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

Good morning, and welcome to the Midsona Q3 2022 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Peter Asberg. Please go ahead, sir.

Thank you so much, and welcome to today's call. Midsona is facing some difficult times, and as we have been very hard hit by cost inflation. That said, I'm of the opinion that we do have solid plans for the future and that we -- that the management and the Board are 100% committed to turn this situation around. And this is what I will dedicate most of my presentation towards today. We turn to Page #2. And before we continue, I just want to make you aware that this presentation may contain forward-looking statements and that such statements are based on current expectations and are subject to both risks and uncertainties. Please go to Page #3 in the presentation. And this is a summary of the main events for the quarter. I think it's important to state that we do see a relatively solid demand for our conventional brands like Friggs, Earth Control, Gainomax and Swebar. Sales was strong, very strong in the quarter. For organic product, it was more of a mixed bag of results. Our brands did show slight declines in size while our demand for organic product, label prices were very strong in the quarter. One of the most important things for us is to continue to implement price increases, and we have done so during the quarter. They have supported a gradual improvement month-by-month in the quarter, both in sales and in EBITDA profits. Also our efforts to lower the cost base yielded very good results. Since we started to implement our cost reduction program in the spring of 2022, white collar staff has been reduced by approximately 10% in what I would say is a relatively short timeframe. Still the EBITDA result is down before one-off items from SEK 80 million last year to SEK 50 million this year. And while the measures that we have taken has improved the situation, the cost inflation unfortunately has continued. I would say that raw material prices have stabilized somewhat and the summer harvest season actually looks quite decent. And those of you who have followed us might remember that the last harvest season in 2021 was quite poor. Instead what has hit us is very unfavorable change rates. It's mainly the strengthening of the dollar against all relevant currencies for us. We have been hit by soaring energy prices and also price increases from third-party suppliers. What this means is that we're in the process of implementing further and significant price increases. We'll see some effect already in quarter 4, but the better part of the impact will be in quarter 1, 2023. We have also decided to expand our cost savings program. We announced a cost saving program of SEK 40 million in the spring, and we're well or I would even say ahead of track on that program to decide to expand that to SEK 60 million instead. Also as a result of lower profit generation and a higher WACC, weighted average cost of capital, the Board has decided to write down goodwill in divisions, North and South. And finally, the Board has also decided to propose a new Rights Issue, which is fully guaranteed by our main owner, our largest shareholder, Stena Adactum, and I will update you more on the details of that later in the presentation. Let's go to Page #3 -- sorry, Page #4. And this is a financial summary of the items that I've already discussed. So we're having a growing net sales. And as you can see, our main issue has been the eroding gross margin, and that's why it's so important to continue to drive our price increase agenda. The net result is, of course, very negative, and that is due to the fact that we have done the write-downs in divisions, North and South. And we did achieve a free cash flow in the quarter of SEK 22 million compared to minus SEK 8 million in the previous quarter. We are turning to Page #5. I must say that we're, of course, taking the situation very seriously, and we are now taking forceful action to manage our current challenges. As I've already mentioned, the by far most important one is to restore the gross margin via price increases. We're now in the process of implementing significant price increases across all parts of our business in all geographies, and we feel confident that we'll push through on the price increases we are planning for. And those actions will have some effect already in quarter 4, but a very strong positive effect in quarter 1 2023, all else equal. We're expanding the cost savings program. We have reduced headcount by 10% already. We are looking at further headcount reductions, but also other cost-saving measures. As mentioned, after a relatively speaking weak start in the quarter, we have seen gradual sales improvement with support from price increases. Also while some consumers might look to lower price points, but still wish to consume healthy and sustainable products. And as said, we have also taken measures to strengthen the balance sheet via new Rights Issue. We turn to Page #6. You know that we have 3 commercial areas; organic products, conventional brands and consumer health. And a lot of our focus now is on the organic part of the portfolio. Private label is growing at very healthy rates. But of course, the most important thing for us is to grow our brands. So a key action for us is to be able to create value to customers and consumers in this new environment via good marketing and good sales efforts. Turn the page. It's of course important to continue to drive innovation also during difficult times. One of our bestselling product in Friggs is the [indiscernible] sea salt, and we have now just launched a twin product, the Friggs sesame sea salt and first signs are very good sales of the product. Let me turn page again. Sports nutrition has been a major growth area for us during the last few quarters and the strong trend continued also in quarter 3. Gainomax was growing by 19% and Swebar by 12%. We've also done some launches in the quarter that we're quite excited about. Those happened quite late in the quarter, so the sales effect of those launches were relatively minor in this -- in quarter 3, but we have good hopes that they will contribute on a major basis in quarter 4 and forward. And it's the Gainomax BCAA series of health drinks and also a new Swebar Popcorn variant. We turn the page again. The Board has proposed a Rights Issue of approximately SEK 600 million, subject to approval of an Extraordinary General Meeting planned to be held on November 24. And the purpose of this is to repay long-term loans of about SEK 353 million, but also to increase the financial flexibility of the company. The subscription price has been set to SEK 825 for A and B shares, and we are now proceeding with the process step-by-step. We are -- have been, our the largest shareholder, Stena Adactum, has committed to fully guarantee the Rights Issue. I think that this is a good proof of their belief in the company, and that's something that we will do everything that we can to give our team. I'll turn to Max Bokander, the CFO, for the financial review.

Thank you, Peter, and I would like you to be on Page #11, the financial summary. And as Peter already mentioned, the net sales for the quarter landed on SEK 944 million and the EBITDA landed on SEK 150 million. This was lower than last year, but I would like to highlight it SEK16 million better than previous quarter. The net result of minus SEK 478 million includes the negative impact from the write-down of goodwill, as Peter mentioned before, but it also includes a write-down of low utilized and high energy consuming production line in Germany. I now ask you to turn to Page 12, where I will walk through the net sales development. The net sales growth was -- for the quarter was 5.7%. The structural growth was at 3.6% and currency added 3.5%. The organic growth was slightly negative, driven by the weaker sales of organic product portfolio through the grocery trade sales channel. Now please turn to Page 13. The EBITDA for quarter 3 last year was SEK 80 million, but including pro forma vitality, the comparable EBITDA was SEK 85 million. The negative effect from the time lag between cost increases and now price increases towards our customers continued during quarter 3. Further, during this quarter, the gross margin was also negatively impacted by the slightly adverse mix when private label outperformed the sales of our own brands. Additionally, the stronger U.S. dollar and Euro also had a negative transactional impact on the gross margin. This combined resulted in a total minus SEK 40 million effect compared to last year, which is basically the driver for the negative trend versus last year. However, I would like to remind you that the EBITDA was improved versus previous quarter and that we see positive effects from our protection plans. With that, I ask you to move to Page 14. The net cost for labor and marketing reduced with SEK 30 million compared to last year. This was strongly supported by our ongoing restructuring program that now are implemented with a rolling 12 effect of SEK 37 million versus previously communicated SEK 40 million, and now we're initiating additionally SEK 20 million. So in total, it should be SEK 60 million. The savings were partly offset by cost increases and inflation in items like outbound freight, higher cost for insurance, et cetera. I now ask you to turn to Page 15. The free cash flow landed on SEK 22 million for the quarter compared to minus SEK 8 million last year. We see the cash flow being strong, having in mind seasonality effect where we, during the quarter 3, build inventory for the Christmas sales. And now I would like you to turn to Page 16. We ended the quarter with SEK 434 million in available cash, representing 11% of the latest 12 months net sales. Here I also would like to highlight that we extended our finance agreement with our banks. And with that, I would like to hand back to you, Peter.

Thank you, Max. And we go to the last page of the presentation, which is Page #17, which is about the priorities for 2022. But of course those priorities will mainly remain also for 2023. And the most important thing is that we are 100% convinced that we will turn this around. The turnaround so far has been slower than expected because they've been plagued by continued cost inflation. We have done a lot to increase our prices to cover for mainly raw materials. But as described in the presentation, being hit hard by FX, inflation, to some extent, energy. And this is what we now have to price for. And we feel very confident that we actually will push through those price increases. We do have a growth agenda. And as I said, demand for our products are stable. We do continue to see demand for health and sustainable food, and we will continue to drive our brand portfolio. We are implementing [indiscernible] cost savings measures, and we have been very successful with it so far. Considering the situation, we are now upping the program and going from a cost savings from SEK 40 million to SEK 60 million. And to strengthen the balance sheet and also to achieve more financial flexibility, the Board is proposing a new Rights Issue, which has been fully backed by our main shareholder, Stena Adactum. By that, I thank you for listening, and I open up for questions.

[Operator Instructions] Our first question comes from Johan Dahl at Danske Bank.

Just, Peter, on the -- you talked about the trading down effect, et cetera. I think it seems like somewhat of a perfect storm. First, you have the sort of weak overall performance before heading into this inflationary environment for organic products, differing bingo, et cetera. Now you've got the trading down effect. What sort of -- would you lay the land there sort of a long-term perspective of your brands? What makes you so sort of convinced that this is still a growth area for you guys?

First, and what we have seen from -- to some consumer behavior, but also a lot of consumer research is that the interest in eating health and sustainable food remains. So this is something that I feel very convinced about. I would say that for our conventional brands, sales has been good. For the organic, it has had been more a mixed bag of results, where we have been hit mostly is in -- healthy stores down in Germany, France and Spain, where demand has been quite weak, to be honest. Looking at the grocery trade, I see that the customers and consumers are still interested. I think it's also about making our brands relevant in a new environment and provide value with different means. So from my point of view, I'm convinced that people will continue to see strength in sustainable foods. Of course, consumers are having a difficult time right now, and they are clinging on to their wallet and their money. But I would say that sales is very slightly down on organic brand. It's not a lot. And we have seen a little bit of a gradual pickup during the late summer in automation. So I have good hope still that there will be demand for our product as in the future. And very importantly, it's not a major drop to or seeing it. It's very light so far. We will also do further price increases, which will, of course, give some room for organic growth considering that or assuming that we are at least to some extent, keeping volume up, which I think we will.

If we were to just look at the volumes in Midsona, i.e. take out the price sort of inflation, which is running at double-digits right now, I guess. But what sort of an interval be in terms of volume that deliveries for Midsona in Q3?

I don't have a precise figure on that, that I can give you, but it is, as you say, down as you expected. And it's not down double-digit, but it's down mid-single digit, I would say, to a little bit higher than that. So that's about where we are right now. And of course, what we have to do now, which is also part of our cost savings program is to adapt cost accordingly. Then as I said, we have had very high demand for private label. So this means that that has had a counteracting effect also.

You wrote in the report also that you're dropping some distribution agreements in next year. What's the sort of reason behind that? And why is that happening?

It's smaller ones that do expire. So it's nothing that is major. I mean the major one was the one that we announced in quarter 2, which was the HRA contract. And the reason for that, of course, due to the fact that they have been sold and the new buyer has their own distribution sales force in the Nordic countries and then the whole of Europe better.

Just a final question. The proceeds from the rights issue, you talked about amortizing debt, et cetera. But is it -- you've announced cost savings so far, roughly 1.5% of sales. Is it fair to assume that sort of the remaining part sort of will be spent to accelerate cost savings in the company? Or how should we view it?

So sorry, can you repeat that because I don't --I'm not sure that I got the…