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

Welcome to the Midsona Q3 2023 report. [Operator Instructions] Now I will hand the conference over to the speakers CEO, Peter Åsberg; and CFO, Max Bokander. Please go ahead.

Thank you, and welcome to this third quarter Midsona call. This is Peter Åsberg, CEO speaking. We are taking you through the third quarter results, and we are step-by-step executing our plans, and we do see key progress, especially on the key parameters, EBITDA and cash flow. Before we go into the presentation, we would just like to make you aware that this presentation might contain forward-looking statements and that those statements might be subject to risk. For those of you that attended the quarter 2 call, you might remember that we said that we will put priority on two main things: EBITDA And cash flow, and we would do this even before net sales in quarter 3 and forward. And this is exactly what we have done in quarter 3. We made good progress on both EBITDA and cash flow in the third quarter. EBITDA was improved by 16% before one-off items, and this was despite some major brand investments that we made, which I will come back to later in the presentation. We also delivered a record strong cash flow for the third quarter. So this is something that we are both proud and happy about and it shows that we are executing our plan step-by-step. Sales was declining slightly. And the main reason for this being discontinued licensing agreements. If we adjust for this effect, the sales would actually have increased by 3%. One important thing that we've been working on is the gross profit. Its strength considerably the support from initiatives that have been implemented according to our master plan. But still, we are somewhat behind our target level when it comes to the gross margin. And the main reason for this being exchange rates, and more specifically, the weak Swedish and Norwegian krone. In terms of raw materials, we see more of a mixed picture, both up and down, but not at all the same big movements that we saw, say, a year ago. So we're improving EBITDA before one-off items to the second quarter in a row. Thereby, we have broken the negative profit spiral that we have been in for some time, and we really do see this as a first sign of a turnaround. Clearly, a number of steps in the right direction, but we want and expect more in the future. I would like to take a closer look at our gross margin as the previous erosion of this has been one of our main challenges. We had a sharp downturn in 2021 and the beginning of 2022, but we have now turned this as you can see. And both in quarter 2 and quarter 3, we are now clearly ahead of last year. Good steps in the right direction. Still, we are somewhat behind historical levels. And as said, the main reason being negative currency effects. And at the same time, raw material prices show gradually decline. So this is something that we -- I think, will balance out over time. But of course, we are following this very, very closely. I would like to take you through the different parts of our portfolio. We see a 5% growth for organic portfolio. Yes, it's, to some extent, helped by FX, but it also shows some underlying strength in a number of the brands in the portfolio. Kung Markatta starts to grow again after quite a long period of decline. We have launched a new communication program and first plans are very good and promising. I will show you more about that later in the presentation. Our organic brand in Norway showed very strong growth. If you look at the commercial brands, Friggs is a shining star with an increase of 16% in the quarter. Still we had modest growth overall for conventional health food brands. And the main reason for this is that we have exited a number of low profit or even unprofitable private label contracts in this segment. And then as expected, consumer health products were down quite significantly. And this is, of course, the direct result of the discontinued licensing agreements that we've already talked about in quarter 1 and quarter 2. It should also be said that many of those licensing agreements had their peak credit to the summer period. So there is an extra large effect in the summer months. If we look at the different divisions, I think it gives quite a clear picture of where we are performing well and where we need to improve further. The Nordic division is performing well. It stays strong. EBITDA before one-off items was in line with last year. This is despite the discontinued licensing agreements that clearly hit Nordics. And our conventional brands are doing very well [indiscernible] in the store. For the organic brands, Kung Markatta and Helios are increasing sales. We still see a decline for Urtekram. However, what we're doing in Urtekram that we're launching the same type of communication concept that has been launched for Kung Markatta in quarter 3 that we're doing for Urtekram in quarter 4. Gross profit is also improving in the Nordics despite unfavorable FX development. So again, strong performance in the vision Nordics, we have double-digit EBITDA margin. If you move to division North, which is a DACH region, really, it's mainly the German market. We did have a challenging quarter. Sales and EBITDA were slightly up, but from a too low level, I would say, and it's still not at a level that we would see as acceptable. In Germany, we see a clear market decline and consumers are also moving towards more private label products with lower margins for us. And we are now working on a number of measures to strengthen our German brand Davert. At the same time, it's our ambition to act upon profitable private label opportunities. And we have secured a number of new listings, both on the brand side and the private label side in quarter 3. Those new agreements will make some positive contributions already quarter 4, but mainly in quarter 1 2024, and we will continue to [indiscernible] unprofitable contracts. In division south, we do see double-digit sales growth, but it mainly comes from private label. And still, the results are negative, which we can, of course, not accept. We are improving in France, but we still have some remaining production-related issues in Spain, and we are now working very hard to address them and also turnaround Spain. I talked about the Kung Markatta campaign to some extent already in the quarter 2 call. It's our way to make our organic brands more relevant. And as I said, we launched this in quarter 3 in Sweden. We made quite a major investment behind it and first signs are positive. And as I said, we have started to slightly grow the market again after a longer period of declines. And if we go to the next page, we will now launch the same concept for Urtekram in both Finland and Denmark in quarter 4 and hope and think that, that will also turn the trend for the Urtekram brand. One of our successors have been Friggs. We have seen continued growth since 2012 and the success from the rest on what I would call three quite distinct pillars. One is expansion into new markets. [ Friggs originated ] out of Sweden, and it's still by far our largest market. However, the brand has also proven to resonate well with consumers both in Finland and Norway, and as you can see from the graph on the right-hand side, it's actually in Finland and Norway where we see the biggest growth in the last 2 years. Very strong brand that we will continue to develop. Another positive success formula is consumer meaningful innovation. We have made a number of successful new innovative products that they have launched in the market. [ Friggs Chia Seasalt, Friggs Popcorn ] and now recently, in quarter 3 2023, we advanced [ Friggs Chili Cheese ], which we think would be a new best seller. Also, the third pillar is very effective, both in terms of cost efficiency and consumer relevancy, digital marketing platform that we're also ruling out across the different markets. Before we jump into the actual numbers that will be presented by Max, I would just like to briefly talk about our forward focus. One is clearly to drive our core brands. Volume has been a challenge for us this year as consumers have changed the pattern towards more cheaper products. We are trying and working very hard to keep up volumes and improve them. And as I said, we see some very positive signs in quarter 3. We will continue to activate our brands. We focus on high profit items. And one example is the new campaign for our organic brands. We're also working to find new business opportunity for our core brands. This might be listings, new customers. And we have also been successful in that, especially in Germany during quarter 3, and we will continue that quest in quarter 4. On a separate note, I would say that private label is booming, and we are looking at profitable opportunities also in private label. We will continue to simplify our portfolio via SKU reduction and discontinued growth brands and SKUs are not adding to the portfolio. This might short-term hit our net sales, but long term, it will contribute to better profitability. And then just as I said in the last call, we continue to focus mainly on EBITDA and cash even before net sales to continue to improve both EBITDA and cash flow. By that, I leave it to you, Max, and then I will come back with a short summary at the end.

Thank you, Peter. As a financial summary for the quarter, the net sales was down 2.2%, but the gross margin improved with 2.1 percentage points, and the EBITDA improved with SEK 8 million, or as Peter mentioned in relative terms 60%. The net result landed on minus SEK [ 80 ] million, impacted by SEK 9 million of our restructuring costs, mainly related to the restructuring of the Danish organization in the quarter. The financing costs continue on a higher level versus last year. This despite significantly higher or lower, I mean, net debt due to the higher interest rates. Additionally, the net result was impacted by tax cost versus last year and tax income. The tax cost is a result of good profits in some entities while not activating taxable losses for some entities, which we did last year. Finally, on this page, I would like to highlight that we delivered SEK 80 million in free cash flow, which is a new record for Midsona in the third quarter. Looking at the net sales development for the quarter, the organic growth landed on minus 8%. As Peter mentioned, this is almost mostly or almost fully explained by the discontinued distribution agreement and excluding these, the organic sales development would have been calculated to minus 3%. For our own brands, several of the key brands demonstrated good growth, while branded sales to restaurants and bakers declined in the quarter, taking down the branded sales to negative. License plans were down 35.1%, but excluding the discontinued distribution agreement, the organic sales would have been calculated to flattish. Private label still show good momentum, but developed weaker than last year due to cancellation of certain low-margin contracts. Now explaining the EBITDA development compared to last year. The negative organic sales growth, or in this case labeled as volume, resulted in SEK 20 million lower contribution. This was, however, more than compensated by the improved gross margin that generated SEK 21 million plus. The improved gross margin is driven by better price management compared to last year. However, it could be mentioned that the price net would have been better without the transactional FX headwind we have had. The sales and admin expenses were down SEK 4 million. this side investing SEK 5 million more in marketing, as explained by Peter earlier. The FX development at the end of the quarter was, however, positively impacting the EBITDA for us when reevaluating operating liabilities. And compared to last year, this had a SEK 4 million positive effect. As a summary, EBITDA landed on SEK [ 58 ] million for the quarter, which is 16% better than last year. Focusing on the sales and admin expenses development, the net cost of our own personnel were reduced with SEK 2 million, thanks to the restructuring. So this was, however, offset by the already mentioned SEK 5 million more in marketing. The lower volumes resulted in SEK 3 million lower cost out on freight and additional our strict cost control reduced other cost with SEK 5 million compared to last year. Moving over to the cash flow. The free cash flow, as already mentioned, landed on SEK 80 million for the quarter compared to SEK 22 million last year, driven by better inventory management. The inventory came in more than SEK 200 million lower than last year. We have, historically, built inventory during the third quarter. This year, we have optimized the planning further and will take in the most of so-called Christmas volumes in Q4 instead of earlier historically done in Q3. Finally, our cash and debt situation. We ended the quarter with SEK 500 million -- SEK 507 million in available cash, which represents 30% of our 12 months net sales. And we reduced the net debt with SEK 95 million, thanks to strong cash flow and also favorable exchange rate conversion of our debts. With this, from my view good news, I would like to hand back to you, Peter.

Thank you so much, Max. And I will just like to give them a short summary before we open up for questions. We are quite happy about the development that we see in quarter 3. We are improving on the two key parameters that we talked about in quarter 2, i.e., EBITDA, and we did have a very strong cash flow, which helps a lot, of course. This said, although we are happy about quarter 3 results, we are not content and we want more. And looking forward, there are three main things that we will focus on. First is to drive profitable sales to activate our brands with a focus on the high profit items to find new business opportunities for our core brands that might be listings, new customers. We have done so in quarter 3. This will give effect -- some effect in quarter 4, more affecting quarter 1, 2024, and we will continue to look and found for those opportunities. Private label is booming, and we will continue to secure private label contracts with a good level of profitability. But at the same time, we might continue to exit contracts with too little margins. We will continue to drive our cost savings again and complexity reduction. It's something that we have worked on throughout the year and has proven to strengthen our efficiency to drive down working capital and in the longer run also improved our profitability. So I think that we are [indiscernible] see some light at the end of the tunnel. We are executing on our plans. They start to yield results. EBITDA is improving, cash flow is strong, and we are reducing our debt, and we plan to continue down this path in quarter 4. Thank you so much for the same. And now I open up for questions.

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

Just a few questions from my end. So you're seemingly investing more in your profitable brands through marketing campaigns. You mentioned Kung Markatta and now Urtekram is coming up. Is this something that we can expect for all of your top brands going forward? And is there a chance that you could perhaps quantify the costs associated with such a campaign per brand?

The main extra marketing activity will be around our organic brands. These are the brands whom have been struggling to some extent and where we need to turn the trend. Now we saw some very positive signs on Kung Markatta. The major investment of Kung Markatta has been made in for the fee. We can expect an investment of about a similar level for Urtekram in quarter 4, but that should not short term for sure, long-term payout in terms of extra volume. When it comes to Friggs, we think that we already do have a pretty optimized level when it comes to marketing spend. And as stated, the brand is growing very, very nicely. If you look at our brands outside the Nordics, especially the organic brands, I would say that that's a bit of a different ballgame for us. The main focus for brands like Davert in Germany, Happy Bio in France, Vegetalia in Spain is to drive distribution and get new customer listings. And for that, we do not need extra marketing money. It's rather to actually utilize our organization in the best possible way. So somewhat higher marketing spend also in quarter 4, but no major step change in terms of [indiscernible] no.

Yes, that's clear. And a question on price. Certain certain grocery retailers in Sweden have recently highlighted that they have seen additional price hikes for suppliers. Could you perhaps provide us with some update or insight regarding price increases from your end? And perhaps to what extent you have raised prices?

I mean this is a touchy subject and also the Swedish competition authorities have asked suppliers not to talk about pricing, and we will not do that in detail. What I can say is that we will continue to look at pricing very actively. Of course, this has to do with FX exchange rates, raw materials, lots of different things in there. And we see so from a mixed picture when it comes to raw materials, but our target is still to continue to strengthen our gross margin long term because we are not at the target levels and we're still somewhat behind those levels. Those activities could be -- I mean, lots of different activities to get there.

Yes. Understood. And on the topic of discontinuations, how long do you expect the comprehensive discontinuation agenda to last? And to what extent do you believe that it will be conducted?

We are very committed to this. And we have started this -- I mean this is something that has always been ongoing, but we have stepped this up [indiscernible] in 2023. This does hurt net sales short term. But long term, we are 100% sure that this will actually improve our profitability by streamlining our factories, by tying less capital and inventory, by being able to focus our production on the most profitable and the big items. I see that this continue at least through 2024. And as said, I mean, it's supposed to be a profit contributor, although that size might be down.

Yes. And final question in regards to working capital management. Would you say that you're pleased with where you are currently? Or do you assess that there's more work that can be done on this front?

I think looking at the inventory that is driving our working capital, we are pleased with what the organization has done. There is, of course, more to be done, but it's -- I think the low-hanging fruits where we have now improved the minimum order quantities, change safety stocks and improve the planning are done. What is needed now to improve further is linked to the SKU reduction program and harmonizing assortment. So we will not be able to see an improvement of SEK 200 million into 2024. I think we are on a level where we will be able to keep it in relation to sales. That's my prediction. However, it should be noted because as you may look into quarter 4, quarter 4 is traditionally a very strong cash flow quarter because we use the inventory that we have built in quarter 3. Now we will not be able to repeat that because we have managed inventory at a much lower level. But what I'm saying is that if you look at the inventory level over a year in relation to sales, we are on a good level.

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

And this is Peter speaking again. I would like to thank you so much for your attendance to this conference call. We look forward, if not before, to meet you again in February when we are presenting quarter 4 results. Thank you so much.