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

Welcome to Midsona Q1 Report 2023. [Operator Instructions] Now I will hand the conference over to CEO, Peter Åsberg; and CFO, Max Pakanda. Please go ahead.

Dear all, thank you all for attending this call. This is Peter speaking. And I'm happy to start the presentation by saying that we now see signs of a more stable situation, and the measures that we have taken to turn around Midsona are working. And before we get into the main presentation, I would just like to state that it might contain certain forward-looking statements, and those are associated with risk. We have just recently published a new annual report, and there you can go through the full risk map. And let's jump straight into the business and the overall summary of Q1 2023. As I said, overall, we are happy with the performance that we have and the steps that we are taking. We are clearly picking steps in the right direction. We started to see signs that things are turning around in the quarter. And as you know, since the innovation of Ukraine in February 2022, we have faced increased prices for raw materials, transportation, other inputs, challenging exchange rates, and this has been a challenge to us but also to the industry. But we believe that the development in quarter 1 is a turning point. Looking more closely at Midsona, we delivered slightly improved net sales, and this is despite the fact that we have terminal distribution agreement for SEK 31 million. So we're quite proud of the net sale performance. We saw continued very strong demand for private label, it was up 19% year-over-year. But most importantly, we have renegotiated a lot of contact, and we have thereby improved margins, and we have also terminated quite a few loss-making contracts. So we're setting a better and more profitable mix of private label. [indiscernible] delivered double-digit growth. Organic products, a little bit of a mixed bag, but overall, a much more stable situation also for organic products. The price increases that were announced at already end of last year took effect gradually during the quarter. It should be said because this is important that it maybe took place in February and March. So the full effect of the price increases we will not see until the second quarter. And in quarter 1, the gross margin improved versus last year, but they are still not at 2020 and 2021 levels. We still have some way to go here, and I will come back to how that will happen. We are also proud about the strong cash flow that we delivered SEK 76 million free cash flow in quarter 1, and net debt properly reduced the cost of that. And this is related to the second quarter in a row. We have a record of strong cash flow, so we are naturally very proud of our working capital management. A little bit more in detail. What are the things that we have done? What are the actions that we have taken to improve the situation and thereby to turn around the business? First and foremost, price increases, the main issue that we had last year was the eroded gross margin. Our price increases can suddenly be justified, and they have been very well received by the trade. I would say that for the moment, we don't see any major new price increases. Rather, we see that the full implementation of the current price increases and have been the full effect of them which will come in quarter 2, in combination with successively lower cost per input goods shouldn't be enough to restore our distorted gross margins. And what this means is that in the coming quarters, we should see clearly improved gross margins versus last year, but it wasn't really until the second quarter in 2022 that we saw the real negative effects of the war in Ukraine. We have 2 cost-cutting programs running, but also again, across cost consciousness, of course, and we are on track to deliver the community SEK 60 million during 2023. The supply chain has stabilized. The overall delivery situation is much better. That said, we had [indiscernible] in our factory in Spain, where we produce our front-based meal alternatives. And we incurred significant extra costs in quarter 1, but as of quarter 2, that situation has been resolved. Finally, we continue to strengthen our balance sheet. We have had a very active working capital management, and this has reduced our debt further. It might be verified to take a closer look at pricing, and this is likely quite a busy chart. But if you start at the bottom, the left-hand bottom part of the chart, you can see that in quarter 2, 2022, our gross profit margin was down 4.7 percentage points, minus 3.9% in quarter 3, minus 1.3% in quarter 4, and we now have a positive gross profit margin development in quarter 1. And this is something that we think and are very sure that it will continue. And as I talked about before, we are still behind historical levels. And considering the reason we had a debate about cost inflation, we want to state that the price increases that we have taken, they are justified and they are needed. But it's also a judgment that all else equal, we should be able to restore our previous levels by cost reductions that we get from expected and lower market prices for key raw materials. And we're also now in a process where we are out negotiating with a lot of our suppliers. If we dive into the science side of the business, you can see that organic products grew by a little bit more than 2%. As I said, it's a little bit of a mixed bag, but overall, we saw a stabilization of our own brands and then very heavy demand for private label. It's continued to be a strong business driver for us because there is a pent-up consumer and customer demand as consumers are trying to find somewhat lower-price alternatives. And what we have done here also is that we have a better margin for the private label contracts. That was one of the main issues that we had last year that had eroded label margins, but now they are at much, much healthier levels. If you look at our health food portfolio, it grew by 4%. We had a very strong growth of free double-digit, but a little bit more of challenges for our sports nutrition brand, but overall, some pretty decent growth. Consumer health prices are down, and that is what is hampering our growth. And what this constitutes is the fact that we grow our own brands, but we have a decline that is completely related to a discontinued license brand. And as I said earlier, that brand or brand portfolio means that we have a minus of SEK 31 million in quarter 1 compared to last year. So overall, I would say that we have still decent growth considering the circumstances that we're facing. Going forward, we have a number of key projects that we're working on. The first one is to maintain our turn pricing. As I talked about earlier, they can be fully justified. And considering the immediate bite of inflation, we see currently that our prices are very justified, and there is no room for price decreases, but we also don't see the need for major price increases going forward. This means that we might have some discussion in the trade, but we feel very confident that we can explain our need to maintain our current pricing. Then it's a challenge for us, but it's also a challenge for the old industry volumes. Volumes are generally going down as consumers are changing their spending patterns. They simply have less money in their wallet. And we will do what we can to keep up volumes. We will activate our brands, and we will focus on the high profit items. We are working on a lot of new business opportunities for our core brands. It's new listings with current customers. Also, we are trying to attract new customers across Europe, and we are starting to see quite some progress in that area. And private label is booming, and we will continue to leverage the opportunities that we have there. But of course, only at the right margins, as discussed earlier, we have actually designed 2 private label contracts or terminated them because margins were simply too low. While we are a growth-driven company, and we will continue to track for growth as our volume focus indicates, our current focus is EBITDA and cash before net sales. And we are in the midst of a complexity reduction project, and we have plans to discontinue both nonperforming brands and products. And it's our judgment that this will have a positive short- and long-term effect on our EBITDA. We will come back to talk more about that in the quarter 2 call. And over the year, we will continue to drive our inventory down. As you never say that now we are in the period of the year where we had to build up for the summer and even for some order sales. So that means that most probably we will increase our inventory slightly in quarter 2, but the objective is still to be down at the end of the year. And again, EBITDA and cash is at the top of our priority. By that, I'm leaving to CFO, Max Bokander. Please, Max.

Thank you, Peter. In the financial summary, as you can see on the screen, the net sales looks flat. And as Peter explained, it is partly explained by the negative effect from the discontinued distribution improvement. Otherwise, we would have seen a growth. The gross margin, however, improved. We opened 2 percentage points, but the EBITDA came down with 2 versus last year. The net results landed on minus SEK 6 million impacted by restructuring costs and higher financing costs. Additionally, the net result was negatively impacted by higher tax cost than last year. This deviation was driven by a decision to not activate taxable losses for certain entities. Finally, on this page, again, I would like to highlight that we delivered a strong record cash flow for quarter 1. The organic growth landed on 3.4%. But again, excluding the discontinued distribution agreement, the organic growth would have been calculated to some small growth. Private label continued to grow strong in the quarter, and licensed brands would also have shown a growth if we were to exclude the discontinued distribution agreement. Our own brands, however, showed a mixed bag with good growth, for example, [indiscernible], while some of the organic brands developed weaker. The EBITDA development compared to last year was impacted negatively by the organic sales or, in this case, labeled as volume, resulted in SEK 10 million lower contribution. This was largely to a large extent, compensated by the improved gross margin and lower sales and admin expenses. The improved gross margin was driven by corrective pricing, which had a gradual positive effect during the quarter. And despite improving the private label business, the private label has a negative mix effect when it outperformed our own brands. And we also, during the quarter, continued to run with temporary high production expenses in Spain. So as a summary, I would say the gross margin improved despite these some -- you could call it almost one-off negatives, which we are actually quite proud of. And as a summary, the EBITDA landed on SEK 16 million for the quarter, which stand SEK 2 million lower than last year, but SEK 15 million better than quarter-to-quarter. Our cost focus has been mostly in sales and marketing and admin expenses, and we continue to see positive effects from the restructuring program, where the label reduced with SEK 5 million compared to last year despite having some salary inflation and actually we also had some temporary high costs for external expertise, mainly in South Europe. Additionally, the strict cost control reduced other costs, which, however, was offset by slightly higher investments in marketing of own brands. The free cash flow landed on SEK 76 million, as mentioned. This is compared to minus SEK 50 million last year. And this is, again, a record cash flow for quarter 1, partly driven by continued good inventory management. and the inventory ended the quarter at approximately SEK 120 million lower than March 2022. Finally, we ended the quarter with SEK 740 million in available cash, and we reduced the net debt further with SEK 53 million, which also improved our leverage ratio. And with that, I hand over to you, Peter, again.

Thank you, Max. And I would just like to make a short summary before we open up for questions. We are reaching higher in 2023. And as stated, we are starting to see some light at the end of the tunnel, and assuming a stable macroeconomic environment, we are positive on the future and the outlook for 2023. And to summarize this, we have implemented price increases according to plan in quarter 1. And this is a major and very important step. We get the full effect of those price increases in quarter 2. We do see a stabilization of raw material prices and energy, and we are also working with key suppliers to have them lower the prices. And we think that we will have some good progress in that also during quarter 2. We continue to be cost-conscious and driving our cost savings again, including the cost-saving programs that we announced earlier. We are having a brand focus to focus on our iconic brands and to drive them in an environment where volume is a little bit tougher. At the same time, we will continue to reduce complexity, especially in the portfolio, and [indiscernible] is something that we will work on in quarter 2, and I'm sure that we will come back to more information on that when we present quarter 2 figures. That said, our overall and overarching goal for 2023 is to improve our EBITDA and cash situation. I think we are making some good progress in quarter 1, and then we should continue to reap the benefit in the coming quarter. Thank you. And thereby, I open up for questions.

[Operator Instructions] The next question comes from Nikola Kalanoski from ABG Sundal Collier.

You mentioned that you will review your product portfolio and potentially discontinued brands and products that are not sufficiently profitable. If you could perhaps be more specific, is there any particular type of products or brands that would be of significant interest to discontinue or divest?

I will not mention specific brands, but it's exactly the type of product that you were talking about brands or products that are sub-profit and/or nonprofitable where we see no way to get them profitable. So I mean, it should be brands or [indiscernible], which will actually help us to improve our profitability long term.

And if I could just follow up a bit. When you mentioned the word discontinue, did that also include divest potentially? Is there a potential to divest something or would it only be a discontinuation in terms of just, well, discontinuing the product, the brand itself?

We are looking at both. When it comes to potentially discontinued brands, I mean, of course, that's something that we have to come back to if and when we have such a deal. But I would say that the main focus is over to clean and discontinue the current portfolio to get it more efficient so that we can improve our profitability that way but also, over time, improve our working capital management and also the utilization of our plants. But it is, of course, smaller products, smaller brands, we have less good perspectives.

And if we look forward a bit, would you assess that potential price increases could be welcome again, say, when the next price change window opens? Obviously, we don't know what inflation will look like then, and there are many moving factors. But given present circumstances, do you think that is something that could be considered still?

I would say that margin management and price management is, of course, still at the top of our agenda. I mean, there have been a lot of pressure now from politicians from the trade to get inflation down, which is, of course, very understandable. As I said earlier, I mean, our price increases are very well justified and they have been well received by the trade. We will continue to monitor the situation. And first of all, the focus would be to maintain the current price level because we need that to get back to historical levels. We are also working with suppliers so that we can close the gap that we still have versus historical levels. So I think that will be the main focus for the upcoming future. Then, of course, we are clearly monitoring the macroeconomicization including the development of raw material prices, transports, energy and, of course, FX, which can have potentially a big effect, both positive and negative, depending on the trend on our business.

And just a final question. I understand there has been some hoarding behavior back in Q1 '22, especially in the North segment, I suppose related to the war. Could you perhaps estimate how large that effect were to be or would you say that the effect is only marginal, if we could call it that?

I would say that it was quite a big effect, and it was specifically big in Northern Europe, I'd say. I mean, we might have seen some effects also in other countries. It was a significant effect. And to elaborate on that server, we are just a couple of million below last year's result. And I think I should elaborate on the reasons for that because, of course, we wanted to improve. The #1 reason is the wording that we cycled in [indiscernible] or Germany. And then also the extra production-related costs that we have had mainly in Spain. So those were the 2 effects, and I would call them one-off effects in the sense that it will not cycle those effects in quarter 2.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you so much for attending. As I've stated, we do start to see the light at the end of the tunnel. The measures that we are taking are biting better and better, and we look forward to talk to you again in quarter 2 when we report quarter 2 figures. Thank you so much.