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

Welcome to the Midsona Audiocast Teleconference Q2 2020. Today, I am pleased to present CEO, Peter Åsberg; and CFO, Max Bokander. [Operator Instructions] I'll now hand the floor to Peter Åsberg. Please begin your meeting.

Thank you so much for attending this call. Let's go immediately to Page #2 in the presentation. I would just like to make you aware that this presentation may contain forward-looking statements and that also are based on current expectations and are subject to risks and uncertainties. And by that, we get into the brief presentation on Page #3. And the second quarter was a challenging quarter for Midsona, as we were very harked by severe cost inflation. That said, we have been and we'll continue to execute the plan with the objective to step-by-step restore the margins and, ultimately, to surpass previous margin levels. And this is something that we are now working very, very hard on. And I would say that despite the tough situation, we are starting to see some light at the end of the tunnel and some good signs. We did see some moderate organic growth in quarter 2. Our conventional food brands and consumer health brands had very good growth levels, but still the market and therefore, also our organic plans were somewhat depressed still. We have -- as we discussed about in the course of the last quarter, implemented price increases in the second quarter according to the plan. But clearly, they were not enough to offset the massive cost inflation that we saw in quarter 2. And therefore, we are planning and executing new price increases in the third quarter, and I will come back to talk about that in some more detail. Also started to implement a cost savings program. It's going according to plan. Actually, not only are we executing on the SEK 40 million cost savings program that we had, but we have also found new cost-saving opportunities and Max will get back to that and describe that plan in some more detail. Let's turn to Page #4. Cost inflation has for sure been -- has been on our mind for the second quarter. We have been battling severe cost inflation in quarter 2. And as said, despite the price increases that we implemented, our gross margin has eroded in quarter 2. And principally, all key raw materials, energy and transport, continued to increase significantly in quarter 2. At the same time, we have been hardly hit by the continued strengthening of the U.S. dollar versus both the euro, Danish krona and the Swedish krona, which has a negative impact on our gross margin levels as we have quite big buy in the U.S. dollar. And accordingly, the price increases that we made in quarter 2 have not been enough, and we have started a new round of price increases. Many of them, especially our brands, have taken effect already in July, and they will be followed by new ones later in the quarter. Our private label business has been a major profit drain as we have had a lot of long-term contracts with fixed prices. We renegotiated prices but also terms as contract expires. And clearly, the model that we've historically employed is not suited for the current inflationary economy. And the better part of the contract will expire in the second half of this year. And we should, therefore, step-by-step, improve the profitability for the private label part of the portfolio. We go to Page #5. And this is a short financial summary. Max will go into the numbers in details. I will just give you a few headlines. We do see good growth, which is, of course, a strong sign that consumers are still demanding our products. They are still interested in healthy and sustainable foods. And that's, of course, important for the future. I've already talked about it. Our issue, for sure, is the eroded gross margin. The whole difference in the profitability is actually in the gross margin. I would also like to point out that we had good cash flow, mainly by good working capital management. Let's go to Page #6. A lot of the focus has been on pricing and battling cost inflation. But of course, it's also very important to build for the long term to build our brands and to build the [indiscernible] categories that we're in. And one of the key initiatives is our focus on our plant base assortment. And as you know, we have expanded the Castellcir plant in Spain. It's now fully operational, and it gives us a lot of new opportunities. We have continued deliveries to Mercadona in Spain, the major retailer in Spain for a number of products. We have products that have been outsourced before, and we do this step-by-step. And of course, a big part of what we're doing is innovation. And at the bottom of this page, you see a few new Vegetalia products. Vegetalia is our brand in Spain. These are products that we have recently launched in the Spanish market that are plant-based new alternatives, all of them. Let's go to Page #7. The fact that we are now back to more normal life after the pandemic has been very positive for many of our brands. And this has been especially true for our conventional food brands, but also, to some extent, for our consumer health brands. And this is one example of our sports nutrition portfolio. We received very good growth for Gainomax and Swebar. People are back in the gyms and they're back at events like Göteborgsvarvet, the Half Marathon in Gothenburg and Stockholm Marathon. We have been represented at those events and a number of other events and thereby, we have been able to connect the consumers again. And at the same time, we updated the brand equity for both Gainomax and Swebar, and we see that consumers are responding very positively to this. And this is, of course, also a part of our process to brand by brand, step-by-step, connect to the consumer in this new environment. An important part of this consumer connection is to continue to drive innovations. We do put a specific focus on organic brands here that we have been struggling a little bit of growth. So this is one of the key cornerstones to turn around performance. And with slide, you see a few of new launches that we're doing that we did during quarter 2 and more will follow in the autumn. Page #9. I talked about our action plan in the last quarterly call, and this action plan is still the one that we're working on. The key task is, I said, to restore the gross margins. We did implement a lot of price increases in the second quarter. But as I said, they were not enough. So new ones will follow now in quarter 3 to step-by-step restore the margin. We are implementing a cost savings program. The objective is or was, I should say, to have SEK 40 million in savings. We are not actually aiming higher to even find more savings, considering the tough situation that we have right now. And the third one is about accelerating sales. We have 3 commercial area, focus areas, and we'll come back to them in the next slide. And of course, price increases should also step-by-step give some extra help here. We go to Page #10. One of the key tasks that we are working on is to step channel performance of our organic brands. Our organic brands performed very well during the pandemic, but I said a more challenging time after the pandemic. Personally, I think that organic and healthy and sustainable, which is what the organic plan stands for, is as relevant as ever. And we are now working to communicate those benefits to consumers, and thereby, restore growth in our organic portfolio. The portfolio of conventional health brands have been doing very well. We still see a lot of opportunity to expand all those brands out into new Nordic markets. And we do see some results of that already in the second quarter as evidenced by very good growth for those brands. Lastly, but not least, we have created more of a stand-alone organization for consumer health brands. It is a vital step to put the right focus on those brands and thereby also drive more growth and profitability for that portfolio over time. We're working on making the marketing of the brands more cut through, and we have full confidence that we will get the full portfolio back on growth again. By that, I leave the word to Max, and he will take you through the financial review.

Thank you, Peter. And then I ask you to go to Page 12, where I will walk through the net sales development during the quarter. If you start to look at the graph to the left, you can see that the sales growth was 5.9% during the quarter with a structural growth of 3% from added vitality and the currency translation had a positive effect of 2.5% for the quarter net sales. After quarters with negative organic growth, we now delivered a small organic growth of 0.4%, which, you can see in the graph to the right, was driven by strong sales through the channels of -- sale channels, pharmacies and food service. I ask you to move to Page 13, where I will explain the EBITDA development compared to last year. Also here, I ask you to focus on the graph to the left, where you can see that the EBITDA for quarter 1 last year was SEK 78 million, but including pro forma vitality, the comparable EBITDA was SEK 80 million. The difficulties to pass on cost increases in a timely manner continued during quarter 2, as Peter just said. Further, during this quarter, the gross margin was negatively impacted by a slightly adverse product mix when private label and licensed brands outperformed our sales of own brands. Additionally and actually quite significantly, the margin was negatively impacted by the stronger U.S. dollar and euro. That had a negative transactional effect on the gross margin during the quarter. These combined resulted in a total variance of SEK 50 million, which is basically explaining the total EBITDA decline compared to last year. As you can see in this graph, which I also will come back to later, we had a positive effect from our profit protection actions and our initiated restructuring projects with SEK 6 million as a net. Furthermore, you see a bar called Other, which actually in the quarter included a positive SEK 1.7 million from sold assets related to closed operations in [indiscernible]. However, as a total compared to last year, this Other was flattish. Besides the already mentioned negative transactional effects that impacted gross margin, we also have negative effect from revaluation of operational assets and liabilities that in total took down EBITDA further SEK 3 million versus last year. I now ask you to turn to Page 14, where I will focus slightly more on the restructuring effects and also cost-saving effects. And as you can see, combined, the actions we have taken for labor and marketing totally saved SEK 13 million compared to last year. Within this, then official project delivered SEK 4 million, i.e., we had SEK 9 million extra savings that is not really in the official structuring, but it's also savings that we see will continue further on. The savings were partly offset by cost increases for items like outbound freight and also we had slightly higher cost of insurance. Insurance fees have gone up. It's not only for us. We were successful in implementing new insurance program, however, to slightly higher costs. Example, given, you know that [indiscernible] in Sweden had an accident, which have led to that insurance companies are hesitant to keep the old pricing for the risk. However, as a summary, I would like to emphasize that the sales and admin expenses in relation to net sales improved by 0.6 percentage points compared to last year pro forma. With that, I ask you to move to Slide 15. And as Peter already mentioned, we had a good cash flow, driven by the working capital reduction on top of the positive EBITDA, and also highlighted here, during the quarter, we had a low level of CapEx, partly thanks to including SEK 7 million revenue from selling the closed facility in progress. And now finally, from my side, I would like you to move to Page 16, and we ended the quarter with still SEK 470 million available cash, representing 12% of the last 12 months net sales. With that, I hand back to you, Peter.

Thanks so much, Max. And I would just then like to give a short summary before we open up for questions. We are working very delicately to really turn the situation around. And for sure, we have the ambition to reach higher. Price increases is our #1, 2 and 3 priority. And as mentioned, a new round is planned and is being executed for the third quarter. And the first of them do take effect already in the month of July. We are committed to drive growth by driving our iconic brands. We do have very good momentum for quite a few of them, but still have some work to be done on organic brands. Our expanded facility in Castellcir gives us new opportunities in plant-based. We follow through on our previously announced cost savings programs. And as Max mentioned, we have found new cost-saving opportunities to offset the negative effect that we have had from cost increases altering the system. Lastly, we continue to drive our sustainability agenda. In quarter 2, Midsona won 2022 Symbiosis Award, which recognizes a Swedish company that successfully combined responsible behavior with profitable growth. So again, we are very committed, very dedicated to step-by-step get back to levels where we were before and then ultimately to suppress them. Quality was a tough quarter, but still, we follow our action plan, and we do see some light at the end of the tunnel and some good actions taken. And I look forward to come back to you after the third quarter report and tell you more about that. By that, we do open up for questions.

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

So firstly, on these price increases you're mentioning in July and then later in Q3 as well. Do you still experience higher input costs sequentially as well? Or are these just kind of drop down on the bottom line essentially?

I would say that we had a huge spike from the month of April until May or maybe even mid-June. After that, I would say that it has flattened out a little bit. I think it's too early to say that it's a new direction or a direction down. I would also say that we do see lots of ups and downs that, for sure, some raw materials are now trending down again. Some are still trending up. I think the size effect now will be harvest, and they will start to come in now during the summer months and then later in the autumn. And that will really dictate the further direction of cost inflation for us. And this is nothing that I could or would speculate in, but I would say that we are much better prepared to handle those type of cost increases now compared to before. The continued strengthening of the U.S. dollar has been a headache for us. It has eased up a little bit in the last few days, but still, the U.S. dollar is at a very high level, vis-a-vis, the euro, the Danish krone and the Swedish krona. Also there, I'm not the right person to speculate about that, but just to say that these price increases -- cost increases will pass on to the customer in the end. So I would say not the same dramatic price increases or cost increases that we saw during quarter 2, but still too early to say that it's a clear change in direction. So I think that we're very humble about that. We keep our eyes very open and we act as fast and as decisively as we can.

Great. And you're mentioning the input prices and with -- as you're mentioning, some prices have been starting to drop quite significantly during the recent period, how quick would you say should this continue would it take for it to be visible in your P&L?

I would say it's very much depends on the raw material. I mean some of them would be in a month or 2. Others would be longer. So I think that if that was the case and the trend you would gradually see that during the quarter. But then again, I mean, a lot of the things that we consume now, at least at the beginning of the quarter are things that we bought at quite high prices in quarter 2. So I would -- if -- and I say if, that is the general trend, we might see some effect at the end of the quarter, quarter 3, but most of that we see coming in quarter 4.

Great. And then moving on to the general cash flow and inventory levels and the likes given your positive cash flow during the quarter, how do you see this developing given the destocking up ahead of Christmas season and the like. So general cash flow thoughts and during H2?

Our ambition is that the inventory should not continue to go up. It should be -- I mean, despite we need to build for the Christmas season, which will have an impact now in July and August. September is a month where we also sell out for the Christmas season starting. However, of course, those invoices are not necessarily paid at that time. So the accounts receivable could be higher and slightly higher in the end of quarter 3. Our ambition is to still and should be able to generate positive cash flow in a quarter 3.

And just to build on what Max was saying, which is 100% correct. I just want to emphasize that one of the issues that we had last year was that we did not get the volumes or the raw material that we needed for the Christmas season in time due to the year-end transport situation that we had in the world at that point in time. We have now planned ahead. We have taken in more raw materials a lot earlier than we normally would do. And as Max was saying, that had a negative effect on inventory in quarter 2 in the sense that it was higher than we would normally want. But still, it was, for sure, the right thing to do. Of course, it means that we are much better prepared for the very important Christmas season for these improved products this year compared to last year, which, all else equal, should give a positive effect maybe some already in September, as Max said, but most of it in quarter 4 then.

Great. And then lastly from me as well. Regarding the financial position, would you consider any divestments in order to ease leverage levels?

Yes. I mean, our key focus for sure is to, one, improve profit levels, again, EBITDA and then very actively working capital. I would say that principally speaking, we are always willing to discuss divestments if the price is right, and that would be the key factor. But our main focus, for sure, is on our current business and to improve that and take it back to the levels where we have been and I said, ultimately, get to a higher level.

[Operator Instructions] And that next question is Henrik [indiscernible] of Erik Penser Bank.

Yes. So I was wondering about what you have seen, could you talk about what you have seen so far with regards to hard harvest, as you said, Peter, mostly most of the harvest is late summer and autumn. But if you could say anything compared to last year for regards to the spring harvest?

Yes. Henrik, what I would say...

There is some background noise on Henrik's line so I muted him now, you should go on.

I mean, first of all, the harvest last year 2021 was, generally speaking, quite bad. I think it's quite hard to speculate. We see some good signs in South America for certain raw materials. We do have current heat wave in Europe and drought in southern part of Europe, which might affect us negatively. So I think that it would not be right for me to speculate. The important thing for me is that, one, we have to much better extent, secured the important Christmas season. We do have those raw materials in place. We have -- we are better prepared for further price increases should raw material prices continue upwards. But I mean, the few spring items that has been harvested have been quite okay, but the summer season is still more of a question mark, I would say.

And another quick question. You had a planned delivery interruption for Happy Bio, could you talk a bit about that and what the effects were from this, both in the quarter, but also effects forward on taking in warehousing and distribution under your own management?

Okay. So it was on the disruption of Happy Bio, the question?

Yes.

No, it's -- I mean, principally speaking, what that is about is that the warehousing and the selling of the Happy Bio products have been performed by the previous owner via a contract that we had with them. Now we're moving this in-house. This principally meant that in -- when we did this, we had an interruption of approximately, I would say, 2 weeks of sales that was basically to make the movement and to put up the systems. This was planned, it was the right thing to do because we do have it in our own warehouse. We can distribute it more effectively. And we have also established unowned sales force in France. It's quite an investment, I would say, which, to some extent, has a negative effect on our P&L right now. But for the long term, it's absolutely the right thing to do because it will mean that we will be able to drive and Happy Bio a lot harder.

Okay. And one final question. If you could just give an update on the conversion from health food stores to grow food stores in Europe and your part in this conversion both in division North Europe and South Europe?

Yes. I mean it has been our strategy for quite some time to do so. And this is a plan that we continue. It is about the Happy Bio brand in France and Spain, despite the fact that we now had this 2 weeks of disruption, it has been going according to plan. I think the fact that we are now rolling out our own sales force will step-by-step give us better opportunity to drive distribution of the brand. Same in the Davert brand in Germany. We are working on our plan step-by-step, and we are very well represented in one of the big retailers in Germany, less so in the other, but there we also have a plan, and we are gradually building distribution to that retail as well. And as I said, that retailer have their own organic plan where they will step-by-step build shop-in-shops in a lot of their stores, and we are part of that concept. And as Max was pointing out in his part of the presentation, health and food has been one of the segments that has been performing very negative in the second quarter. I would say that this is partly an effect of the fact that they did very well in -- during the pandemic because people rather wanted to go to small stores nearby rather than going to hypermarket and now we see the reverse of that effect. So my conclusion, I mean, it's still the same that I've talked about earlier that the conversion from health food stores to mass market will continue. It's very important we play an active role in that and drive our brand in this channel, which will be -- the channel will be growing most in the future. Although, the health stores will also be important for the foreseeable future.

And we currently have no further questions in the queue at this time. So I'll hand the floor back to our speakers for the closing comments.

Yes. Thank you so much. I've already done my summary, I think. And as you do understand, we are working very hard. The team is 100% behind this plan to get back on track and get back to previous profit levels again. We are working very decisively on pricing, driving our brands and also having a tight cost control. And as said, I look forward to meet you again, if not before, in the third quarter conference call. And I would also like to wish you all a very nice summer. Thank you so much.