Earnings Call: Q3 2021

Oct 22, 2021

Hello, and welcome to the Mid Sonae Q3 Report for 2021. Today, I am pleased to present CEO, Peter Osborne and the CFO, Max Bokanda. For the first part of this call, all participants will be in listen only mode and afterwards, there will be a question and answer session. I'll now hand you over to Peter Osberg. Please begin. Thank you so much, and welcome. I will start with a general business update, and then Max will go more into the actual numbers. And I propose that we turn to Page number 2. And although we increased sales and improved of the gross And EBITDA margin in the quarter 3. We have to acknowledge that it was quite a challenging quarter for us. And our organic sales was actually slightly negative. And There are a number of reasons behind that. First of all, we see negative effects from the tilt of reopening of societies after The pandemic and that effect has been a little bit bigger than we had actually expected. But still, The key issue is in our supply chain and we have a number of factors that have affected us quite negatively. First of all, we have had bad crops in many parts of the world during the summer period. We have droughts As well as floodings in Europe, Asia and South America. And this has led to Delays in deliveries of key raw materials to us. They are arriving step by step, but it has taken longer and it has been more Difficult to obtain them than we had expected. We have also delayed in deliveries of tech materials. And on top of that, we have had a real chance of disruption, especially from Asia and South America. So this is the overall picture. And this is, of course, something that we've been working very hard on to mitigate those issues. It looks a little bit better now, but still we do see challenges in front of us also in quarter 4 and forward. Our sales increases in Foodservice and Pharmacy and those for the segment mostly affected in the pandemic. So now we see Here were positive effects. In the grocery trade, we see good development for brands A slower development for private label. And then we have had a major issue in the health food stores. We have seen a major decline, a major market decline, but still as far as we can judge, We are keeping we have increased our market share. As Eduardo pointed out in the report, We do see first signs of price inflation for raw materials because of the poor crops, For packaging materials, but also for transports, we have started to look at the price increases, which we will now gradually implement. Looking at the divisions, in the Nordics, Most parts are actually doing quite well. The key issue has been Christmas side of dried fruits and nuts From our facility in Denmark, we had major delays in deliberate raw materials and therefore we haven't been able to produce To the extent of €200,000,000 and also parts of the organic assortment we have seen supply issues. In the Wisschen North, which is the DACH region for us, we see solid development for the Brand Albert, But weak development also here in Health Food Stores. And in division South, We see a very strong development for our brand for the grocery trade, Happy Bu. It's up 38% in the quarter. And this is driven by the rollout of the Peruvian brand in the grocery trade in France and Spain. So it has been a difficult quarter, but we're still confident about the future. We also welcome the fact that Siena Daxim, our main shareholder, has shown confidence in the company and bought quite a significant amount of shares now in the morning. So we will continue to tackle the issues that we have and look forward and thereby improve our operation. We can turn to Page number 3, please. Just a couple of brief notes on this one because Max will go through it in much more detail. We are increasing sales by 9%, but as said, this is acquisition driven growth. We are, however, increasing EBITDA at the faster pace than the net sales is up 11%. We are showing some improvements in operations in this sense. We turn to Page number 4. And this If our organic growth by channel and this pretty much describes the situation that we have and also the challenges at hand. In the grocery trade, we are slightly down. But I said, our brands are doing relatively well and they are growing a little bit. So we see the main issue is in private label development. We have had a major decline in the healthy stores. It seems like consumers have abandoned the stores when the pandemic was over. Many of those stores are in the cities, and we think that He's been in the cities. I've spent 4 times in restaurants, but also gradually been going back to the mass market trade. So this is the issue. There is a really, really poor sale. Still a set of judgment is that we have kept or maybe even increased our market share in the Helfrich store. Pharmatives and foodservice are doing well and this was, of course, the reverse effect after the pandemic when Society is reopening again. We turn to Page number 5. An important part of Vitsona is to drive our innovation pipeline. And we are now launching actually a new brand, an organic skincare brand called Narsysa. It's actually an addition to the Urticon brand, But it's targeting a younger target group and is more focused on skincare, while typically or traditionally, Ertugrudrum has been more focused on Here, Karim. So this is something that we're excited about, and we're gradually rolling it out first across the Nordics in quarter 4 And then increasingly in the rest of Europe in 2022. Please turn to Page 6. The Kumarket brand is one of our prioritized brands, And we have done a number of improvements to the brand that now is not to show in the stores. First of all, We have launched a new design, which we think is very up to date and very contemporary. I think that this will be a major factor driving the trend forward. We are also driving innovation and have launched quite a few new products, specifically In the frozen segment, we see a couple of products on the right hand side of this slide. Also On the left hand side, we see our nut butter and this is not a particular innovation, but we're quite happy that those dry tunnel have been in force. We're producing them in our own plants rather than having them outsourced as we had before. Page number 7. I've already talked about this, but our major initiative for us is to to roll out our key brands in the grocery trade in Europe. In Europe, a lot of the sales are still in health food stores, but we think that the future is in the grocery trade. And we had good single digit growth for the Dovest brand in the grocery trade in the quarter. And as stated earlier, happy BU grew A spectacular 38%. We go to Page number 8. In the quarter, we have also raised about SEK 500,000,000 via share issue. This is a way To drive our M and A again, Dan. It's part of our strategy to be a consolidator in the Nordics, but also the rest of Europe Goodbye, Good Family Companies and to Wellett and Furber. And On Page number 9, you see the acquisition that we did during quarter 3. We acquired the company Vitality in Finland. Finland has been our Smallest marketer we had, the smallest presence in the 4 Nordic market. This is a good addition to the Finnish business. It would mean that we had products both on the dietary supplement side, but also some organic products. Also very importantly, we're driving critical mass And we're also getting a significant foothold in the pharmacy sector. We have traditionally been weak in Finland. So this is one acquisition that we're doing, and we're constantly on the hunt for new acquisitions. We see signs that The market's requisition is opening up again, and we are in discussions on a major interesting things here. Prior that we go to Page number 10, I think Max will go to Page 11 already and Max will go through the financial statement for the company. Thank you, Peter. Yes, please ensure that you're on Page 11, the financial executive summary slides. In the quarter 3, as Peter already mentioned, we had a net sales growth of 8.8%, driven by structure. The organic growth with a decline of 3.9%. This is due to the disruption in supply chain and back of certain raw material. The gross margin, however, improved mainly driven by favorable mix as a result of our own brands continuing developing better than our other business. The improved EBITDA versus last year was driven by structural growth and improved gross margin and also realized synergies. Not shown on this slide, I would also like to highlight that the EBITDA margin came in slightly better than quarter 2 and this also despite slightly lower sales. So we see improvements in the underlying business despite tough circumstances. The free cash flow That was during the quarter impacted by seasonal build of inventory in sustained foods and timing of customer payments. I will come back to that in a later slide. Please now move to Slide number 12. Structural growth, as I mentioned, is driven by Susterenberg adding SEK 109,000,000. And besides already mentioned organic decline, the currency continued to have a negative translation effect, but for this quarter a more modest 0.6%. Now please move to Slide number 13. On this slide, you see the organic sales development over time, and we would like to highlight the constant better performance for our own brands. Please move to Slide 14. On this slide, we compare actuals with last year adjusted for sustained float. We can call it pro form a as we do in the slides. And in the upper graph, you see that the gross margin improved with 1 point 4 percentage points versus pro form a. And as a result of this, despite 8% lower sales versus Pro form a, we almost managed to generate the same absolute gross profit. And in the lower graph, You see that despite SEK 62,000,000 lower sales versus pro form a, the EBITDA came in at almost the same level as pro form a, where Synergies cost control almost fully offset the lower gross profit and additionally a €4,000,000 negative exchange rate variance versus last year. I now please ask you to move to Slide number 15 and the summary of Nordics. I want to highlight again, Nordic is our largest division, representing almost 70% of the group sales. And here, the net sales grew with 15.7%, driven by structural growth sustained growth again, adding SEK 109,000,000. The organic sales development, however, was down 4.5% and here partly explained by an exited low margin license brand sales contract, which we also have highlighted in previous quarters. Additionally, global supply chain constraints Negative impact on delivery into grocery trade and foodservice. And in this division, foodservice actually had a small decline, But the underlying demand was greater, but due to service level situation, there was no growth. The EBITDA improved with SEK 7,000,000. This despite the SEK 4,000,000 variance in difference of exchange rate relation. And the stronger EBITDA was driven by sustained fruit addition and realized synergies. Please move to Page 16. In the summary of North Europe, Net sales declined with a modest 0.8%. However, excluding negative Currency translation, the division demonstrated a small organic growth of 0.4%. And By its constraints in global supply chain, sales of products from own brands demonstrated a strong growth of 4.7%. This is driven by the Java deployment in gross and trade. The EBITDA improved with SEK 5,000,000 versus last year, Driven by the improved gross margin. However, for comparison, we should mention that 4% to 3% last year included extra temporary high production costs. And now please move to Slide 17. In South Europe, The net sales declined with 6.7%, this including a negative currency translation of 1%. The organic sales development was minus 5.7%. This division have the largest exposure to health food stores. And within this division, this channel was down 14% during the quarter in a tough market. And we track external statistics that indicate that the health food stores in France We're down up to 20% for MIXONA product categories. But still, we believe we for performing well under circumstances. What we want to highlight is, of course, that we emphasize Still the strong focus to also deploy our product in grocery trade with all through our Happybee brand. And during this quarter, Happybee grew 38%. EBITDA was weaker versus last year from the lower gross profit following lower volumes. And now I would like you to go to Page number 18. The quarterly free Cash flow was negatively impacted by worse working capital development versus last year. This driven by Sustanford with their seasonal building of inventory. And I want to remember you that sustained fruit was not included in this summer last year at the same time. However, this year free cash flow is significant weaker than last year and looks to continue to be weak also in Q4. And there are some clear explanations for the variance versus last year. Some of them we have highlighted in previous quarters, The discontinuation of the factoring in Q1 that had a negative effect of SEK 67,000,000. And we were forced to that or we wanted to do as well, but limited in our bank contracts to continue with factoring. To Stanford, Building inventory has also had a negative effect in comparison during the 1st 9 months. And additionally, now in Q4, VISANA will have a negative working capital effect from the new EU directive related to unfair trade practices, Where Sweden have decided to implement it with a new regulation limiting payment terms to 30 days for in the food sector, this starting from 1st November. And within the Sirona, we have historically managed to have Favorable net of accounts payable and accounts receivable. We will, of course, focus to and Really prioritized to have good balance on that in the future as well, but with more restrictions. With that, I would like to hand back to you, Peter. Thank you, Enno. I would like to shortly summarize before we open up for questions, And we can do that on Page 19. We do see increased net sales and improved margins. But as stated, it's Acquisition driven and organic growth is slightly negative. On the positive side, the continued rollout of Dabot in the grocery chain in Germany and happy to build the grocery trade in France and Spain continues to do very well. The main issue that we have had during the quarter is on key supply chain challenges. It is a little bit of a perfect storm We've had a cut to many raw materials, lack of key pack materials and also delays in the transportation chain. This is, of course, something that we put high priority on to fix and to work very hard to mitigate the effects of this. And as stated, we have seen some creative improvements, but still a lot of work ahead of us in Q4 and forward. As part of the bad crops, increasing cost of peck materials, We are preparing for price increases, and we do see that they would have gradual effect from the beginning of 2022. We did one acquisition during quarter 3, and our objective is to continue to acquire company, mainly in Europe to build this European health and well-being company that we aspire to be in the future. Looking ahead, We are confident about the future. We are sure that people will continue to want healthy and sustainable foods that Nissan provides. Still, there is uncertainty in quarter 4 and the key The issue in the key challenge is a surprise situation. It should gradually improve, but we're very humble about Things have all been very fast and we're keeping a close eye on this. Thank you so much. And thereby, I open up for questions. Thank you. And our first question comes from the line of Ewan Brown of ABG. Please go ahead. Thank you. I'll take my questions 1 by 1. Firstly, is it possible to give some color of the magnitude essentially of these price hikes you're planning? What we have said in the report is that they can be quite significant. It varies very much by country, by product group. So I think that giving a figure would not point you in the right direction. But our ambition Yes, that we should compensate for the cost increases that we've had. That's our clear ambition. And we have good hopes that this will also materialize because The issues at hand are well known to the trade, and then they are well documented also. Thanks. And then another one. Is it possible to quantify the missed sales, if you will, of these supply chain issues, Service level issues and yes, crop issues as well. I think it's somewhat our theoretical Question is something, of course, that we do discuss internally as well. It's impossible to give A precise figure on that, but for sure, it's a significant shortfall we have because of that. And The major driver why our organic growth is negative. Had it not been for that, My judgment for sure is that we would have had organic growth for the company. Great. And then on SystemVirt as well, 2 questions from my side. In the report, you're mentioning that synergies haven't really come through entirely. Are there any specific issues here? Or are we talking about The plan increasing synergies over time. I would say that the implementation has been More difficult than anticipated. It's we have done a lot of integrations in the product. I think that this has been one of the more challenging ones. And we're still working on that, and that's why we have seen some delays in the integration. And then I would say that The combination of being in integration mode and at the same time facing the operational issues that we're facing in terms of Significant lack of raw materials, issues with transports, that has created a quite difficult situation for The team in Denmark. This is something that we're working together with the team now to find solutions. We've had a number of meetings on this subject, and we do think that we have a solid plan going forward to fix the issues and Going back to growth again. And maybe I could add to it as well. I mean, in that sense, the synergies could be classified in Different categories. Of course, there are sales synergies and there are maybe purchasing power synergies and there are strict cost synergies By combining the organizations. And when it comes to realizing the cost synergies, these have been following the plan And those have been realized. And in this quarter, we had SEK 7,000,000 of cost synergies. Great. So SEK 7,000,000 of cost synergies. And then at the time of this acquisition, you expect That a 2020 sales year of SEK 562,000,000 and then an adjusted EBITDA of SEK 38,000,000. This is in Swedish kron, so a bit FX variations, of course. But is it possible to give any updated rolling 12 month Figure for Systeme Truck. I would say that it All depends on the Christmas season of here we're into right now. It all depends on how we're performing in Q4. So it's Quite difficult to give an estimate. And of course, we would have our rolling 12 figure for the last 12 months, but we are Now integrated for one thing. And then 2, we are not reporting figures for anything else but our division. So I mean, I I probably can't give you a figure, but I would say that I could stretch a long enough to say that a major deviation that we have had is The development in Denmark, which has to do the surprises that we've had and the integration challenges, Whichever specifically affected the Christmas Day now that typically starts in September, we're seeing some serious delays in that. Right. Thank you. Those were all of my questions. Our next question comes from the line of Johan Dahl of Danske Bank. Please go ahead. Yes. Thank you. Hi, Titra and Max. Can I just continue along the same reasoning? If you just look on your Southern European acquisition made late 2019, can you just to update us where we are in terms of sort of profitability compared to where you were when you acquired the company and compare to your plans and just your sort of view here on the earnings performance in that area, please. Sorry, I'm not sure that Which acquisition did you refer to now, Johan? Alimento, Siobhan Santo. Okay. Got it. Okay. Already answered the first part of your question. Yes. We are, first of all, happy that we did this acquisition because it Provides a major platform in Southern Europe and also which is important is a platform in plant based meat alternatives. So in that sense, This acquisition for sure was right on strategy. And one of the key projects that we've been working on now during the last year Yes, the expansion of our facility for plant based meat alternatives. We have done Now the first test runs and they are very satisfactory. So now we are starting to scale up that part of the production, which will give Good addition to 2022 and forward. Ian, There is no doubt that we had a very disappointing quarter in division South in quarter 3. And the main reason is that it was recorded with very soft volumes compared to The infrastructure that we have built. Now we're working very hard on getting back on track in terms of With new private label contract, but also, of course, driving our own brands. And we're very happy about the development, happy to be. The main issue in quarter 3 has been around the development of Selma in the health food stores in France and the Getale in the health food stores in Spain, As Max explained, we had very weak development, although we still think that we did that within the market. So in that sense, we are behind in quota 3 and behind the plan. On the other hand, we had a fantastic 2020. So overall, I would say that we are very happy about the acquisition, but the key now will be to improve volumes And then do thereby driving net sales. And then I'm sure that this will work out very well. No, I'm just I mean, you had I guess, as we mentioned, you had tailwind Last year and headwind this year for various reasons. So what I'm basically looking for is that your view of The big picture here compared the earnings that these guys had when you acquired the company compared to what you're seeing now, you could argue that the tailwind last year would be sort of offset by the headwind this year. So where are you in terms of earnings in this area? I would say that if you look at Brazil right now, We are somewhat behind our expectations due to the fact that we have had a significant headwind this year. I feel confident that we have a strong team in place, a strong plan in place for the future, some good opportunities to be a major player in Southern Europe, good brand in the form of Happy Bio, which is resonating very well with both customers and consumers, Which is evidenced by the strong growth that we're having in quarter 3. And we have good hope that that will continue in the future. Then I said the wholesale free trade this year has been I mean the negative effects, I would say I've been greater than the pickup that we had last year. So this is now a main issue to get the Helfrichsberg on track again. Now having said that, As discussed earlier, this is a general market decline and we're still doing, as far as we can get, better than the market. So It's not entirely up to us to turn it around, of course. I mean, our main focus will be to sell our brand and do better than the market. But This whole pandemic, it has been quite difficult to foresee the effect. And personally, I have not expected It's significant drop in sales and the health results that we have seen in quarter 3. My expectation is that it would get back to normality once everything has stabilized, but that's the main challenge that we have right now. And of course, we're doing everything to drive our brand, but also we have to have the market with us in this. Sure. Thank you so much. Two more questions very briefly. Firstly, What sort of regular measurements do you make on the relevance of your prioritized brands? And also can you measure and or can you share with us any conclusions from the trend how your prioritized brands are developing. And secondly, I was wondering if you could help me understand The shortage in supply which you referred to, how do we connect that with the increasing inventory that is quite significant here 9 months year to date? Thanks. Okay. If I start with the franchise brands, we do have brand trackers for all the brands. And then we are in many instances working in niche segments. So it's quite we don't have market share where we can compare to our For some of the brands we have, for others we don't. Overall, I would say that we are winning with our brands. Now this year has been difficult, especially for the organic dry brands in the Nordics. But on the other hand, we had a very significant uplift last year. Frix has continued to deliver well. As already stated, we're successful with the rollout of Happy BU in France in Spain and Albert in Division North, primarily Germany. So overall, I would say that we are doing Well, this is something that we continue to work on. And 1 brand has, as I described also, was the market that we were making A major revamp of the brand in terms of aesthetics, in terms of innovation, but also in terms of insourcing products to get better margins over time. On the supply side, it's true that our stock did increase significantly. We did get incredible stock at the end of the quarter. So it's like in terms of raw materials, which means that we have Better opportunity to produce in quarter 4. Then we have had safety stocks for various products that have been quite high. But then on the other hand, there have been products where we have no safety stock whatsoever because we had really bad crops for some key raw materials. We do have contracts and we are starting to get products or raw material in, but still it's really a mix of things. Thanks. And there are no further questions. Please go ahead, speakers. And I would like to thank you so much for your attendance.