Musti Group Oyj (MUSTI) Earnings Call Transcript & Summary

Hi, everyone. David here from Musti. With us we also have Toni from Helsinki and also Essi that will help us with the presentation today. We're going to go through the half year report that we sent out this morning. And we can start with going through the highlights in the report. So we think that we had a solid first half of the year, and important to point out that we are on track with our long-term targets. So net sales increased with the 16.2% to EUR 193.8 million in H1 that was mainly driven from new customers as before, and we are continuing taking market share in all 3 countries. In the second quarter, sales increased with -- for us only 12.1% to EUR 92.4 million. The sales was negatively impacted especially in February due to disruption in supply chain, rapidly accelerating inflation, but maybe most of -- or the terrible war that impacted consumption, and mainly that was in Finland. We have though seen a return to normal levels from mid-March, and in April we saw strong bounce back. Important to point out that we're not selling anything to Russia or Ukraine. H1 sales in like-for-like was 6.9% in total, 4.1% in stores and online about 16%. We were meeting quite high online growth number last year, so with the 16% like-for-like online on a 2-year basis, that's pretty high. The group's adjusted EBITDA increased by 17.4% to EUR 33.8 million for H1. The adjusted EBITDA margin was 19.6% versus last year 18.6%. In the second quarter, EBITDA increased to EUR 14 million versus last year EUR 13.1 million. Of the key things that we're looking at is the number of loyal customers, and that was growing as well this period. So we are now at 1.37 million customers. That's approximately 12% growth versus last year. If we include all our customers that is in our online verticals, we had a new record coming in at 1.66 million customers. We're extremely happy with that. In H1, the group's adjusted EBITDA increased by 10.8% to EUR 20.3 million. The adjusted EBITDA margin was 10.5% versus last year, 11%. So it was down a bit. There are some specifically reasons behind that and also why the Q2 adjusted EBITDA came in at 7% versus last year's 7.7%. Toni will go through this more in detail later. Cash flow from operations came in at EUR 18.5 million in H1 and EUR 5.3 million for Q2. Also this section is part of Toni's details. And as I said earlier, after the period in April, sales were strong, 18% growth, and 40% on a 2-year basis. So we have a strong start of Q3, which we, of course, are very happy about. So let's look more into the growth of the company on next slide. As said, net sales increased by 16.2% during H1 and 12.1% in Q2. We see H1 more as a period than Q1 and Q2, and the reason behind it is the kind of the outdoor effect and the impact of that. It relates to when the cold weather is coming. This year, we had it in December and last year we had it in January. So that actually swings a bit in the quarter. So that's why we're looking at H1 more as a period. For H1, Finland had 12.6% growth, which is a good number. Strong growth in stores and a bit lower online due to the high comps that we're meeting. Sweden had 14.7% growth, strong growth in stores and online. And Norway, the ramp-up country, had 43.9% growth in the 6 months period. That's very strong growth both in stores and online. And if we look a bit on the longer perspective, you can see in the middle chart there that the CAGR sales growth H1 2019 to H1 2022 has been steady at 16%. And net sales rolling 12 months was EUR 368 million with an LTM growth of 18%. And as before, per segment, Sweden and Norway are taking bigger share where Finland has 44% and Sweden and Norway has 56%. Last year, the same period, Sweden and Norway had 52%. So it's part of the strategy and growing Sweden-Norway to be a bigger part of the company. So if we look at sales on a bit longer perspective on next slide, most growth has been increasing on a 2-year basis for many quarters. But in Q2, it came down to 35%. It's important to look at it on a 2-year basis as well, especially when we're meeting these extremely high comps. That 35% represents 12% on a one-year basis. And as I said, it was impacted in exactly February due to the reasons I said earlier. And if we look at H1 more in the period how it was, it came in at 16% growth and 38% on a 2-year basis. After closing April, as I said, 18% growth, strong bounce back, 40% on a 2-year basis. Also that we want to point out that stores was growing 27% in April with 8% like-for-like. So happy with the strong start. Let's move on and look at the gross margin development. The gross margin and share of own exclusive products are strong. The development is in our favor. The trend in this gross margin has been very strong the last quarters and during Q2, it increased to 46.5% versus last year 45.3%, and for the period H1, 47% from last year 45.7%. The strong development is mainly driven through a couple of reasons. And the most important thing is the -- our increased share of our brands that -- own exclusive brand that is going upwards, as you can see on the right side. It's the successful campaign pressure, and it's an increased gross margin in our pure play that we have been working within the last 12 months. This has been important for us to be able to increase our gross margin in the pure play and online verticals. So we're not diluting the business in the gross margin perspective. And all of all, this is, of course, extremely positive for Musti going forward, and this turbulent situation where similar companies are in. Let's look at the EBITDA development on next slide. Musti continues to increase the EBITDA. In Q2, Musti delivers EUR 14 million in EBITDA with a 15.1% margin. We have seasonality effect between the quarters, as I said. That is also reflected in the margin, of course, where Q2 and Q3 is the lowest. So we were in one of the lowest quarters, and Q4 and Q1 is the highest. That's also why we would like to look at it as periods, half years. For H1, Musti delivers EUR 33.8 million, 17% growth versus last year. And if we look at CAGR, even here you can see that it has been stable, up going at 22% EBITDA growth. So very strong momentum. Trends is in our favor, and we're pasting our own goals. And during this period, we have also strengthened our concept. You can see that on Slide 8. Musti has strengthened its position in the Nordics the last years. We have been focused on opening stores, acquiring franchise and growing our online business. This has been important for us to take market share and build the kind of a concept in the 3 Nordic countries. The last 12 months we have added 56 stores, and this is more than we planned when we did the IPO. You see it on the left. Every year we added 20, 29, and last year 56. These stores is still in a ramp-up mode, so they burden us short term, but they will help us long term. You can see the economics in the middle chart. So when they are mature after 3 years, they give us approximately EUR 1.1 million of sales and EUR 300,000 in contribution. So these stores is in a ramp-up phase year one. This means that they will enable us to reach our financial targets. And that's also why we've been speeding up, because we have seen a great opportunity to open more stores. At the same time, which is also extremely important, we have been investing and pushing our online verticals. And so you can see on the right side, the online sales that now stands for 23% share of sales. That has been growing 21% CAGR since H1 2019. And with this combination, Musti are well-positioned to keep on gaining market share with a strong omnichannel model, and we have built it for future growth. And remember, it is burdening us short term, but will help us long term. Now I will hand over to Toni that will go through the EBITDA and the segments more in detail.

Thank you, David. So about the EBITA, in the first half, it increased into EUR 20.3 million. So I'm posting a best first half ever for Musti with 11% growth on the first half. And as David there explained on the previous slide, adding these new stores and investing in the future capabilities in a short term, especially now when we had a little bit lower top line on the quarter 2 compared to Musti's growth speed in history, this is burdening our bottom line there below EBITA. And that's also one of the reasons that why we internally -- and also we've been talking with you investors about the EBITA, as that will show in our mind in another way how well the machine is worth. There were also no adjustments in the EBITA in the second quarter. So what we have talking in the past about Eskilstuna, is sort of now business as usual. But of course, one of the reasons in the quarter and a bit also on the first half was that the high volumes in Eskilstuna, our central warehouse, are earning than the central cost and the group cost part. And also the kind of -- looking at the first halves there from '19, '20, '21 and '22, we are in a good trajectory also regarding our long-term targets. On the next slide, we could look a little bit on kind of characteristics of our business. So pet business has proven quite resilient on different type of consumer shocks and changes. And especially with Musti, we have large share of these non-discretionary staples, which over 50% is food and cat litter, where consumers have been found very brand loyal. And when it comes to the brands, the high share of own and exclusive with Musti, what we posted now was 53% as the group provides good shelter in this case as well when it comes to the gross margin and pricing power. Also the all-time growing size helps us in the [ inflationary ] environment to negotiate with our suppliers and kind of a pushback the part of the inflation, what is then possible by our good sourcing team. One shelter also for the inflation is the Musti cost base. So on the pie chart there on the left, you can see that 1/3 of our cost base is roughly the sort of fixed cost, which is sheltered a bit better here in the Nordics from the inflation compared to materials and services. So salary inflation, inflation related to the premises has so far been lower than, for example, the raw materials and some of the products, and not to mention the gasoline and distribution cost. So these 3 points are good to remember in case of this [ inflationary ] environment and what is sort of the backbone of Musti. From here, we can step into the 3 segments we have, and we start from Finland. We had a 9% growth in Finland in the quarter 2, quite on level with like-for-like growth, but kind of this hesitance with the consumers, especially in Finland, was visible in the February and early part of the March. But as mentioned there in David's slides, in end of the March and especially then in April, we have seen clear return to normal when it comes to Musti customers. And the growth in Finland was supported by growing the network, acquiring the franchise stores end of last financial year, and a good inflow of the new customers. Also profitability declined a bit in Finland when it comes to the quarter and then now on the first half, 12%. Next one, we can take a look at the Sweden. Good growth in Sweden as well, 9% growth. It's almost similar to like-for-like. But the most delighting part in Sweden is maybe the EBITA increase of almost 40% to EUR 6.1 million. This was due to kind of a better operating leverage in the country, growing sales and a bit offset maybe the online part, but also in the online we were performing quite good on the quarter and also on the first half. Adjusted EBITDA margin increased in the period to EUR 15.6 million. And looking at the right side of the picture, year-on-year comparing the first half of '19 to 2021, and this year, there is a good track where we are on with the Sweden. And now we have also combined in the management team that the -- Daniel leading Sweden is also looking after Finland and utilizing these great learnings in Sweden for Finland market. Then finally Norway, always on its own growth numbers, top line growth, 35%. And here, maybe pointing out the right side of the picture again, from '19 sort of a breakeven first half to EUR 5 million profits in this year, and the pace keeps going on in Norway. Good ramp-up of the new stores, a little bit tailwind also on the currency for the period, and great performance on both profitability and growth. Then we can move into the financial position and cash flow, as David promised there in the beginning. So cash flow on the quarter a bit lower than we have used, but there is a good reasons for that. We have identified the risks in the global supply chain due to the turmoil there in the world, and have increased our inventories quite significantly, and also kind of the increasing inflation in the world, we have secured our inventories and availability for the customers with the current prices and availability from our suppliers. Also good to notice that during the period, we paid the first half of this year dividend or technically a capital return of EUR 7.3 million, and the second portion will be paid out in August. Gearing jumped a bit on the quarter as well. We took a little bit more debt with the current facility. And our leverage there in the last 12 months adjusted to EBITDA was 2.2%, still within the threshold of our targets, and this kind of coming from 2 ways, so a bit on the profitability and bit on more debt. Investments in the quarter were EUR 3.6 million, which out of EUR 2.7 million was a goodwill from the acquisitions in Sweden, and then rest is store network expansion and some IT investments. Then my final slide on the long-term targets. No change there. We are aiming to reach the EUR 500 million, at least EUR 100 million top line by the end of '24, our financial year, so autumn '24, and also deliver EBITA margin of at least 30% at the same time. We keep the leverage below EUR 2.5 million, and aim to pay dividend or capital return equivalent to 60% to 80% of net profit. Now I hand over back to David to summarize the topics.

Perfect. Thank you very much. Yes, if we look at the summary of the full presentation, so we had a solid first half of the year, and we are well on track with our financial targets as said. During H1, sales grew with 60%, mainly driven from new customers. And the EBITDA grew with 70% in the same period. So a good progress there. It has been a turbulent second quarter, impacted, especially in February, where sales was impacted of the reason we talked about. But we had a strong April bounce back where sales came in at 40% growth on a 2-year basis, and 18% on a 1-year basis. Gross margin has been developing very well the last 6 months. And if we look at H1, 47% versus last year, 45.7%. And the other part that we were also mentioning was the store openings, that we have been pushing a lot more store openings in the last 12 months, 56 stores. They have burdened us short-term profitability, but they will support us reaching our long-term targets. Pet sector has proven to be resilient in tougher times, and the momentum continues to be strong, and Musti is on track with our long-term financial targets. Perfect. I think that's everything in the presentation. So we will hand over to questions.

Yes. Hi, everyone. This is Essi. Unfortunately, we seem to have some technical problems with the teleconference, but please send your questions through the webcast chat and we can read them from here. So let's do so that I will read the questions, and Toni and David, you are free to answer. So the first question comes from Joni Sandvall. April sales were up 18% year-on-year. Can you open country-by-country development?

It has been strong, I can say, in all 3 countries, coming back to normalized levels. And especially Finland, that was a bit more impacted earlier in the Q2, we saw an uplift, but more back -- going back to normalized levels in all 3 countries.

Then the next question is also from one Joni Sandvall. Can you open your cost pressure due to inflation? I think at least in Finland, retail sector has employee negotiation during autumn.

Yes, I can take that. So what comes to the salary inflation this financial year, it's quite well locked out. We have around 2% salary inflation in Finland and Sweden, and approximately 3% in Norway. What then shall happen in autumn negotiations is then up to that. But of course, there is pressure all over this. At the moment, what we see what comes to the inflation, it's a lot about the distribution. What we have seen already earlier was the freights from Asia to Europe, and now more increasingly the distribution in the Nordics as well that the fuel surcharges with all the operators are going upwards due to the gas prices rising. That is something that we mitigate what we can, but of course, we need to push part of that also into our consumer prices. Then maybe kind of in the products what we see, the main pressure of inflation is more maybe on the food side than on the accessory side, and there, our own production facility helps us quite a lot. So we are increasing the volumes in there. And there, we have a good availability of all the raw materials, what we need. Looking back the last quarter, what there is sort of inflation in our numbers -- so we talk about maybe 3.5%, 4%, and then the last 12 months is around 2%, 2.5%. But of course, we can see that it's increasing, and we have done some price increases already and then are utilizing that part in the future more.

The next question from Joni Sandvall. How large impact did you have from additional sick leaves in Q2?

Not material. It was a bit higher than on average, but not material on a sort of a group level.

Then the next question comes from [ Matti Sarasi ]. You have mentioned increasing number of acquired franchise stores as part of the reason of decreasing margins in Finland. Can you please be more specific on this number and its impact on margins? How long do you think this effect could last?

Well, the effect kind of goes then through the year-on-year comparison, and we acquired those big bunch of franchises at the quarter 4 last year. So we can see that the impact there kind of in year-on-year numbers still a couple of quarters. And the dynamics were so, as we discussed in the previous quarter, that our franchising fees and then the sales to the franchisees, how they are channeled through the group and different parts. So now Finland sort of are in a short term, is a bit suffering from that one. But it's around percent impact on Finland, what there is on the profitability in that sense. So no kind of anything that turns the needle totally, but it's an impact for Finland still for a while.

Then another question from Matti Sarasi. Can you comment on your plan regarding number of new stores opening, acquiring in the future? Do you think that the pace seen in the last 12 months is something sustainable?

Yes. So we are -- when we built our EUR 500 million plan, we, of course, had a target of number of stores and online, et cetera. And we are currently ahead of our plan. So we will probably slow down a bit with store openings because we have been opening and acquiring more than we planned. And so I think you will see a lower number than the 56 that we have the last 12 months -- 54. So it will come down, that's for sure. And also, we should remember that the kind of new store openings that we're doing is hurting the old stores as well from a like-for-like perspective. So that's why we are also shifting more into looking at growth. If we just take Finland, for an example, the cannibalization effect of opening stores and acquiring the franchise center is about 3% impact on the like-for-like. So we look more on the growth than on the like-for-like, specifically in special areas.

Next question from Joni Sandvall. Regarding Eskilstuna headquarter costs, should we expect Q2 as a run rate? Or are you expecting any efficiency gains from, for example, Eskilstuna?

Yes, we do expect efficiency gains. But now the kind of our external factors are a bit burdening as Eskilstuna's capability to focus on development items. So probably it's a run rate now for the next quarter, and will aim to improve towards the end of the financial year at -- in the quarter 4.

Next question from Olli Vilppo. Did the timing of Easter boost sales figures in April?

Yes, it might did, but not a big effect, I would say. We had exactly -- we had some -- we had the effect in April, yes, but limited I would say.

Next question from Andy Wade. Please, could you confirm that Q2 saw LFLs plus 8% for the last 6 weeks, and therefore, flattish in the first 6 weeks?

The like-for-like in April was 8% exactly. The other I didn't get through. Toni, do you --?

Yes. Not entirely sure what -- yes, the Q2 had the 8% LFL, and also what we now mentioned about the April growth of that 18% there, the LFL was also 8%.

Next question from A. Costa. What's David's opinion about [indiscernible] being taken privately? What's going to be the impact in our digital development -- in your digital development? Are we planning at a certain point to internationalize outside the Nordics?

I think the impact for them changing owner so far is no difference. We, of course, believe that they will have maybe a more aggressive agenda. I don't know if that's the Nordics, maybe it's more the DACH region, et cetera, that we will see. For us, when we look at our online verticals, of course, we're looking at the opportunities to go outside the Nordic countries. Nothing is decided, but we're looking into it.

Next question from Andy Wade. Which categories underperformed early in Q2? Was it discretionary categories, for example, accessories? Would April partly have benefited from pent-up demand after the slow start to Q2? So the exit rate may be higher than future LFL rates?

So it was mainly the non-food categories that was underperforming in February and part of March. The food has been fairly stable all the time. And in April, we saw a bit stronger sales in all categories, I would say.

Next question from [ Maria Wistrom ]. Any issues with availability of products? Have you seen any bottlenecks? And how you are prepared for the quarters to come?

Yes. So I think one of the reasons why we have been burdened in the cash flow a bit is because we have been needed to take in a lot of more products so we can keep high availability in the supply chain disturbance that we're seeing. But currently, the availability is fairly good. It was a bit lower in Q2, I would say, in the beginning.

Next question from Andy Wade. What happened to Sweden's space contribution? It looks to have fallen from 9% in Q1 to 1% in Q2?

Do you -- can you take that one or…

Yes. What happened to Sweden space contribution? It looks to have fallen from 9% in Q1 to 1% in Q2.

Well, we -- during the quarter, we took new stores, franchise stores into the network in Sweden. So there were maybe a bit bigger stores. Maybe there is one impact on that one. But I must confess, I haven't looked at the Sweden from this angle in that detail, but I'll find the reasons for you, Andy, later on.

Next question from Tommy Ilmoni. Can you comment on how much acquired franchise stores in Finland affected profitability? Why our group function costs so high? Can we expect this level to remain in the future?

Yes. So the franchise stores -- like I commented earlier, and also in the last quarter, so it's about the kind of internal sales dynamics and how we allocate the cost related to those. So there's nothing changed in that one. Maybe it's more in -- this quarter was the volume-driven impact on what was there in the profitability. Group function cost, they are 1/3 of Eskilstuna related cost and then 2/3 of other group costs, what all we have there, marketing, customer service center, finance and HR, and so kind of compared that year-on-year. So all the new colleagues and all the new capabilities, what we took into use in Musti during the '21, also in the quarter 3 and 4, are now there kind of as a -- fully loaded in this quarter when we compare to Q2 and Q2. This year, we have taken a quite strict measures on the cost with the company. But of course, the '21 cost growth is still a bit burdening there. What I said also earlier about the Eskilstuna that now the kind of challenges that we have, the warehouse -- our inventory level is quite high at the moment, and with -- and the development of the cost part and capabilities of Eskilstuna will then follow in the near future. Target is to lower the cost in relation to the top line. And in general, we have development projects on that area.

Next question from Andy Wade. What do you mean by the impact of Finland from cost allocation in relation to franchise store acquisitions? Could you explain this? How much impact did this have?

I believe that's the same question now third time. So clearly, an interesting area. Maybe we are -- can come up with some picture on that in the next presentation to clarify it further.

Sounds good. Next question from Jonas [indiscernible]. Sales mix -- have you seen any signs of customers trading down on their purchases of non-discretionary goods such as food? How is the mix outlook? Eskilstuna update, when should efficiency reach a satisfactory level? And any color on how should we think about the group costs?

No, we haven't seen anything that people are shifting down. And regarding Eskilstuna, I think we are on a level which is satisfying, but we would like to have more. And the more part is a problem in these days because the supply chain disturbance that we're seeing with random shipments coming, and also need to have more products than we used to have because of having the -- having to order more, et cetera. So with that said, it's hard to estimate when we will see the upsides that we're hoping for in Eskilstuna. And was the third -- the cost, right? Head office cost. Maybe you could take that, Toni.

Can you please repeat what was it?

Yes, any color on how should we think about the group costs going forward?

Yes. So what comes to Eskilstuna, we are quite busy at the moment running the operations. We are aiming to have improvements there. And then the rest of the group cost, we are proceeding exactly in the plan and keeping that on a very steady level this year.

Next one from Andy Wade. Why are you talking about the profit drag from expansion now? Has it become more of a burden than in the previous quarters? If so, how much more?

Yes, exactly. It's the 50 -- the store openings and acquisitions that we've done. It's the number there that has an impact. Maybe Toni, you can take the more detailed answer on it.

Yes, exactly. So kind of as mentioned there in the presentation, we have been a bit front heavy on kind of based on the opportunities, what there is in the marketplace, increasing the network, and that fits perfectly into our plan. So now when just a little bit slower top line quarter comes in front of us, we can see that the fast acceleration of network growth is then burdening the profitability on the short term. But on the long term when those stores are ramping up and growth back to normal, then it's more of a blessing than a burden.

Yes. And then also, of course, it's driving cost, filling up these stores from a supply chain perspective, and other costs, but we're not getting the full volumes.

Next one from [ Maria Wistrom ]. Have you progressed on testing the markets in North Germany?

No, we haven't.

Next one from Olli Vilppo. Can you talk about sales mix in the Q2? Was the accessory sales hurt more than food sales? Is the bigger inventory value now related to accessories or food?

Yes. We had the – exactly, we kind of had a positive outdoor effect in December. So we didn't have it in January versus last year. So that's why outdoor was lower if you compare to same quarter last year. That was one. And then when the kind of effect came in February, that was also non-food that was mainly impacted. So yes, it was more in that area, which means that we have a bit more inventory in the non-food categories.

Then one from Joni Sandvall. Can you comment on recent developments within Musti ecosystem? And when could we see impact from growth investments?

Yes. We are doing live shopping in all 3 countries now, which is going extremely well, that you can go in through websites and follow the live shopping, which is good. The kind of investments that we're doing in -- we're not doing as much investments in that area that we did earlier. So we're doing it more internally in a way. And the -- of course, services is something that we're pushing very hard, physical services.

Then we have our last question for this session coming from Andy Wade. You had quite a big swing in EBITDA margin with Q1 plus 100 basis points and Q2 minus 80 basis points. How should we be thinking about H2?

And that's the kind of a problem why we also look at the seasons combined, so Q1 and Q2, because you have the outdoor effect that drives a lot. You have also volumes when that's going up. We had a bit more volumes maybe in December than we -- if you compare it to last year, because we had it in January. So yes, you could say that the -- from a profitability and a margin perspective, it's more or less the same between H1 and H2, but then you have the growth, and then you have the things that we're working with the scalability.

Thank you. There are no more questions in the webcast chat.

All right. Thank you very much. If there are any things you just reach out to ask when we set up a call. Thank you.

Thank you.

Bye-bye.