Humble Group AB (publ) (HUMBLE) Earnings Call Transcript & Summary

Good morning, and welcome to Humble Group's third quarter presentation. My name is Anders Fredriksson, and I took over as CEO on September 14, and I'm proud of joining the company and really excited of stepping into this role. But of course, humbled, no pun intended, by the trust given to me. With me today is our CFO, Johan Lennartsson.

Good morning, everyone.

Johan will take us through cash flow and leverage when we come to those slides and help me answer more detailed financial questions afterwards. As usual, you can send in questions throughout the presentation in the chat, and we will address them when we come to the end of the presentation. I would like to start with my first weeks and what I will focus on. I have visited a number of companies so far, 6 to be exactly. And what I see throughout the group is strong entrepreneurship and people are proud of what they build. And that is an asset that we will keep, but I think it's important that every company has clear targets and priorities, and we follow up against them. So my 3 priorities for the first 12 months are profitability first. We can see that the EBITA margin in the period rose to 6.4% from 3.7% and the efficiency program is completed. The next steps are to take firmer control over pricing, purchasing and cost discipline in every company. Second, cash conversion. Operating cash flow was SEK 120 million against SEK 195 million last year, and the working capital was absorbed SEK 35 million in the quarter. That is not something I'm satisfied with, and here is definitely room for improvement. And the third priority is clearer active ownership and focus within the group. From the turn of the year, 2 experienced FMCG leaders will join us, Henrik Arfwidsson, as Chief of Staff; and Ludvig Persson as Head of Segment for Future Snacking that will strengthen our FMCG experience and executive power to support our subsidiaries and drive change within the group. And we also divested 7 businesses this year to reduce complexity and improve focus. Some highlights then on the report, the quarter in brief. The reported EBITA increased by 83% to SEK 141 million, and the EBIT margin was 5.1%, up from 1.5%. Net sales grew 5% to SEK 2.2 billion. And breaking that up a little bit, 4% was organic and led primarily by Future Snacking at 12% and Quality Nutrition at 14%. Sustainable Care declined 2% organically on the weak U.K. consumer sentiment. I'll come back to that a little bit further on in the report. Gross margin improved to 31.3%. Cash conversion was not satisfactory, as I mentioned before, and we will come back to that. Leverage came down to 2.5x from 2.8x at the end of June, primarily driven by an improved EBITDA. And looking at the portfolio, we divested Fancystage and Kryddhuset in the quarter and Marabu and Assertia Fastigheter after the quarter. That will take us to -- I will take you through an EBITA bridge to show where the improvement comes from and a little bit about the underlying EBITA development. The reported EBITA rose by SEK 64 million. Looking at the underlying EBITA, it increased from SEK 128 million to SEK 165 million. SEK 27 million comes from lower items affecting comparability. And breaking that up, minus SEK 51 million last year was related to the efficiency program and the former CEO. And that compared to this period where we have a minus SEK 24 million from divested operations and acquisition-related costs. So the net from those 2 is SEK 27 million. The remaining SEK 37 million comes from the underlying business, basically where the largest contributor in the period is Quality Nutrition at plus SEK 24 million (sic) [ SEK 43 million ]. We will -- we go on and look at the gross margin. Looking at the trend, gross profit grew 8% to SEK 689 million in the period, and the gross margin was up 0.9 points to 31.3% compared to last year. I would say, mainly from consumer and product mix in Nutrition and Nordic Distribution. Gross margin was weighted down by Sustainable Care impacted by the customer sentiment, as I mentioned before. Currency added about SEK 9 million to gross margin. Compared to second quarter, the gross margin is slightly lower, 31.3% against 31.7%. And EBITA compared to previous 2 quarters shows a growth of about SEK 20 million. Yes, we will continue to net sales. Here, we see an increase of 5% to SEK 2.2 billion. The 5% is organically, the growth is 4% and currency added another 1% on top of that. Acquisitions and divestments in the period basically netted out to 0. The growth comes from Quality Nutrition and Future Snacking and Nordic Distribution where I would say Quality Nutrition and Future Snacking are the prime drivers of 14% and 12%. Sustainable Care declined organically by 2%, mainly because of weak British consumer sentiment, which has been against us in previous quarters as well. Organic growth is important to us, but it has to be a profitable growth. I'll come back to that when we close the presentation. With that, I hand over to Johan, for sort of look at the cash flow and leverage.

Thank you, Anders, and I will speak a little bit about the financial position in the period and the development that we've seen during the quarter and also year-to-date. Looking at the cash flow for the period, cash flow increased to SEK 155 million versus SEK 137 million in the comparative period. That is an increase of 13%. But we can conclude that the change in net working capital had a negative impact on the quarterly cash generation. We absorbed SEK 35 million in net working capital, which is, of course, something that we will prioritize and continue to prioritize going forward. Cash flow after change in net working capital amounted to SEK 120 million versus SEK 195 million last year, a decrease of 38%. Worth mentioning is that we repaid tax deferrals during the quarter of SEK 45 million, and that is the main driver of the short-term liabilities decrease that we could see in the period. But as mentioned, net working capital remains to be a higher prioritized area. It amounted to around 12% in relation to the net sales in the last 12 months. And this is something that we will continue to follow to drive it down. We can conclude that the inventory increased by SEK 103 million year-to-date. And this is, of course, a natural development as we grow the underlying business. We drive the innovation and we explore new business ideas and opportunities. We can also conclude that volatility in raw material prices had a slight impact on the working capital development. For example, the whey protein prices have been significantly volatile during the period. But with that said, we repeat that we see a potential to drive the efficiency in the capital allocation and the usage of the group. We do have tax deferrals also in the coming year that we will do the final installments in Q1 and Q3 last year before the full deferrals have been repaid. And with that said, we also continue with the investments in new confectionery site that we've communicated previously. During the quarter, we continued according to plan, and we expect to have minor investments in Q4 and also a few spillovers in Q1 of that project that we will have an impact on the overall cash flow and CapEx development. And with that said, that has an impact on the leverage. We can conclude that despite we've done -- despite the strategic investments we have done in the factoring and other projects, we decreased the leverage down to 2.5x adjusted EBITDA from 2.8x in the second quarter. And we can conclude that we are back on our target level where we have established where we said that we want to be. But with that said, we are not satisfied where we are. We want to continue to drive the leverage down even further. And this is for us to achieve a stronger financial flexibility for new value-driving activities. The development in the leverage is mainly driven by both improved profitability of the group, all in all, but of course, also the underlying cash generation of the group, which has enabled us to remain on a, yes, flat level versus year-to-date despite the strategic investments that we've done and despite the inventory buildup that I mentioned on the cash flow slide. But as Anders have been very clear about to further drive down the leverage and the capital allocation of the group is one highly prioritized area going forward.

Thank you, Johan. Now a quick look at each of the segments, starting with Future Snacking. Future Snacking grew 12% organically with resilient demand across the core categories, I would say. EBITA was SEK 38 million against SEK 33 million. Here, it should be noted that last year's quarter included a one-off income of SEK 18 million. So the underlying improvement is clearly stronger than the headline number shows. The new confectionery factory in Skövde is expected to be completed in the fourth quarter, and that will strengthen our production capacity and our ability to grow. Then we will move over to Sustainable Care. If you will switch the slide, Johan, thank you. Sustainable Care continue to have headwinds. We declined 2% organically in the period weighted by U.K. consumer on both, I would say, sales and gross margin that fell to 34.7%. Even so, EBITA increased to SEK 72 million from SEK 68 million and the EBITA margin improved to 11.3%. But looking at the underlying EBITDA, that is affected by the cost efficiency program last year of minus SEK 7 million. So if we take that into account, that shows a decrease of EBITA from SEK 75 million last year to reported SEK 72 million this year. The divestments, we also made divestments here in Fancystage and Marabu, and that will sharpen the segment's portfolio going forward. Quality Nutrition had a very strong quarter, 14% organic growth and EBITA of SEK 40 million against minus SEK 3 million last year is, I would say, supported by strong demand. Nutrition is a fast-growing business to be in and higher capacity utilization for us. The strong -- you should mention, as I said, in the CEO letter that the volatility whey protein over the past year, has been somewhat favorable for the segment, but it also increases uncertainty around purchase prices and sales volumes going forward. So this is something that needs to be closely managed. The underlying EBITA is affected by the cost efficiency program last year, minus SEK 19 million. So if we take that into account, it shows an increase of EBITA SEK 16 million from this year to reported SEK 40 million this year. And finally, Nordic Distribution, it grew 4% organically and gross margin improved to 20.1% from 17%, thanks to favorable customer and product mixes. Unfortunately, we don't see this improvement materialize in the result, and there's definitely opportunity for improvement here. EBITA was stable at SEK 33 million and doing the same look at the underlying EBITA as we did in the other segments. This year's result includes management fees of SEK 3 million. Now invoiced to the segment, which wasn't last year. But last year, the efficiency program impacted by minus 1. But I would say that those changes are not material. What is material here is that this is a large part of the group, and I see an opportunity to strengthen it with margin expansion as the primary goal. That will bring us to the final words. I will close looking at our financial targets and the next steps. So on leverage, we are a target at 2.5x. Next lever to pull here is to work with working capital. The inventory, as Johan mentioned earlier, is SEK 103 million so far this year, and that is something that we need -- we are going to put a strong spotlight on. On growth and profitability, we are not there yet. Net sales grew -- sorry, we have 5%. We're not there yet, but we're working on it. Sorry, I lost my train of thought here. EBIT margin went from 1.5% to 5.1% in the year against a target of 10%. So here, we closing this gap is what my profitability priority is all about. Here we need to take a firmer control over pricing and purchasing and cost discipline and a portfolio of businesses that contribute to value. And when it comes to growth, net sales grew 5% and the target is 15%. Future Snacking and Quality Nutrition showed double-digit growth in the period, which is good. But organic -- I would say here that organic growth is important, but it has to be profitable, growing lower-margin volume only drives working capital. So my recipe is simple, stability first and profitability and then growth basically. We will report progress on this quarterly as we proceed forward. Yes, with that, we are happy to take your questions.

Thank you, Anders. And we should also say that you are more than welcome to write questions for us if you have any on the reported presentation. But first of all, we have a question from -- we have a couple of questions from Victor Hansen here about Sustainable Care. You mentioned that a little bit of the weak U.K. consumer, Anders. We have mentioned that we have new contracts with Solent from early '27. Is that still true? What are your thoughts about Solent in Q1?

I'll say that, as I mentioned throughout the presentation a couple of times, Solent and our U.K. businesses have had a challenging year with rising costs and a weaker consumer sentiment. And that is something that they -- the management in Solent and those companies have worked really, really hard to address. We -- I don't give forecast -- but what I can say is that there's intense work going on to turn that business around.

Thank you, Anders. Victor also asked a question about higher protein input material prices. We mentioned that there is a quite high volatility in the whey protein market. A question from Victor then is, how long is your inventory? How long is it in your inventory? And when will it start to impact earnings? Any comments on that?

Yes. First, I should say that raw materials movement up and down is a natural part of FMCG business. So sometimes it works for you and sometimes it works against you. And when it works for you, then if you manage to build some stock then before the rise, then it usually impacts your working capital and so forth. So it's up and down. But without going into any details here, I will say that we -- the effect in the earnings is temporary. I don't give any forecast on this.

Thank you, Anders. And the last question from Victor here is also a little bit -- [ John Adams ] has a little bit similar question. We write about a one-off nonrecurring revenue that occurred in the third quarter in Future Snacking last year, which we've impact on the EBITA. Are there anything -- any comments and thoughts on that, that we want to raise?