Olvi Oyj (OLVAS.HE) Earnings Call Transcript & Summary

Welcome. Thank you for joining us for our half year report. Before we get to it, the usual disclaimer. So we'll be referring to future events slightly and that always includes some uncertainty. Many of you are already familiar with us. I have Tiina-Liisa Liukkonen, our CFO, with me, and I'm Patrik Lundell, the CEO of Olvi Group. Before we get to the details, I just want to frame up the second quarter and indeed the first half of the year. So our investment that we made into our brands have held them really strong. We've invested in media. We've invested in store presence. We've also had a particularly active period in terms of sales activations across our channels. And this has helped us to secure our strong market positions. We've even strengthened our share in many categories. However, the overall market demand was significantly below expectations, especially in the second quarter. So this is clearly turning to our profits, as many of you have already seen in the numbers shared. So with that being said, we should also keep in mind that we are operating in a business that has a certain degree of seasonality involved. Preparations for summer already start in Q1, actually. You start building stock, you start securing promotional slots, you start preparing the materials for indoor or in-store execution and you secure media slots. All of this was done expecting an average summer at the least and with confidence in our -- both our brands and our actions. We also invested in stock. As many of you know, we have a new high-bay warehouse in Iisalmi. We invested in our brands. And as I mentioned, we brought 220 new products to market during the first half of the year. So we've really brought a lot to consumers to enjoy and yes, celebrate around. And despite the significantly smaller than anticipated market, we indeed kept our share. And as I mentioned, we grew in some. And to be more specific in Finland, for instance, we took more than 2% share in the water category. And in Latvia, we grew our beer share with 2%. So significant improvements in terms of our position in the market on an already strong starting point. Our delivery accuracy was on a very good level. In Finland on a historically high level, we had 98.6% and delivery accuracy throughout summer across our platforms. And we improved our mix, which you can see in the expanding margins. The weather and the consumer confidence worked against us. This drove the market down especially in the beginning of summer. We have to remember that we're overlapping a historically warm summer in 2024. In May and June alone, in 2024, we had 30 hot days. When I speak about hot days, it's a translation from Finland, from the Finnish language, we're referring to days where the average temperature was about 25. In '24, we had 30 such days. This year, we had two. Also the uncertainty in the environment generally and the economic strain that's on households and consumers has impacted demand overall. So the market, as such, was very much smaller than anticipated and this has indeed resulted in detracting margins during the second quarter. And I want to close on emphasizing that our portfolio is strong. Our people are committed. We have improved the efficiency of our operations. And through that, we've demonstrated the resilience and the relevance of our proposition. So we remain very confident in our ability to deliver also in the future and to have a stronger second half of the year. But with those introductory words, Tiina-Liisa, why don't you go through the numbers for us?

Yes. Thank you, Patrik. So let's start with the financial performance in the quarter 2. So as it was said, quarter 2 was behind our expectations, especially due to this cold weather in the early summer and this continued economical and political uncertainty, which then reflects in the consumer purchasing power. And that caused this volume decline of 3.3% in quarter 2. Still, we were able to maintain our market shares and expand also our margins despite the overall significantly reduced volumes in the market and this intensified competition. The total net sales in quarter 2 remained in the previous year level, and we improved our average sales price as we can see from the figures. The profitability was affected by this decreased volumes, investments in the sales, marketing and pricing, then higher logistic costs and also business development measures. But I want to emphasize that our gross margin stayed in the previous year level, even though the EBIT declined. Then, when we are looking the segment performance in quarter 2. Even though the cold and rainy, early summer weather affected the sales volume in all the segments, the net sales declined less than volume as the average price improved in all the segments. Then if we are looking for Finland, we can see that the volume decreased 4%, net sales 2.3% and EBIT was in the last year level. What we want to emphasize from Finland is that our strong brands performed well. As Patrik referred in waters, we were able to grow our market share over 2% even though the overall market decreased in water 16% in May and June. And also in beer, we kept leading market -- we kept leading the market with more than 50% share. And then also consumers chose Sandels as the beer brand in one of the surveys. And in Finland, the total market in May and June, in both nonalcoholic and alcoholic beverages, declined by 10%, so we can see how this hot taste really reflects on the market totally. Then when we are looking at this Baltic Sea region. Additionally, due to the weather conditions, weak development of consumer purchasing power continued, and that tightened price competition in a slowing market. In Latvia, overall market in low alcoholic beverages like beer ciders declined 14% in May and June, and that is a quite a big drop in 1 year. So this decline in market and the lower-than-expected sales volumes impacted the profitability, but together with higher marketing and sales expenses. The impact was heaviest in Denmark and Latvia, but we can say that our investments in brands drove our Olvi soda market share to be triple compared to last year and in our market share in Latvia in beer that was 2% higher, as Patrik just mentioned. Then Belarus. The weather also affected overall demand there, especially in beer and kvass categories. Our operations have developed according to the plan, otherwise, but the increased costs, and in Belarus, especially in logistics, weakened the profitability. And unfortunately, we have to inform that the restrictions on the payment of the dividends by Western companies has been extended to the year '26 or end of the year '26. We haven't changed our estimations, the dividend, what can be distributed is EUR 1 million to EUR 3 million per year. And we can still say that no effect -- this has no affect parent company's ability to pay dividends. Other changes in Belarus situation, there is none. And then when we are looking at the whole year or the first half of the year, as we have been many times already stated, the whole year sales volumes were affected this continued weak consumer demand, the general market uncertainty, poor weather, especially this early summer and this product portfolio optimization measures adopted in Finland and Denmark, which then, again, are also visible in the improved margins. In line with our targets, we continue to improve the sales volumes in nonalcoholic products and retained our market shares in all our main product groups. Also, our net sales remained at previous year level and was supported by this higher average sales price, thanks to better portfolio and also channel mix. We have been able to improve our HoReCa sales, for example. Then the operating result in January-June was weakened by this increase and this first half of the year weighted sales and marketing activities, higher logistic costs, business development inputs in line with the strategy. The lower sales volumes reduced the sales margins in euros, even though the relative sales margin improved on year-on-year. And then when we are looking at these segments for the whole reporting period, January to June, in Finland, we can say that the operating result improved compared to last year, mainly as a result of improved production efficiency, the stabilization of the cost increases and changes in the product portfolio. What we want to also highlight is that the sales of hard seltzers and nonalcoholic products continue to grow and we maintained our strong market shares, as mentioned earlier, and even gained more in some categories. In the Baltic Sea region, the sales volume declined, as said, especially in Denmark and Latvia and the net sales decreased, but not as much as volumes. In Baltic states, the continued weak development of consumer purchasing power was most pronounced in Latvia. So together with the tightening of the excise duty and alcohol legislation, price competition increased in the slowing market, especially in the beers. What we can say about the Denmark is that the sales volume was affected by this product optimization, as we have stated earlier, but we were successful with this Jolly cola brand as saying that we were able to multiply the net sales, but wasn't able to improve the result yet. In Latvia, the market decreased heavily and lower volumes with the greater investments, the brand visibility, sales and pricing, affected profitability -- profitability significantly. In total, the Baltic Sea region, the market impacts sales and marketing inputs and increased logistics costs, decreased the operating profit. Total market change was big and unexpected. So that lowered the gross margin in euros, which we didn't cover -- so that we didn't cover the fixed cost because of that. In Belarus, also weather affected, overall demand as said, especially in beer and kvass and sales volume declined, but in nonalcoholic product categories, the sales volume increased, in line with our strategic targets. And also in Belarus, the greater inputs were made in the sales and marketing than in the previous year, that supported also the demand, especially in this nonalcoholic. And net sales increased and the operating result remained at the previous year levels. The relative decrease in the operating result was especially affected by significantly higher logistic costs. And then as a summary from this financial position, we can say that the balance sheet and financial position are still strong. Cash flow development was affected by the increase in the inventories due to the weather conditions and the delivery accuracy improvements. So end of the June, the inventories were higher. And then also the lower sales cost and lower accounts receivables. The cash flow from financing activities improved by the drawdown of long-term green loan for the brew house investment. Then about the investments. So our extension and replacement investments were almost EUR 21 million, so about EUR 6 million more than last year. EUR 14 million was related to Finland for this logistic warehouse and brew house investments. And those investments are going according to the plan and the budget. In the Baltic Sea region, investments focused on the procurement of the sales equipment and the improved production conditions and those were EUR 4.3 million. In Belarus, those necessary replacement investments for the continuity of the production were made with the subsidiaries own cash flow financing about EUR 2.5 million. And from sustainability, we can highlight that we got this A rating in the CDP's value chain assessment. So CDP is an international nonprofit organization that help companies and other organizations to disclose their environmental impact. And the A minus is the second best rating. So I think those were the highlights from the financial part.

And the CDP is a great continuation on the recognition we got last year from Time Magazine, placing us amongst the top companies in the world. So that was a great achievement as well.

Yes.

Now then to the near-term outlook. So we've updated our near-term outlook based on the actuals from H1. Our strong market position, the normalized late summer weather conditions, the investments we've made in the first half of the year is why we expect a better half 2 or second half of the year. So we expect our operating results to improve from last year in line with the updated guidance. Now then a short word on the strategy and our view on the future. Despite the setbacks in Q2, I emphasize the second quarter, our strategies work. We see our brands performing strongly with solid market shares, even growth in some categories, our margins and the efficiencies of our operations are improving. So we continue to move forward and to execute our strategy with confidence. But now let's open the floor for questions, and we thank you for your attention and look forward to answering whatever you have in mind. So please [indiscernible], our colleague here will coordinate things.

Maria Wikstrom from SEB.

I had a few questions. Starting from gross margin that was flat in the second quarter, and you have seen an expansion in gross margin in many quarters ahead. Was the gross -- flat gross margin as a result of a sales activation, so should we expect gross margin expansion to continue in the second half? Or is there reasons, I mean, why we should expect, I mean, a similar trend to continue in the second half?

We discussed this earlier with Tiina-Liisa, and you had a great way of summarizing the changes that happened last year in terms of the underlying pricing and the comps there. So would you like to repeat that.

So overall, the gross margin improvements are related to the cost inflation earlier, which we were not able to adapt in the same time as the inflation came. So all this efficiency work and also price increases were a little bit delayed. So that's why you have seen many quarters now, the improvements. Especially in Finland, we have to remember that last year, quarter 1, our compare numbers didn't include the price increase it made last year April. So that's why in Finland, we cannot anymore see the profitability growth as much as we saw in quarter 1. So now we have kind of reached the point that where the major price increases has been implemented in the market to offset the inflation. But of course, we will continue to improve our product mix and then internal efficiencies to improve the gross margin. But the expectations to such kind of improvements that we have seen in many quarters is not kind of the case to expect.

Precisely so and I just repeat what I think is a key part of the message. Also something we indicated already, I think, at the end of last year, saying that the potential improvement will be less going into this year for precisely these reasons, but I emphasize the improvement is yet to be delivered as well. We'll continue our work internally on efficiencies and our portfolio and our pricing and increasing our analytics. So all of the strategic work that we're doing in-house will enable us to continue to improve, but perhaps to a lesser potential degree than we have in the past.

And then my second question will be on the profitability of the Baltic Sea region, which was one of the disappointments in Q2. And I think you pinpointed the deteriorating profitability to Latvia as well as to Denmark. Can we a little bit talk about, I mean, the future in both of these markets that, I mean, how long-lasting this, I mean, of course, I mean, they are totally different operations. Denmark is a turnaround operation. But little bit on the profitability aspects from going forward.

Yes. We haven't, in the past, gone into great detail around specific markets, but as you see in our report today, we highlight in these two markets, perhaps more than in the past. If we start from Denmark, as Tiina-Liisa shared and what was described here earlier, we have made investments behind our brands. And I think it's a strong evidence of the actions getting results when you can talk about tripling your market share in the soft drinks categories. The Olvi brand is really performing well. And now in terms of overall performance and profitability in the market, we are not where we need to get to, should work very much continues, but with the increased demand for Olvi, we are improving our relevance to trade, and we're having much stronger discussions around future collaboration and growth-driving initiatives in the market than we did maybe 6 months ago. So it will be some time to come before where we need to be, but we're not giving up and we have line of sight of how to get that improvement through. And then in Latvia, I think the theme that we've described, which holds through for all our markets in terms of going into summer, very well prepared with strong activations. This holds true in Latvia as well. But I think in Latvia, what we saw was an even greater drop of demand and shrinking of the overall market, which clearly couldn't carry the investments we've done. You might be thinking, so why didn't you react? Why didn't you put the brakes on in the midst of May and June? The structure of our business is such that when you've agreed a campaign, when you put in media spend, when you put your placements in store, you can't really take them back and save any money, quite the opposite you lose that opportunity that you invested in. So we see it very much as a situational a moment in time, whereby we are now enjoying 2% more market share. So now we will invest proportionately to the size of the market going forward, but off a higher base proportionately. So when the market returns, we will be in an even better position than we were going into summer. But is there something you'd like to extend on that?

Yes, maybe to highlight that in their market, it is not a question that the profitability is significantly lower than last year. It is that it has not improved as we would, of course, like to. In Latvia, the case is that the profitability is lower, but we see that there are temporary reasons now why it is so. The lower demand, higher marketing and sales investments done to the summer, which kind of didn't match that well. But we can see that we have gained market shares, and we see that also this is long-term investments that hopefully will pay off then in the later months that we are going forward. And also to remind that we have made this sales and marketing input in the market now that is weighted to the first half of the year.

And finally, I would ask on the Belarus as you were generating more cash than this EUR 1 million to EUR 3 million that you were able to distribute. Is there any possibilities to invest the money on, I mean assets that are not quoted in Belarus? Or are you forced to keep the money in your accounts? Or how does that work?

This is a tricky one to comment in detail, so the operating environment remains challenging. The necessity to seek approval for sales is still there. We haven't received this approval and the market performs. We're investing in our own operations that we're looking after the health of the business. This extension of 1 year is not a dramatic event in our minds. It doesn't hinder our ability to pay dividends going forward. But it's a continuation of the uncertainty in the market that we've seen for some time already.

And of course, you asked that what will happen to the cash there, so naturally, there will be their own operations that we can support there. But then that naturally, we have said also that we are looking for different kind of options to the whole market situation, what we can do. And of course, we are still active to find different kind of solutions to the situation.

Sanna Perälä from Nordea. I'll start with a question about your guidance and you lowered the upper end of the guidance range. And now after H1, your EBIT is 8% behind last year, but you're still expecting to improve for the full year compared to last year. So how do you -- you already mentioned something, but could you just elaborate a little bit more on how do you aim to do this? Where should we see the most improvement in H2?

Yes. Thank you, good question and great observation as well. As we've been already sharing our plan for this year was a bit front loaded. So we went into somewhere with a strong plan. That's there. On the other hand, we already saw the slight softness in the market come through in Q1, so of course, we started to identify levers where we might be able to then execute some cost-saving initiatives throughout the second half of the year, if necessary. So these have now been activated. So we see us going into, as I've been describing with a stronger position into the second half, and we've been able to then activate these initiatives that we identified already during the first half of the year. So that's why we have confidence in the second half being better than the first half and our ability to indeed deliver growth versus last year as in line with our guidance.

Yes. And also we said in the report that the summer weather has normalized in June and now when we are living already August at the moment. So we had a good heat days in July in Finland. But unfortunately, the weather conditions in Baltics and Belarus was not that good, but anyway, kind of normalize, not that cold and rain anymore. So that is also one reason that we believe that we have kind of normalized also the market conditions, which are not any more burden so much with this cold and rainy weather.

That would be my second question. Like how did July look like, but I think you already answered it. Then I would like to ask about your product mix in terms of like water, beer, soft drinks. Did that change in Q2? And did it have a meaningful impact on earnings?

I'd say it's part of the trend that we've seen for some time where our margins keep expanding because we're focusing on our own brands on one hand and then really the health of the portfolio overall. We also have a specific focus on nonalcoholic products. Of course, always looking at our core, which is beer, our heritage and not abandoning that for a second. But adding on to that, an emphasis on nonalcoholic because we see these categories growing for the long term. And that's why we're so pleased to share that we took share in these growth categories as well.

All right. Then perhaps a follow-up. You mentioned price competition continuing in Q2, which of these categories are the most affected by it?

Well, overall, I mean, competition is intense, but I think it's fair to say as a brewer that beer is perhaps the category, which is mainly in the spotlight of competition.

And just to add what you asked earlier. So our kind of nonalcoholic product sales increased 5.8% more than the alcoholic sales. So that is, of course, changing all the time because the market growth is also there. But we are shifting or kind of changing our product portfolio due to the -- when we are launching novelties. So you can see the average sales price increase. So that is also one method to kind of shape the portfolio to bring this more premium product in the portfolio.

Right. Then last one, you mentioned in the report that in Finland, product portfolio optimization measures had a negative effect on sales volumes in, yes, in Q2. So could you elaborate a bit more what was done the year before? And how did this impact sales in Q2?

Yes. Actually, that movement already started in '23. So we took some choices or made some decisions on certain SKUs -- beer SKUs in the Finnish market. And now we are kind of seeing that decline or the impact of those decisions, which led into volume decline subside, but there's still some of that as we overlap previous years' stronger months, but that's something that will neutralize. The effect of that should be going away.