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

Hi, everyone, and welcome to ABG fireside chat. With us today, we have the CEO of Midsona, Peter. Welcome, Peter.

Thank you so much.

I think that if we could just start off by hearing your perspective on Midsona, how you perceive the business and what your vision is for the business going forward, and that would be helpful, I think.

Absolutely. No Midsona is a company dedicated to healthy and sustainable foods, and that's really our mission to provide healthy, sustainable food for people and planet and with the vision to become a leader in Europe. And the way that we do that is by our strong brands, you're a Swede, so you probably know a brand like Friggs, the organic brand Kung Markatta. We have a strong brand, Urtekram in Denmark, Dalblads in Germany and so on. So a European as a player in healthy and sustainable food.

Yes. I think that's a very fair summary. And I think if we just look at some of the history of the business, I think, in '22 and '23, it's fair to say that it's been quite a tough period for players in the food and beverage industry. Could you perhaps give us a summary of what the environment has looked like and how Midsona has performed during that time?

You're absolutely right. It has been a couple of tough years for the industry. And it really started in 2022 with the war in Ukraine, which led to massive food inflation, quite tough supply issues and the consumer sentiment that was down really so consumers were quite wary in terms of how they spend their money. And this, of course, did hit us and it did hit the industry. We have really seen this as an opportunity to change, to look at the business differently. And first, it was mostly about getting our pricing right, renegotiating with suppliers but increasingly during 2023, we started to focus on the long term of the business again. And that -- what we will come back to is when we start to look at our financial target and also our long-term strategy. And we worked quite hard on that 2023, and we will come back to that presented a new strategy and new financial targets today. I would say that we made recent and decent progress. It was gradual. 2023 started quite slow. But in the second half of the year, we picked up speed. Our margins started to improve, profits started to improve. And we were really, really good in terms of generating cash flow for the business. So we had record cash flow for the full year, driven by the cash flow in the second -- third and fourth quarter.

Yes. Yes. And I think you mentioned this. You have had some progress on profitability, especially on gross margin in the second half of '23. Would you say that you're satisfied with the progress? And is there more to be done?

I would say that considering the circumstances that we faced, I'm quite happy about the progress that we made in 2023. This is however only the starting point. So in my mind, we should continue to improve in 2024 for sure and also in the years to come. And that's why we've also set new financial targets.

Yes. And I think if we just jump into the financial targets, we have a slide here, you announced new financial targets today. And they are slightly different. Could you perhaps elaborate a little bit on the new financial targets?

Absolutely. We have 3 new targets. The first one is organic growth for the business. And over the planned period, which stretches until 2027, we say that we will achieve an average of 3% to 5% in terms of organic growth. The main driver of this will be our brands. So the objective for our brands is that we should achieve at least 5% organic growth average per year. This, in essence, means that the rest of the business, which is primarily private label, we might see lesser growth or even negative growth as we go away from contracts that are not profitable a lot. So focus on our brands, focus on organic growth, not so much focused on M&A-driven growth. So it's really a brands that could drive the growth of the business. The second target, which is, in my mind, is the most important one is our EBIT margin. We have set a target that we should reach at least 8% by 2027. And if we compare to last year, we achieved 1.6% EBIT and the top year 2020, we achieved 6.5%. So this is quite a journey that we're on. We are very confident that we'll reach there. It's part of our strategy, which we'll talk about later in terms of driving our brands, but also creating a lot more efficiency and harmonization in the business. The third target is our gearing. We have set that at 2.5x net debt to EBITDA, 2.5x. And currently, last year, we were at 2.7x. So we want to come down a little bit further.

Yes. I think that sounds very reasonable. And could you perhaps provide some insights into the catalysts that led to this decision to announce new financial targets and the new strategy?

I know we talked about it to some extent already earlier that really the industry has changed a lot in the last couple of years. And we have looked at our strategies. We have looked at our competitive position. And that in combination that is to make those decisions to announce new targets, financial targets and also new strategy. I think while it has been tough in the industry and tough for us. We do have a strong platform. I would say that many companies have suffered more than we have done. So I think that now we are in a phase where we can accelerate the business.

And I think if you could just perhaps elaborate on the key initiatives that you'll take, the actions that you will take to achieve these financial targets and to successfully implement the strategy. I think that would be helpful.

Absolutely. And now we can actually look at the model that we have behind us here. A couple of things that are important. I mean first of all, it's still all about organic and healthy foods. The consumer is as eager as ever to consume foods that are both healthy and sustainable. And in our mind, as the economy starts to strengthen again, we think that they will get back to doing exactly that. It's also all about our brands. So it's our brands that should be the real catalyst in this. And thirdly, it's about the markets that we are in. Our core market is really the Nordics, the 4 Nordic countries. And we are strong and have been strong all throughout this phase here. Then we still have a lot of work to be done in our division North, which is basically the DACH countries and division South, which is Spain and France. And what have we been doing? Well, we are employing 3 main strategies. The first one is around our organic offering. So our organic products, what is in Swedish called [Foreign Language]. And we have phrased it to create one organic powerhouse. In terms of organic food, we are a strong player in Europe. We do have strong brands. It's local brands, one brand by market basically. And we want now to develop this via more and better communication, which is something that we started already last year and saw some good results. More and better innovation but also to really use the power we have in terms of sourcing our products, streamlining our production, streamlining our assortment to make it less complex and thereby to be able to drive margin. And I would say that, that is really, really key because organic products stand for more than 50% of total sales in the company. The second priority is to drive our conventional health brands, and we will mainly focus on 3 brands, which are Friggs, Earth Control and Gainomax. Those are today mainly Nordic brands. And the first priority would be to strengthen the organic or the presence in the Nordic even further and thereby drive organic sales. Long term, we could and should look at countries outside the Nordics. The third pillar is around to build for the future by optimizing and making our whole offering more efficient. So optimization and harmonization. If we start by harmonization, we have made quite a lot of acquisitions in the past. So we have a very broad portfolio. This is and could be a strength because we have a lots of good product that we could sell in more markets, but it has also meant that our assortment has become very complex. So we will streamline this assortment. This is something that we started already in 2023. We see good results. We were driving down inventory, creating really, really good cash flow, but also we start to improve margins because of that. In terms of efficiency, we are a big buyer of organic products and raw materials. We should use that power better. We should use our innovation power better, our communication power better and distribution power better. So those 3 pillars are the ones that should take us to our financial targets.

Yes. I think that's a very good and lengthy description, I think, for to boil it down, it comes down to focusing on the products where Midsona can add a lot of value and where there's a large underlying demand and secular growth. And then, of course, you've already streamlined your cost base quite significantly lately and some cost optimization initiatives. So it looks certainly like if you do maintain certain organic growth and focus on the best brands that this is very much achievable if we look at the history and the portfolio...

Absolutely. I feel very confident about that. And I should also say that still there is quite a lot to be done when it comes to complexity reduction. We have done a lot, but still a lot to be done.

Yes. And I think just a final question on the financial targets. How can we -- how does the company measure and track the success and the implementation process and what can stakeholders look at in terms of the milestones that you are targeting.

Internally, we have a very detailed plan in terms of what should be achieved by year by quarter almost, which we know we'll follow. External, I think that what you should see is a gradual improvement. And for sure, we are looking at further improvements when it comes to gross margin, EBIT margin already in 2024. So gradual improvement towards long-term goals that should be achieved by latest 2027.

Yes, that's very clear. I think that if we move on to some of the future opportunities that you do see in conjunction with the financial targets that you've set and you're active in 3 regions, as you mentioned. First, we have the Nordics, and then we have North Europe, the DACH region primarily. And then we have South Europe. What would you see in terms of growth opportunities in each region? I think if you could help us understand what your perspective is, I think that would be helpful.

If you stop by the Nordic region, which is almost 70% of our sales, I think it was 68% of sales in 2023. That region has been quite stable all throughout this industry turmoil. We have in 2023 seen record sales for Friggs. We turn around sales for organic brands. So in that region, it's very much about using the distribution power, getting more distribution for our brands in the countries in the Nordics continue to create efficiency. So there are -- we are already well on track. When it comes to the division north and division south, one major difference compared to the Nordics is that in division north and south, we are 100% organic. So it's only organic products that we sell. And organic products have been harder hit by the downturn in the economy. So what we have done is to look at what are the opportunities. One is that we have created better communication for the brands, not only talking about organic, but also the health benefits and sustainability benefits by eating our organic products. What we've also done is that we've looked at new customers, and there still are lots of customers out in Europe where we can sell our product. And we've been successful in attracting new customers, and that starts to show already at the end of 2023. So we are turning the business around in those 2 divisions as well. I'm very confident about that and also as icing on the cake to really drive efficiency in our sourcing and production and that should make the turnaround in those 2 divisions.

Yes. I think that's very clear in terms of how you see all these 3 geographic segments. And I think there is also another way to look at Midsona, that's, I guess, the product categories. You have some organic brands, you have some health foods and then you have consumer health products. How should we think about Midsona if we were to apply the product lens, if you will.

If you look at -- I mean, the biggest segment is organic. That stands for a little bit more than 50% of our sales. And this is the segment where the market went down during the recession that we have seen. We've seen some good signs lately. Some industry signs that actually sales start to even out at least, but we have also been able to grow faster than the market. The way has been communication, innovation, selling the right products and attracting new customers, and that will continue. It's also when it comes to organic where we have the biggest need of harmonization to reduce complexity. That's a process that started already, but will continue in 2024 and also 2025. If you look at our consumer health brands, brands like Friggs, Gainomax, Earth Control, that business has been stable or even growing. Friggs had a record year in 2023, very high demand in the home market Sweden, also increasing demand in new markets like Norway and Finland, and we will continue that journey of Friggs to continue to drive sales of the brand and also apply pretty much the same model for Gainomax and Earth Control to drive sales that way.

Yes. I think that's very clear. And I can say that as a consumer, I'm happy to contribute to this.

Thank you so much for you appreciate it.

I like the product. I think if we go into some M&A previously, Midsona has a history of having acquired businesses. Given the new financial targets, you have a somewhat different perspective. Now could you perhaps share your general perspective on how you see M&A from Midsona given today's new financial targets?

I would say that in the nearby future, our focus for sure will be in the business that we already have because there is so much that we still can improve in terms of driving growth of our brands, in terms of attracting new consumers, customers and consumers, in terms of actually building for the future by optimizing and harmonizing. So that's what we start to do to some extent already in 2023 with good results. That work will continue into 2024 for sure. That said, long term, this industry is still very fragmented. We start to see some consolidation, and we were one of the drivers in around 2015 to 2020 basically. Then came the pandemic and then the economic downturn. And during that time, not so much happened. I still think that over time, this industry will be consolidated. Hopefully, we should be part of that consolidation. But right now, for sure, the focus is on streamlining the business that we have and thereby driving towards our financial targets.

Yes. I think that sounds very healthy to pursue organic opportunities if you think that they're very attractive internally already, of course. I think if we just move on to finish, I would say if you were to say anything about what you look forward to in terms of next year 2024 and then '25 and perhaps even 2027, of course. If you could give us some perspective on that, I think that would be useful.

I would say that we are very dedicated to achieve our long-term financial targets now and the first steps need to be taken this year and then it needs to continue year after year. And that's what we are really focused on. What I think now is that this quite tough situation that we have faced. We have worked through our strategy, our opportunities, the competitive landscape and we see a very good opportunity now to actually improve from this platform. Then if you also then see a little bit more of an economic upturn, so that consumers start to spend a little bit more. That would, of course, also help us. That, in my mind, would be icing on the cake because in my mind, our plan is now so strong that we should and will be able to create growth towards our targets anyway. So I'm very positive about the future. We do have a strong plan. We do have a strong team. We do have financial targets that we're very dedicated to reach.

Thank you very much, Peter. I think this was very useful and helpful to understand both how you think about the business and the new financial targets. And thank you to everybody else for listening in.

Thank you so much. Thank you.