Welcome to the Midsona Q3 2023 report. For the first part of the conference call, the participants will be in listen-only mode. During the questions- and- answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to the speaker, CEO Peter Åsberg, and CFO Max Bokander. Please go ahead.
Thank you so much, and welcome to this third quarter Midsona call. This is Peter Åsberg, CEO, speaking. We are taking you through the third quarter results, and we are step by step executing our plan, and we do see clear progress, especially on the key parameters, EBITDA and cash flow. Before we go into the actual presentation, we would just like to make you aware that this presentation might contain forward-looking statements and that those statements might be subject to risk. So for those of you that attended the quarter two call, you might remember that we said that we would put priority on two main things, EBITDA and cash flow, and we would do this even before net sales in quarter three and forward. This is exactly what we have done in quarter three.
We made good progress on both EBITDA and cash flow in the third quarter. EBITDA was improved by 16% before one-off items, and this was despite some major brand investments that we made, which I will come back to later in the presentation. We also delivered a record strong cash flow for the third quarter, so this is something that we're both proud and happy about, and it shows that we're executing our plan step by step. Yes, sales was declining slightly, and the main reason for this being discontinued licensing agreements. If you adjust for this effect, the sales would actually have increased by 3%. One important thing that we've been working on is the gross profit. It's strengthened considerably with support from initiatives that have been implemented according to our master plan.
But still, we are somewhat behind our target level when it comes to the gross margin, and the main reason for this being exchange rates, and more specifically, the weak Swedish and Norwegian krona. In terms of raw materials, we see more of a mixed picture, both ups and downs, but not at all the same big movements that we saw, say, a year ago. So we're improving EBITDA before one-off items for the second quarter in a row. Thereby, we have broken the negative profit spiral that we have been in for some time, and we really do see this as a first sign of a turnaround. Clearly, a number of steps in the right direction, but we want and expect more in the future.
I would like to take a closer look at our gross margin, as the previous erosion of this has been one of our main challenges. We had a sharp downward turn in 2021 and the beginning of 2022, but we have now turned this, as you can see. Both in quarter two and quarter three, we are now clearly ahead of last year. Good steps in the right direction. Still, we are somewhat behind historical level, and as said, the main reason being negative currency effects. At the same time, raw material prices show gradually decline. This is something that we hope and think will balance out over time. Of course, we are following this very, very closely. I would like to take you through the different parts of our portfolio.
We see 5% growth for organic portfolio. Yes, it's to some extent helped by FX, but it also shows some underlying strength in a number of brands in the portfolio. Kung Markatta starts to grow again after quite a long period of decline. We have launched a new communication program, and first signs are very good and promising. I will show you more about that later in the presentation. Our organic brand in Norway, Helios, showed very strong growth. If you look at the conventional brands, Friggs is a shining star with an increase of 16% in the quarter. Still, we had modest growth overall for conventional health food brands, and the main reason for this is that we have exited a number of low profit or even unprofitable private label contracts in this segment.
Then, as expected, consumer health products were down quite significantly. This is, of course, the direct result of the discontinued licensing agreements that we've already talked about in, in quarter one and quarter two. It should also be said that many of those licensing agreements had their peak period in the summer period, so there is an extra large effect in the summer months. If you look at the different divisions, I think it gives quite a clear picture of where we are performing well and where we need to improve further. The Nordic division is performing well. It stays strong. EBITDA before one-off items was in line with last year. This is despite the discontinued licensing agreements that purely hits Nordics. And our conventional brands are doing very well, Friggs again, being in the store.
For the organic brands, Kung Markatta and Helios are increasing sales. We still see a decline for Urtekram. However, what we're doing on Urtekram is that we're launching the same type of communication concept that has been launched for Kung Markatta in quarter three, that we're doing for Urtekram in quarter four. Gross profit is also improving in the Nordics despite the unfavorable FX development. So again, strong performance in Division Nordics with double-digit EBITDA margin. If we move to Division DACH, which is the DACH region, or really, it's mainly the German market, we did have a challenging quarter. Sales and EBITDA were slightly up, but from a too low level, I would say, and it's still not at a level that we would see as acceptable.
In Germany, we see a clear market decline, and consumers are also moving towards more private label products with lower margins for us. We are now working on a number of measures to strengthen our German brand, Davert. At the same time, it's our ambition to act upon profitable private label opportunities, and we have secured a number of new listings, both on the brand side and the private label side in quarter three. Those new agreements will make some positive contributions already in quarter four, but mainly in quarter one, 2024, and we will continue to hit [audio distortion] for profitable contracts. In Division South, we do see double-digit net sales growth, but it mainly comes from private label, and still the results are negative, which we cannot, of course, not accept.
We are improving in France, but we still have some remaining product-related issues in Spain, and we are now working very hard to address them and also turn around Spain. I talked about the Kung Markatta campaign to some extent already in the quarter two call. It's our way to make our organic brands more relevant. And, as said, we launched this in quarter three in Sweden, and made quite a major investment behind it. And first signs are positive, and as said, we have started to slightly grow Kung Markatta again after a longer period of decline. And if you go to the next page, we will now launch the same concept for Urtekram in both Finland and Denmark in quarter four, and hope and think that that will also turn the trend for the Urtekram brand.
One of our success stories have been Friggs. We have seen continued growth since 2012, and the success formula rests on what I would call three quite distinct pillars. One is expansion into new markets. Friggs originates out of Sweden, and it's still by far our largest market. However, the brand has also proven to resonate well with consumers both in Finland and Norway. And as you can see from the graph on the right-hand side, it's actually in Finland and Norway where we see the biggest growth in the last two years. Very strong brand that we will continue to develop. Another part of the success formula is consumer meaningful innovation.
We have made a number of successful new innovative products that we have launched in the market, Friggs sea salt, Friggs popcorn, and now recently in Q3 2023, we have launched Friggs chili cheese, which we think will be a new best seller. Also, the third pillar is a very effective, both in terms of cost efficiency and consumer relevancy, digital marketing platform that we're also rolling out across the different markets. Before we jump into the actual numbers that will be presented by Max, I would just like to briefly talk about our forward focus. One is clearly to drive our core brands. Volume has been a challenge for us, this year, as consumers have changed their pattern towards more, more cheaper products.
We are trying and working very hard to keep up volumes and improve them, and as said, we see some very positive signs in quarter three. We will continue to activate our brands. We focus on high profit items, and one example is the new campaign for our organic brands. We're also working to find new business opportunities for our core brands. This might be listings, new customers, and we have also been successful in that, especially in Germany during quarter three, and we will continue that quest in quarter four. On a separate note, I would say that private label is booming, and we are looking at profitable opportunities also in private label. We will continue to simplify our portfolio by SKU reduction and discontinue both brands and SKUs not adding to the portfolio.
This might short term hit our net sales, but long term, it will contribute to better profitability. And then, just as said in the last call, we continue to focus mainly on EBITDA and cash, even before net sales, to continue to improve both EBITDA and cash flow. By that, I leave it to you, Max, and then I will come back with a short summary at the end.
Thank you, Peter. As a financial summary for the quarter, the net sales was down 2.2%, but the gross margin improved with 2.1 percentage points, and the EBITDA improved with SEK 8 million, or as Peter mentioned, in relative terms, 60%. The net result landed on SEK -18 million, impacted by SEK 9 million over restructuring costs, mainly linked to the restructuring of the Danish organization in the quarter. The financing costs continue on a higher level versus last year. This, despite significantly higher or lower, I mean, net debt, due to the higher interest rates. Additionally, the net result was impacted by, tax costs versus last year, and tax income. The tax cost is a result of good profits in some entities, while not activating taxable losses for some entities, which we did last year.
Finally, on this page, I would like to highlight that we delivered SEK 80 million in free cash flow, which is a new record for Midsona in a third quarter. Looking at the net sales development for the quarter, the organic growth landed on -8%. As Peter mentioned, this is almost mostly or almost fully explained by the discontinued distribution agreement, and excluding these, the organic sales development would have been calculated to -3%. For our own brands, several of the key brands demonstrated good growth, while branded sales to restaurants and bakeries declined in the quarter, taking down the branded sales to negative. Licensed brands were down 35.1%, but excluding the discontinued distribution agreement, the organic sales would have been calculated to flat. Private label still shows good momentum, but developed weaker than last year due to cancellation of certain low-margin contracts.
Now, explaining the EBITDA development compared to last year. The negative organic sales growth, or in this case, labeled as volume, resulted in SEK 20 million lower contribution. This was, however, more than compensated by the improved gross margin that generated SEK 21 million plus. The improved gross margin is driven by better price management compared to last year. However, it could be mentioned that the price net would have been better without the transactional FX headwind we have had. The sales and admin expenses were down SEK 4 million, despite investing SEK 5 million more in marketing, as explained by Peter earlier. The FX development at the end of the quarter was, however, positively impacting the EBITDA for us when reevaluating operating liabilities. And compared to last year, this had a SEK 4 million positive effect.
As a summary, EBITDA landed on SEK 58 million for the quarter, which is 16% better than last year. Focusing on the sales and admin expenses development, the net cost of our own personnel were reduced with SEK 2 million, thanks to the restructuring. This was, however, part offset by the already mentioned SEK 5 million more in marketing. The lower volumes resulted in SEK 3 million lower cost of outbound freight, and additionally, our strict cost control reduced other costs with SEK 5 million compared to last year. Moving over to the cash flow. The free cash flow, as already mentioned, landed on SEK 80 million for the quarter, compared to SEK 22 million last year, driven by better inventory management. The inventory came in more than SEK 200 million lower than last year. We have historically built inventory during the third quarter.
This year, we have optimized the planning further and will take in the most of so-called Christmas volumes in Q4 instead of earlier, historically done in Q3. Finally, our cash and debt situation. We ended the quarter with SEK 500 million in, SEK 507 million in available cash, which represents 13% of our 12 months net sales. We reduced the net debt with SEK 95 million, thanks to strong cash flow and also favorable exchange rate conversion of our debts. With this, from my view, good news, I would like to hand back to you, Peter.
Thank you so much, Max, and I will just like to give them a short summary before I open up for questions. We are quite happy about the development that we see in quarter three. We are improving on the two key parameters that we talked about in quarter two, i.e., EBITDA, and we did have a very strong cash flow, which helps, which helps a lot, of course. This said, although we're happy about quarter three results, we are not content, and we want more. And looking forward, there are three main things that we will focus on. First is to drive profitable sales. To activate our brands with a focus on the high profit items, to find new business opportunities for our core brands that might be listings, new customers. We have done so in quarter three.
This will give effect, some effect in quarter four, more effect in quarter one, 2024, and we will continue to look and hunt for those opportunities. Private label is booming, and we will continue to secure private label contracts with a good level of profitability, but at the same time, we might continue to exit contracts with too low margins. We will continue to drive our cost savings agenda and complexity reduction. It's something that we have worked on throughout the year, and that's proven to strengthen our efficiency, to drive down working capital, and in the longer run, also improve our profitability. So I think that we're clearly starting to see some light at the end of the tunnel. We are executing on our plans. They start to yield results.
EBITDA is improving, cash flow is strong, and we are reducing our debt, and we plan to continue down this path in quarter four. Thank you so much for listening in, and now I open up for questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Nikola Kalanoski from ABG Sundal Collier. Please go ahead.
Hi, Peter and Max. Thanks for the presentation. Just a few questions from my end. So, you're seemingly investing more in your profitable brands through marketing campaigns. You mentioned Kung Markatta, and now Urtekram is coming up. Is this something that we can expect for all of your top brands going forward? And is there a chance that you could perhaps quantify the cost associated with such a campaign per brand?
The main extra marketing activity will be around our organic brands. These are the brands where we have been struggling to some extent and where we need to turn the trend. Now, we saw some very positive signs on Kung Markatta. The major investment in Kung Markatta has been made in quarter three. We can expect an investment of about a similar level for Urtekram in quarter four, but that should, if not short term, for sure long term payout in terms of extra volume. When it comes to Friggs, we think that we already do have a pretty optimized level when it comes to marketing spend, and as stated, the brand is growing very nicely.
If you look at our brands outside the Nordics, especially the organic brands, then I would say that that's a bit of a different ball game for us. The main focus for brands like Davert in Germany, Happy Bio in France, Vegetalia in Spain, is to drive distribution and get new customer listings. And for that, we do not need extra marketing money. It's rather to, to actually utilize our organization in the best possible way. So somewhat high marketing spend also in quarter four, but no, no major step change in terms of marketing spend. No.
Yep, that's clear. Thank you. And a question on price. Certain grocery retailers in Sweden have recently highlighted that they've seen additional price hikes from suppliers. Could you perhaps provide us with some update or insight regarding price increases from your end and perhaps to what extent you have raised prices?
I mean, this is a touchy subject, and also the Swedish competition authorities have asked suppliers not to talk about pricing, and we will not do that in detail. What I can say is that we will continue to look at pricing very actively. Of course, this has to do with FX, exchange rates, raw materials, lots of different things in there. And we see so far a mixed picture when it comes to raw materials, but our target is still to continue to strengthen our gross margin long term, because we are not at the target level still. We're still somewhat behind those levels, and those activities could be, I mean, lots of different activities to get there.
Yep, understood. And on the topic of discontinuations, how long do you expect the comprehensive discontinuation agenda to last? And to what extent do you believe that it will be conducted?
We are very committed to this, and we have started this. I mean, this is something that has always been ongoing, but we have stepped this up considerably in 2023. This does hurt net sales short term, but long term, we are 100% sure that this will actually improve our profitability by streamlining our factories, by tying less capital in inventory-
... by being able to focus our production on the most profitable and the big items. I see that this continue at least through 2024. And as said, I mean, it's supposed to be a profit contributor, although that size might be down.
Yep. A final question in regards to working capital management, would you say that you're pleased with where you are currently, or do you assess that there is more work that can be done on this front?
I think, looking at the inventory that is driving our working capital, we are pleased with what the organization have done. There is, of course, more to be done, but it's, I think the low-hanging fruits where we have now improved the minimum order quantities, changed safety stocks, and improved the planning are done. What is needed now to improve further is linked to the SKU reduction program and harmonizing assortment. So we will not be able to see an improvement of SEK 2 million into 2024. I think we are on a level where we will be able to keep it in relation to sales. That's my prediction.
However, it should be noted because as you may look into quarter four, quarter four is traditionally a very strong cash flow quarter because we use the inventory that we have built in quarter three. Now, we will not be able to repeat that because we have managed the inventory at a much lower level. But what I'm saying is that if you look at the inventory level over a year in relation to sales, we are on a good level.
Yep. Thank you very much. That's all for me.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
This is Peter speaking again. I would like to thank you so much for your, your attendance to this conference call, and we look forward, if not before, to meet you again in February when we are presenting quarter four results. Thank you so much.