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

Thank you so much, and we can start on Page 2. This has been quite an intense summer quarter, I would say. And let's be honest, it has not been our strongest quarter in terms of result generation. But I think that there are good explanations for that, and I would come back to those. And overall, I would still say that we have a positive outlook for the future. And we can move to Page #3 already, and then I will go through the key developments during quarter 3. And if you look at Midsona, we had a very strong half first year, to some extent, driven by the pandemic, which actually made a huge spike in our sales. But then, mid-July, we saw a drop in sales which lasted until about the end of August. And we see this as what we call a reversed lockdown effect. When restrictions were lifted, that meant that in-home consumption went down. We think that both customers and consumers had then the possibility or the urge to drive down their stock levels, which then impacted sales negatively during the second half of July and the month of August. We have then seen a strong bounce back in September, which gives us some confidence that this stoppage has been temporary. September is actually our second strongest month in the year after the stockpiling month of March. So it's a strong sign that we should be back on track now again. I said that third quarter has been quite intense. And also as lockdowns are eased, we had the opportunity to make new acquisitions. We took control of the Gainomax brand. It's a strong iconic sport nutrition brand in the Nordics on September 1. And then just after the end of the quarter, we announced and also took control of System Frugt, which is a major acquisition for us. It's an acquisition that almost adds 20% pro forma sales as of October 1. Looking at our divisions, I would say that the main news in the Nordic division was the [indiscernible] acquisitions of System Frugt and Gainomax. And that's a very good addition to sales in the Nordics. We also see good development opportunities for the brand. So those are both growth acquisitions that we have made. And in the case of System Frugt, we see a very good possibility for synergy generation, and I will come back to that later in the presentation. In division North, we had a disappointing result in the quarter. Sales were relatively okay. We had a slight growth in North, but had some mix effect. In the last quarter, I talked about the rollout of the Davert, the major retail customer. That launch was temporarily halted during the third quarter due to COVID as well. The retailer did not have the resources to execute. And that made sales to the [ then ] Davert a little bit lower in the third quarter. What has happened then is that the launch restarted again at the end of the third quarter, and we have after that seen a strong distribution build up to the brand. And we have also seen reorders from this major retailer in the beginning of the fourth quarter. We have also had some extra costs related to production maintenance. Our production and this [ goes to ] for division North and South, we're running at very high utilization levels in quarter 1 and quarter 2. This meant that we have a little bit more aware on our production equipment, but also that maintenance that we normally would have done in the first and second quarter, they were all done in the third quarter, and that drive some extra costs. Division South is, as you might know, is a relatively recent acquisition. We took control on the 1st of October last year. We are very happy with the development so far. It has gone extremely well, we would say we are ahead of our plan.And we also had a relatively good development in the third quarter, primarily driven by the continued rollout of the Happy Bio brand to the retail trade in both France and Spain. We can then go to the fourth page, in the quarter 3 highlights. This is pretty much a short summary of what I've already discussed, and the somewhat weaker sales also meant that our EBITDA was slightly down for the quarter. What we're happy about still is that we managed to have a very good cash flow, which more than tripled compared to the same period last year. Let's go to Page #5, which then highlights our revenue development for the third quarter. A big portion of the growth is M&A driven, and there is the acquisition in France and Spain, the Alimentation Santé acquisition that we did last year, which explains that part -- with this part of the page. We did have some growth of our top 10 brands despite the fact that they were also affected by the lower sales where restrictions were lifted, but they're up 2.4%. As I already mentioned, we had a continued good development for the Happy Bio brand in France and Spain due to the rollout of the grocery trade. Many of our brands in the Nordics also do well. Urtekram was growing, and the Friggs brand was growing. The Helios brand was growing at very healthy rates. A little bit more challenging situation in the self-care products where we had a drop in sales, and this is what you saw in -- what you see in the other part of this page. And then we had a quite negative currency effect, which is basically due to the strengthening of the Swedish krona, both against the euro and the Norwegian kroner. We can move to Page #6 and look at the year-to-date figures. And as I mentioned, although we are disappointed about the third quarter and the drop in sales we had due to the different restrictions, I would say that the overall development during the COVID crisis has been positive for Midsona. We have been growing sales at healthy rates and also see a very good improvement in both the EBITDA and the EBITDA margin. We almost doubled the net result, and we almost tripled the cash flow during this first 9 months of the year. So while the third quarter wasn't our strongest, we still feel that we are in a good track. And again, this is mainly due to 1.5 months of very slow sales in the second half of July and the month of August, but then we have seen a bounce back in September. Let's move to Page #7, which outlines the key points on the System Frugt acquisition. This is a major acquisition for us. I said it as almost 20% to sale pro forma. It's a strategic one. Midsona is the market leader in dry organic products in all the 4 Nordic markets. And this is, of course, an important growth area for us. But still, there are lots of consumers that are mainly focused on conventional products and mainly consume conventional products. So the acquisition of System Frugt to get a very strong brand Earth Control, which is focused on conventional dry product. It's a very good combination to our organic brands. The acquisition gives us a very strong position in the Danish market. Where we, not really, but almost double our presence, but it also gives us the opportunity to develop positions in other Nordic countries. System Frugt has wider control brand sales and operations in all the other countries. I would say that they do not have the same leverage with the customers as we have that we see good opportunity to further drive sales in those countries. Furthermore, we have identified significant synergies, about SEK 34 million to be relet until the end of 2022. So this is a major acquisition and one that we are very happy about, and we took control already on October, beginning of October. So the System Frugt figures will add to our sales and EBITDA already in the fourth quarter. And by that, I leave the virtual [indiscernible] to the CFO to do the financial review.

Moving then on to Page #9. This will be very much a summary of what Peter has already mentioned previously. But if we look at the quarter and also the full year results, we see here that we are slightly below than on the EBITDA level in the Q3. But on the overall, we are quite far ahead. And what we can say is that the pandemic has really offset our seasonality where we normally had a strong -- a weak Q2 and a strong Q3, and we see a little bit of the reverse here this year. Looking in also into the our cost saving programs, I mean, we are continuing our cost savings programs in the Nordics, and they follow plan, as we will see a little bit later on here also on the total cost levels. And we are working very much closely with the maintenance costs in Germany and also with the continued integration of the Europe South, where we also see cost savings coming out of these operations. Our financing cost is slightly lower this year compared to last year and it has to do with some restructuring of our internal debts and how those are calculated. We also see the depreciation that is very much related to -- there's not much -- yes, it is really the acquisition of the Europe South that has affected the depreciation. Income taxes are in line with the different income taxes that we have in the different countries. So the profit for the period is just almost in line with last year. But year-to-date, we see a quite substantial profit compared to last year. If we move over to Slide #10, going in a little bit into the different segments. In the Nordics, we see a little bit slower sales, as Peter mentioned here, very much related also to the health food trade, pharmacy and also food service in the wake of the pandemic. However, we see continued focus on the cost efficiency programs that were launched back in 2019 and also a continuous -- continued cost efficiency tracking towards the development that we have during the year to secure that we have a profitability increase going forward. Northern Europe here, we had, as we mentioned here, we had some delays in the launches of -- to main customer here. And this suite of branded products, meaning also that we have a higher stake of private label products driving down the gross margin in the quarter. However, we see now that we had launches are coming out now end of September, beginning of October. We also had some maintenance costs related to the high utilization of the factories in Q2 that we took in Q3. South Europe, as mentioned before, we have a very good development. We are very pleased with the development there. Of course, South Europe is also affected by the pandemic, but still we have good growth, especially of our brand in the grocery trade, which is the Happy Bio brand. So we're very pleased with that development. Moving into Slide #11. As mentioned, the free cash flow. Cash flow is a main component for us also for the -- for going forward with more acquisitions in the future. And behind this, we see a sound and improving base business profitability wise, but also a continued high focus on working capital. This is a struggle, especially now like in the pandemic where we need to secure supplies and therefore, have had a little bit of a high inventory level compared to what we normally would have had but that we need to secure also the supply out to our customers and also supply the supply from suppliers where we see different countries going into lockdowns and opening up and then going back into lockdowns again. So I think that we have managed this quite well in light of the pandemic here. And this is also shown here in the free cash flow, which has improved dramatically. Moving into Slide #12. This is just an illustration of our sales distribution where we see here that up until the end of September, we have -- that our organic category stands for 60% of our sales. And we can also see that on the right-hand pie chart, there are licensed brands in line with our overall strategy of around 20%. That has been the targets or the numbers that we have had for the last years. Of course, this will be a little bit offset now where we see that health food will increase here with the acquisition of Gainomax and System Frugt. And also the licensed brand will go down a little bit here going forward. With that, Peter, I'll hand over to you.

Great, and then I will move on to Slide #13, and I would like to make a short summary before we open up for questions. Of course, there's still many uncertainty considering the pandemic. And as I tried to explain, we have seen some quite erratic demand patterns. [indiscernible] [ short hoarding ] effect at the end of quarter 1, continued high demand during quarter 2 when we saw a lot of restrictions and lockdowns, then weaker sales at the beginning of the third quarters and restrictions were lifted, more of a normalized sales during the month of September. But overall, again, we are growing the business versus a year ago, and we have made major profit improvement. We now see a signal of new COVID-19 restrictions. And this might, of course, have effect on both demand and supply. Of course, it's very hard to predict how this will play out. But what I would say that what we have seen so far, and I think that that's a reasonable assumption also for the future is that the more restrictions in society, the more time people will spend at home and that in itself will lead to more home cooking. So that should then have a positive sales effect to us. So as restrictions have been lifted and we might now rather go in the other direction, we don't see any further volume risk from lift of restrictions in quarter 4, probably rather the opposite then. However, I mean, what is most important is the continued efforts that we make to grow our business further. The rollout in the grocery trade in Germany with the brand Davert and with Happy Bio in France and Spain continues in quarter 4. We have had very good development for Happy Bio in France and Spain during quarter 2 and quarter 3. The Davert brand had a very strong development in quarter 2, but then slower in quarter 3, as said, due to the fact that the retailer we're rolling out did a temporary pause, but we have started now again at the end of quarter 3 and made new orders at the beginning of quarter 4. We are very happy that we found this wind to make 2 good acquisitions. The Gainomax acquisition that strengthens our position in the sports nutrition segment. And then especially System Frugt, which is a major strategic acquisition, we have some very good growth and synergy potential. And one of the key focus here now in quarter 4, will, of course, be to start integration and then to start realizing synergies as soon as possible. We continue our focus on cost and cost savings. Special focus in [ Germany ] now considering the somewhat higher cost level in quarter 3. And I would say, overall, we are very humble about how the situation will develop in the future, but we are still doing that from a [indiscernible]. We think that there is very good opportunity for Midsona to continue to grow both sales and profit at healthy rates. By that we go to Page #14. I leave the word back to the operator to start the Q&A session.

[Operator Instructions] Our first question comes from Johan Brown from ABG.

So I have a couple of questions. We'll start off with the sort of stock situation among your customers. Do you have any sort of indication of how much that has affected your sales during the quarter?

I think that is, of course, very hard to say because we don't have the stock numbers by customer, so it would be very difficult. I think that there has been a significant impact. We saw a very clear slowdown in sales in the second half of July all throughout August. And it was, I would say, that it was quite weak sales, but then quite a good rebound in September again. So it is quite a major effect that we now have behind us, and we are back to the growth -- reasonable growth rates in September again.

October.

And October. I mean that trends continue in October, I mean. Yes.

So you mentioned a bit about extra costs related to the production maintenance. Is it possible to give some sort of number to that?

Well, the way I would put it is that in sales in division North was up a little bit, but EBITDA was about half. And I would say that this is all related to different types of production cost. I mean there is -- a significant part is different type of maintenance, which we see as one-off costs. Then there is a little bit of a mix effect due to the fact that we sold less of brand Davert due to the halt in the rollout of this major retailer. We also, to some extent, had a little bit of extra manning in production, which we then didn't see when sales were dropping. So the mix of those 3 effects, I would say. But production rate and maintenance is a better part of that. But all of these free costs I would consider being temporary.

So last question from me. It's on the gross margin. I think you were talking a bit about that just now. But -- so essentially, the product mix, raw material prices and FX should have aided a bit as well or on the counteracted at least. So what is extrapolatable if we put it that way on if we look on the gross margin?

I'm not sure I understood the question. What was the question?

Yes, sorry. So sort of the dynamic behind the gross margin since there are a lot of moving parts there, what can we expect going forward regarding all of these effects that we saw during the quarter?

I would say that we are not making those kind of forward-looking statements. As I said, I mean, I explained the effect in division North. In the division Nordic, it was a little bit of a mix effect, I would say, that we have lower amount of sales of self-care products, which typically have relatively seen a little bit higher margin, gross margins compared to our organic product and health food products. So that's an effect that we see in the Nordics. And division South, it has been a little bit downward pressure on the gross margin, but that has been related to production maintenance just in division North.

And we can also see, I mean, you mentioned here the FX effects and so on. And of course, the pandemic here now depends a little bit on how this pans out because it will -- it might and can affect, of course, raw material pricing depending on and so on. So that is one thing. Of course, then on the other hand, we have a stronger Swedish krona compared to previous year. So that improves it a little bit. So this evens out. But it is very difficult at this point in time to predict the consequences of the pandemic and especially when it comes to raw material pricing.

Our next question comes from Johan Dahl from Danske Bank.

Just on Southern Europe, can you -- I mean, you've had this operations in the company now for a year. Can you just update us on sort of some of the performance compared to what you expected when you acquired it? I think you talked EUR 5 million EBITDA. And also update us on the -- how synergies are expected to be realized here in 2021? What actions? And possibly the time line for that?

I would say that, first of all, we are very happy with this platform acquisition with [indiscernible] We have done a very good integration, a very good team down there. They are now driving the right type of products in terms of especially the rollout of the Happy Bio brand. I mean what we're doing is that we have mainly been in the specialty trade as we are now moving the brand out in the net market trade. And we think that, in the long run, there will be much more potential in that. So I think they have done an excellent job in that area. So we are very happy. Developments, we are ahead of plan. Then in terms of synergy realization, I would say that we are on plan or potentially slightly behind plan. And the reason for that is that when it comes to synergy projects, these are collaborative processes and many of those have been quite hard to execute during the pandemic. So there has been kind of a halt for half a year in that. And also, as mentioned earlier, in the first half year, we saw very high demand from customers and consumers in new divisions of which meant that the key focus was to secure customer and consumer demand. So I would say that we still have some way to get there, but there is, on the positive side, because that's an upside.

What we can say is also there, we have -- apart from the cost synergies we're making, we are already now in different projects with source -- common sourcing. We are in a different project with product swapping with South, the products from the Midsona group previously launched under the Happy Bio brand. There are very good projects ongoing and being launched into these different markets. So there are a number of projects, collaboration projects ongoing. But as Peter said, they are on the slow side right now. It has been a little bit slow side at the moment. I don't know if System Frugt, if you want.

And Lennart was talking about System Frugt. And of course, that's one of our key focus here is now for the fourth quarter and forward to start that integration process. I think that now we've only been owners of the company a couple of weeks, but the reception has been very good from [indiscernible] personnel. Progress have already been started. We are looking at our joint organization and we're making some progress on that. We see a good opportunities I said, both on the cost in the side, but also increasing as we get to know the company on active driving the product portfolio in the countries outside their home market, Denmark, where we have a lot more critical mass and thereby leverage vis-a-vis the trade, both at the headquarter level and in-store. So this is quite an important priority for us now and something that will give a very good addition to company results.

All right. Just a question on this inflation you're seeing on logistics, some raw materials, et cetera. I think you talked about price hikes in the report. What are the sort of potential to actually recoup that loss that we saw here in third quarter? And also, if you can just mention briefly this maintenance cost. I presume that's sort of a normal -- the normal operations that happens every year and nothing you should really take out of -- treat as an extraordinary item.

Yes. If we start with the second question on the maintenance cost, I think that, one, there has been some pent-up maintenance because we just did not have the time to do it in quarter 1 or quarter 2 due to the very high demand. And then the fact that we have been running at high capacity utilization has meant that there has been some extra wear and tear on the machines, and that might, to some extent, have caused this. But I would say that this is -- fourth quarter, it's a lot more than normal and also some, I would say, unfortunate incidents. But -- so I see those as more one-off costs. They are not recurring at that level at all. So it is, for sure, one-off costs. Sorry now, what was your first question again? Sorry, Johan.

What is -- what prospects do you have of actually compensating for this logistics inflation that you're seeing?

I mean our principle on that is very simple. When we have raw material price increases, we should take those to the market, to the customer and consumer. I mean that's the only way. And that should go both ways. If we have lower raw material prices, I mean, for sure, our customers would come back on that. So that we -- our intention is to price for that, and we will do that.

You will do that, is that what you're saying? Have you announced already [ a price like that ]?

Sorry. We -- maybe I should -- [ present tense ], we are doing that, to be clear.

[Operator Instructions] Okay. There appears to be no further questions. So I'll hand back to the speakers for any [indiscernible] remarks.

Thank you so much.

Thank you.