Musti Group Oyj (MUSTI) Earnings Call Transcript & Summary

Hi, everyone. My name is David Romberg. I'm CEO for Musti Group. And with us today, we also have Toni Rannikko. We are here in Helsinki and we also have some people here in the studio that we welcome as well. Today, we're going to go through the financial statements review for the fourth quarter and the full year. And let's jump in. When we look at the main KPIs that -- the ones that we are following, they all look really, really good. So we had 14.4% growth in local currency. We had a strong like-for-like, 10%. We had a strong cash flow, EUR 29 million, which is a record for us. We also had an online growth that was quite stable, but extremely high numbers, 20.7%. The loyalty club has been growing with about 6% and something that we want to point out is that we were able to increase the gross margin, especially in this tough environment with the FX headwinds, we were able to increase the gross margin with -- from 50 -- from 45.2% to 46%. And that led to that we had an extremely good, adjusted EBITDA that came in to EUR 20.6 million. And if we look at the full year, we had EUR 425.7 million in sales. If we look at the FX-adjusted top line, it was EUR 450 million. From a cash flow perspective, also for the full year, it was really strong, EUR 79.6 million and the adjusted EBITDA, EUR 73.6 million. Also here, we had some FX headwinds. So if we add back those, we ended up at EUR 79 million. So overall, for the fourth quarter and the full year, we are extremely pleased and happy with the results. But let's now take a look into what has happened the last week with the recalls of the Smaak grain-free products. And for having that presentation, I welcome Pamela to the stage, so we can go a bit more into the detail. So if Pamela can present yourself, please.

Hi, everyone. Good afternoon. I'm Pamela Nelimarkka, and Musti Group's COO.

Very good. Also welcome from my behalf, Toni Rannikko, CFO of the company. So as you have probably seen in the releases what we have put out and in the media, at least in Finland. We have been calling back a couple of grain-free products in our range. We have established also yesterday in the release, possible reason for what is causing the symptoms with the pets. And we have ended up into this, excluding different factors in the product. So we have been able to test almost all ingredients in the product. And through that, comparing those into the symptoms with the pets, we have come into the conclusion that the only possible thing or the most likely possible thing causing this is toxins in potato flakes. Pamela will tell you more about this in a minute. Majority of these batches were halted in our stores and warehouse, but still a few thousands of bags ended up into consumption and into our customers. Putting that into perspective, in a month, we sell roughly 400,000 bags of food, but still even 1 sick pet is too much. Sales of these 2 recipes during the last financial year was approximately EUR 2.5 million, and the whole Smaak brand equals to roughly EUR 16 million. During these days, during the media turmoil in Finland and while our thoughts are with our customers, we still have had steady performance in our stores and our online business. We have pledged and promised that we will cover the veterinary cost related to these batches and products, and we have also held the orders from this potato flakes supplier currently. Also in the future, we will do self-monitoring and test every potato batch in our factory. And now to Pamela for the more detailed part.

Thank you, Toni. So yes, indeed, as Toni mentioned to you, we are currently suspecting that the ill dogs, maybe the glycoalkaloids in potatoes. How you can see if the glycoalkaloid concentration is high is basically of the green color of the potato. We have been using potato flakes, both within the EU and the likelihood of that -- these potatoes may have increased -- may have contained increase amount of glycoalkaloids can be seen as likely. And the symptoms also is matching with the symptoms that you have when consuming glycoalkaloids. Now glycoalkaloids do not have an established fee limit in the EU. And this, of course, something that we hope that is something that EU and the food authorities will continue investigating to make sure that there is a limit to where we can then in the future, also measure against when we are measuring our inbounding potato as a raw material. This is also the reason for why these aren't measured right now, every batches in our industry and also our supplier have not measured every batch of the potatoes that they have supplied to us. And as we communicated earlier, we have halted the purchase with this supplier. This potato flakes from our supplier within the EU have been used with -- for 2 grain-free products in our segment. And the rest of the products, we are using potato starch from a Finnish supplier. Then a few sentences also about our factory in Finland. Most the group's factory in Lieto in Finland, Western part of Finland is a very, very modern. Year '21, we established the dry food line on which these products are being produced. From a technology point of view, we are talking about extrusion. And when you produce products via extrusion process, the products goes to a high degree. And based on this high degree of temperature, we can then more likely exclude certain bacteria, for example, or moist of the products, and that has also then led to our suspicion of the glycoalkaloids, together, of course, with our specialists who have been also investigating the case. What is very rare in our industry is that our factory has 2 certificates. We have FSSC 22000, which is used actually for the human food industry. And on top of that, we have ISO 14001, which is then covering the environmental pack. We take this very serious in our factory, in our whole company, and we continue investigating. We are not excluding anything right now. As I said, we are suspecting the glycoalkaloids, but still, of course, also analyzing it from many different angles in order to make sure that we are not missing anything.

Thank you very much. And we have then taken the decision to take away this product -- those 2 products, those full ranges from the market. We -- from the beginning, we took away the batches. But now when we went out with information regarding this, we have been getting in some more complaints from customers and just to make sure that none of these products is out there and could have this problem in it, we have been taking decision now to take away both of these products. And it's the same supplier. It's the same potato. So by precaution and also for the information that we now have, we've been taking a decision to take out everything. Thanks, Pamela. So if we then move on into the numbers again. So strong growth with improved profitability. I think that's the main -- the headlines we have for the quarterly and the yearly results. So extremely happy with the top line growth, 14.4%, as I said, maybe even stronger with the like-for-like that came in at 10% and last year, 4.7%. So a huge uplift. Online growth like-for-like was also very strong, as I said, with 20.7%. And then the gross margin that I pointed out is a strong achievement. If we then look a bit more into the margins, and the EBITDA improvement that was also very, very good. We see that we've had very tight cost control and good top line and then with an improved gross margin that, of course, improves the profitability. So the adjusted EBITA increased with 23.7% to EUR 12.6 million, which is very, very strong. Adjusted EBITA margin 11.4 versus 10. So a huge uplift there. And then net cash flow, as told, EUR 29 million. If we look at the categories, we see that we've had double-digit growth, has been continuing in the resilient food and consumables. We saw that the discretionary part that has been impacting a bit more the last quarters was bouncing back. So last quarter, we had negative growth. We were also, of course, meeting high comps there in Q3 '22. Now we saw that the discretionary was bouncing back to positive growth. Otherwise, the driver, that stands for 75% of our sales, the consumables and the food, has been very strong the last quarters. And actually, food has been upgoing. And this, of course, is driving stability in the company. We believe that the discretionary will continue to come back and grow a bit faster going forward. If we look more into the sales, we can see that -- quite stable, 14% net sales growth if we look at the year CAGR 2020 to '23. If we look at the quarter, it was also 14.4% growth in local currency. If we look at the total last 12 months, EUR 426 million. And if we add then the FX impact, we end up at EUR 450 million. And as before, Finland has been -- still is the biggest part of the total sales with 45.3%. Sweden is coming closer, but still a bit behind. And Norway, they're kind of a ramp-up country, is also coming closer. When we look at the like-for-like and the growth, as I mentioned before, we see a big deviation here between the reported growth and the local currency growth. So the biggest deviation was actually last quarter. And this quarter, it came back a bit, but still we have a huge difference here. You can see on the right side, from a group perspective, a 6% impact, Sweden had 10% impact and Norway 13%. But that is, of course, not calculated in the like-for-like, as you see in the staples where we can see that the like-for-like has been stable between 11% and 10% now the last 3 quarters. And if we then look at the countries, it's also important to point out that the like-for-like has been strong in all 3 countries. And maybe one of the most positive things in the quarter is the very strong gross margin that we saw was increasing versus last year. So as you can see in the staples, we have been below last year, the last couple of quarters in the gross margin. The deviation has been shrinking, but now we saw that we were able to go over last year. There's a lot of things behind it. It takes a lot of time. And campaign pressure is one, supply chain management is another important thing, sales mix and also discounts. So all of that combined took us to this good level of 46%. And this is, of course, a trend so we hope that this will then, of course, continue. Own and exclusive also important, quite stable, 52%. So if we look at the profitability, that was increasing with 23.7%, a fantastic result. We came in at EUR 12.6 million. We had a EUR 0.8 million impact from an FX. So if we add that back, we had EUR 13.4 million. We -- as I said earlier, it was good traffic, good top line, high gross margin and tight cost control that took us to this level. And from a year-to-date EBITA, we had EUR 42.6 million versus last year, EUR 38.8 million, and also kind of a stable growth there of 13%. But to be able to increase top line with 9% and profitability with 24% is quite an achievement. So yes, with that, I hand over to Toni for the segments.

Thank you, David. So let's start in Finland. Finland presenting quite astonishing growth for our most mature country. Again, Finland has had a few strong quarters now in a row and, again, Finland sales increased by almost 13% to EUR 50 million. This was a result, like David said, steady growth, both online and stores. And as I mentioned a bit earlier, we have witnessed this trend also during the past days and weeks. We had good traffic. We have, of course, done price increases in all of our markets and some impact also integrating the pet food factory into Finland segment. Strong like-for-like, Finland, over 9%. Adjusted EBITA increased by 33% to EUR 12 million in Finland market. Adjusted EBITA margin almost 25%. So very good profitability level in Finland, and we have introduced quite a few efficiency improvements in our store network. So this is a combination of kind of good operations in place in Finland market. Then if we look at the Sweden market, so Sweden and Norway, both [ pasting ] as fast as Finland, but there is a heavy headwind. So both SEK and NOK are pushing the performance in Sweden and Norway market down, but if looking at the local FX, neutral growth of almost 12% and have a big impact to SEK had for the growth of around EUR 4 million. It's easy to say that Sweden is performing quite well. Improving profitability compared to last year and very good signals in Sweden market in that sense. Now when we are looking at the FX rates, having a little bit steadier mode compared to a couple of quarters back. We believe that Sweden and Norway can improve even more. Norway, pretty much the same story. Of course, higher growth as Norway is still in our kind of a growth bucket for introducing the most new stores in this market. But also here, FX having a significant impact on both top line and profitability. So FX also has impacts on Norway gross margin and through that, the country profitability. But still compared to last year level in euros, but in percentage a little bit below last year performance in profitability. Then we move to financial position, which in Musti Group is very strong. We had a record cash flow in the quarter and that is a result of our long and hard work in our end-to-end supply chain. So we've been talking that before as well. So how we operate from suppliers all the way to the stores. So we have been able to increase that speed, how fast the product travel through the company and also reduce the net working capital levels of inventory and improve the AP performance in that part. Then about the debt position, looking at the debt without the lease liabilities and comparing that to our cash position, equals around to 50, 60 -- EUR 50 million level debt. So company has kind of a good headroom to invest in the growth as well in the future. Investments quite in level of last year, but very strong balance sheet and very strong cash generation in the quarter and for the full year. Our long-term financial targets are unchanged. So we see good speed on growth. FX adjusted last year was EUR 450 million. Profitability on a good trend. I just mentioned, our capital structure is very strong and allows us to grow further. And in the dividend policy, our Board is proposing to the Annual General Meeting a dividend of EUR 0.60 per share. Through that, I'll hand over back to you, David, to wrap up.

Thank you very much. So when we do a summary then, I think -- there's so many things going our way. First of all, if you look at the top line with a 10% like-for-like. It's quite an achievement. We can also see that the gross margin has been improving. We can see that the profitability with the EBITDA was improving with 24%. The margin -- profitability margin went from 10% to 11.4%, and the cash flow actually was over 100% growth to the record of EUR 29 million. We can also see that food and consumables, that make up the majority of the sales, is strong throughout the fiscal year and also the quarters. We can see that the kind of internal projects that we've been working with, with the supply chain and the cost has -- is bearing fruit. We see that our online sales has a growth of 20% and also the profitability in the online channel is growing and growing fast, also correlated with the supply chain that is performing really, really well. So as we say, we are on track with the long-term financial targets. And overall, the company is performing really well in the numbers. But from -- at this point, our full focus is on our customers, as it's always been before, and especially those that is impacted by the Smaak recall after the reporting period. And this is, of course, a high focus for us now to solve that and do it fast. So with that, we hand over to Q&A. And I think, first out is the people that is here live in the studio.

Svante Krokfors from Nordea. A couple of questions. If I start on the financial side, your Finnish EBITA margin was very strong in Q4 and you have earlier talked about perhaps reaching 22% now you exceeded that significantly. Is there are other explanations than the Lieto factory integration into numbers now fully?

Yes, of course, looking at year-on-year price increases, what we have been doing during the past year are now biting perhaps even more. And then due to good work in Pamela's organization, we have also seen that the in-price increases from our suppliers have flattened out. So this is kind of a really important part of the story, what David mentioned on our gross margin rebounding and turning back into growth mode.

And actually following up on your answer. Quite big part of your like-for-like growth over the last 12 months has been price increases. And looking at how the situation looks now, how should we look at your like-for-like outlook for financial year '24 and -- or should we expect that the impact will come more from that, the gross margin will further improve from the favorable pricing situation when it comes to purchases from your side?

I think from a like-for-like perspective, we are at a kind of a stable and good trend. We, of course, see that a big part of it is driven through price increases. Traffic is a smaller part of that total like-for-like. We believe that we can continue on a good level from a like-for-like perspective, especially when the online is growing 20% in a like-for-like perspective. We also believe that the gross margin has the potential to stay or continue that good trend that we've seen. And then, of course, the cost base that we've been working with for a long time. We believe also that will, from a trend-wise, continue. We should also remember that we have added the Lieto factory into the cost side.

And regarding the gross margin? I mean you have had significant FX headwinds in Sweden and Norway. To what extent -- I mean if FX headwinds have been between 10% and 15%, how much of that have you been able to compensate through price increases?

Not much because at the same time, we have had also the inflation on all markets. So that we have been mitigating quite well. But then the FX impacts, both in Sweden and Norway, we haven't.

And then, question about the Smaak recall. You have outside clients also in the Lieto factory. Do you believe you could be forced to pay any damages to corporate clients.

I don't think we are speculating on that right now.

But of course, we have insurance companies in that.

We have a liability insurance that's well covered. We have already discussed with our partner in insurances and we're in good cooperation and following up how the situation evolves. But then it's good to remember that we still don't have full certainty on what was causing the symptoms in the pets. So we have a strong suspicion that it could be the toxins in the potato. And now we are eagerly waiting laboratory results on that.

And we also, of course, have a supplier that we need to set up some meetings with.

It's Joonas Häyhä from OP Financial Group. Maybe a question about the product mix. Your food and consumable sales have been growing faster than the discretionary part and it's been like that for many quarters in a row. Can you comment on your thoughts and expectations when do you expect the share to stabilize?

So we -- what we saw was that, as we can see there in the graph, Q3 '22 until then, it was fairly stable if you averaged out the backwards quarters in all categories. Then it started to drop. Since then, we've seen that the discretionary has been going down and now starting to go up again. The other categories, we believe, is going to be quite stable at those growth levels, but we hope that the discretionary will start to come back. We don't believe it's going to come back to the same levels as it was before in short term. But over time, we believe it's going to come back. But we see that, that specific category is a category that may -- that was a bit, you can say, inflated in the COVID period.

Yes. And then maybe another one regarding your own and exclusive brands and the share of that. We look at the country-specific shares, I think Finland and Norway are roughly at the same level and Sweden is then the lowest. So could you please comment on the kind of the midterm potential? Do you see potential to increase the share in Finland and Norway, where the share is already high versus Sweden? How do you think about that?

Yes. So for -- when we look at the own and exclusive, it's important to look at it first per country, but also per channel. So you can see that stores has one level and online has another level. Sweden has a higher share of sales online. That's why the total O&E goes down in Sweden versus the other countries. When you look at stores, Finland is at the highest level then, not far from Sweden and Norway accounts. So we're talking about 70% in stores maybe in Finland and 55% in Sweden and Norway. But when it comes to online, that takes it down. And that's also one of the things that we are working with to increase the O&E all over, but especially in online. And the other part, that's not referring to your question, is to increase the accessories in the online verticals. Both those combined is driving profitability.

Maria Wikstrom from SEB. A few questions on my side. Maybe starting a bit again on the profitability and it's still Sweden and Norway that are much below the level of Finland. And probably the story to increase the profitability in these markets are a bit different. But if you could describe that if there are any fundamental differences in the markets, why you should be on a different profitability level going forward? And do you see -- I mean both of Sweden and Norway like continued to grow profitability like hand in hand? Or is there one that you expect could grow the profitability faster?

So from a fundamental perspective is no difference. We can see that we have a bit higher gross margin maybe in Norway and Finland versus Sweden. That's because of the mix and also the online share of sales. From a market perspective, which also relates to profitability is that in Finland, we have a stronger position. From a market share perspective, we are stronger in Finland. There are still some more smaller competitors in Sweden and Norway, if you exclude the groceries. I think with the setup now, we are ready to push a lot harder in Sweden and Norway versus our competitors, especially through the online seamless omnichannel and the online verticals that we have. We're seeing that we're growing 20% online and 14% total, which when the market is maybe growing 4%. So obviously, we're taking market share. Now is the time to push a lot harder in Sweden and Norway. And when that happens, we are also able to increase profitability.

And it's good to remember also a little bit different structure in the countries when it comes to the store network. So in Finland, most of the stores are what we call mature stores. And then in Norway and Sweden, we've been opening with a more fast phase new stores, especially in Norway, but also in Sweden, acquiring franchise stores and opening new stores. So we have the maturity curve effect still in those countries.

And then I think this is the second quarter in a row when you talk more about like pushing the online verticals. So can you be more open than what you're actually doing when you say that you are pushing the online verticals?

Yes. No, you can start from the basics and say that if you don't have a very kind of efficient supply chain, everything, taking in the products, picking, packing, sending out returns, all of that. That is a huge cost in the P&L for an onliner. And it also impacts the customer service. The work we've done in the last 2 years with Eskilstuna, our main hub through the supply chain, is bearing fruit and it's going really well. When we are at that level, of course, then it's easy for us to push more marketing. We can do more to get customers in into our online verticals, and we can do it with higher profitability and better customer service. So that's what we're actually doing now. And we're using that kind of a possibility, and we have done it. And that's why we're seeing very good growth numbers through online.

And then finally, touching on this unfortunate situation with the product recalls. How many customer complaints you have so far?

Can I hand over to Pamela?

Yes. We are still -- we are working on going through these customer complaints. So we don't have a sort of exact number right now, but we go through them every day, and we are in contact with our consumers.

What we can say was that when we went out with the communication, we had 5 complaints. When we took the decision to stop selling the product -- the products, we had 1 complaint.

We have now been focusing on -- as we have received messages via social media and also claims to our customer service that our biggest sort of emphasis to the consumers now is that they should be in contact with us and send in the reclamation so that we can basically then treat them kind of in the way that we want to be in contact with them.

And to get a bit of sense of the scope, I mean, you said that -- was it 2,000? Or could we would be more specific on the number that -- of the like 2,000 bags, I mean, that went out before you stopped the product or...

Yes. The first item that we got the 5 reclamations of that David was referring to, 1,400 of the production batch, which the consumers and the majority of the consumers are in Finland. Then the other batches that we withdraw yesterday, it's approximately another same amount.

3,000.

3,000.

3,000 altogether.

And there has been some number going around. And just like the -- we had 33 tonnes was one number that went out, not from us, but that's been in the media. That was the total production batch whereas a lot of that was still in the warehouse and in the stores that wasn't sent out. But also important to point out is that these batches, we took back. We have now a taken decision to take back everything that is out there, not only these 2 batches, but also other batches. There are number of reasons of -- because of that, but one is, of course, what when we went out with the communication of these batches, we have been also getting more complaints that we have been analyzing. And some of those complaints could have been on batches before, but it's the same supplier, it's the same potato, it's the same product. But just from a precaution perspective, with the information we have now and also from a customer perspective, it's hard to actually know which batch is what. We take out the full range in those 2 products.

And then just curious that -- is there other European dog food manufacturer who uses potato as a raw material, which may come from the same factory or is this really like Nordic specific because it's at least on my new stores, I mean, this is the first time when I come to this issue with the pet food and the glycoalkaloids.

Other suppliers do use potatoes. We cannot however have gone from where that are purchasing the potatoes.

Potato is very common protein in the grain-free products tying up the necessary items in the product.

And especially the grain-free products they are used, yes.

All right. Calle Loikkanen from Danske Bank. Going back perhaps to the gross margin, it was really strong in the quarter and perhaps 2 questions relating to this. Can you elaborate on what the margin would have been if adjusting for FX? And then secondly, what sort of margin level should we expecting going into this new fiscal year?

Well, I mean, what I mentioned there earlier that now how we can deduct from the price increases what we have done and the inflation cooling down from our supplier end and how the trend is turning. We can kind of see the future that gross margin is on the level or turning back into growth mode. And what would be -- the FX impact, we haven't put out a number on that, but of course, percentage is a percentage. But then if we took the kind of real FX mix behind it as we source in U.S. dollars, euros and then selling SEK and NOKs, so it's a quite complicated puzzle to come up with the exact number what the impact would have been there.

All right. That's clear. Then, perhaps on the on the longer-term targets and the EUR 500 million of sales in fiscal year '24. That basically means that sales should grow 17%. And I guess EUR 500 million is FX adjusted. So the kind of the growth drivers or the levers would be practically like-for-like growth and then new store growth as well. So basically, my question is how much of 17% is like-for-like growth? And how much is the new store growth? And then also do you need to enter a new country or make any sizable acquisitions to get to that EUR 500 million?

Yes. So the plan is to open or acquire a combined 25 -- around 25 stores. We're currently looking into the possibility to speed up that a bit. So we have been opening 2, 3 years ago. 2 years ago, we were opening and acquired a lot more, and then we have been slowing down, and now we're thinking about speeding up a bit again, especially in Norway and Sweden. We will be -- we will not need to go into a new country. The financial target is it's for the 3 countries that we operate in. But obviously, it is also important to get a strong like-for-like, driven not only from stores but also with online to be able to reach that target.

All right, good. And then regarding the margin target, it's at least 13%. Is that doable with the EUR 500 million of top line? I mean you've been doing around 10% for the past 4 years, I think. So getting to 13% in 1 year or from 10% to 13% in 1 year would be quite a big jump. So do you need more than EUR 500 million of sales to get that 13%?

We don't think we need more than EUR 500 million. Our plan is to reach 13% in the end of the year. So when we go out to '24, we have 13%. It's not reaching the 13% in the full year '24. And I think the accomplishment that we did now going from 10% to 11.4% is quite an achievement. And with the trends that we're seeing, we believe that's possible.

All right. That's very clear. And then perhaps lastly, any comments regarding entering a new country? Or have the recent events kind of postponed any plans to some extent?

No, the recent events haven't postponed anything. It's on our list absolutely to enter a new country. We're doing a lot of work in that area, and hopefully, we can come back with something in the maybe coming 6 months.

[Operator Instructions] The next question comes from Magnus Råman from Kepler Cheuvreux.

Yes, I wanted to tie into the last question firstly here with your expansion and your sales target in '24, which is quite aggressive or strongly positive. But you mentioned here that you see flattening out purchasing costs and looking into '24 and your sort of pricing plans, do you see that additional price hikes is a component here to reach this sales target?

For the '24, we have planned slight price increases, not on the level of what we saw in the '23, but roughly half of it we will be introducing. Mostly, this will happen in Sweden and Norway markets to mitigate that FX impact. That was the question already before.

All right. Great. So that would come as a sort of with a lag. And then if we assume flat FX -- spot FX from here, you would sort of gain a lagged effect of that, I guess, then?

Yes. Then, increases will happen throughout the year, so not as one lump in certain point of time.

Right. Then a few questions on my side also as related to the recall here. You mentioned -- and it's been circulating before, the 33,000 kilos of those specific batches, but then you alluded to now to withdrawing those 2 products or taking all of the products. Can you comment on the total weight of all that taken back products?

I would say the total production weight of the products, I think...

It's a financial point of view.

No. So the -- what we've communicated earlier is like it's 12 months' sales is EUR 2.5 million that we are completely taking out and going to come back with a product in a different, yes, communication and regarding everything with that.

Yes, but regarding the inventory situation with the pet food in general is circulating very fast. So on average, we have 1 or 1.5 months inventory per product.

All right. But if I understand you correctly now, as it relates to this grain-free chicken cat food and the fish dog food, you will cease to use the sort of this brand packaging and so on and make a relaunch, but you will keep the other Smaak food?

Yes. Sure. We will keep the other -- all the other products, we will keep unchanged. We will do a relaunch on these specific 2 and those specific 2 have EUR 2.5 million sales last 12 months. It's only that -- so point to out, it's only those 2 that we have an external supplier with this potato in the production all other products doesn't have that. So it's only these 2.

So we want to know and we've done the laboratory results for the potato and then we do next decisions on those products and how we change the possibly change the supplier and ingredient.

Right. Yes, yes. And maybe I'm rushing ahead of you with a follow-up question on that since maybe you haven't made decision yet, but do you see that you can produce these 2 products that now have been halted with potato starch instead of the flakes as with the other products.

Well, those 2 ingredients have a little bit of different functionality in the product, but this is now what we want to do for the best of our customers, create clarity on the stores and in the online space. And therefore, we did it.

We will look into it from an NPD point of view as well, how to further develop similar products without this potato flakes.

Right. Okay. That's clear. Then could you perhaps give any lead to -- I mean you've given the component here of total sales, which is very limited, but can you give any comment on the very sort of short and the sweet current trading of pet food within the group as a total, if there's any effect that you can see there.

So it's quite early days, but so far, we haven't seen any impact at all, except on those 2 specific products.

Which is, of course, natural since you pulled them, I guess.

Yes. Exactly. Exactly.

But -- yes. But then I also have a question as it relates to if you have been looking at previous historical examples. For example, some years ago, the big producer, Hill's Pet Nutrition, they had a recall of canned foods. I believe that was elevated levels of vitamin b that poisoned dogs. So if -- have you look at this or any other historical example and seeing any impact -- if any impact in the longer term of sales of such recalls in history?

So far, we haven't had the time, you can say that, to go into that. But of course, it's something that we're going to do. But we -- yes, our view is that we will, of course, say -- we will see an impact on the sales on Smaak, we believe, and of course, these 2 products, but also maybe Smaak as a brand, it will have an impact for a while and then we believe it's going to come back.

But what we have estimated and stated in our report is on a group level, our estimation and experience on the past couple of days is that there is no major implication to the sales or profitability. So there might be a minor impact for the sales or profitability.

Great. Good answers there to put some more color. Then I have one also, finally, on the profitability. You highlighted online here as an important driver, both to sales -- your sales targets and also as it relates to profitability, and you mentioned here that it has improved quickly or rapidly. I mean can you elaborate a bit on the reasons behind this? Is it mainly a gross margin factor here? Or is it the operating costs? Or both?

In the online verticals, specifically, you mean?

Yes, yes.

Yes. So yes, we have been improving the gross margin all over and also, of course, in online maybe a bit more online than in stores, actually. And then we have been able to have a more efficient supply chain that I said -- that I talked about. That also has a good impact on the profitability. And then marketing expenses has been quite flat or actually percentage going down. So overall, that has been a good combination. And also important to point out is that we are -- even though we are growing online with 20% and stores with less, we are increasing gross margin and we are increasing profitability in the group. So the kind of growth from an online perspective doesn't hurt the business that much.

Clear. And then just finally, you plan to try to outcompete some smaller local competitors in Sweden and Norway. You mentioned here to do some price push, I presume that, that is? Or is it more marketing than -- and if it's price, then -- or whatever it is, should we expect then a bit of a near-term profitability effect from this and then more positive effect in the longer term?

No. You...

How can that be achieved?

It's achieved by the -- as I said, like the market growing mid around 4%. And if we are growing 20% online, 14% total, acquiring and opening stores in those areas and at the same time having online growth, that is probably twice what the competitor has, then you're able to take market share quite fast. And when you do that over time, they will not able to perform or actually be there in the market, as we've seen in Finland, with [indiscernible] and others.

That's clear. So we should view it as you open close to buy with the best -- close nearby the competitors with a better offering rather than that you are price aggressive or marketing aggressive to push them out.

Yes, exactly. It's like we have a toolbox that we're going to use.

The next question comes from Adela Dashian from Jefferies.

Most of my questions have already been asked and answered, but I do just have 2 follow-ups on the product recall. The first one being associated with this 1 specific supplier that you've been able to isolate. Could you give us any more color on how big of a supplier this is for you? Or if the potatoes are the only, I guess, ingredient that you use it for?

It's a minor supplier for us.

Potatoes only.

It's only the potato flakes for these 2 items.

Okay. Great. And then also you mentioned earlier that you do have insurance policies that cover you pretty well. Does that also extend to potential recovery of veterinary costs?

We are looking into that together with our insurance partner but most likely, yes. Okay. Then we have an online question from Tommy Ilmoni from Carnegie. You mentioned that your financial targets are unchanged. Can you specify what you mean by that? Are you expecting net sales to be at least EUR 500 million during the current fiscal year?

Exactly. So when we talk about the EUR 500 million, it's the FX adjusted. So let's see what happens there with the FX. Them, acquiring and opening stores will, of course, have an important part of that and then the online growth. So in that combination, we still believe that we can reach the EUR 500 million.

Then we have another question, a bit of a continuing to that, regarding the target of EUR 500 million revenue in '24. Does it include any acquisition? Or is it fully organic?

Yes, including acquisitions of stores, but not a bigger acquisition.

Indeed. And the third one for the same topic. How do you aim to achieve the 16% growth rate needed to reach EUR 500 million in revenue by the end of fiscal '24?

Yes, I think that we have answered.

So I think we have answered that. And then I believe there is no more -- one more question on the line from Mr. Peter Gustavson, 2 questions. First, when it comes to capital allocation, based on the low price compared to free cash flow, why is Musti not trying to increase compounding by spending excess capital on share buybacks instead of just sending capital back to the shareholders?

Dividend.

In Musti Group, kind of the shareholder returns are handled via dividend or capital returns. So it's what the Board has now proposed for the AGM is the EUR 0.60 per share. Then second part of Peter's question is, can you elaborate a little bit what kind of suitable opportunities you're looking for? What potential markets or new product services could fit with Musti business model? David, do you want to take that?

Yes. So I think in the ecosystem, there's big potentials, of course, but you have the vet business that we have 10 to 12 clinics today that we can expand. We have digital services. We have more of the kind of physical services in the grooming and the service stations. And then when we look at other countries, it's likely that there are countries close to the 3 ones we're operating in.

One more question. How have you seen the Smaak brand sales development after the news during the weekend? I can maybe answer that. So of course, Smaak sales, especially with these 2 products, but maybe in generals market has been a bit slower. But then on a total Finland sales normal or actually even a bit better than an average, and then on a group-wise, no change on that.

Important also to point out that this Smaak has a bigger impact in Finland than in Sweden and Norway.

Smaak is having a larger share in Finland than in Sweden and Norway.

And also media coverage in -- more in Finland than in Sweden and Norway.

How large do you estimate the compensation responsibilities caused by faulty dog food will rise? Well, first of all, we are not yet entirely facts driven on is the reason in the dog food. But of course, we are helping our customers now with the veterinary cost. And at this point, we don't disclose any estimation than what could be the amount.

And also important to point out is that we still are not 100% sure that's these 2 recipes that is behind the situation. We're still waiting for some lab results. It's most likely, but just to...

Yes.

Okay. I think that was it.

That was it.

All right. So with that, we thank you all for listening and all the good questions, and hope to see you soon again. Thank you.

Thank you.

Thank you.