods as well if we continue to boost our sales in other markets. Now let's talk about the product categories. So here, Gunta already mentioned that our makeup segment is growing. And also, in 2023, we had extensive skin tint campaign, which definitely contributed to growth of makeup share and also makeup segment. And specifically tinted products are at the core of our business, and we will continue to promote them in next year as well. Otherwise, we see that proportions are quite similar. Still for MADARA, face care is the top segment. Of course, we have body care and hair care products, but face care is our focus segment. And some key events of the second half of the year regarding products, is that we had several very strong and successful launches. So first one is retinol alternative serum, and the Time Miracle line, which already from the beginning got really big acceleration in revenue growth. And already now, it is one of the best-selling products of MADARA with really good reviews, both from our B2B partners and customers. So we are really proud about this product. And also, we introduced SOS+ line for sensitive skin, which is dermatologically approved, and this is also quite a new segment for the company. And we really hope that we can, with this line, attract new customers with sensitive skin. Products are without aroma and are really suitable for this type of skin. And also, last year, we launched an extensive set collection. So we had overall 25 sets. And we saw really huge increase around Christmas period, which it was also intended from the beginning. And yes, it was a really new segment for the company to try itself in, and we saw that our customers, especially in retail, we're really happy about such option. And we got the chance and try to position MADARA also as a brand that you can give someone. And going next, regarding channels. So as you know, direct e-commerce is an important part of our business. And in 2023, our direct e-commerce sales were 36% of the revenue. And it is an increase of 2 percentages points versus a year ago. And overall, we see that direct e-commerce is growing revenue, increase was 5%. And we keep attracting new customers, which is a good sign. And in the second half of the year, 32% of direct e-commerce revenue came from new customers. And of course, direct e-commerce is very important for us, both from sales perspective, from marketing perspective, from customer experience and loyalty building and also from sales portfolio diversification. So we will continue to develop direct e-commerce channel in the next period as well. And now, I give floor to Gunta.

Thank you, Tatjana. So I continue with other events that might not necessarily be put into numbers or specific numbers. But other highlights to mention is that last year, we started implementing new retail identity in our retail stores in Latvia, Riga. So we opened a new store in Galleria Riga shopping center in the downtown general street with -- revealing also new, like I mentioned, brand retail identity. And then we also refurbished the Spice store. And I'm happy to report that the Galleria Riga is 1 of the top 2 performing retail stores already now since its opening in September. And we will also continue investing in refurbishing stores in 2024. So bringing this new retail experience to more stores. Second, which is also very dear to my heart, is that it's part of brand DNA to be a sustainable company and to deliver sustainable products. And we very much put our team effort and also financial effort into the mission of really delivering Ecocerted sustainable products to our end consumers. And I'm very proud and happy that it has been -- these practices have been recognized by the industry. And last year, MADARA was nominated as #1 greenest brand in the Baltics, which we proudly take home, and we will probably continue innovating and setting, of course, an example for the whole industry in sustainability agenda. And last, but not least, we continue to push ourselves and to innovate ourselves not only within the existing technology that we have, but then also last year, with the help of Norwegian grant, we invested into new production equipment so that we can enter new segments into press powders, which is, to be honest, quite a demanding segment to be in. But I'm very pleased to say that we have started production of press powders, and we will offer the first products in the market in 2024. Another important avenue to discuss and reflect on, of course, is our print-on-demand for cosmetics company, Selfnamed. And Selfnamed can be characterized by one word last year. So that's for sure, growth. So we saw almost 4x increase in revenue. That was very much generated by new user acquisitions. So there was more than threefold increase in new user registration. And then 14 new products added to Selfnamed portfolio available to customers to put their brands on and sell to their end customers. If you look at key financial indicators, then another important milestone was reached. The company generated more than EUR 1 million in net revenue. But of course, this is still a business where we have to invest into both product, and by product, I mean, the platform of Selfnamed.com. We have to invest in team and people. So the team is growing as the company is growing. So overall, it's logical and expected that Selfnamed generated minus EUR 56,000 in EBITDA. And then to continue on what's to come in 2024. And for sure, it's going to be a year full of events. First of all, to mention that management expectation is to grow at least 10% in 2024 compared to previous year. And you may speculate, is it a lot? Is it a little? One important point to mention here is that we will continue investing into bringing internal -- sorry, bringing external expertise in our teams, that we are more fluent in new user acquisition in B2B and [ B2B ] segments. But however, I also have to mention that we have taken a conscious steps into how we approach also MADARA Cosmetics promotional strategy. So there is a balanced game that we will try to reduce the promotional intensity of the brand. So that very much also impacts with what speed we may grow, knowing that decreased promotional intensity will help us to generate higher gross margins and then healthier brand for the future. But coming back to, let's say, number one goal for next year, it will be new customer acquisition in the business segment and in consumer segment, and this is also teams where we will fortify with both raising internal competencies, but also bringing external expertise in. If we talk about the products, then I would like to highlight two strategic directions that we have set to go forth in 2024 and beyond. So number one is really strengthening our core segment, which is skincare. And we have said that we want to be experts in functional skincare or how we say it, alternative or rebel skincare. So meaning it's not just organic. It actually is much more. It does much more. So you have seen innovations like alternative retinol serum, which is going to expand into a line. Now we literally, a few weeks ago, launched alternative -- botanic alternative to niacinamide. And this is the avenue, we are going to innovate and we are going to invest our resources in to deliver more functional products. And this is also very important because in one of our focus markets, France, we are actively working on pharmacy distribution networks. And these type of products have very good traction in these markets. So that's why we will continue actively focus on really functional products that are, by the way, Ecocert. Second growth avenue will, for sure, be tinted products, which we see continuous growth momentum. Just to mention what is coming in semester 1. So we are adding 12 additional shades to foundations. So it means in overall, we are -- we will offer, as of April 18, different shade ranges to different skin tones of our tinted products. And here, we collaborate with both makeup artists across the markets and also end consumers to really work on communication model that supports -- that these are amazing products for your skin that you use on daily basis for many hours. So they must be good for your skin. But then also, we address the diversity. So we are offering multiple of shade ranges to choose from, again, which opens us doors of distribution in European and beyond markets. But then it also addresses the brand being inclusive and offering diverse portfolio to its end consumers in various markets. And last, when speaking about the products, like I mentioned, we will continue -- not we will continue, we will start offering product powders -- press product powders. So it will start from translucent powders but will continue to bronzers and blushes. So again, new growth avenue to explore for the company. And last, but not least, and I would say one of actually most important points, we will continue strengthening our teams. Just to maybe highlight two most important changes is that already, last year, we did quite some restructuring of how we think and approach marketing in the company. So in February, we welcomed the first ever Chief Marketing Officer to the company, a person joining from Bolt with global experience into scaling and building global business. So I'm happy Nauris Bruvelis has joined the team. But then also to mention other changes in the marketing. We're bringing external expertise into marketplace team, so working with Amazon and clients alike. Yes. And then the other team that also reflects on the company's goal of new customer acquisition, we are strengthening our field teams in Germany and in France. So we are adding people in sales teams to really accelerate new business client acquisition. And this team, let's say, like I mentioned, strengthening will continue in 2024, and we have also a pipeline of team activities to address in 2025. So with that, I believe, should be my last slide. Thank you very much. And I hope it gives the clarity of company's journey and also setting expectations for what's to come. And we are open for questions. I will stop sharing the screen, so.

Thank you for the presentation. [Operator Instructions] The first question that we have received, do you see a possibility to decrease selling expense ratio from sales? Currently, it's 45%. Can you make more sales with less sales costs?

I will tackle this one. Well, we discussed the 3-year growth trajectory, this was definitely one of the questions, what we asked ourselves, how we can be more efficient. And that didn't come at only at the sales expense ratio discussion. It came also at gross margin discussion. But then obviously, we discussed how can we be more effective at the field or, let's say, at executing the strategies in the markets. So where these expenses are -- let's say, what are the two biggest buckets here is definitely people cost and it's also trade marketing initiatives that we do. And here, my answer is that we have to grow faster in terms of revenue. So what we set the trajectory for the teams is that, although we will continue increasing in terms of trade marketing activities, in absolute terms, we have to decrease the percentage rate than what we do. So it means we have to accelerate growth. So answer is yes. It is set also in how we constructed next year's P&L and 3-year P&L that we have to generate more revenue with, let's say, same or relatively less absolute resources increase, so to be more efficient.

When do you plan to pay dividends? And what could be the amount?

Yes, I will answer this one. So first of all, MADARA has paid dividends over the past many, many years. So we expect to propose from the management dividend payout this year as well. So normally, we published this information end of May in our audited financial statements. So just follow company news. And then in June, normally, we have the meeting of shareholders where shareholders vote for the proposal. So I cannot name the amount yet, but we are planning to make such proposal. Over to -- also to elaborate a bit more, for the past years, the goal of the management was to provide growth of the company but a profitable growth. So at the moment, we see that we have enough resources, financial resources to continue providing profitable growth. So yes, there is an intent from management to propose paying out dividends.

Thank you. And there are no more questions received. We'll be wrapping it up. On behalf of MADARA Cosmetics, thank you, everyone, for joining, for listening. It was a pleasure to be with you today.