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

Welcome to the Midsona Q2 Report 2021. Today, I am pleased to present CEO, Peter Åsberg; and CFO, Max Bokander. [Operator Instruction]. I'll now hand over to our speakers. Please begin your meeting.

Thank you so much, Peter Åsberg, speaking, and we can turn to Page #2 immediately. I would like to start by taking you through some of the highlights and explanations of the quarter behind us. And it should be said that we did have a second quarter with challenging comparison figures, which was very much due to the hoarding that we saw in quarter 2 last year. Still, we think that there are some clear explanation for the performance. We think that there are a number of positives And also, we have a strong action plan moving forward. And by that, let's go to Page #3 in the presentation, where I will take you through the key developments. As already stated, we had tough comparison figures due to last year's product hoarding. It should be said that we were gradually improving in the quarter. So the start was weaker, and then we became stronger, pretty much month by month. And in the month of June, we actually had an EBITDA that was better than last year. So that we think is a strong sign that our marketing and sales activities are working. It's also important to say that our own brands did comparatively better. Actually, if you look at the total portfolio of our own brands, they were slightly growing by 0.2%. A little bit different from what we are normally used to. Prioritized brands actually were declining in the quarter. And those are the brands that have a big positive effect from COVID last year due to hoarding. It's mainly the dry organic products, where we saw major uplift last year. And then what is doing comparatively better then is the brands that did not do so well last year. Since many of our consumer health brands, Friggs has continued to do very well and also our sports nutrition brands are some great during the quarter. I've been talking before about the rollout of our organic brands, Davert in Germany and Happy Bio in France and Spain in the grocery trade. And this work has continued in the quarter. We have seen some good progress on that, although we were meeting the same hoarding figures as we have done for many other brands. So we see that our program to roll out in the grocery trade across Europe is working and it's gradually gaining speed. One positive is the fact that we have improved the gross margin in the quarter. And even though the improvement might not look the biggest at paper, it should be mentioned that what we have in the numbers for this year is System Frugt. We were margin in the lower part of 20s, meaning that the actual improvement in gross margin is quite significant. And this is some good mix effects. We are selling a better mix of products and also the program that we have for common sourcing to source our products cheaper. Also, food service was very depressed last year due to the fact that people spend more time at home. We see a good rebound in the food service business. We have stepped up our marketing investment in the quarter. We have actually increased it by SEK 12 million versus last year, which is quite significant. This has had a positive effect on volumes, but also quite a negative short-term effect on the profit. But it was a good choice to strengthen our brands. We also have some unfavorable FX effects versus last year of about SEK 8 million. So that makes up quite a bit of the difference in profit versus last year. It should also be said that we have had service level issues in both divisions: North, i.e., Germany; and division South, Spain and France. And this is due to the fact that we have been out of stock for a number of raw materials. It's mainly products coming from Asia, China, India and Sri Lanka, where it has been delayed quite a lot. We expect to see a gradual improvement in our service level as we go back to a more normal situation after the COVID epidemic. So that was some of the key developments, and we turn to Page #4. And most of this, I've already talked about, and Max will also talk about the numbers in some more detail. I think the 1 thing that I still would like to mention is the EBITDA margin of 8.6%. Of course, comparing to last year, this is not so impressive. But last year was also very special. And we think that the better comparison is for the 2 in 2019 when we had an 8.4% EBITDA margin. So quarter 2 is historically our weakest quarter. And then we got a big boost last year, but that's also an explanation why the EBITDA margin is going down. We turn to Page #5. And here, you see that we have quite a big positive effect from M&A and this is the acquisition of System Frugt. We are very happy with the progress that we're making in terms of integrating the company. It should be said that the first half year and also including the second quarter is significantly weaker compared to the second half of the year for System Frugt. The big season for nuts and dried fruit is in the autumn and especially in the Christmas, and a lot of the Christmas sales are done in September, October and November. So we are looking at an uplift for System Frugt in the second half of the year. As you can see, our prioritized brands are down versus last year. Still, our total brand portfolio is slightly up, and this might sound contradictory, this is what I talked about before that we are doing quite well for our consumer health brands or sport nutrition brands, but we were cycling very high numbers for our prioritized organic brands, where sell a lot of the dry products during the hoarding period last year. We go to Page #6. And here, we can clearly see the effect of the hoarding last year. [indiscernible] So we are down in the grocery trade because that's the channel a lot of consumers were hoarding products. We're also down significantly in health food stores. And what happened in the second quarter last year was that we were -- we had closedowns in society, people went to nearby stores and especially in France, Spain and Germany. There are a lot of organic food stores, which are smaller and closer to where people live, and people shop a lot of goods in those stores and thereby the relatively big decline this year. On the positive side, the pharmacy trade is doing very well. We have increased quite significantly. Of course, here, we are citing lower numbers but we've also done some good launches, which we'll talk about later in the presentation and a big rebound in food service, that's, of course, a sector that was very depressed last year. And we see now month-by-month improvement in the food service area as societies are opening up again. We go to Page #7. And this is something that I would like to emphasize and something that we're actually quite proud of. It might not seem a lot that our own brands have an organic growth of 0.2%, but we think that it is quite good under the circumstances due to the fact that we were cycling the hoarding numbers from last year. So the programs that we have put in place have worked out very well. We have made a number of launches that has worked out well. We are continuing our path to increase in the grocery trade in France, Spain and Germany. So this is quite good. So actually where we're reducing out is in licensed brands. We have stopped a number of contracts where we're below margins. And that's also 1 of the reasons why we have a better mix and thereby better gross profit this year. And also some of the license brands' tougher times than our own brands, so that also speaks to the strength of our marketing programs. And then we have also lost sales in manufacturing. And we think that there also was some customer hoarding last year, which drops out of contract manufacturing, that's mainly private label products. And also, as discussed earlier, we have had supply issues. And of course, we want to supply all our customers. But from time to time, when we had shortages, we have prioritized our own brands. So overall, the positive thing here is that our own brands are still increasing, although we have had this quite difficult situation. Page #8. This I've already talked about. This is a key project of ours, something that is very important for the future. This is how we became very successful in the Nordics by moving our brands from the specialty stores out in the grocery trade. And this is the process that we are also going through in our main markets in Europe. We have invested quite heavily in that and we see growth, good consumer response and customer response. Let's go to Page #9. As said, we are increasing, we have a number of own brands in consumer health, and 1 of them is Mivitotal. Mivitotal is an iconic Nordic brand of Director supplements But traditionally, it has been liquid multivitamins that we have sold. What we have done now is to create a range of tablets in total into 10 SKUs, you see 6 of them here on this page, but it's 10 in total, as said. And we have got a very good listings both in Sweden and Finland and with the intention to roll them out also in the other Nordic countries. And also very good consumer response, we see massive growth for the Mivitotal brand. Likewise, if you look at Page #9, sorry, Page #10. We have done a relaunch of our Eskio-3 brand, meaning that we've done a design update. We have done a number of new products and also created a new marketing concept for the brand, and also here, we do see strong growth. So we have been able to contract negative hoarding effects from last year by doing -- taking a number of actions for our brands which has actually meant that on total, we are increasing slightly for our brand portfolio. Page #11. Sustainability is a big part of our company and something that we are working for quite some time. And we're very happy that we now have what is called science-based targets. So that's our way of reaching the Paris treaty and contributing to that. And those targets have now been approved and we have now started to look to actually make it happen. And this is something that could be a focus for a number of years going forward. By that, we turn to Page #12, and I'll leave the word to CFO, Max Bokander.

Thank you, Peter. And I would like you to move to Page #13, the financial executive summary slide. And some of my comments will be a repetition of just -- what Peter just talked through. In quarter 2, we had a net sales growth of 5.1%, but with a negative organic growth of 4.2%. Last year, strong sales due to hoarding, but also increased household consumption were challenging to match. The gross margin, however, improved, mainly driven by a favorable mix as a result of our own brands developing better than the other business. The lower EBITDA is largely explained by already mentioned higher investment in sales and marketing, and also additionally last year included a positive exchange rate revaluation effect. Regarding the items affecting comparability, it could be mentioned here that it's a net and the SEK 3 million includes also a write-off of intangible assets, which does not impact the EBITDA, where the one-offs then led to SEK 11 million instead of SEK 3 million. The free cash flow was during the quarter weak and impacted by the seasonal build of inventory, mainly within System Frugt and timing of payments for supplier invoices. I will come back to all my above comments more in detail in the following slides, and I now ask you to move to Page 14, the sales bridge. The structural growth on 14, 12% is represented by System Frugt adding SEK 104 million in sales, slightly also lower than last year pro forma, with the same comments as before with tough hoarding comparison numbers. And besides already mentioned organic decline, the currency continued to have a negative translation effect for this quarter at 2.8%. I ask you to move to Page 15. On this slide, you see net sales growth over the last 6 quarters. And please note that the sale of own brands has during these -- all these quarters being better than the average organic growth. I now ask you to move to Page 16, where I will go through the results more in detail. In the upper graph, you see the gross profit and the gross margin development versus pro forma last year. And versus pro forma, we improved the margin with significant, I would say, 1.6 percentage points. And despite 8% lower sales versus pro forma, we almost managed to generate the same absolute gross profit. In the lower graph, you see the EBITDA development and it was SEK 23 million lower versus pro forma, driven by the lower gross profit and SEK 12 million higher investment in sales and marketing and the fact that last year included SEK 8 million in positive exchange rate revaluation effect. Worth mentioning is that during this quarter, we finalized the operational integration of System Frugt, closer it was 1st June. However, the realized synergies during the quarter, these were accounted to SEK 5 million was done in the quarter, to a large extent, offset by slightly higher integration costs than planned, system costs, et cetera. These, of course, will not be repeated into forward quarters where we don't -- only will see the synergies. Please now move to Page 17 and the summary of Nordics. For Nordics, the net sales grew with 15.7%, including a negative currency translation of 1.5% and the structural growth for Nordics amounted to almost 20%, where System Frugt add SEK 104 million in sales. The organic sales development was minus 2.6%, mainly due to challenging comparisons in the sales channel grocery trade. And as Peter mentioned before, worth noting is that food service and pharmacies are growing, of course, partly due to low comparison rates. But to be noted, they are also up versus Q2 2019, with 14%, respectively, 6%. EBITDA was down versus last year and is to a large extent explained by the comments I just mentioned for the group. Please now move To Page 18, the summary of North Europe. Here, the sales declined with 10.2%, including a more larger currency translation negative effect of 4.5%. The organic sales development was minus 5.7%, and here also due to challenging comparison in the sales channel grocery trade and also health food stores. Also within North Europe, we see a strong recovery for food service and also here, it's up versus 2019. EBITDA was weaker than last year following the lower volumes, but also due to some less flexibility in the production expenses when the business, at the same time, assessing lower volumes, struggled with the service level due to disruption in the supply chain. And now please move to Page 19, the summary of South Europe. For this division, the net sales declined with 12.1%, including a negative currency translation of 4.4%. The organic sales development was minus 7.7%, with this division facing even bigger challenge to match the last year's strong sales in grocery trade and for them, a large sales channel health food stores. However, we would like to highlight that Happy Bio rollout in the grocery trade continued to show organic growth also in this quarter. The EBITDA was weaker versus last year from the lower gross lower profit and higher structural costs for the operations. The structural cost for future growth and running an independent divisions were not fully in place during last year. And now I would like you to move to my final Page, #20. During quarter 2, we had a weak free cash flow. It was impacted in comparison with last year by System Frugt having a low EBITDA in the first 2 quarters, but at the same time to build inventory for the high seasons in end of quarter 3 and quarter 4. This quarter was additionally negatively impacted by timing of payments to suppliers, partly as a result of ongoing activities to improve supply chains through disruptions. Regarding the year-to-date cash flow, I would like to remind you what I mentioned in the quarter 1, where we then decided to cancel an expensive factoring both within System Frugt and mainly within System Frugt to the level of SEK 67 million. With that, I would like to hand back to you, Peter.

Thank you so much, Max, and we move to Page #21, which is the summary and outlook page. So this is pretty much the last page of the presentation. It might be repeating myself a little bit, but as I said, we met tough comparative figures at the beginning of 2021. The last year's hoarding month was April. Then we have seen gradual improvement both in comparative sales but also EBITDA. Overall, our own brands are doing well under the circumstances. We have continued the successful rollout of Davert in Germany and Happy Bio in France and Spain. We also see increases in our consumer health portfolio with brands like Mivitotal and Eskio-3 and also continued growth for Friggs and the negative effects, as I said, is primarily in organic dry foods, where we also had the biggest positive effect in quarter 2 last year. We did step up marketing investment in quarter 1 and quarter 2 to support our launches, both in the Nordics and outside the Nordics, and also to take us through a tough comparison period. So that was the focus on quarter 2 and the year so far. A couple of things that I would like to mention before moving forward. We now have a strong focus on M&A again. The M&A market has started to ease up. It's now easy to travel. There are more discussions ongoing and there are more potential investment opportunities also. So it is our ambition to now be out on the M&A path again during the second half of this year. It should also be said that in quarter 3, we're meeting easy comparative figures, and we will also go back to a more normal marketing spend. So in summary, we had a tough quarter 2 with tough comparisons. We think that under the circumstances, we have done well. We are looking positive at the future, and we continue to drive our own brands to create this strong European company. We have a strong presence in the grocery trade organic products across Europe. And we also hope to come back with some news on M&A during the second half of the year. Thank you so much. And by that, I move to Page #22 and leave it open for questions.

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

A couple of questions from me, and I'll take them 1 by one. So just an update here on the extra marketing costs here. Are we talking just the removal of this SEK 12 million sort of a time-limited marketing campaign? Or are you still going to sort of continue to have slightly higher marketing costs during the second half of the year as well?

Well, not being exact, I would say that it would be in line with last year. Then of course, we've added System Frugt with some extra marketing activities through the second half year, but in line or slightly higher versus last year, but now some in -- in quarter 1 SEK 18 million extra, in quarter 2 SEK 12 million extra, and it will not be up at all to that extent in the second half of the year.

And in regards to the North Europe division, you mentioned that you had a product range shift here, some trouble with overlapping. Is it possible to give some indication about the sales volumes lost during Q2?

It's quite difficult to do that, but it is significant. We have had -- 1 is the overlap that you were mentioning, but I think the big effect has been service leverages and supply chain issues, and this is something that we've been working very hard on. Both demand and supply has been very erratic. And we have had a number out of stocks for major products due to the fact we simply haven't got the raw materials in. And this is, of course, due to the fact that the transportation chain, especially from Asia has been disrupted during the second quarter. And as I said, our expectation is that it will improve gradually as COVID is downplayed. But to be quite honest, we are very humble about this because we have seen so many ups and downs in this respect. That said, what we have been trying to do now is to have some extra safety stock for a number of key raw materials, so that should increase the situation looking forward.

And regarding the year-on-year growth in EBITDA here in June, is it possible to say something about the organic growth in June as well?

We don't typically, I mean, give out those kind of figures. But I would say that, I mean, I repeat the message that I said earlier that there has been a great improvement in sales month by month. And then of course, that is also reflected in the EBITDA. So it has been improving month by month. And the real hoarding was in April last year, there might have been heightened demand in certain channels, especially in countries like France, where you had more demand in the health food store during the -- or at least first month of the quarter, but we will not give out a specific figure. But as I said, I mean, a gradual improvement.

And the last question as well in regards of the gross margin and the -- and how you feel about the second half of the year here where we do have a lot of supply chain issues and fight costs increasing and so forth. And you mentioned the -- that you have increased inventory levels and so forth. But how do you see all of these costs bundling together after a very strong gross margin in Q2? And how do you feel about your pricing power here, if any costs were to continue to increase?

Regarding the margin, we are dependent on the share of System Frugt. And for quarter 3, there will be a proforma adjustment that means that the margin will go down compared to quarter 2. But we still see -- expect to see an underlying improvement in the underlying business also for quarter 3. But if we look at the margin exact comparison, Q2 with Q3, since System Frugt will have a higher sales and they are on the lower margin, it will go down as a comparison with Q2. However, we see good signs for being able to continue a better margin than last year. Pricing power, of course, that's difficult to discuss. There are windows of negotiation. It's in the first semester of the year, and there is in September, I don't want to predict too much regarding that.

What I would like to add to that is that our -- generally cost of raw material price increases, we will price to those, but as Max was saying that there might be a lag effect, which then, of course, might go in both directions. It takes some time to get price increases or price decreases through the system.

And maybe on the comment on the raw materials. We have not yet been exposed to significant raw material cost increases. There are some trends. However, short term, we have a positive effect because we have quite high inventory in certain areas. But for sure, when it comes, we will focus on passing it on to the customers as well.

And our next question comes from the line of Johan Dahl of Danske Bank.

Just a question on last year, you had this maintenance stops, I think, in the European operations. Could you just clarify how you're planning for that this year in the year-on-year comparison? And also if there are any positive FX one-offs, which we should be aware of here in the comps last year?

If you look at the maintenance stops, we traditionally do 1 in France every year. That was done in the second quarter. Then -- what you see in this third quarter is that you have normal vacation period in all European countries. It might be July in some countries, August in others. But that's exactly the same as last as I see no difference in that respect. So there are no planned longer maintenance stops in quarter 3, no.

And are there any in Q4 that you want to talk about?

No, not at the current moment, no.

And just on the growth. I mean if you just zoom out a little bit and look on the Midsona's group performance first half last year and the first half of this year, I mean I guess, the growth you saw last year is fully offset by the decline this year. And still, we talk a lot about these positive trends out there. And also, I'm just thinking if you were to highlight sort of the weak spots in the system, it seems to be a bit of the licensed brands. And what's your strategy for those licensed brands forward? What's sort of at risk here in your license part of the portfolio? If you can also address the sort of supply issues, I would presume that, that's neutral from a competitive standpoint with the supply issues. And I guess being a large play, you'd be preferred sort of receiver of goods in some sense. But can you just highlight how that has stayed and it just fell through in your -- among your customers that is really weak? Or what is actually happening there?

Yes. I will try and explain or answer that -- those questions. If you start with the first in terms of the mix by sales type. So overall, I would say that our brand portfolio is doing well and that we are increasing. As you have seen, licensed brands has had a very negative development in this quarter, but also in quarter 1. There are a number of license agreements that has not been renewed. And many of them were at very low profitability levels. And then there were demands for even lower volumes from our side, which we declined. So that means that in the Nordics, we have a few brands that are in sales quite significant, but in margin, very insignificant that we have just stopped selling. So the effect that you see in the second quarter, this is something that will continue more or less a year out. It will vary a little bit by quarter because we have some quite important licensed brands that we still carry like the Compeed brand, which we're very happy about and that brand that we will continue to drive and then some of our brands. Then, as you have seen also, we have quite a huge decline on contract manufacturing. So we have been doing a lot better with our own brands compared to contract manufacturing. It's hard to give a good picture of what is driving that. Of course, 1 would maintain that our sales and marketing efforts at work, our own brands have done better than the private label brands. There are some competitiveness out there. So we have lost a few contracts because prices were too low. We couldn't continue those contracts and we stopped them. So I would maintain that our brand portfolio focus continues to develop well. And although 0.2% in growth might not seem a lot, it's quite good considering the circumstances that we had during quarter 2. When it comes to supply issues, yes, I would say that we do have preferred status. But what has happened is that I can take examples from -- I can take an example from Sri Lanka where we take a lot of products, when workers don't come to work because of the pandemic or feed success is down then it does not matter if you have preferred status because there is no one there to the harvest raw materials. And also, we have seen major disruptions in the transport chain, I think that this is something that goes across almost all industries that there is lack of containers in China and India and other places in Asia. There have also been disruptions when products are entering Europe because the harbors have been full, so we haven't been able to unload. This is something that we've been working on and working quite hard on. And I would say that as Max was saying, we have also increased our safety stocks where we could do that. That has included the situation a little bit. I think it looks better now but as said, it has been very erratic, the whole supply chain and supply chain patterns. So we are still very humble of that. And this is something that we operationally work on day by day to crew. And as said, as the pandemic hopefully becomes less of a force, we think that the situation will improve.

So but if I understand you correctly, Peter, you're saying that sell through among grocery trade for these products, is it down due to supply chain issues is not that you're worse affected than anyone else?

So 1 more time, you -- what did you say now?

If I -- can I just move on to another issue on the cash flow. You talked about new regulation, and we also saw this issue on factoring, which you fixed here in the quarter. If you look forward, given this new regulation and potential new sort of factoring reversals, how much cash flow is sort of your plan for being tied up in the group?

The factoring have had a one-off effect unless we start with factoring again. We have not -- and which is not in the plan. And to certain limits also not allowed in our bank contracts. So factoring have had the impact and will not impact further. This new regulation that is European directive for all businesses within agriculture or food is new. It was finally decided in Sweden, the 10th June. And there are then saying that all payments must be done within 30 days. And this is still too early to assess the impact for us, but you don't see the effect in the numbers at the moment from this. But as we said in the report, we are now digging deep into this, and we'll be able to come back later in -- together with the Q3 report how this will impact us. But our cash at the end of the Q2, we had available funds about plus SEK 300 million.

I guess the reason for mentioning it, I guess, because it's material. And I'm just thinking if you can have any interval or any idea without giving any specific guidance on this issue?

No, it's too early to say, and I don't want to give a number which I don't feel comfortable about at this stage. So I will come back to that in the Q3.

Okay. This closure of the facility in duress, you talked about some exo costs here in the third quarter. How much are you planning for? And what will be the sort of efficiency gain from that in your plans?

As we mentioned in the plan, it's a smaller facility, smaller factory. It has been losing EUR 100,000 a year, and that's why we are closing it. The benefits will be around that plus something more. There is a building that we own -- we need to be able to sell that or discontinue it. That could be part of the restructuring costs. There are a few people leaving, it's a smaller business. It will not be a material impact. But we want to show, and it's sometimes the numbers, even though if it's small, it's a disruption and you -- it's difficult to quantify the synergies or the benefits in the financial business case for these smaller businesses, but it's the right decision to close it, and we move the profitable products to our current facilities and the closure impact will -- as I will communicate is limited.

Okay. Got you, very clear. Final question. Just on the SEK 20 million, SEK 25 million in the marketing and sales investment you've done in H1, I just -- correct me if I'm wrong, but that's sort of aimed at driving instant sales, right, in terms of consumer demand. It's not any sort of CapEx project as such to drive sort of volumes at a later stage. Just a clarification.

No, it's not a CapEx project, but it is, I would say, a long-term investment in our brands to solidify their positions in the market where we're launching the grocery trade in Europe. But also to strengthen our brands in the Nordics and support some of the launches and relaunches that we made recently. So there is no CapEx. They have had a positive effect in quarter 2, but I think more so looking forward, yes.

But I guess these campaigns, they drive -- they should drive volumes in, isn't that right? Why should it drive volumes in H2, apart from brand awareness?

No. But I think that it's a long-term build up. I mean what you do when you launch in new markets, you have to create burners for the brands. And then that's quite a slow process. So this is not something that's happened. It's not that you do indirect actuation where you put down the price or something like that or other campaigns. So this is more long-term marketing of the brands and the way to show -- especially customers also that we are very serious about the launches that we're making and that we're here for the long term. So I would say that they have more of a long term in that sense. So it's not a classical promotion that we have done.

[Operator Instructions] Okay. There seems to be no further questions at this time. So I'll hand back to ask for the closing comments.

And then I would simply say thank you, and we will continue to work down the path of becoming the leading European company in health and well being, and we look forward to update you again after the quarter 3 report. And I wish you all a very nice summer. Thank you so much.