With me today, I have Johan Lennartsson, our Group CFO.
Good morning, everyone.
Before we dig into the details of the quarter, I just want to share a few highlights. We've had a quite strong start to the quarter with strong development in the beginning of the quarter, with a little bit softer trading by the end of the quarter, mainly due to seasonality. We didn't have any sales from Easter, and that goes into April. We're quite confident about the trading for the first six months of this quarter and the year. Looking at the highlights, it's really rewarding to see that we have been able to continuously improve the gross margin. We're making more money out of the sales that we're having, and we are investing that additional profitability into growth initiatives. We can also see that we've been able to maintain the profitability margin despite those quite significant investments.
We have also seen a significant improvement in the operating cash flow after working capital, which is also one of the key priorities that we highlighted in the fourth quarter report. This is also something that we are going to maintain a high focus on, given that we had a quite weak cash flow in the first six months of the last year. This is a priority going forward. One of the big highlights for me this quarter is that we are starting to really see the results of the investments and the initiatives that we've been executing upon in Future Snacking. It's really the highlight segment of the quarter, and especially True Co and Pandy, where we had a really strong growth of more than 100% for the period.
That being said, we have also further initiatives to execute upon: quality nutrition, the weakest segment in the quarter. We have an interesting pipeline for the second half of this year and also one of the key priorities for us. Let's dig into some of the details.
Looking at our net sales, it came in on SEK 1.9 billion. It comprised a total growth of 4%, with an organic growth of also 4%, with limited currency impact. Looking at the segment-wise, we saw a strong contribution from the Future Snacking segment, mainly driven by a really solid growth for some of our strong brands, Pandy and True Co, who grew their sales by nearly double the sales in the quarter. We had some challenges in the quality nutrition segment with some delay in or postponed orders in some of our production facilities, causing some delay in sales and profitability. Looking year on year, we can also see where we had some negative impact from the late Easter, and this impact is mainly shown in the distribution segment for the quarter.
Yes, and talking a little bit about FX, we had a lot of questions the last few weeks from investors asking us, how will this impact Humble Group? Around half of our group sales is in SEK, but of course, the outstanding currencies, we will have a direct impact when we convert a lower international currency to SEK. That being said, we are very positive about this because looking at all of our Swedish companies, many of them have either direct or indirect import of goods in international currency. This is also something that we know has been reducing our gross margin historically. Over time, looking at a few quarters down the line, we assume that this is going to improve the gross margin just with a stronger SEK currency. Overall, as Johan mentioned, we had strong growth in three out of four segments.
Quality nutrition, also as in Q4, was a bit weaker. That being said, we will talk more about quality nutrition, and it's a strong macro growth segment overall, so we're not worried about it long term. Future Snacking, the real highlight here, Pandy and True Co, not nearly double the sales, but actually quite a bit more. Really rewarding to see that the investments we are making in those companies are really starting to show results.
Looking at the gross profit, we grew the gross profit with almost 9%, came in on SEK 615 million for the quarter compared to SEK 566 million the previous quarter. We are also happy to see the improved gross margin driven by priorities internally on strengthening the overall profitability of the group. Gross margin came in on 32.3% compared to 31% in the previous quarter. We see that the main growth in the gross profit is driven in the sustainable care and the Future Snacking segment. Your thoughts, Simon?
I think it's really strong to see that we both sequentially and versus last year are improving the gross margin. We are maintaining that streak ever since the middle of 2023. We have been improving the gross margin continuously. We still have further room for improvement here, but we are gradually improving it. That is also something that we are very focused on right now. For us, it's about making more money out of the sales that we're having, but also being able to maintain growth. Having that balance is always challenging, but I think we've been able to do it well here. As I mentioned earlier, we do see some potential for further improvements with a strong SEK, but also not to mention the freight cost.
We do import a lot of containers from Asia, and we know for a fact that the container prices are down. This is not something that is in the P&L right now, but it's actually going to come a little bit further down the year with the FIFO principles. That's just worth mentioning. We have two macro factors here that might also play in our favor with the gross margin. Despite those, we still maintain a high focus to continue to solidify our gross margin in our companies.
Profitability-wise, the adjusted EBITDA, we managed to grow the adjusted EBITDA to SEK 133 million compared to SEK 128 million compared to last year. This is a total growth of 4%. Bear in mind here that this is a growth of 4% despite significant investments in selling and marketing activities in some of our hero brands across the group. Main contributors to the profitability growth are found in the Future Snacking segment and the sustainable care segment here as well.
Yes, and I just want to share a few words on this because in Q1 last year, we also made a quite significant increase in sales and marketing spend. The results we are seeing in some of our brands this quarter are actually of the spend that we did almost two years ago. Some of the key markets we have entered and invested in historically are actually starting to show results. When we have that sort of traction data, we aren't afraid to invest more because we know that long term, this is going to be highly value-accretive for the group. That being said, I mean, these are efforts that we control. If we need to, we are able to turn those down a bit to improve the profitability even more.
I think despite increasing it by 18%, we are actually showing a tangible profitability growth in line with the net sales growth. That is due to strong cost control and that we are starting to see some leverage in our companies where we have been scaling to additional shift and also implemented efficiency processes for the supply chain.
Looking at our first segment, the Future Snacking, we saw a strong underlying growth in the net sales already communicated earlier. Net sales grew with 19% and amounted to SEK 282 million for the quarter. We also saw a strong increase in the underlying gross profit amounted to SEK 144 million, comprising a gross margin of 51.1%. The adjusted EBITDA amounted to SEK 32 million, improvement to 11.4% in adjusted EBITDA margin. Here is the main impact that Simon mentioned is some selling and marketing initiatives that have a negative impact on the overall profitability for the segment.
Yes, and also worth mentioning, I mean, First Class Brands, one of the bigger companies in this group, we have actually gotten back not to growth, but we are actually just a little bit below last year. We do have an ambition to grow in this year. We've had several very interesting initiatives, one of them Ready to Drink, Fun Light, that has been a real success, and also several product launches with our own brands. I think with that big company back on track with the restructuring process we've been having and also the strong trading from our manufacturers, they are doing really, really well. We're getting the results that we wanted from scaling them and also the brands on top of that. I mean, Future acking is really the shining star of this quarter, but we have a good hope for more this year.
Looking at sustainable care, the net sales grew by 4%, amounted to SEK 543 million. The gross profit also increased by 15% to SEK 240 million, and the gross margin amounted to 39.4%, which is also an improvement from previous quarter. The profitability amounted to SEK 68 million compared to SEK 57 million, reaching an adjusted EBITDA margin of 12.5% for the quarter, comprising a total growth of the overall profitability of 19%.
Yes, and what's worth mentioning here, I mean, we have two of our big brands, Naty and Humble Co. We are starting to see the results from working in those companies. Naty has been back to growth now several months in a row, which is really rewarding to see. Also the profitability is improved in both of these companies. It is a little bit early to tell if the consumer is getting back on the sustainability track with their procurement, but we are seeing positive results from the retailers, higher sales velocity, and that the work we've been doing for the last two years is starting to yield results. Also in this segment, we have some of our U.K. companies, Amber House and Solent, in U.K. with the new labor regulations. There has been a little bit of weakness with some of the retailers.
When I say weakness, I mean they have been reducing their stock levels. We have had a short-term effect on this, but it's not something that's going to impact us long-term that we believe. Overall, I think the performance here has been quite solid, but it could have been even stronger. We do have a turnaround position here in two of our brands that could be really interesting for us going forward.
Looking at the quality nutrition segment here, as mentioned earlier, we saw a negative sales trend, reducing the sales by 7%, reaching SEK 362 million. This is a negative trend that we noted in the fourth quarter that we also had some impact in the first quarter. Worth mentioning here is that we've taken some initiatives to reduce this impact going forward, mainly caused by some postponed orders from major larger retail stores. Looking at the gross profit, it decreased by 14% for the quarter, mainly driven by the lower net sales for the segment. Profitability-wise, we managed to remain almost flat on the adjusted EBITDA, decreasing to SEK 26 million compared to SEK 33 million for the quarter.
Yes, and I mean, quality nutrition is one of our key segments where we expect a lot of growth going forward. We have prepared with our powder site with increased capacity. We have our bar site with increased capacity available, and we have the drink line that we had the official sort of opening for just a few months ago. I am really impressed with what we've done here, fully automated energy drink line. Our ambition here is now to really scale up this additional capacity with high-value customers. We are focusing a lot on export here. We see many opportunities, and this is one of the key initiatives for the year that we are going to gradually ramp up the capacity utilization in all of these companies. As I mentioned earlier, a bit weak trading in Q4 and Q1.
What's positive here is that we've seen increasing orders from our existing customers going into the later part of this year in their forecast. I am not worried about quality nutrition long term, and it's a fast-growing market. For us, it's key here that we're able to ramp up the additional capacity, but with the right customers that also have strong profitability.
Looking at the last segment, Nordic Distribution grew the net sales by 6%, amounting to SEK 718 million. Here we also had a little bit weaker gross margin, reducing the gross profit to SEK 133 million and the gross margin decreased to 18.5%. This can mainly be explained by some sellout of some low-value stock for the quarter. I should say that the profitability managed to reduce flat on SEK 27 million for adjusted EBITDA.
Yeah, I think this is really showcasing, as Johan mentioned, we have reduced the stock levels a bit here. We have a good trajectory going forward in this segment. Also, as we mentioned earlier, a lot of the Easter sales with candy is in this segment. This is something that has already hit our P&L in April positively. What's really rewarding to see here is that we're, despite having a bit of a sellout with some inventory, able to maintain a solid profitability. This is due to the different efficiency initiatives that we have been executing upon historically. I think with normal gross margins and the regular trading here, we have a good opportunity for strong profitability. That's something that we focus on because we want to be really efficient in our distribution.
Looking at cash flow-wise, this is, as previously communicated, a highly prioritized area for us. The cash flow from operations came in on SEK 134 million compared to SEK 127 million before changing working capital. After changing working capital, we could see that we had a cash flow of SEK 70 million compared to SEK 60 million and increased by SEK 10 million. Worth mentioning here is that we also had a repayment of tax deferrals by SEK 45 million that reduced the working capital. Adjusted for that effect, we had a cash flow from operations after changing working capital of SEK 115 million, which is a significant improvement, nearly double the cash flow compared to the previous quarter last year.
Yes, and as you mentioned, I'm really positive about this. We are translating more of our net sales into cash flow. What we can see also, what's really important for us is the second quarter. We had a bad second quarter with minus SEK 49 million last year. I think if we're just able to keep this track and being able to grow and scale efficiently without tying too much working capital, we should be able to provide strong cash flow as well. That is one of the challenges being a product company. When you are growing, you have to have the products in advance, and that's tying some working capital. This is a main priority for us to continue to strengthen, and we're trying to implement more processes to be even leaner in our inventory and working capital management.
Looking at the debt ratio and the leverage, we see that the overall leverage adjusted EBITDA in relation to the net interest paying debt came in on 2.8 times. This is almost flat development from the fourth quarter last year, but we can see that we have a continuous improvement here, and we're not so worried. We see that we have a positive trajectory of the overall leverage quarter on quarter.
Yes, and also worth mentioning here, we had a negative impact from currency. This is also something that impacted our cash by the closing balances. Despite that, we've been able to reduce the net debt, and we are closing in on our target to get down to below 2.5 times as in our financial targets. To wrap things up for the first quarter and what we're thinking ahead, as I mentioned in the CEO letter, we have a clear ambition to deliver higher organic growth for the rest of the year than we did this quarter. In our financial targets, we have a minimum majority of 15%. That's quite a bit up from where we are in Q1. We have a really positive outlook for the rest of the year.
Despite a volatile market and environment, our companies are actually quite confident. I think it's all about executing on the initiatives and maintaining the momentum that we've had in our companies for the last years, and we feel solid about that. What's also good with our positioning here is that we are seeing some strong demand in our private label and contract manufacturing side of the business. This is something that we are trying to grow, especially in the Nordics, where we are a little bit behind the U.K. retailers. That is one of the things that we are working on. Also, looking at the gross margin I mentioned earlier, we have two major things that actually might play in our favor with the currency for Swedish companies and also the reduced freight costs for a lot of our companies that import goods from Asia.
That is something that might play in our favor. On top of that, we are implementing seven initiatives to further improve the gross margin, such as centralized procurement in some of our platforms. The third part here is about cash flow, and that's something that we are highly focusing upon because we want to reduce our debt. We want to improve the cash flow. Over time, we might be able to start acquiring some companies and do bolt-on acquisitions again. There are a lot of companies that really like what we are doing and want to become part of this group, but we want to feel confident about our balance sheet before we do so. That being said, thank you for this first quarter, and we're looking forward to the rest of the year.
Now time for some questions. It's not so many questions, but one question from Victor is what's behind the sales decline year on year in Sweden? In Q4, it was 6%. Now it's -1 .
I think, I mean, we've had some challenges, as also mentioned in our quality nutrition segment. That's the big drainer for this year. Also, as we also mentioned, Nordic distribution, we are meeting tough comparables given that we didn't have any sort of pipe fill sales for Easter, which is actually several percentage points of a potential growth. I mean, if we're looking at the first six months of the year, that's not going to have any sort of seasonality impact. Q1 versus Q2 is always a bit tricky just because of the Easter and that we do have a lot of companies selling candy and providing the stores with the products for Easter. Overall, I mean, Sweden is doing well, and we see, especially in future snacking, the development is very strong.
Quality nutrition, I mean, a lot of our companies in that segment are in Sweden. What's positive here is that we have been able to ramp up the capacity. The drink line is up and running. We're starting to provide the first serious customers, and the pipeline in both our powder, bars, and energy drinks is looking very strong. We've been in development projects for the last six months with a lot of these customers. I think as long as we're able to convert these customers to actually producing orders, which generally take from start of a project to actually being up and running nine to fifteen months, we should be doing quite well in the coming sort of quarters for quality nutrition as well.
Great, thank you. Another question. Given the reduced acquisition activity and limited cash available, can you share some thoughts on if the group has shifted focus toward organic growth and joint venture products and maybe share your thoughts on future M&A opportunities?
I mean, you have to be mindful about that. If you look at the last two years, we have invested quite significantly into CapEx as well. That is something, as we mentioned in our capital markets day, we're not going to have the same level of CapEx investments going forward. I think by reducing that and that we have been able to invest in all of our facilities to a certain point that we feel, okay, now we do have capacity. By having lower CapEx, we will generate more cash and we can deploy that into acquisitions. Of course, I mean, those investments are to facilitate organic growth in our existing companies. We have a lot of extra capacity going forward with the investments we made and a few more coming this year, next year. We have a lot to do with our own companies.
That being said, with our cash generating profile and with the CapEx gradually going down, there will be room for acquisitions as well.
Okay, thank you. One question here about quality nutrition that we mentioned, temporary slowdown and some postponed orders. Just how the question is about how should they think about the temporary, wording temporary, and have we seen some pickup in sales?
Yeah, I mean, just to give an example, one of our biggest customers in the bars production, they had a lot of excessive stock in Q3. They didn't buy anything in Q4 and Q1, and now they started ordering again for Q2. I mean, you have those shifts sometimes in the market. Same with powders. There was a bit of weakness last year in that, but now our key customers here are turning up their orders again. If you look at sport nutrition market and the quality nutrition market for a longer period of time, it's a very strong macro growth. As long as we are an efficient supplier of quality products, there will be demand with other brands to produce with us. I think it's all about that.
As long as we feel confident in our ability to produce great products and having a solid profitability on that, I think we're in good shape. As I mentioned earlier, I think the drink line, I was severely impressed when I saw it finalized, actually. I think that's an exciting opportunity. We have a great pipeline, but it's like six to twelve months before those customers are starting to produce with us. There are some good leads already.
One question here is a little bit related to why are we not focusing more on profitability and taking these strategic selling and marketing activities?
I mean, as an entrepreneur of a brand like Pandy many years ago, the sort of traction we are seeing in our brands, it's everything you would want as an owner. If you look at these brands, I mean, we're still profitable on these companies, but we're keeping it at sort of a break-even level and reinvesting everything we can to grow them. If you talk about value creation long term, that's exactly what you should do because growing these brands, they have tremendous value for us and also potentially others. I think that is something really worth considering. If we were losing money and not having the opportunity to turn off marketing, I mean, then that would be an issue.
Entering a new market and building brand awareness, rapid start campaigns, demo activities, all of those investments, that's because you are going to take a good position and grow long term. Pandy is a great example. We did start in Norway quite recently, and it's been a tremendous success, almost surpassing Sweden. I think when you have that data and that sort of traction, that's where you need to invest. We're not afraid to do so if we're confident it's going to bring value long term.
I think you're touching a little bit on it, but one question is a little bit on our markets in Europe and the penetration. Of course, maybe tricky to pinpoint every market, but what are your general thoughts on how we perform on the different markets?
I mean, we're barely scratching the surface. I think Scandinavia is, of course, a big market for us, but we have been initiating a lot of activities throughout the last two years to get into Germany, U.K. I mean, the U.S. is something that we've been starting with and starting to see some really interesting dialogues with retailers. I mean, we have a few key markets that we want to enter, but of course, over time, we want to be present in any sort of Western market where you have the same consumption behavior with the products that we are providing. We have a lot to do in Europe, and not only with our brands.
As I mentioned, if you look at in terms of value, producing qualitative products from the Nordics, for instance, nutrition is something that is very attractive for international brands and companies. If we can be a bigger exporter of products, that is also going to be value-adding for us long term.
One question from Stefan here. What are your thoughts about the time lag before we see a potential tailwind from the weaker US dollar?
I don't want to guide on that exactly, but generally, it's between five to nine months before you have the changes in COGS in the P&L for most of our companies. It depends on if you're a brand or a distributor or manufacturer. I mean, a weaker dollar is impacting some of our Nordic companies, but also some of our international companies where we're buying in USD from Asia, for instance. I mean, the strength of the SEK currency lately is like we have to provide more info on that going forward, how it's actually going to impact the profitability long term. What we do know is that it is going to be positive on a twelve-month basis, and it has been one of the big drainers historically also when we had an opposite effect of the currency.
Thank you, Simon. We are through all the questions that we received relating to the first quarter. Do you want to summarize?
Thank you, everyone, for listening. I think we're continuing on the track and the strategic plan that we have set, and we look forward to the rest of the year.
Thank you so much.