Welcome to the Midsona Audiocast Teleconference Q2 2022. Today, I am pleased to present CEO Peter Åsberg and CFO Max Bokander. For the first part of the call, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. I'll now hand the floor to Peter Åsberg. Please begin your meeting.
Thank you so much for attending this call. Let's go immediately to page number two in the presentation. I would just like to make you aware that this presentation may contain forward-looking statements and that those are based on current expectations and are subject to risks and uncertainties. By that, we get into the real presentation on page number three. The second quarter was a challenging quarter for Midsona as we were very hard hit by severe cost inflation. That said, we have been, and we've continued to execute a plan with the objective to step-by-step restore the margins and ultimately to surpass previous margin levels. This is something that we are now working very, very hard on.
I would say that despite the tough situation, we are starting to see some light at the end of the tunnel and some good signs. We did see some moderate organic growth in quarter two. Our conventional food brands and consumer health brands had very good growth levels, but still, the market and therefore also our organic brands were somewhat depressed still. We have, as we discussed about in the course of the last quarter, implemented price increases in the second quarter according to the plan. Clearly, they were not enough to offset the massive cost inflation that we saw in quarter two, and therefore we are planning and executing new price increases in the third quarter. I will come back to talk about them in some more detail. We also started to implement a cost savings program.
It's going according to plan. Actually, not only are we executing on the SEK 40 million cost savings program that we have, but we have also found new cost-saving opportunities, and Max will get back to that and describe that plan in some more detail. Let's turn to page number four. Cost inflation has for sure been on our mind for the second quarter. We have been battling severe cost inflation in quarter two. As said, despite the price increases that we implemented, our gross margin has eroded in quarter two. Principally, all key raw materials, energy and transports continued to increase significantly in quarter two.
At the same time, we have been hard hit by the continued strengthening of the U.S. dollar versus both the euro, Danish krona, and the Swedish krona, which has a negative impact on our gross margin levels as we have quite big buying in the U.S. dollar. Accordingly, the price increases that we made in quarter two have not been enough, and we have started a new round of price increases. Many of them, especially on our brands, have taken effect already in July, and they will be followed by new ones later in the quarter. Our private label business has been a major profit drain as we have had a lot of long-term contracts with fixed prices. We renegotiate the prices, but also terms as contract expires.
Clearly, the model that we've historically employed is not suited for the current inflationary economy. The better part of the contract will expire in the second half of this year, and we should therefore step-by-step improve the profitability for the private label part of the portfolio. We go to page number five. This is a short financial summary. Max will go into the numbers in detail, so I will just give you a few headlines. We do see good growth, which is of course a strong sign that consumers are still demanding our products. They're still interested in healthy and sustainable foods. That's of course important for the future. I've already talked about it. Our issue for sure is the eroded gross margin. The whole difference in profitability is actually in the gross margin.
I would also like to point out that we had good cash flow, mainly by good working capital management. Let's go to page number six. As you know, a lot of the focus has been on pricing and battling cost inflation, but of course, it's also very important to build for the long term. To build our brands and to build the prioritized categories that we're in. One of the key initiatives is our focus on our plant-based assortment. As you know, we have expanded the Castellcir plant in Spain. It's now fully operational, and it gives us a lot of new opportunities. We have continued deliveries to Mercadona in Spain, the major retailer in Spain, for a number of products. We have also continued the insourcing of products that have been outsourced before, and we do this step by step.
Of course, a big part of what we're doing is innovation. At the bottom of this page, you see a few new Vegetalia products. Vegetalia is our brand in Spain. These are products that we have recently launched in the Spanish market that are plant-based meat alternatives, all of them. Let's go to page number seven. The fact that we are now back to more normal life after the pandemic has been very positive for many of our brands. This has been especially true for our conventional food brands, but also to some extent for our consumer health brands. This is one example of our sports nutrition portfolio, where we see very good growth both for Gainomax and Swebar. People are back in the gyms and they're back at events like Göteborgsvarvet, the Half Marathon in Gothenburg, and Stockholm Marathon.
We have been represented at those events and a number of other events and thereby we have been able to connect to consumers again. At the same time, we have updated the brand equity for both Gainomax and Swebar, and we see that consumers are responding very positively to this. This is, of course, also part of our process to brand by brand, step by step, connect to the consumer in this new environment. An important part of this consumer connection is to continue to drive innovations. We do put a specific focus on our organic brands here that we have been struggling a little bit with growth. This is one of the key cornerstones to turn around performance.
With slide, you see a few new launches that we did during quarter two, and more will follow in the autumn. Page number nine. I talked about our action plan in the last quarterly call, and this action plan is still the one that we're working on. The key task is, I said, to restore the gross margins. We did implement a lot of price increases in the second quarter, but I said they were not enough. New ones will follow now in quarter three to step by step restore the margin. We are implementing a cost savings program. The objective is, or was, I should say, to have SEK 40 million in savings. We are now actually aiming higher to even find more savings considering the tough situation that we have right now.
The third one is about accelerating sales. We have three commercial focus areas, and we'll come back to them in the next slide. Of course, price increases should also step by step give some extra help here. We go to page number 10. One of the key tasks that we're working on is to step change the performance of our organic brands. Our organic brands performed very well during the pandemic, but has had a more challenging time after the pandemic. Personally, I think that organic and healthy and sustainable, which is what the organic brand stands for, is as relevant as ever. We are now working to communicate those benefits to consumers and thereby restore growth in our organic portfolio. The portfolio of conventional health brands have been doing very well.
We still see a lot of opportunity to expand all those brands out into new Nordic markets. We do see some results of that already in the second quarter, as evidenced by very good growth for those brands. Lastly but not least, we have created more of a standalone organization for our consumer health brands. It is a vital step to put the right focus on those brands and thereby also drive more growth and profitability for that portfolio over time. We're working on making the marketing of the brands more cut through, and we have full confidence that we will get the full portfolio back on growth again. By that, I leave the word to Max, and he will take you through the financial review.
Thank you, Peter. I ask you to go to page 12, where I will walk through the net sales development during the quarter. If you start to look at the graph to the left, you can see that the sales growth was 5.9% during the quarter, with a structured growth of 3% from added Vitality, and the currency translation had a positive effect of 2.5% on the net sales. Of the quarters with negative organic growth, we now delivered a small organic growth of 0.4%, which you can see in the graph to the right, was driven by strong sales through the sales channels, pharmacies and food service. I ask you to move to page 13, where I will explain the EBITDA development compared to last year.
Also here, I ask you to focus on the graph to the left, where you can see that the EBITDA for quarter one last year was SEK 78 million, but including pro forma Vitality, the comparable EBITDA was SEK 80 million. The difficulties to pass on cost increases in a timely manner continued during quarter two, as Peter Åsberg just said. Further during this quarter, the gross margin was negatively impacted by the slightly adverse product mix when private label and licensed brands outperformed our sales of own brands. Additionally, and actually quite significantly, the margin was negatively impacted by the stronger US dollar and euro, that had a negative transactional effect on the gross margin during the quarter. These combined resulted in a total variance of SEK 50 million, which is basically explaining the total EBITDA decline compared to last year.
As you can see in this graph, which I also will come back to later, we had a positive effect from our profit protection actions and our initiated restructuring project with SEK 6 million as a net. Furthermore, you see a bar called Other, which actually in the quarter included a positive SEK 1.7 million from sold assets related to closed operations in Qares. However, as a total compared to last year, this Other was flattish. Besides the already mentioned negative transactional effects that impacted gross margin, we also have negative effect from revaluation of operational assets and liabilities that in total took down the EBITDA further SEK 3 million versus last year. I now ask you to turn to page 14, where I will focus slightly more on the restructuring effects and also cost-saving effects.
As you can see, combined, the actions we have taken for labor and marketing totally saved SEK 13 million compared to last year. Within this, the official project delivered SEK 4 million, i.e. we had SEK 9 million extra savings that is not really in the official structuring, but is also savings that we see will continue further on. The savings were partly offset by cost increases for items like outbound freight, and also we had slightly higher cost for insurance. Insurance fees have gone up. It's not only for us. We were successful in implementing new insurance program, however, to a slightly higher cost. For example, Paulúns in Sweden had an accident which have led to that insurance companies are hesitant to keep the old pricing for the risk.
However, as a summary, I would like to emphasize that the sales and admin expenses in relation to net sales improved by 0.6 percentage points compared to last year pro forma. With that, I ask you to move to slide 15. As Peter already mentioned, we had a good cash flow driven by the working capital reduction on top of the positive EBITDA. Also to highlight it here, during the quarter, we had a low level of CapEx, partly thanks to SEK 7 million revenue from selling the closed facility in Quares. Now finally from my side, I would like you to move to page 16. We ended the quarter with still SEK 470 million available cash, representing 12% of the last twelve months net sales.
With that, I hand back to you, Peter Åsberg.
Thank you so much, Max. I would just then like to give a short summary before we open up for questions. We are working very delicately to really turn the situation around, and for sure we have the ambition to reach higher. Price increases is our number one, two, and three priority. As mentioned, a new round is planned and is being executed for the third quarter. The first of them do take effect already in the month of July. We are committed to drive growth by driving our iconic brands. We do have very good momentum for quite a few of them, but still have some work to be done on organic brands. Our expanded facility in Castellcir here gives us new opportunities in plant-based.
We follow through on our previously announced cost savings programs, and as Max mentioned, we have found new cost-saving opportunities to offset the negative effects that we have had from cost increases elsewhere in the system. Lastly, we continue to drive our sustainability agenda. In quarter two, Midsona won the 2022 Symbios award, which recognizes Swedish company that successfully combine responsible behavior with profitable growth. Again, we are very committed, very dedicated to step-by-step get back to levels where we were before and then ultimately to surpass them. Quarter two was a tough quarter, but still, we follow our action plan, and we do see some light at the end of the tunnel and some good actions taken. I look forward to come back to you, after the third quarter report and tell you more about that.
By that, we do open up for questions.
Thank you. If you'd like to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. Once again, that's zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Johan Braun of ABG. Please go ahead. Your line is open.
Thank you. Hi, guys. Firstly, on these price increases you're mentioning in July and then later in Q3 as well, do you still experience higher input costs, sequentially as well, or are these just gonna drop down on the bottom line, essentially?
I would say that we had a huge spike from the months of April until May or maybe even mid-June. After that, I would say that it has flattened out a little bit. I think it's too early to say that it's a new direction or a direction down. I would also say that we do see lots of ups and downs. That for sure, some raw materials are now trending down again. Some are still trending up. I think the decisive factor now will be harvests and they will start to come in now during the summer months and then later in the autumn. That is really dictate the further direction of cost inflation for us.
This is nothing that I could or would speculate in, but I would say that we are much better prepared to handle those type of cost increases now compared to before. The continued strengthening of the U.S. dollar has been a headache for us. It has eased off a little bit in the last few days, but still the U.S. dollar is at a very high level vis-a-vis the euro, the Danish krona, and the Swedish krona. Also there, I am not the right person to speculate about that, but just to say that these price increases or cost increases will pass on to the customer in the end. I would say not the same dramatic price increases or cost increases that we saw during quarter two, but still too early to say that it is a clear change in direction.
I think that we're very humble about that. We keep our eyes very open, and we act as fast and as decisively as we can.
Great. You're mentioning the input prices and with, as you're mentioning, some prices have been starting to drop quite significantly during the recent period. How quick would you say should this continue would it take for it to be visible in your P&L?
I would say it very much depends on the raw material. I mean, some of them would be within a month or two, others would be longer. I think that if that was the case and the trend, you would gradually see that during the quarter. Then again, I mean, a lot of the things that we consume now, at least at the beginning of the quarter, are things that we bought at quite high prices in quarter two. If, and I say if that is the general trend, we might see some effect at the end of the quarter three, but most of that we see it coming in quarter four.
Great. Moving on to the general cash flow and inventory levels and the likes. Given your positive cash flow during the quarter, how do you see this developing given the stocking up ahead of Christmas season and the like? General cash flow thoughts during H2.
Our ambition is that the inventory should not continue to go up. It should be, I mean, despite we need to build for the Christmas season, which will have an impact now in July and August. September is a month where we also sell out f or the Christmas season starting. However, of course, those invoices are not necessarily paid at that time. The accounts receivable could be higher and likely higher in end of quarter three. Our ambition is to still and should be able to generate positive cash flow in quarter three.
Just to build on what Max was saying, which is 100% correct. I just want to emphasize that one of the issues that we had last year was that we did not get the volumes or the raw material that we needed for the Christmas season in time due to the general transport situation that we had in the world at that point in time. We have now planned ahead. We have taken in more raw materials a lot earlier than we normally would do. As Max was saying, that had a negative effect on inventory in quarter two, in the sense that it was higher than we would normally want.
Still, it was for sure the right thing to do because it means that we're much better prepared for the Christmas season for the premium fruit product this year compared to last year, which all else equal should give a positive effect. Maybe some already in September, as Max said, but most of it in quarter four then.
Great. Lastly from me as well, regarding the financial position, would you consider any divestments in order to ease leverage levels?
I mean, our key focus for sure is to one, improve profit levels again, EBITDA, and then work very actively with working capital. I would say that principally speaking, we are always willing to discuss divestment if the price is right, and that would be the key factor. Our main focus for sure is on our current business and to improve that and take it back to the levels where we have been, and as said, ultimately get to a higher level.
Great. Thank you very much. That was all from me.
Thank you. We currently have one further question in the queue. Just as a reminder to participants, if you do wish to ask a question, please dial zero one now. That next person is Henrik Holmer of Erik Penser Bank. Please go ahead. Your line is open.
Yeah. Hi, guys. I was wondering about what you have seen. Could you talk a bit about what you have seen so far with regards to harvests? As you said, Peter, most of the harvest is late summer and autumn. If you could say anything compared to last year with regards to the spring harvests.
Yes. Hi, Henrik. What I would say?
There's a bit of background noise on Henrik's line. Just muted him now, so you should be able to.
I mean, first of all, the harvest last year, 2021, was generally speaking quite bad. I think it's quite hard to speculate. We see some good signs in South America for certain raw materials. We do have a current heatwave in Europe and drought in southern part of Europe, which might affect us negatively. I think that it would not be right for me to speculate. The important thing for me is that, one, we have to a much better extent secured the important Christmas season. We do have those raw materials in place. We are better prepared for further price increases should raw material prices continue upwards.
I mean, the few spring items that has been harvested have been quite okay, but the summer season is still more of a question mark, I would say.
Okay. Thank you. Another quick question. You had a planned delivery interruption for Happy Bio. Could you talk a bit about that and what the effects were from this, both in the quarter but also effects forward on taking in warehousing and distribution under your own management?
Okay. It was on the disruption of Happy Bio. I only heard.
Yeah
of the question. Yeah.
Yes. Yes.
No, it's principally speaking, what that is about is that the warehousing and the selling of the Happy Bio products have been performed by the previous owner via a contract that we had with them. Now we're moving this in-house. This principally meant that when we did this move, we had an interruption of approximately, I would say, two weeks of sales that were zero basically to make the movement and to put up the systems. This was planned. It was the right thing to do because we now have it in our own warehouse. We can distribute it more effectively. We have also established our own sales force in France.
It's quite an investment, I would say, which to some extent has a negative effect on our P&L right now, but for the long term, it's absolutely the right thing to do because it will mean that we will be able to drive Happy Bio a lot harder.
Okay. Thank you. One final question. If you could just give an update on the conversion from health food stores to grocery stores in Europe and your part in this conversion, and both in division North Europe and South Europe?
Yes. I mean, it has been our strategy for quite some time to do so, and this is a plan that we continue. It is about the Happy Bio brand in France and Spain. Despite the fact that we now have this two-week of disruption, it has been going according to plan. I think the fact that we are now rolling out our own sales force will step by step give us better opportunity to drive distribution of the brand. Same with the Davert brand in Germany. We are working on our plan step by step.
We are very well represented in one of the big retailers in Germany, less so in the other, but there we also have a plan, and we are gradually building distribution to that retailer as well. As I said, that retailer have their own organic plan, where they will step by step build shop-in-shops in a lot of their part of that concept. As Max was pointing out in his part of the presentation, health food has been one of the segments that has been performing very negatively in the second quarter. I would say that this is partly an effect of the fact that they did very well during the pandemic because people rather wanted to go to small stores nearby, rather than going to a hypermarket.
Now we see the reverse of that effect. My conclusion, I mean, is still the same that I've talked about earlier, that the conversion from health food stores to mass market will continue. Very important we play an active role in that and drive our brand in this channel which will be a channel we'll be growing most in the future. Although the health food stores will also be important for foreseeable future.
Okay. Thank you. That was all for me.
Thank you. We currently have no further questions in the queue at this time, so I'll hand the floor back to our speakers for the closing comments.
Yes. Thank you so much. I've already done my summary, I think. As you do understand, we are working very hard. The team is 100% behind this plan to get back on track and get back to previous profit levels again. We are working very decisively on pricing, driving our brands, and also having a tight cost control. As said, I look forward to meet you again, if not before, in the third quarter conference call. I would also like to wish you all a very nice summer. Thank you so much.