Royal Unibrew A/S (RBREW) Earnings Call Transcript & Summary

Hello, and welcome to the Royal Unibrew conference call. [Operator Instructions] Today, I am pleased to present CEO, Lars Jensen; and CFO, Lars Vestergaard. Please begin your meeting.

Thank you very much, and I would like to welcome you all to this audiocast, where we will try to give you some details based on the acquisitions that we have announced yesterday. Two in a day is quite a lot, but we have been working on these acquisitions for many months. And it happens to come out on the same day, not something that I cannot advise others to do. I'd also like to stress that, given that we have a process with clearance of competition authorities in Finland due to the size of the deal and that we have works council process in France, there's limits to how detailed we can go on a number of subjects. But we will try to do the best as we can. Please go to Slide #2, which highlights a bit of the strategic rationale of the acquisition of Solera. It's a 100% acquisition of the total business. And it's a business that we are taking over from a private equity that has been building up the business over a number of years organically, widening the portfolio as well as by acquisitions. So it's a strong platform that we are taking over. And in terms of the product ranges, it has a very wide span. So although that wine is the biggest category, the organization has proven through a number of years that they have been able to build up propositions within beer, within soft drinks, within waters, within energy drinks, et cetera, et cetera. So when you look at the overall mindset, their capabilities, it's pretty equal to what we live every day in our multi-beverage markets in Denmark. The acquisition is about growth. And what they're providing is a really strong route-to-market. And we do expect that we will be able, together with the team, to build a plan to grow the business further. So this is, by any means, not a cost case, it's a growth case. It's about building a total Nordic/Baltic business that operates within the framework of being a multi-beverage. There's a big difference between the businesses in the three countries. And of course, we have a good, solid business in Finland. So what is new to us is operational businesses in Norway and Sweden. So we get a route-to-market access, which is on top of the partners that we already worked together with in these countries. And as I said, we will aim, together with the Solera team, to work towards a plan that builds the portfolio from being between multi-niche and niche to be in real multi-beverage -- sorry, it's between multi-beverage and multi-niche and we want to build it towards being multi-beverage, so a really strong acquisition we feel. So please move to Slide #3, which is the map of the business. And as you can see here, it will complete the Nordic/Baltic landscape. And we will almost double the amount of consumers that we will target on an everyday basis. So all in all, we will go beyond 30 million consumers that we can target with our broad portfolio. On the left-hand side on the slide, you can see that there is a range of different partners that Solera operates with. We have a similar set of partners that we operate with in Finland. Some of them are actually the same. And of course, one of the things that we do see as an opportunity here is to be a one-stop shop partner for many of the brands that we work together with. So it completes the Nordic landscape, which we are really happy about. And then I would like Lars to take the next slide.

Yes. So if you turn to Slide 4, then here, you can see the numbers for the business that we are looking at. The nature of the business we take over is it's a lower-margin business than what we have in Royal Unibrew today. So they mainly sell other people's brands or third-party brands, which by nature is lower margin than when you own the brands and have invested a lot of capital to produce them. So the numbers are different than what you normally see in Royal Unibrew. We will get roughly DKK 1.3 billion in normalized revenue. And the reason why we talk about normalized revenue is that COVID have kept the Norwegians in particular at home. So that means that the revenue for this business have been substantially higher than what we see here in the monopolies in particular, when all the Norwegians could not travel abroad and buy wine and spirits. So we've spent quite a bit of time on cleaning out for this COVID effect. So DKK 1.3 billion in revenue, normalized EBITDA of around DKK 70 million and EBIT margin in the neighborhood of 5%. We paid DKK 770 million, so a multiple of 11. This will, of course, dilute the group margin in Royal Unibrew. And as a stand-alone business, it would be difficult to move the margin to the same level as the Royal Unibrew group on this business. So there will be quite a lot of work in moving the margins up by expanding the portfolio with own brands and do bolt-on acquisitions in the coming years. We funded the acquisitions from existing credit facilities. Even though we announced two acquisitions yesterday, they are not complete, any of them. So we will deal with the question around the second tranche of share buybacks later on. But the two transactions will not materially alter our credit profile, so not a big change in that. If you turn to -- or maybe I should just remember to mention that the closing of this transaction is pending regulatory review. And it's in particular in Finland, where we have Hartwa-Trade and Solera, who are competing in the wines and spirits segment, where we have a short process that needs to be completed. We expect that to be finalized during Q3. If you turn to the next page, you can see the revenue split of the three business -- of the three countries. You can see that it's -- the biggest piece is in Norway, which is a very strong business we have in Solera Beverage Group in Norway. It's the second largest player in the Nordics, when you look at the monopoly markets. It's a big portfolio. And I think, as Lars mentioned, they are very good at managing third-party brands, so importing leading brands into the markets, which is also something that Royal Unibrew have done with Pepsi and Heineken into Denmark, Finland and the Baltics. So clearly, some similarities in terms of that. If you take Slide #6, Lars?

Thank you, Lars. So to give a little bit more color and detail on the operations in the three different countries, Lars did show you the revenue difference. Norway is, by far, the most developed market in the Solera portfolio. It's about -- it's more than half of the employees that sits in the organization and, of course, also because there is corporate functions that support the countries in Sweden and Finland from Oslo. But it is a more advanced portfolio that the Norwegian business is operating. You can also see it on the portfolio, so to speak. The business is representing more producers, more categories, more brands. And ultimately, it also carries a higher market share. The market shares that you see here on the slide indicates a #2 position in monopoly wine area. And most, I would say, importantly, to complete the channel coverage, #1 -- an estimated #1 position in on-trade in wine. And a #1 position in wine is a market share which is in the neighborhood of between 20% and 25%, so a really wide coverage of customers. So a very strong business. When we do benchmarking to other beverage companies in Norway from a size point of view, it is as big as the second brewer in the market. And when you look at the margins, they are on a comparable basis to other beverage companies, it's in a good spot. When we move to the Swedish business, that's a business that has been -- that is being built up as we speak. That means that the portfolio is being expanded. It means that the channel coverage is being expanded and so on and so forth. That is a business that is at this moment of time is a bit subscale compared to the business in Norway, so a growth case that needs acceleration and investment. And then you have the Finnish business, which is a business that is almost focused on the wine area and with a different focus on the portfolio that we are carrying in our Hartwa-Trade business. So the Hartwa-Trade business is very strong in spirits as an example. It's very strong towards on-trade, whereas the Solera business is stronger towards the wine business in the Alko system, and they are stronger towards the wholesale business, which is -- which tends to be smaller- and mid-sized on-trade customer, so a relatively good match to the business that we have. And we do see opportunities to create commercial synergies together. Then Lars, you can take the next slide.

Yes. So just looking at the outlook for the Royal Unibrew group for this year, then we keep our margin range that we've had for the two transactions. And if you look at -- of course, we get some EBIT in the rest of the year, it should be mentioned that we also have transaction costs that we will get in the remainder of the year. And they are both growth cases. So that means we also will start to invest in the businesses and spend commercial money on both of them in the remainder of the year. Of course, if you look at Solera, it comes with a lower margin than the group. So we changed our medium EBIT target -- EBIT margin target of 20% to 21% to a long-term target. So we will work on this for a number of years to get the margin up. But we do not change to a lower level. So the way we want to increase the margin in the combined business is by realizing synergies from the acquisitions. And the synergies will be, to a very large extent, commercial, that we'll be launching our brands in the two markets. And when we start to sell our own brands, they come with higher margin than when you sell third-party brands. So this will be where we get the uplift that will be when we grow our own portfolio, when we get the scale benefits of selling a broader portfolio. Also, it opens up for the opportunity to do bolt-on acquisitions, which will also deliver more synergies than when you just do a platform acquisition as the one we do. So all in all, it changes the margin profile of us for a number of years. But from a pure value creation point of view, we believe that it gives us a lot of optionality to deliver value to the shareholders in the coming years. If you take Crazy Tiger?

Yes. And just maybe a final comment on the Solera piece here. We do see opportunities commercially, we have said growth many times. Lars has mentioned the optionality of the broader Royal Unibrew portfolio. That's one of the pillars. Another pillar is centered around the strong third-party brand portfolio. So that is developing that even further, using cross-border synergies to build an even stronger proposition together with the partners. We have mentioned that there might be some optionalities in some assets that can be bolted on. We have proven that in a number of other markets. Of course, that's not a given. But it's something that we will have a look at as we speak. We could extend partnerships even further on than what we have today. So there's a lot of optionality. And we will have to work that through diligently with the Solera team in terms of what really makes sense in each of the markets. Because it is the Royal Unibrew model that we will pursue here. And that is that we need to optimize the local opportunities. We look -- we need to look at each market individually and harvest the synergies across the countries but with the aim of being the best and preferred partner for the trade and for the customers at the end of the day. So that was my last words on Solera before your questions. And I guess you will have questions. Moving to the last slide of the presentation here on the energy drink in France called Crazy Tiger. This is a business -- this is the real local energy drink. So the two big players in the market that Crazy Tiger is competing with is Monster and it's Red Bull. And then there's a bit of private label and smaller brands in the market. It's a category that is growing very fast. I've seen some of the analyst comments already, have been digging into Nielsen numbers, which indicate over the last 12 months, a growth of between 20%, 25%, 30%, depending on which channel that you're looking at. So it's a category that is growing. And energy drinks and lemonades are the two categories that are growing the most. So if we will be able to conclude this acquisition, we will be exposed to the two fastest-growing categories in the beverage territory at this moment of time in France. So we feel that, that is really attractive. The 2020 revenue was about DKK 100 million. If you look at the equivalent size of the business in France for Lorina, it's about a 50% increase of our total revenue. And as you know that this has been produced by third party. So that also means that it is very asset-light and fits well into our footprint. The majority of the sales is conducted in the retail channel, which is a one-to-one link to what our business is in Lorina. Lorina, we are also starting to develop the convenience channel. So we are adding on distribution points as we speak. So that's the only area where we do not have an overlay in terms of our sales. So we also look forward to, call it, double the exposure of our sales force so that they can nurse two brands instead of nursing one brand. Yes. So with that, we would like to go to the Q&A. Thanks for listening in so far.

[Operator Instructions] We have a question from the line of Edward Mundy from Jefferies.

Congratulations on these transactions, you've been very busy. Just a quick question on some of the commercial opportunities as you think about putting your broader own brand business near through to this new distribution platform as well as your existing agency business. Are you able to perhaps provide a bit of a range as to sort of what type of revenue uplift might be feasible based on your analysis at this very early stage? And then second of all, you mentioned an opportunity to sort of take the margin profile up, less about cost synergies but more about putting your own business through this. Could you talk about sort of what type of time frame that might take? And then third of all, as we think about modeling this, any sort of broad comments you might be able to share on sort of what the business has been growing on an underlying basis and what it might grow at over the medium term would be really helpful.

Yes. Thank you, Ed. I think, first of all, when it comes to building a commercial plan, we will do that together with the Solera team. And I think -- so we cannot share details on that, of course. We have some hypotheses. The hypotheses are centered around the same categories as we have highlighted as priority categories. There's no big difference between the Danish, Finnish/Norwegian, Swedish market. There are some categories that are growing a bit faster in some of the countries than in others. There are some categories where the consumers are more positive on new innovations as an example than in others, where the markets are more conservative. So of course, we'll have to take that into consideration in terms of the speed that we are adding. I think organic growth, of course, takes a bit of time. You need to create the proposition. You need to get the listings and you need to do the marketing to make it all happen. So we will have the patience and we will secure that we have the money to support that journey. So I would say don't be too aggressive on this in the beginning. It must be ramped-up. It's a long-term investment into making a full Nordic platform. Where we do see a lot of, I would say, business opportunities, and we have tried also to draw the link to the acquisition that we did in Canada, which is a 100% agency business. And now we have had the ownership of that business for a couple of years, and we have actually been able to grow the business on the agency side quite substantially. We have been back discussing with the agencies on how to grow the business even beyond what has been delivered before. We have made growth plans and taking that business to another level. And so you should not neglect the opportunity to work closer and better together with the partners in a total Nordic perspective. Because it is about a platform, it's not about single brand propositions. And that also alludes to the next one that you asked about, and that's the margin and the time frame. Normally, we say that mid-term is 2 to 3 years and long term is 3, 4 to 5 years. So that's the kind of perspective that you should put on it in terms of working ourselves towards the range of 20% to 21%. And that would not -- we would not be able to do that just by working on the margin in the acquired business. As Lars said, that would also have to be done by organic growth in the business that we are already managing. So that will be a mix of the two is our hypothesis. You asked about the last question. So what is the flight attitude of the business the last years? I think the last 1.5 years, the flight attitude of Solera business have been really high. But we -- as Lars said, it's COVID-related. I think it's -- one thing is the growth rate and another thing is the quality of the growth. So the business has been able to grow top line mid-single-digit something like that if you normalize it over a 5 years' period of time. But what is very good to see is that the quality of the net revenue has also gone up. So they have been able to work on the assortment, improve the operations on an ongoing basis, not fast but a little bit every year. So that's the -- that's where we come from.

Our next question comes from the line of Fintan Ryan from JPMorgan.

And I guess, following on from that, just probably two for me, please. Firstly, can you -- appreciate that you've held a 25% stake in Hansa Borg in Norway for a long period of time. How is that relationship affected by this acquisition? And like when you say you're looking for future growth or bolt-on opportunities in the Norwegian and Swedish markets, would it be fair to say that Hansa Borg could be -- could sort of fit the bill there? And then secondly, just in terms of the -- quite recently, you provided the sort of the mid-term growth algorithm of the sort of 3% to 5% EBIT growth, which you should be sort of factoring in plus or minus. Is it fair to assume that once you sort of annualize both the Solera and the MC ENERGY acquisitions, that sort of 3% to 5% growth algorithm of holds?

If I take the question around Hansa first, now we have done this acquisition by our own. And honestly, of course, the Hansa team have only seen this yesterday. So I think our view is that Hansa is a great business as well as Solera is a great business. And if there's any merit in working together in some sort of way, there's many ways that, that can be done, I think that would strengthen the totality. But that is, of course, something that we need to discuss with Hansa. If there's no merits, then that is also okay. That's not an issue. But we will do whatever we can to optimize and make the best portfolio available. Hansa has been performing well over the last 18, 24 months. So we are a happy owner of 25% of that business and we have been that for about 20 years, so no change in that.

Yes. And to our growth algorithm, then I think what was really important for us to communicate earlier on was that the focus of Royal Unibrew group has shifted slightly towards overinvesting in growth buckets. And that is why we increased the growth element in our value creation formula. Of course, with this kind of acquisition, we sort of signaled that we want to focus on organic growth in this acquisition. But as Lars mentioned, this is something we want to do right. We want to make certain we get into categories where we can generate good margins, where our propositions fit the consumers. And we need to do that with the local teams. So it's a bit early to evaluate whether we change the numbers on the organic growth formula. But clearly, this is maybe putting it towards the upper end of our existing range rather than to the down -- lower end. But I think it's important for us really to make the plans and then we can always evaluate the targets at a later point in time. What's important for us to ensure is that we build long-term, sustainable, profitable business in these markets. Because with agency business, you can grow very fast with very low profitability, which is not a place we want to be. So we do not change our targets at this point in time. But clearly, the profile is more growth-oriented, so it is pointing in the right direction.

Great. And actually, just one follow-up for me, please. Within the Solera portfolio, can you give us a sense of the sort of the category mix in terms of how much is wine, how much is beer, how much is soft drinks?

We will come back to those details when we get the feedback from the competition authorities, and we'll be able to share more details of the different elements of the business. But we will have -- that's one of the questions that we have to wait on answering.

[Operator Instructions] Our next question comes from the line of Frans Hoyer from Handelsbanken.

Just wanted to reconcile the 700 brands mentioned on Slide 5 and then the 300, 250 and 200 brands mentioned on Slide 6. I'm not sure, I probably misunderstand the definitions here. But is there no overlap between the markets in terms of brands?

There are some overlaps. But there's also a number of agencies that are just in place in a single country. I think when you look at the SKU numbers, then if you compare that to the Hartwa-Trade business, which operates with around 800 to 900 different SKUs, so that's a bit the benchmark. Of course, it's always what is a brand, what is an SKU when you're in the wine territory. But look at the SKUs, that is what is really important.

Okay. Also wanted to just touch on the issue of risk in this deal, where do you see any pitfalls or risks that you need to be especially focused on? I'm thinking whether there is a concentration on your supplier side, the brand owners that you -- where you need to make sure they are onboard. Also on the staff side, I guess, this is very much a people's business. I gather that it's a strong sales force. And what can you do there to mitigate any risk on that front?

Yes. I think for all acquisitions, you always look at three things that how do you secure your brands, which in this case is third-party brands. So how do you secure that, that they are continuously happy and that they are supportive also with the collaboration of Royal Unibrew. And we have no reasons to believe why that should not be the case. If we look at what has happened in the past, we have not lost any of the partnerships after we took over Hartwa-Trade. When we -- since we have taken over the agency business in Canada, we have only expanded with partners and even stronger partners. So we have a long, strong heritage in doing both our brands and partner brands. The other one is, of course, how do we make sure that the employees that have delivered good results for the business, that they are onboard. I think the management of Solera and CapMan as a seller here have done what they can do to secure that there is a retention in the business. And then of course, the third one is the customers, so how does the customer see us as an operator. So those are the three that we're always looking at, evaluating and trying to secure so that the acquisition becomes a good acquisition.

Is there sort of any -- I mean, could you say something about how important your most important counterparties are on the supplier front or brand owner front rather?

No. Again, that's one of these questions where when we have the keys, we can start sharing more. But at this moment of time, we are bound by not telling.

Our next question comes from the line of André Thormann from Danske Bank.

Just have three. Just in terms of normalizations, I just wanted to be sure here, how much have you taken out on top line and EBITDA? And are these 2020 numbers? And are there any risk that some of these normalizations will come back in 2021 due to continued COVID effects? The second thing is in terms of guidance. I just wanted to be sure here why you keep the 2021 guidance. Are all the EBITDA that comes in or will come in, in 2021 expected to be taken out again in integration costs? Or are there also something in transaction? And then my third question in terms of Solera, just wanted to ask if we could get a proxy on how much of their revenue that comes from these state-owned monopolies, such as Vinmonopolet, Systembolaget and Alko. Yes, that was it.

So regarding the normalization, so the impact on the business in '21 is very substantial in the first many months of the year. So we have, of course, looked at that. If you look at the trends in the marketplace over the last 10 years or so, you can clearly, by channel, see what is the unusual uplift in the market due to COVID. So if you take some of the monopolies, they have public figures, where you can just see that the numbers spiked during '20 and '21. So it's actually not that hard to eliminate the monopoly element in, what you can say, the market growth. So we have a positive impact both in '20, we have a positive impact in '21. And that we have taken out in the numbers we've shared as normalized EBIT. Clearly, there's also a positive element in the business in '21. As we haven't taken over the business yet, a lot of that uplift sits with the current owners. So when we hopefully get to closing, we hope that COVID is behind us and things will start to normalize again. So what the numbers we've shared with you is post-COVID numbers. Regarding the guidance, there's a few things worth mentioning here. First of all is that we have not come to closing on any of the two acquisitions. And we do not know what time it is that we will get the final -- we'll get the keys to the two businesses so that -- it's not 0.5 year that we get both businesses. Therefore, it's less than 50% of the EBITDA that would go to us. We have transaction costs on both the businesses. And then as we have mentioned quite a number of times, it is growth businesses. So we think it's more important for us to go in and really thought the businesses with investments where we do see opportunities in the rest of the year. So there's a little bit of money for investments in commercially in the businesses, the transaction costs. And then we do not know how long we will have the businesses for. So those three elements make it a small number in terms of the impact on '21. But the clear priority for us is to ensure that these businesses are well integrated and grow faster rather than deliver synergies in the short term or deliver bottom line in the short term. And I think again, we have not been given all the clearances from the regulator. Therefore, we cannot give you full details on how big the part of the business that is from monopolies. But I think it's important to understand that the monopoly channel is extremely important for all beverage companies in the three markets that we talked about. And thus, we have a fairly big exposure to when and where you have the monopoly business. It's something that we already know how to deal with. So that's -- it's a very important channel. And Solera is very capable of managing these channels.

Okay. That's great. Just one last question in terms of MC ENERGY, just check some numbers here. And as I see the market share has been fairly flat the last 3 years. So first of all, just wanted to ask whether you can confirm this and what the reason is for this, if it's correct.

I think, first of all, the energy drinks market is growing very, very fast. So that's the first tick-the-box. If you look at the pricing of the assets in terms of the share price, it is slightly below the cans while this is sold in PETs, so it's not that different. There's a small difference to a brand like Monster. And so Red bull is priced far higher than any other brands, but it's pretty comparable to, call it, the mid-segment. In that segment, even though that the big guys have been pushing extremely hard, have invested tons of marketing money, the brands have been able with relatively, I would say, low spending to keep up the pace of the market. And I think that's actually quite positive, I would say. So we look at it in a positive way that they have been able to keep the share. We have seen similar kind of developments in some other markets, where the smaller brands have been squeezed out of the two big guys, which is not the case in France here. And that for us indicates, and we have done excessive work on understanding the brand through consumer surveys, that actually indicates that the brand healthiness is in a sweet spot. So we are pretty confident with what they have delivered.

Our next question is a follow-up question from the line of Frans Hoyer from Handelsbanken.

Yes. Two points. One is which -- I mean, it's obvious that before you plan what to do in Sweden and Norway, you will leverage the expertise of the Solera people. But from your point of view, as things stand now, which of the Unibrew brands is it that you would consider most interesting to launch into Sweden and Norway?

Frans, I think we are not looking at it from a brand point of view yet, we're looking at it from a category point of view. And then we have brands in the Nordic countries, even in Italy and France that could travel. So this is about the category and then evaluating the brand proposition. To give you an example, the Solera business, as you can see, is carrying Sanpellegrino. They are doing really, really well. And that means that there's no reason why that we should push LemonSoda because we have the strongest brand in that category already. But then there might be other categories where we are not doing any business. And if you look at a category like energy drinks in Sweden, there's no proposition at this moment of time in Solera's portfolio. So we, of course, will have to evaluate if we have a proposition that could fit here. Whereas if you look at Norway, the business is doing business with the CELSIUS brand and thereby covering a piece of the energy drinks market. So we'll have to -- we'll go through that kind of like brand category matrix and work it through with the Solera people. So it's back to the categories that we have talked about, no/low sugar, no/low alco, ready-to-drink/cider, cocktails, energy drinks, enhanced waters and so on. So those are the categories that we will -- where we will start looking first. When it comes to our own brand propositions, of course, with the wine and spirit portfolio, it will be a slightly different angle.

Okay. And then a question on France and the energy drinks market there. Can you give us an indication of how progressed is the French energy drinks market compared to the progression achieved already in other markets like the Nordics, for instance?

Yes. We see -- our evaluation is that Finland is probably the most developed markets of all markets in Europe when it comes to energy drinks. Sweden, Denmark are just behind. And then you would see that the further south you go, the more years it will be behind, whereas I would say maybe Germany is 1 or 2 years behind Denmark, whereas France is probably -- as Denmark, Finland, whereas France is probably 2, 3 years behind, Italy is probably 3 to 4 years behind. It's getting up to speed very rapidly. So it might be that it's not 3 to 4 years, but it's only at the end of the day, 2 to 3 years. But when you look at the shelf, when you look at the innovations in the market, when you look at the different the way the different players are playing the market the way that the retailers are looking at the category, it has not yet reached a mature level that is -- so it's a big optionality. And just to give you a little bit of color, we have launched LemonSoda Energy Activator in Italy. As we have talked about in the past, we have reached the highest distribution rate for any innovations that we have done in the past. So we have reached a higher distribution than any other innovation that we have put into the Italian market over the last 10 years after we have been in the market for about 8 weeks, which clearly shows that the retailers are watching pretty closely at the energy drinks category. And they are open-minded for propositions to get on the shelf as long as they are relevant for the consumers.

There are no further questions registered. So I hand back to the speakers for any closing remarks.

Thank you very much. Thank you for participating early. Also for the London guys on the team here, we thought it was important to talk to you before the market opens up. Appreciate your participation questions, and we look forward to connect later on. Thank you.