Midsona AB (publ) (MSONB) Earnings Call Transcript & Summary

Thank you so much for attending this call. We will move on to Page #2. And I will just give a short introduction of the call. I will present the highlights of the report. I will go into some key numbers and overall business trends and a more specific update on COVID-19 and how that has affected the business result. Then Lennart Svensson will present the numbers in some more detail, and we will end the call by a Q&A session. And by that, we move on to Page #3, which provides us the key figures for the quarter. We are overall very pleased with the quarter. We have reported record sales and EBITDA for the quarter and by quite some length compared to the previous best quarter. As you can see from the figures, we have grown EBITDA significantly ahead of sales, which is also a sign that we are actually moving ahead on our cost savings and integration programs that we do have in the company. A strong net result, significantly better than last year. Cash flow might look somewhat modestly, only SEK 2 million. We should then remember that Q1 usually is quite weak cash-flow-wise. So this is more of a trend that we see from year-to-year. What we've also done is that we have, during the quarter, proactively increased raw material stocks for some key raw materials in preparation of COVID-19. And then, of course, we have had a significantly stronger sales compared to last year in the month of March, and the proceeds of those sales will show in the cash flow in quarter 2. But overall, a quarter that we are extremely happy with. And let's move on to Page #3 where I will spend some time discussing the -- sorry, Page #4 where you will see a schematic order for a diagram of our revenue development. And we had turnover of SEK 786,000 -- SEK 786 million in quarter 1. Those of you who have followed us for some time know that we are an acquisition-driven company. And we did a couple of acquisitions last year. A platform acquisition in Alimentation Santé, which is a French-Spanish company with a focus on organic products and plant-based products. And then a smaller add-on acquisition in Germany, a company named Eisblümerl Naturkost. And those 2 acquisitions together added SEK 116 million to the sales. Then we are having 10 key brands of products, brands that we focus on. And for those brands, we had a very nice growth of 15% in the quarter, which we consider being very strong. We lost a distribution contract that affected us in 2019, but also the 2 first months of 2020, and that is the Alpro contract that we did not have during 2019 and beginning of 2020. Importantly, here, is that the month of February, the last month of this cycle, the Alpro numbers. As of March, we don't have Alpro in the comparison base anymore. Then we have some other items. And that is some of the smaller brands in the portfolio, our contract manufacturing business and our foodservice business. And we see growth in our smaller brands and contract manufacturing, but the foodservice, which is a relatively small part of our business, it's less than 10%. But here, we have seen a decline in sales due to the fact that restaurants have not been open in most parts of Europe. And then a small currency effect, which brings us to the SEK 946 million. So growth via both M&A, but also fundamentally strong growth for our key brands. We move on to Page #5, which highlights the key developments in the quarter. And before we go into the specific COVID-19 effects, it's very important to say that there is a general continued high interest in our key product groups, i.e., healthy and organic food products. And we had a very solid start in the month of January and February. And then, of course, a step change in the month of March. And what we saw was, first, a hoarding phase, which led to very, very high sales during 1 or 2 weeks, basically. But then, after the initial hoarding phase, demand has continued at a higher level compared to the previous months. This has led to an extreme high-capacity utilization in our plants in March and that continues in April. And we actually see continued good demand also in April, although we don't have the same hoarding effect as we saw in the month of March. We have 3 major divisions, the Nordic division, the North division and the South division, and we have made good progress in all 3 divisions. We are seeing good growth in all the 3 divisions. And then a specific project that we are focused on. In the Nordics, it's the rollout of the new organic concept, a new design and innovation. I will show some pictures later. We have had continued strong demand for Friggs. And we have executed on the cost-saving programs that we've initiated earlier. And that means that we are improving profits in the Nordics, although sales is quite flat due to the Alpro effect. In the division North, which is basically Germany, we had integrated the acquisition by Eisblümerl Naturkost, and we have seen significant increases, especially in contract manufacturing volumes in the division. And in division South, we acquired Alimentation Santé October 1 last year. And we have done the integration work. It's going very well so far. And we are now focusing hard on rolling out the Happy Bio brand, which is the brand of the grocery trade in Southern Europe. We move on to Page #6 to go a little bit more into the specifics of COVID-19. And as you know, we have lockdowns in many countries across Europe, and that has mean -- meant that home consumption has increased in a number of categories where we are in. And specifically, we've seen increase in corn cakes, a lot of dry products like pulses lentils, rice, different type of canned product that could be crushed, everything from crushed tomatoes to coconut oil and coconut butter and coconut milk, different type of baking products, natural remedies. Huge increase in hand soap. We have a number of hand soaps under the Urtekram brand -- main organic brand. And then we haven't talked so much about that, but we also have a hand sanitizer business in Norway where we have sold, as you can imagine, everything that we could produce. So overall, strong trends for a wide variety of the categories that we're in. We move on to Page #7, and I would like to spend some time discussing some of the key initiatives that we are actually rolling out as we speak. During 2019, we have prepared for a launch of a new organic food concept in the Nordics. And what that means is that we have been updating the signs for our major brands: the Urtekram brand, which is a market leader in Finland and Denmark; the Kung Markatta brand, a market leader in Sweden; and the Helios brand, a market leader in Norway. And we've also rolled out a number of new product initiatives, beverages, but also fresh and frozen products under the Nordic brand names. Page #8. Also for our organic beauty care brand, we have done a major revamp of the design, which we're very happy about. And we have also started to launch new products. And for both the new organic food platform and for the organic beauty platform, it's still early days, but the signs that we see so far are very promising for both of those initiatives. The last initiative that I want to talk about is on Page #9, and it's the rollout of the Happy Bio brand. Happy Bio is our organic brand for the grocery trade in France and Spain. And we have rolled Alpro brand in new customers in both France and started a launch in Spain during the quarter. So those are some of the initiatives that also have been driving our sales throughout the quarter. By that, I leave to Lennart Svensson, who will go through the financials in some more detail.

Thank you, Peter. And then we can move on to Page #11. And this is then the financials for the first quarter. And as Peter mentioned, our net sales came in at SEK 946 million compared to SEK 786 million last year. And with an EBITDA of SEK 107 million compared to SEK 73 million. And here, we really see what Peter mentioned previously, we have an increase of EBITDA of 47% compared to sales of 20%, which is really good. And this is, of course, both from the cost savings programs and synergies from the acquisitions. But we also see efficiency in the production now. With a higher production that we've seen in the first quarter, we also see efficiency coming out of the productions. Moving down into the -- in the income statement, we come to depreciation. And we -- if we look at -- compared to last year, we -- our depreciation has increased. And this is both due to the acquired business, especially the business in France -- Spain and France. But also, we have implemented a new ERP system for the whole Nordic division. And that has gone live now end of last year. Our net financing costs have decreased compared to last year. And last year is -- was affected also by an internal loan and the revaluation of an internal loan that we had between Sweden and Norway. This has now been eliminated, and we have -- so we see the positive effect from that. What we also see here is that with the new financing agreement that we signed in the autumn 2019, we also see that our interest rates are slightly lower due to that. Our debt level has decreased now in the first quarter since our interest rates or interest that we pay is based on a staircase call from a net debt-to-EBITDA point of view. And we have gone down on our debt here in the first quarter. Looking then into the tax situation. Yes, it looks a lot that it is in relation to the actual tax rates that we have in the different countries. And as you might know, the tax rate is down in France, it's 31%, moving down to 28% this year; Germany is 31% as well; Spain, 25%. So that affects, of course, our income tax. Moving into Page #12. This is a segment reporting. And as we can see, we had good results in all 3 divisions with an EBITDA margins of 12%, 11% and 15% in the different divisions. And we have seen in all 3 divisions a strong growth, especially now in -- both in January and February, but especially now in March, that has accelerated. In the Nordics, we see that the cost initiatives that we had -- we -- it's a project that was initiated last year, first quarter. We're now starting to see the effects of that one coming in. We see also in Northern Europe with good growth. And the Eisblümerl acquisition is now completely integrated into the production, and we see positive effects from this integration. And then the last division, South, is something that we're really, really happy about. I mean it's a strong result from that group. I mean being also that these 2 countries are very much in a lockdown situation that we see both strong growth both in France and Spain. And so it's certainly a nice acquisition that we see here. For the total, then we come in at SEK 107 million, which is an EBITDA level of 11.3%, which is moving towards our targets that we have in our financial targets. A little bit way to go, but we are moving in the right direction. Moving into the Slide #13. This is a new slide or new information that we have talked about with analysts in the past that now we also included in our financial statements in our quarterly presentations, and this is the allocation of revenue. And what we see is what we have also said before, we have our own brands. They stand for 70%, more or less. Licensed brands, 18%. They have gone down, as you can see, from SEK 215 million to SEK 157 million. And this is, of course, due to the Alpro effect. Contract manufacturing has increased slightly now, especially in the third quarter here with some contract manufacturing demands here in the wake of the COVID-19 as well. So we have more or less 17% is own brands, 18% to 20% is licensed brands. And this is more or less the level and the -- our target where we have said more or less 80-20 as a kind of a target going forward. Moving in then to Slide #14, a little bit of an outlook 2020. And of course, this is very, very dependent on the COVID-19 development. This is something that we monitor, of course, every day. We follow up with all the divisions continuously to see what is going on and how we can do this. But what we see is from a company perspective, we will continue the integration of division South Europe both from an administrative, but also from a supply chain perspective. I think there are more synergies that we can take out from these acquisitions, and they will come over the next -- this year and the next year. Securing of course the launch now, as Peter mentioned, of the One-Organic across the Nordic division, we had a good start of that in the beginning of the year. It was slowed down a little bit here in March, but the underlying information that we had from our customers is a very positive reaction to this One-Organic and to the new brand designs that we have and the new products. Of course, we will continue to leveraging on the cost optimization project that we initiated in 2019. It's something that is monitored continuously to secure, and we also see that in the results already now in the first quarter. We see a good start now in Q2. However, we need to understand that the Q2 is historically is our weakest quarter during the year. So it is -- we have started good, but -- so we can say we are cautiously positive on the Q2 and, of course, also on the rest of the year. But a lot of this is, of course, dependent on the development of COVID-19. And with that, we are now ready for questions. I'll leave it back to the moderator.

[Operator Instructions] And our first question comes from the line of Johan Brown from ABG.

Congratulations on a good quarter. Just a few questions from me. So can you give us some insight about how much the price hikes have affected the gross margin?

We have no specific figure that we want to give out, but it, of course, have had a positive effect. We have done price increases in Sweden and Norway mainly, and those start to give effect mid-quarter, I would say, so from the mid of February. But there is a positive effect in there that is, to some extent, counteracted by negative FX effect for the Swedish and Danish kroner.

All right. So also a question about the organic growth, excluding the hoarding effects. Is it reasonable to assume the same growth during April, less the second half of March?

We are not giving those type of future statements. But -- so I will hold to what we have written that we have had a solid start in April, we have growth in the business.

All right. Then a question about the development in foodservice. Is it possible to say something about the growth tempo there, how much is it affected by the pandemic?

First of all, it's important to understand that our business is 90% home consumption and 10% foodservice. So foodservice is a relatively small part of our total business. There has been a sharp decline in that part of the business, but the positive effect in home consumption has by far outweighed the negative effect in foodservice.

All right. So just the last one from me, and that's how has the M&A possibilities been affected by the pandemic?

Yes. There are still a number of interesting objects out there. We see a little bit of the holdback that people are waiting a little bit now to see -- to understand what is happening. We have some absolutely interesting M&A possibilities. And we are looking, of course, to continue that and basically focusing on add-on business here going forward. But right now, as we stand right now, we -- of course, it is a little bit -- we need to understand really where the -- with this -- with the outbreak where it's going. But there are a number of interesting cases on the table.

And also, of course, one of the main issues that we have right now is that we cannot travel out and meet management, visit factories, which is, of course, something we want to do in order to be able to do acquisitions. So this is, to some extent, holding us back. But we think that there will be -- as the societies open up again, there will be good opportunities for sure.

[Operator Instructions] Our next question comes from the line of [ Christophe Pavilion ] from La Financière de l'Echiquier.

Just a question on the contribution in operating profit. Could you be more specific on what has contributed the most M&A synergies and pricing? As you did for the revenue contribution, could you be more specific, please?

Well, I -- we haven't really stipulated that, but you can see that a little bit on the segment reporting where you see specifically the South Europe how much that has contributed to the results. Eisblümerl business in Germany is a fairly small add-on acquisition. So you could say that a lot of the add-on, if you say, the -- comes from the South Europe, which is on the Slide 12 in the presentation.

And then in the Nordic -- and then in the Nordics, as Lennart presented, we have pretty much sales that are flat because of the Alpro effect. But still, we are increasing EBITDA significantly. And that's primarily through price increases and then the cost savings initiatives that we have gone through with.

Okay. And regarding commodities and pricing for the Q2, how do you stand? What's your position right now? And how do you think you can increase the price? And how is commodity price today for you?

It has been quite volatile, and it has been going in both directions where we see some pretty steep price increases for some commodities, but lower prices than other. On average, I would say that we are on par with the first quarter. So there are no major changes in that. With regards to price increases, as we've been flagging, we have done some price increases in Sweden and Norway in the last quarter. We will selectively look at price increases where -- especially where commodities have increased a lot.

Okay. And can you transfer production of some products to focus on other products that are mostly in demand currently? Or is there some flexibility on that?

There for sure is some flexibility on that. And we have been running all our production sites at very -- quite high -- very high capacity utilization throughout the month of March. And in most production units, that has continued also during the month of April. So we are really running at good capacity utilization right now. And of course, there are limits to what can be done. But also the increase in demand spans over most of the categories that reenact this. So it goes quite well together with the capacity that we have in production.

Okay. And sorry, last question on Germany. How is the Davert business running right now? And the capacity utilization, could you update us on that?

The capacity utilization in Germany has been very high. And as we are flagging in the report, we see good demand also in April. And the statement about March where we have seen the highest increases in sales in the countries that have been most locked down is still true. And that means that Sweden is still relatively open compared to many other countries. And the Nordics is still relatively open while we see almost total lockdowns in countries like Spain and France and also almost a total lockdown in Germany. So the increase in sales have been higher further South overall.

Okay. Okay. And sorry, last question this time. On the midterm target, I know it too soon to review or to talk about that. But what's your position right now?

Sorry, I didn't understand the question.

Yes. On the midterm targets, I know that it's too soon to talk about this or even to think about it. But have you changed your position? What's the current state for you?

No. As Lennart say, we are humble but cautiously positive about Q2 and the rest of the year. It will, of course, to a great extent, be dependent on what's happened with COVID-19 and what the implications on -- long-term implications on society are. But overall, I would say that COVID-19 is a health crisis. And one effect that we see is that people are more concerned about their own health, but also the health of the planet, which means that they take more interest in natural, organic, plant-based products, which play to our advantage. And then, of course -- and this is, of course, hard for us to judge. As long as we see lockdowns and more home consumption compared to out-of-home consumption, that will be to our benefit. So we are cautiously positive.

And as we have no further questions registered at the moment, I will hand the word back to our speakers for the final comments. Please go ahead.

Then I would just like to thank you for attending this call. We are very happy about the quarter 1 development. We have had a strong quarter, a record quarter, to some extent, of course, propelled by the COVID-19 crisis, but also strong fundamentals that has also contributed to the result. And as already said, we are humble but cautiously positive for the future. Thank you so much.