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

Hello and welcome to the Midsona Q3 report for 2021. Today, I am pleased to present CEO, Peter Asberg; and the CFO, Max Bokander. [Operator Instructions] I'll now hand you over to Peter Asberg. Please begin.

Thank you so much, and welcome. I will start with our general business update, and then Max will go more into the actual numbers. And I propose that we turn to Page #2. And although we increased sales and improved both the gross and EBITDA margin in the quarter 3, we have to acknowledge that it was quite a challenging quarter for us. And our organic sales were actually slightly negative. And there are a number of reasons behind that. First of all, we see negative effects from the total reopening of societies after the pandemic. And that effect has been a little bit bigger than we had actually expected. But still, the key issue is in our supply chain, and we have a number of factors that have affected us quite negatively. First of all, we have had bad crops in many parts of the world during the summer period. We had drought as well as floodings in Europe, Asia and South America. And this has led to delays in deliveries of key raw materials to us. They are arriving step by step, but it has taken longer, and it has been more difficult to obtain them than we had expected. We have also delays in deliveries of tech materials. And on top of that, we have had severe transport disruption, especially from Asia and South America. So this is the overall pitch and this is, of course, something that we've been working very hard on to mitigate those issues. It looks a little bit better now. But still, we do see challenges in front of us also in quarter 4 and forward. Our sales increases in food service and pharmacy and those were the segments most affected in the pandemic. So now we see a reverse positive effect. In the grocery trade, we see good development for our brands, a slower development for private label. And then we have had a major issue in the health food stores. We have seen a major decline -- a major market decline, but still as far as we can judge, we are keeping -- we even increased our market share. As I've also pointed out in the report, we do see first signs of price inflation for raw materials because of the poor crops for packaging materials, but also for transport. We have started to look at the price increases, which we will now gradually implement. Looking at the divisions. In the Nordics, most parts are actually doing quite well. The key issue had been Christmas sale of dried fruits and nuts from our facility in Denmark. We had major delays in deliveries of raw materials and therefore, we haven't been able to produce to the extent that we wanted and also part of the organic assortment, we have seen supply issues. In division North, which is the dark region for us, we see a solid development of the brand Davert, but weaker development also here in health food stores. And in Division South, we see a very strong development for our brand for the grocery trade Happy Bio. It's up 38% in the quarter. And this is driven by the rollout of the Happy Bio as a brand in the grocery trade in France and Spain. So it has been a difficult quarter, but we're still confident about the future. We also welcome the fact that Stena Adactum, our main shareholder, has shown confidence in the company and bought quite a significant amount of shares now in the morning. So we will continue to tackle the issues that we have and look forward and thereby improve our operations. We can turn to Page #3, please. Just a couple of brief notes on this one because Max will go through it in much more detail. We are increasing sales by 9%. But as said, this is acquisition-driven growth. We are, however, increasing EBITDA at a faster pace than the net sales, it's up 11%. We are showing some improvements in our operations in this sense. We turn to Page #4. And this is our organic growth by channel, and this pretty much describes the situation that we have and also the challenges at hand. In the grocery trade, we are slightly down. But as I've said, our brands are doing relatively well, and they are growing a little bit. We see the main issue is in private label development. We have had a major decline in the health food stores. It seems like consumers have abandoned the stores when the pandemic was over. Many of those stores are in the cities, and we think that people in the cities have spent more time in restaurants, but also gradually been going back to the net market trade. So this is the issue. So we see really, really poor sales. Still, as said, our judgments is that we have kept or maybe even increased our market share in the health food stores. Pharmacies and food service are doing well. And this was, of course, the reverse effect of the pandemic when society is reopening again. We turn to Page #5. An important part of Midsona is the driver innovation pipeline. And we are now launching actually a new brand, an organic skincare brand called narcissa. It is actually in addition to the Urtekram brand, but it's targeting a younger target group and is more focused on skin care, while typically or traditionally Urtekram has been more focused on hair care. So this is something that we're excited about, and we're gradually rolling it out first across the Nordics in quarter 4 and then increasingly in the rest of Europe in 2022. We turn to Page #6. The Kung Markatta brand is one of our prioritized brands, and we have done a number of improvements to the brand that now we plan to show in the store. First of all, we have launched a new design, which we think is very up-to-date and very contemporary. I think that this will be a major factor driving the brand forward. We are also driving innovation and have launched quite a few new products, specifically in the Frozen segment. We see a couple of products on the right-hand side of this slide. Also, on the left-hand side, you see our nut butters, and this is not a classical innovation, but we're quite happy that those products have not been imported. We're producing them in our own plants rather than having them outsourced as we had before. Page #7. I already talked about this, but a major initiative for us is to roll out our key brands in the grocery trade in Europe. In Europe, a lot of the sales are still in health food stores, but we think that the future is in the grocery trade. And we had good single-digit growth for the Davert brand in the grocery trade in the quarter. And as stated earlier, Happy Bio grew a spectacular 38%. We go to Page #8. In the quarter, we have also raised about SEK 500 million via share issue. This is a way to drive our M&A agenda. It is part of our strategy to be a consolidator in the Nordics, but also the rest of Europe to buy good family companies and develop them further. And on Page #9, we see the acquisition that we did during quarter 3. We acquired the company Vitality in Finland. Finland has been our smallest market where we had the smallest presence in the 4 Nordic markets. So this is a good addition to the Finnish business. It will mean that we add product both on the dietary supplement side, but also some organic products. Also, very importantly, we are driving critical mass, and we're also getting a significant foothold in the pharmacy sector where we were traditionally being weak in Finland. So this is one acquisition that we're doing, and we're constantly on the hunt for new acquisitions. We see signs that the market for acquisitions is opening up again, and we are in discussions on a maze of interesting things here. We go to Page#10. I think Max will go to Page 11 already, and Max will go through the financial statement for the company.

Thank you, Peter. Yes, please ensure that you are on Page 11, the financial executive summary slide. In the quarter 3, as Peter already mentioned, we had a net sales growth of 8.8%, driven by structure. The organic growth was a decline of 3.9%. This due to the disruption in supply chain and lack of certain raw materials. The gross margin, however, improved mainly driven by favorable mix as a result of our own brands continuing developing better than our other business. The improved EBITDA versus last year was driven by structural growth. and improved gross margin and also realized synergies. Not shown on this slide, I would also like to highlight that the EBITDA margin came in slightly better than quarter 2. And this is also despite slightly lower sales. So we see improvements in the underlying business despite tough circumstances. The free cash flow was during the quarter, impacted by seasonal build of inventory in System Frugt and timing of customer payments. I will come back to that in a later slide. Please now move to Slide #12. The structural growth, as I mentioned, is driven by System Frugt, adding SEK 109 million. And besides already mentioned organic decline, the currency continued to have a negative translation effect. But for this quarter, a more modest 0.6%. Now please move to Slide #13. On this slide, you see the organic sales development over time. And we would like to highlight the constant better performance for our own brands. Please move to Slide 14. On this slide, we compare actions with last year adjusted for System Frugt, we can call it proforma as we do in the slides. And in the upper graph, you see that the gross margin improved with 1.4 percentage points versus proforma. And as a result of this, despite 8% lower sales versus proforma, we almost managed to generate the same absolute gross profit. And in the lower graph, you see that despite SEK 62 million lower sales versus proforma, the EBITDA came in at almost the same level as proforma, where synergies, cost control almost fully offset the lower gross profit and additionally a SEK 4 million negative exchange rate variance versus last year. I now please ask you to move to Slide #15. In the summary of Nordics, I want to highlight again Nordic is our largest division, representing almost 70% of the group sales. And here, the net sales grew with 15.7% driven by structural growth System Frugt again, adding SEK 109 million. The organic sales development, however, was down 4.5% and here partly explained by an exited low-margin licensed brand sales contract, which we also have highlighted in previous quarters. Additionally, global supply chain constraints had negative impact on delivery into grocery trade and food service. And in this division, food service actually had a small decline, but the underlying demand was greater. But due to service level situation, there was no growth. The EBITDA improved with SEK 7 million. This despite the SEK 4 million variance in difference of exchange rate relation and the stronger EBITDA was driven by System Frugt addition and realized synergies. Please move to Page 16. In the summary of North Europe, net sales declined with a modest 0.8%. However, excluding negative currency translation, the division demonstrated a small organic growth of 4.4%. And despite constraints in global supply chain, sales of products from own brands demonstrated a strong growth of 4.7%. This is driven by the Davert deployment in grocery trade. The EBITDA improved with SEK 5 million versus last year, driven by the improved gross margin. However, for comparison, we should mention that quarter 3 last year included extra temporary high production costs. And now please move to Slide 17. In South Europe, the net sales declined with 6.7%. This including a negative currency translation of 1%. The organic sales development was minus 5.7%. This division has the largest exposure to health food stores. And within this division, this channel was down 14% during the quarter in a tough market. And we track external statistics that indicate that the health food stores in France were down up to 20% for Midsona product categories. But still, we believe we are performing well under circumstances. What we want to highlight is, of course, that we emphasize still the strong focus to also deploy our product in grocery trade with or through our Happy Bio brand. And during this quarter, Happy Bio grew 38%. EBITDA was weaker versus last year from the lower gross profit following lower volumes. And now I would like you to go to Page #18. The quarterly free cash flow was negatively impacted by worse working capital development versus last year. This is driven by System Frugt with their seasonal building of inventory. And I want to remember you that System Frugt was not included in Midsona last year at the same time. However, this year, free cash flow is significant weaker than last year and looks to continue to be weak also in Q4. And there are some clear explanations for the variance versus last year. Some of them we have highlighted in previous quarters, the discontinuation of the factoring in Q1 that had, had a negative effect of SEK 67 million, and we were close to that or we wanted to as well, but limited in our bank contracts to continue with factoring. System Frugt building inventory has also had a negative effect in comparison during the first 9 months. And additionally, now in Q4, Midsona will have a negative working capital effect from the new EU directive related to unfair trade practices, where Sweden have decided to implement it with a new regulation limiting payment terms to 30 days for companies in the food sector, this starting from 1st of November. And within Midsona, we have historically managed to have favorable net of accounts payable and accounts receivable. We will, of course, focus and really prioritize to have good balance on that in the future as well but with more restriction. With that, I would like to hand it back to you, Peter.

Thank you, Max. I would like to shortly summarize before we open up for questions, and we can do that on Page 19. We do see increased net sales and improved margins. But as stated, it's acquisition-driven and organic growth is slightly negative. On the positive side, the continued rollout of Davert in grocery trade in Germany and Happy Bio in the grocery trade in France and Spain continues to do very well. The main issue that we have had during the quarter is key supply chain challenges. It is a little bit of a perfect storm with lack of so many raw materials, lack of key pack materials and also delays in the transportation chain. This is, of course, something that we put high priority on to pick and to work very hard to mitigate the [indiscernible]. And as stated, we have seen some gradual improvements, but still a lot of work ahead of us to look forward. As part of the bad crops, increasing cost of pack materials, we are preparing for price increases, and we do see that they would have a gradual effect in the beginning of 2022. We did one acquisition during quarter 3, and our objective is to continue to acquire company mainly in Europe to build this European health and well-being company that we strive to be in the future. Looking ahead, we are confident about the future. We are sure that people will continue to want healthy and sustainable foods that Midsona provides. Still, there is uncertainty in quarter 4. And the key challenge is the supply chain situation. It should gradually improve, but we're very humble about things evolving very fast, and we're keeping a close eye on this. Thank you so much. And thereby, I open up for questions.

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

I'll take my questions one by one. Firstly, is it possible to give some color of the magnitude essentially of these price hikes you're planning?

What we have said in the report is that they can be quite significant. It varies very much by country, by product groups. I think that giving a figure would not point in the right direction. But our ambition is that we should compensate for cost increases that we've had, that's our clear ambition, and we have good hopes that this will also materialize because the issues at hand are well known to the trade, and they are well documented also.

And then another one, is it possible to quantify the missed sales, if you will, of these supply chain issues, service level issues? And yes, crop issues as well?

I think it's some of the theoretical question. It's something, of course, that we do discuss internally as well. it's impossible to give a precise figure on that. But for sure, it's a significant shortfall we have because of that. And the major driver why our organic growth is negative. Had it not been so, my judgment for sure is that we would have had organic growth of the company.

Great. And then on System Frugt as well. Two questions from my side. In the report, you're mentioning that synergies haven't really come through entirely. Are there any specific issues here? Are we talking about the plan increasing synergies over time?

I would say that the implementation has been more difficult than anticipated. It's -- we have done a lot of integrations in the product. I think that this has been one of the most challenging ones, and we're still working on that, and that's why we have seen some delays in the integration. And then I would say that the combination of being in integration mode and at the same time, facing the operational issues that we're facing in terms of significant lack of raw materials, issues with transports, that has created a quite difficult situation for team in Denmark. This is something that we're working together with the team now to find solutions. We have had a number of meetings on this subject, and we do think that we have a solid plan going forward to fix the issues and hop back to growth again.

And maybe I could add to it as well. In those terms, the synergies could be classified into different categories. Of course, there are sales synergies and there are maybe purchasing power synergies, and there are strict cost synergies by combining the organizations. And when it comes to realizing the cost synergies, these have been following the plan. And those have been realized. And in the quarter, we had SEK 7 million of cost synergies.

Great. So SEK 7 million of cost synergies. And then at the time of this acquisition, you expect the sales here of SEK 562 million and then an adjusted EBITDA of SEK 38 million, this is in Swedish krona. So a bit FX variations, of course, but is it possible to give any updated a rolling 12-month figure for System Frugt?

I would say that it all depends on the Christmas season, [indiscernible] into right now. It all depends on how we're performing in quarter 4. So it's quite difficult to give an estimate. And of course, we would have a rolling 12 -- for the last 12 months, but we are now integrated for one thing. And then two, we are not reporting figures for anything else, but our divisions. So I mean, I probably can't give you a figure, but I would say that I could stretch as long as except to say that a major deviation that we have had is the development in Denmark, which has to do with the supply issues that we've had and the integration challenges which have specifically affected the Christmas sale now that typically starts in September, we are seeing some serious delays in that.

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

Peter, Max, can I just continue along the same reasoning? If you just look on your Southern European acquisition made late '19, can you just update us where we are in terms of sort of profitability compared to where you were when you acquired the company and compared to your plans and just your sort of view here on the earnings performance in that area, please?

So I'm not sure which acquisition did you refer to now, Johan?

Alimentation Santé.

Okay. Got it. Okay. I didn't hear the first part of your question. Yes, we are first of all, happy that we did this acquisition because it provides a major platform in Southern Europe. And also, which is important is a platform in plant-based meat alternatives. So in that sense, this acquisition for sure was right on strategy. And one of the key priorities that we've been working now during the last year is the expansion of our facility for plant-based meat alternatives. We've done now the first test runs, and they are [indiscernible]. So now we are starting to scale up that product production, which will give good addition to 2022 and forward. In -- there is no doubt that we had a very disappointing quarter in division south in quarter 3. The main reason is that it was a quarter with very soft volumes compared to the infrastructure that we have built. Now we're working very hard on getting back on track in terms of winning new private label contract, but also, of course, driving our own brands. And we're very happy about the development of Happy Bio. The main issue in quarter 3 has been around the development of Celnat in the health food stores in France and Vegetalia in the health food stores in Spain. Where, as Max explained, we had a very weak development, although we still think that we did better than the market. So in that sense, we are behind in quarter 3 and behind the plan. On the other hand, we had a fantastic 2020. So overall, I would say that we are very happy about the acquisition, but the key now will be to improve volumes and -- thereby driving net sales. And I'm sure that this will work out very well.

I just -- I mean, you had -- I guess, as you mentioned, you had tailwind last year and headwind this year. for various reasons. So what I'm basically looking for is that your view of the big picture here compared to the earnings that these guys had when you acquired the company compared to what you're seeing now, you could argue that the tailwind last year would be sort of offset by the headwind this year. So where are you in terms of earnings in this area?

I would say that if you look at where we are right now, we are somewhat behind our expectations due to the fact that we have had a significant headwind this year. I feel confident that we have a strong team in place, a strong plan in place for the future, some good opportunities to be a major player in Southern Europe, a good brand in the form of Happy Bio, which is resonating very well with both customers and consumers, which is evidenced by the strong growth that we're having in quarter 3. And we have good hopes that, that will continue in the future. Then I said, the whole health food trade this year has been -- I mean, the negative effect, I would say, have been greater than the [indiscernible] that we had last year. So this is now our main issue to get the health food sale back on track again. Now having said that, as discussed earlier, this is a general market decline and we're still doing as far as we can get better in the market. So if not entirely up to us to turn it around, of course. I mean our main focus will be to slow down and do better than the most. But this whole pandemic, it has been quite difficult to foresee the effects and personally, I had not expected a significant drop in sales in the health food stores that we have seen in quarter 3. My expectation is that it would get back to normality once everything has been stabilized, but that's the main challenge that we have right now. And of course, we're doing everything to drive our brands, but also we have to have the market with us in this.

Two more questions very briefly. Firstly, what sort of regular measurements do you make on the relevance of your prioritized brands? And also, can you measure any -- or can you share with us any conclusions from the trend, how your prioritized brands are developing? And secondly, I was wondering if you could help me understand the shortage in supply, which you referred to. How do we connect that with the increasing inventory that is quite significant here 9 months year-to-date?

Okay. If I start with the prioritized brands, we do have brand trackers for all the brands. And then we have, in many instances, work in niche segments. So it's quite -- we don't have a market share where we can compare to our competitors -- for some of the brands we have; for others, we don't. Overall, I would say that we are winning with our brands. Now this year has been difficult, especially for the organic dry brands in the Nordics. But on the other hand, we had a very significant uplift last year. Figs have continued to do very well. As already stated, we are successful with the rollout of Happy Bio in France and Spain and Davert in division North, primarily Germany. So overall, I would say that we are doing well. This is something that we continue to work on. And one brand has, as I described, was supposed to be marketed that we were making a major revamp of the brand in terms of aesthetics, in terms of innovation but also in terms of in-sourcing product to get better margins over time. On the supply side, it's true that our stocks did increase significantly. We did get in quite a lot of stock at the end of the quarter, so according to the raw materials, which means that we have better opportunities produced in quarter 4. Then we have had safety stocks for various products that have been quite high. But then on the other hand, there have been products where we have no sales or whatever because we had really bad crops for some key raw materials. We do have contracts, and we are starting to get product raw material in. But still, it's really a mix of things.

[Operator Instructions] And there are no further questions. Please go ahead, speakers.

And I would like to thank so much for your attendance. Thank you so much.