Earnings Call: Q3 2020

Oct 22, 2020

Thank you so much. And we can start on Page 2. This has been quite an intense summer quarter, I would say. And let's be honest, it has not been our strongest quarter in terms of results generation. But I think that there are good explanations for that, and I will come back to those. And overall, I would still say that we have a positive outlook for the future. And we can move to Page number 3 already and then I would go through the developments during quarter 3. And if we look at mid cylinder, we had a very strong half first year to some extent driven by the pandemic, which actually made a huge spike in our sales. But then mid July, we saw a drop in sales, which lasted until about the end of August. And we see this as what we call a reverse lockdown effect. When restrictions were lifted, that's meant that the in house consumption went down. We think that both customers and consumers had then the possibility or the urge to drive down their stock levels, which then impacted sales negatively during the second half of July and the month of August. We have then seen a strong bounce back in September, which gives us some confidence that this stop in sales has been temporary. September is actually our 2nd strongest month in the year after the stockpiling month of March. So it's a strong sign that we should be back on track now again. I said that the Q3 has been quite intense. And also, as lockdowns are eased, we had the opportunity to make new acquisitions. We took control of the Gaineamax brand. It's a strong iconic sports nutrition brand in the Nordics on September 1. And then just after the end of the quarter, we announced and also took control of Syspientrut, which is a major acquisition for us. It's an acquisition that almost adds 20% pro form a sales as of October 1. Looking at our divisions, I would say that the main use in the Nordic division was the were the acquisitions of Systemfrugg and Gaelemax. And that's very good addition to sales in the Nordics. We also see good development opportunities for the brands. So those are both growth acquisitions that we have made. And in the case of Sisteonfrood, we see very good possibility for synergy generation, and I will come back to that later in the presentation. In Division North, we had a disappointing result in the quarter. Sales were relatively okay. We had a slight growth in North but had some mix effects. In the last quarter, I talked about the rollout of the Davenport brand to a major retail customer. That launch was temporarily halted during the Q3 due to COVID as well. The retailer did not have the resources to execute. And that made sales to the downward a little bit lower in the Q3. What has happened then is that the launch was restarted again at the end of Q3, and we have, after that, seen a strong distribution buildup of the brand. And we have also seen reorders from this major retailer in the beginning of Q4. We have also had some extra costs related to production maintenance. Our production in Disco's Duffer Division North and South were running at very high utilization levels in quarter 1 and quarter 2. This meant that we had a little bit more wear on our production equipment, but also that maintenance that we normally would have done in the 1st and second quarter, they were all done in the Q3 and that drives some extra cost. Division South, This, as you might know, is a relatively recent acquisition. We took control on the 1st October last year. We are very happy with the development so far. It has gone extremely well, we would say. We are ahead of our plan. And we also had a relatively good development in the Q3, primarily driven by the continued rollout of the Happy Bu brand to the retail trade in both France and Spain. We can then go to the 4th page, the quarter 3 highlights. This is pretty much a short summary of what I've already discussed And the somewhat weaker sales also meant that our EBITDA was slightly down for the quarter. What we're happy about still is that we managed to have a very good cash flow, which more than tripled compared to the same period last year. Let's go to Page number 5, which then highlights our revenue development for the Q3. A big portion of the growth is M and A driven and that is the acquisition in France and Spain, the Elementor Chosante acquisition that we did last year, which explains that part with this part of the bridge. We did have some growth for our top 10 brands despite the fact that they were also affected by the lower sales, what were restrictions were lifted, but they're up 2.4%. As I already mentioned, we had a continued good development for the Happy Bio brand in France and Spain due to the roll up of the grocery trade. Many of our brands in the Nordics also well heard the Krum was growing, the Fries brand was growing, the Helios plant was growing at very healthy rates. A little bit more challenging situation in the self care products where we had a drop in sales. And this is what you saw in what you see in the other part of this bridge. And then we had a quite negative currency effect, which is basically due to the strength in the Swedish krona both against the euro and the Norwegian krona. We can move to Page number 6 and look at the year to date figures. And as I mentioned, although we are disappointed about the Q3 and the drop in sales we had due to the lift of restrictions, I would say that the overall development during the COVID crisis has been positive for Midsona. We have been growing sales at healthy rates and also see a very good improvement in both the EBITDA and the EBITDA margin. We almost doubled the net result, and we almost tripled the cash flow during this 1st 9 months of the year. So while the 3rd quarter wasn't our strongest, we still feel that we are on a good track. And again, this is mainly due to 1.5 months of very slow sales, the second half of July and the month of August. But then we have seen a bounce back in September. Let's move to Page 7, which outlines the key points on the Sisteonfroze acquisition. This is a major acquisition for us. I've said it at almost 20% to sales pro form a. It's a very strategic one. Midsona is the market leader in dry organic products in all the 4 Nordic markets. And this is, of course, an important growth area for us. But still, there are lots of consumers that are mainly focused on conventional products and mainly consume conventional products. So with the acquisition of Visteonflugt, we get a very strong brand of control, which is focused on conventional dry dry bags. It's a very good combination to our organic brands. The acquisition gives us a very strong position in the Danish market, where we not really, but almost double our presence. But it also gives us the opportunity to develop positions in other Nordic countries. Systeme have. So we see good opportunity to further drive sales in those countries. Furthermore, we have identified significant synergies, about SEK 34,000,000 to be re let up until the end of 20 22nd. So this is a major acquisition and one that we are very happy about and we took control already on October beginning of October. So the system figures will add to our sales and EBITDA already in the Q4. By that, I leave the word to Lennart Schrenson to CFO to do the financial review. Thank you. Moving then on to Page number 9. This will be very much a summary of what Peter has already mentioned previously. But if we look at the quarter and also the full year results, we see here that we are slightly below than on the EBITDA level in the Q3. But on the overall, we are quite far ahead. And what we can say is that the pandemic has really offset our seasonality where we normally have a strong a weak Q2 and a strong Q3, and we see a little bit of the reverse here this year. Looking in also into the our cost saving programs, I mean, we are continuing our cost savings programs in the Nordics, and they follow plan, as we will see a little bit later on here also on the total cost levels. And we are working very much closely with the maintenance costs in Germany and also with the continued integration of the Europe South, where we also see cost savings coming out of these operations. Our financing cost is slightly lower this year compared to last year and that has to do within some restructuring of our internal debts and how those are calculated. We also see the depreciation that is very much related to there is not much yes, it is really the acquisition of Europe South that has affected the depreciation. Income taxes are in line with the different income taxes that we have in the different countries. So the profit for the period is just almost in line with last year. But year to date, we see quite a quite substantial profit compared to last year. If we move over to Slide number 10, going in a little bit into the different segments. In the Nordics, we see a little bit slower sales, as Peter mentioned here, very much related also to the health food trade, pharmacies and also food service in the wake of the pandemic. However, we see continued focus on the cost efficiency programs that were launched back in 2019 and also a continued cost efficiency tracking towards the development that we have in during the year to secure that we have a profitability increase going forward. Northern Europe here, we had as we mentioned here, we had some delays in the launches of to main customer here. And this is of branded products, meaning also that we have a higher stake of private label products driving down the gross margin in the quarter. However, we see now that we had launches are coming out now end of September, beginning of October. We also had some maintenance costs related to the high utilization of the factories in Q2 that we took in Q3. South Europe, as mentioned before, we have a very good development. We're very pleased with the development there. Of course, South Europe is also affected by the pandemic. But still, we have good growth, especially of our brand in the grocery trade, which is the Happy B You brand. So we're very pleased with that development. Moving into Slide number 11. As mentioned, the free cash flow. Cash flow is a main component for us also for the going forward with more acquisitions in the future. And behind this, we see a sound and improving base business profitability wise, but also a continued high focus on working capital. This is a struggle, especially now like in the pandemic, where we need to secure supplies and therefore have had a little bit of a high inventory level compared to what we normally would have had, but that we need to secure also the supply out to our customers and also supply the supply from suppliers, where we see different countries going into lockdowns and opening up and then going back into lockdowns again. So I think that we have managed this quite well in line of the pandemic here, and this is also shown here in the free cash flow, which has improved dramatically. Moving into Slide number 12. This is just an illustration of our sales distribution, where we see here that up until the end of September, we have that our organic category stands for 60% of our sales. And we can also see that on the right hand pie chart, there are license plans in line with our overall strategy of around 20%. That has been the targets or the numbers that we have had for the last years. Of course, this will be a little bit offset now where we see that Health Food will increase here with the acquisition of Gaynor Max and Sysdairn Drugs. And also, the licensed brand will go down a little bit here going forward. With that, Peter, I hand over to you. Great. And then we move on to Slide number 13, and I would like to make a short summary before we open up for questions. Of course, there is still major uncertainty considering the pandemic. And as I tried to explain, we have seen some quite erratic demand patterns, huge short hoarding effect at the end of quarter 1, continued high demand during quarter 2 when we saw a lot of restrictions and lockdowns, then weaker sales at the beginning of the 3rd quarters and restrictions we listed, more of normalized sales during the month of September. But overall, again, we are growing the business versus year ago, and we have made major profit improvement. We now see signals of new COVID-nineteen restrictions, and this might, of course, have effect on both demand and supply. Of course, it's very hard to predict how this will play out. But what I would say that what we have seen so far, and I think that, that's a reasonable assumption also for the future, is that the more restrictions in society, the more time people will spend at home. And that in itself will lead to more home cooking. So that should then have a positive sales effect for us. So as restrictions have been lifted and we might now rather go in the other direction, we don't see any further volume risk from lift of restrictions in quarter 4, probably rather the opposite. However, I mean, what is most important is the continued efforts that we make to grow our business further. The rollout in the grocery trade in Germany with the brand Dovert and with Happy BU brand in France and Spain continues in quarter 4. We've had very good development for Happy BU in France and Spain during quarter 2 and quarter 3. The Dalit brand had a very strong development in quarter 2, but then slower in quarter 3, due to the fact that the retailer that we were rolling out, these are temporary costs, but have started now again at the end of quarter 3 and made new orders at the beginning of quarter 4. We are very happy that we found this window to make 2 good acquisitions. The GainMax acquisition, the strength of our position in the cost attrition segment. And then especially Susterenfruit, which is a major strategic acquisition with some very good growth and synergy potential. And one of the key focus here now in quarter 4 will, of course, be to start integration and then to start realizing synergies as soon as possible. We continue our focus on cost and cost savings, special focus on Europe now considering the somewhat high cost level in quarter 3. And Ed, I would say, overall, we're very humble about how our situation will develop in the future, but we are still doing that on a positive note. We think that there is very good opportunity for Midsummer to continue to grow both sales and profit at healthy rates. By that, we go to Page number 14. I leave the word back to the operator to start the Q and A session. Thank you. Our first question comes from Johan Brann from ABG. Please go ahead with your question. Hi, Peter Lennart. Can you hear me? Yes. Wonderful. So I have a couple of questions. We'll start off with the sort of stock situation among your customers. Do you have any sort of indication of how much that has affected your sales during the quarter? I think that, that is, of course, very hard to say because we don't have the slack numbers by customer. So it could be very difficult. I think that there has been a significant impact. We saw a very clear slowdown in sales, as I said, in the second half of July all throughout August. And it was I would say that it was quite weak sales, but then quite a good rebound in September again. So it's quite a major effect that we now have behind us. And we are back to the growth reasonable growth rates in September again October, yes. And October, I mean, that trends continue in October, I mean, yes. Thank you. So you mentioned a bit about extra costs related to the production maintenance. Is it possible to give some sort of number to that? Well, the way I would put it is that in sales in division Northos up a little bit, but EBITDA was about half. And I would say that this is all related to different types of production costs. I mean, there is a significant part is different type of maintenance, which we see as one off costs. Then there is a little bit of a mix effect due to the fact that we sold less of Brent Albert due to the halt in the rollout of this major retailer. We also, to some extent, had a little bit of extra manning in production, which we then didn't see when sales were dropping. So it's a mix of those three effects, I would say. But production rate and maintenance is the better part of that. But all of the build free costs, I would consider bidding temporary. Thank you. So last question from me. It's on the gross margin. I know you were talking a bit about that just now. But so essentially, the product mix, raw material prices and FX should have aided a bit as well or on the counteracted at least. So what is extrapolatable, if we put it that way, if we look on the gross margin? I'm not sure I understood the question. What was the question? Yes, sorry. So sort of the dynamic behind the gross margin since there are a lot of moving parts there, what can we expect going forward regarding all of these effects that we saw during the quarter? I would say that we are not making those kind of forward looking statements. But as I said, I mean, I explained the effect in Division North. In the Division Nordic, it was a little bit of a mix effect, I would say, that we have lower amount of safe and self care products, which typically have relatively seen a little bit higher margin gross margins compared to our organic products and health care products. So that's the net effect that we see in the Nordics. And in Division South, it has been a little bit downward pressure on the gross margin, but that has been related to product maintenance just in Division North. And we can also see, I mean, you mentioned here the FX effects and so on. And of course, the pandemic here now depends a little bit on how this pans out because it will it might and can affect, of course, raw material pricing depending on so and so. So that is one thing, of course. Then on the other hand, we have a stronger Swedish krona compared to previous years. So that improves it a little bit. So this evens out. But it is very difficult at this point in time to predict of the pandemic and especially when it comes to raw material pricing. Thank you very much. That's all for me. Thank you. Our next question comes from Johan Dao from Danske Bank. Please go ahead with your question. Good morning. Just on Southern Europe, can you I mean, you've had this operations in the company now for a year. Can you just update us on sort of some of the performance compared to what you expected when you acquired it? I think you talked €5,000,000 EBITDA. And also update us on the how synergies are expected to be realized here in 2021. What actions and possibly the time line for that? I would say that, first of all, we are very happy with this platform acquisition with PIMSOP. We have done a very good integration, a very good team down there. They are now driving the right type of products in terms of especially the rollout of the Kati Bio brand. I mean, what we're doing is that we have mainly been in the specialty trade, but we're now moving the brand out in the net market trade. And we think that in the long run, there will be much more potential in that. So I think they've done an excellent job in that area. So we are very happy development. We are ahead of plan. Then in terms of synergy realization, I would say that we are on plan or potentially slightly behind plan. And the reason for that is that when it comes to synergy projects, those are collaborative processes and many of those have been quite hard to execute during the pandemic. So there has been kind of a halt for half a year in that. And also, as mentioned earlier, in the first half year, we saw very high demand from customers and consumers in division itself, which meant that the key focus was to secure customer and consumer demand. I would say that we still have some way to go there, but that is then on the positive side because that's an upside. What we can say is also there, we have apart from the cost synergies, we are already now in different projects with source common sourcing. We are in a different project with product swapings with South. The products from the Midsona Group previously launched under the Happy Deal brand. So there are very good projects ongoing and being launched into these different markets. So there are a number of projects, collaboration projects ongoing. But as Peter said, they are on the slow side right now. It has been a little bit slow side at the moment. I don't know, Systemfroch, if you want to. No. And Leann was talking about Systemfroch. And of course, that's one of our key focus there now for the Q4 and forward to start that integration process. I think that now we've only been owners of the company a couple of weeks, but the reception has been very good when we meet with personnel. Projects have already been started. We are looking at our joint organization, and we're making some progress on that. We see good opportunities, as I said, both on the cost synergy side, but also increasing as we get to know the company on active driving the product portfolio in the countries outside their home market, Denmark, where we have a lot more critical mass and thereby leverage visavis the trade, both at the headquarter level and in store. So this is quite an important priority for us now and something that will give a very good addition to company results. All right. Just a question on this inflation you're seeing on logistics, some raw materials, etcetera. I think you talked about price hikes in the report. What are the sort of potential to actually recoup that loss that we saw here in Q3? And also, if you can just mention briefly this maintenance cost, I presume that's sort of a normal operations that happens every year and nothing you should really take out of, could you treat as an extraordinary item? Yes. If we start with the second question on the maintenance cost, I think that, one, there has been some pent up maintenance because we just did not have the time to do it in quarter 1 or quarter 2 due to the very high demand. And then the fact that we have been running at high capacity utilization has meant that there has been some extra wear and tear on the machines and that might, to some extent, have caused this. But I would say that this is for a quarter, it's a lot more than normal and also some, I would say, unfortunate incidences. But so I see those as more one off cost. They aren't recurring at that level at all. So it is for sure a one off cost. Sorry, not what was your first question again? Sorry, you won. What is what prospects do you have of actually compensating for this Yes. I mean, logistics inflation that you're seeing? I mean, our principle on that is very simple. When we have raw material price increases, we should take those to the market, I mean, to the customer and consumer. I mean, that's the only way. And that should go both ways. So if we have lower raw material prices, I mean, for sure, our customers will come back on that. So that's we our intention is to price for that, and we will do that. You will do that? Is that what you're saying that have you announced already price hikes or We maybe as a present plan, we are doing that to be clear. All right. Thank you. Thank you. Okay. There appears to be no further questions. So I'll hand back to the speakers for any other remarks. Thank you so much. Thank you.