Musti Group Oyj

OMXH:MUSTI

Q1-2024 Earnings Call

[David Ronnberg, executive]

Hi, everyone. My name is David Ronnberg, CEO for Musti Group. And with me today, I also have Toni Rannikko, CFO for the company. We're here to present the first quarter report of this year. And we can start off with some of the highlights that we're looking at.We are extremely proud of what we've achieved so far in the quarter, it was quite a specific quarter for us. And we saw, of course, the negative impact from the Smaak recall but also in the quarter there was the tender offer that we'll come back to. But if we look at the KPIs, we've seen that we've been delivering strong growth continued a bit softer in the quarter than the quarters before. We came in close to 9% in the growth in local currency, the like-for-like was 4.8%. We had the stable performance in our own and exclusive brands that was 53%. Cash flow came in as a good level of EUR 15.7 million. Our online verticals continue to perform on a good level of 13% like-for-like. We were continuing taking market share. We were growing the customer base with 4.5%.The gross margin was also good, 45.9%, same as last year. But if we exclude the Smaak recall, we actually increased the gross margin to 46.3%. And the performance in the profitability continued to be stable and was increasing as well to EUR 20.5 million. So overall, we're quite happy with the performance. It was a bit softer, December, we've had a better performance in January. We saw that the non-food part was a bit slower in December, the Christmas sales that has now bounced back into January.So with that, I would like to hand over to Toni to go through the tender offer and the Smaak recall.

[Toni Rannikko, executive]

Thank you, David. So, during the quarter, we had two quite exceptional events and I'm going through those now. So maybe starting with the product recall related to two Smaak SKUs. So following customer complaints, we withdrew the specific batches of two Smaak products, grain-free dog food and cat food. Soon after this, when we got more information, what caused or what's the possible reason for affecting the symptoms for some pets. We discontinued these two products totally. The reason was confirmed to be high concentration of glycoalkaloids in a batch of imported potato flakes, and this was confirmed also by Finnish Food Authority a bit later then.Impact of these sales was around EUR 2.5 million per year, and we have also stipulated in the quarterly release that what was the impact for the result being around EUR 800,000 as a direct impact. And in this occasion, we want to, again, apologize from the customers who were affected into this and thank our colleagues who handled the case without any delays and with great performance.The other event during the quarter was the public tender offer by Consortium led by Portuguese Sonae Holdings. And in 29th of November, Consortium made the offer public with a price of EUR 26 per share. On 15th of December, was an announcement that the tender offer period will start and last until 5th of February. And on 19th of January, European Commission gave its permit to go further on the deal. On 25th of January, the offer price was raised to EUR 26.1 per share.Then back to you, David.

[David Ronnberg, executive]

Thank you very much. So stable performance continues. So in the highlights, when we look at the quarter, we see that the performance of the top line was quite good, even though it was a bit softer December and also with the Smaak recall, we came in at close to 9%. When we look at the like-for-like, as I said earlier, 4.8%. Online was taking a bit bigger share, 13% growth. Gross margin of 45.9%, same as last year, but with the Smaak recall one-offs taking out, we were at 46.3%. So good trend there.When we look at the profitability, as I mentioned, the EBITDA margin also increased from last year 17.3% to 17.7%, so also good performance there. Cash flow was good, EUR 15.7 million. And also, we were able to increase the number of customers in the quarter, stable performance even there.If we move on and look at the different types of food, consumables and discretionary that we're selling, we see that food has been quite stable. We have seen a slower sales in the discretionary and the nonfood. Also, that I mentioned is that the Christmas was a bit softer, especially in the nonfood, we've seen a stronger sales in that category or in those categories in January.And during the last quarters, we've seen that food has been very stable and stands for over 50% of what we're selling. If we look at over a longer period, it's also important to see what comps we're meeting. And going forward, as I said, in January, we've seen that the nonfood and especially discretionary has been bouncing back.When we look at sales, we've seen that there've been a stable sales, 8.7% in local currency growth. If we look at it from a longer perspective, CAGR Q1 '21 to Q1 '24. It has been 11% CAGR growth. If we look at the rolling the last 12-month sales, we came in at EUR 431 million. That is, of course, have a negative impact on FX in this one. So if we adjust for that, it's probably close to EUR 455 million.Per segment, still Finland is the biggest country, 44.3%. Sweden is coming closer, and Norway is kind of a ramp-up country, so only 16% of the total sales in the group. But overall, I would say that the sales in local currency, 8.7% is a good number in this challenging environment, and also when we've had this product recall in the quarter.If we look at the total sales and also the like-for-like here, it's quite obvious that the like-for-like has been going a bit up and down, but the last quarter has been strong. As you can see, 11%, 10%, and now it came down to a bit softer 5%. Also here relating to the Christmas sales that was a bit softer. When we look at the FX-adjusted growth, we see that the FX is also coming down a bit, the headwinds. It still was quite tough for Norway, 12%; Sweden, 5% and as a group, it was 4% impact. And we have also seen that the like-for-like and the growth has been bouncing back a bit during January, which is, of course, good.If we move on and look at the gross margin development, we're quite happy with the development, 45.9%. If we exclude the one-offs for the Smaak recall, it's actually 46.3%. So the good trend in gross margin continues. So last quarter, the Q4 was the first quarter where we broke through versus last year, after some challenging quarters earlier. And now again, we were higher than last year.Even though the O&E, own and exclusive, share of sales was at more or less the same level. So there's been a work from a lot of angles to get this gross margin up to the level we have now. And of course, the goal is to continue this good trend even though we're seeing this negative FX impacts that we've seen in the last 1.5 year.If we move on and look at the profitability. So profitability was growing 6.1%, the adjusted EBITDA to EUR 12.4 million. We had a negative FX effect here with about EUR 0.6 million. So if we adjust for that, we come in at EUR 13 million versus last year, EUR 11.7 million. Good performance in, of course, the top line stable gross margin if we exclude the Smaak, actually, higher. And then good cost control and integration of our production facility that we acquired. That has been the background of the increased profits.The margin also increased a bit from 10.6% to 10.7%. I would say that also the cost control has been a very important part for us to been able to deliver this. So we're seeing the scalability in the company, which is, of course, really good. So if we move on then to the segments that Toni will talk about.

[Toni Rannikko, executive]

Thank you, David. So, let's start from Finland, growing 7.8%. Again, the second quarter in a row, over EUR 50 million sales in the quarter. Good performance from Finland, especially considering the publicity around Smaak products during November. This good growth was a result of steady performance, especially in online channel, price increases we have introduced, and the impact of Premium Pet Food, which wasn't yet a year ago part of Finland segment.Adjusted EBITDA increased as well by 15.5% to EUR 11.5 million. Adjusted EBITDA margin being over 22%, which is a very good level and also towards comparison period. The profitability was through gross margin development, like David just explained, and through the impact of Premium Pet Food Finland to the segment. During the quarter, we also opened 1 new store in Finland market.Then going into Sweden and Norway where we see heavy impact still from the foreign currency exchange. And net sales increasing in Sweden with the FX neutral rates with the 7%. Also profitability improvement in Sweden by 11.5% to EUR 7.5 million. And also, in Sweden, we have been steady with the gross margin going in the right direction as well as with the good cost control by team Sweden. During the quarter, we opened two new stores, acquired three stores and one of our franchise stores left the chain.And then in Norway, we see the heaviest impact by FX in euros, so, roughly on the same level as Sweden. But compared to the size, quite a big impact for Norway and FX neutral growth being over 15% as in euros 2.5% profitability level compared to last year and in Norway, we see a bit of a pressure through FX to gross margin. During the quarter 1, we opened two new stores in Norway.Then a quick look for the cash flow and the balance sheet. During the quarter, good cash flow from operating activities totaling EUR 15.7 million against a strong comparison period. And good to also remember that there was EUR 1.6 million of one-off items related to public tender offer and product recalls during the quarter. We were also able to lighten a bit the debt level of the company resulting into net debt in relation to last 12 months' EBITDA, dropping from 1.9x to 1.8x.Cash at the end of the period closer to EUR 20 million and investments also a bit higher than last year as we have speeded up again, opening the new stores. And during this fiscal, we aim to open 20 to 25 new stores, mainly in Sweden and Norway markets. Long-term financial targets remain unchanged.And through that, I hand over back to you, David, to summarize the presentation.

[David Ronnberg, executive]

Thank you, Toni. So when we look at the quarter, to summarize, I would say that that is a quarter with stable performance. There are some unfortunate events, especially the Smaak recall, but there are also a lot of opportunities as we're seeing. There has been a kind of a headwind in the market overall with the lower consumption, but still, we are growing 9% in local currency. We're having 5% like-for-like. We are winning customers. We're taking market share. We're seeing that our online offering is going really well in all countries. And in Norway and Sweden, we are growing faster than ever through our online verticals.We've also been seeing that our gross margin has been increasing not only last quarter, but this quarter as well. We see that a lot of things in the cost base and also when we're working with the supply chain, it's going really, really well. But there's been a bit softer Christmas, but with that said, we have a bounce back in January. So our focus now is to win back all the customer that was affected by the Smaak situation and also to be continuing taking market share and speed up our presence in Sweden and Norway.So with that, I would like to hand over for Q&A.

[Operator]

[Operator Instructions] The next question comes from Maria Wikstrom from SEB.

[Maria Wikstrom, analyst]

Yes. This is Maria Wikstrom from SEB. So a few questions. I mean, starting with the gross margin outlook. I think it was helpful when you mentioned that actually without the product recall your gross margin was up year-over-year. So continuing the trend that we saw in the last quarter of last year, but wanting to have more like a longer-term view on the gross margin and now having the Premium Pet Food within the group that, where do you see the gross margin upside? I mean, now when also the currency headwind will be over?

[David Ronnberg, executive]

Yes. So we hope and believe that we can continue to grow the gross margin trend. But of course, there are also other things that is going against us like the consumer confidence and some other things. But our main goal is to continue to increase the gross margin versus last year.

[Maria Wikstrom, analyst]

And then I wanted to touch base a bit about, I think last year, I think you said that you wanted to try out the concept outside your current market. So if you could give us an update that have you tried in, I mean, the demand or the concept outside the Nordic?

[David Ronnberg, executive]

So at this point, we haven't started it. But I would say that we are very close from a time perspective to do a light start in other countries outside the three Nordic ones.

[Maria Wikstrom, analyst]

And then if we touch a little bit on the target of EUR 500 million sales and medium-term EBITDA margin of 13%. So how do you see you progressing towards the target?

[David Ronnberg, executive]

Well, through the improvements in the gross margin, we see that the targets become closer through profitability wise and also kind of in growth wise, we see healthy trends despite the tough economic situation, which might be easing out a little bit in the future. So FX corrected, we believe that the targets will be reached.

[Operator]

The next question comes from Calle Loikkanen from Danske Bank.

[Calle Loikkanen, analyst]

Yes. This is Calle Loikkanen from Danske Bank. I have a few questions. Maybe we'll take them one by one. First, on the growth side, you mentioned that you've seen kind of a bounce back in January. So, should we think about this that you still are on track on reaching the EUR 500 million of FX adjusted sales this year despite the bit slower start to the year, so to say?

[David Ronnberg, executive]

Yes, I would say so, I think the -- how we see it is that the period is maybe October till January as one period, it's easy to see it that way because October and especially November, you have the Black weekend week, et cetera, and then you have the Christmas sales. And then in January, you have the weather effect if it comes in December or January. So, for us, with the outdoor and everything, maybe it's better for us to see this October to January. So it swings a bit, but for the year-to-date, it's may be easier to see the numbers. And with the strong rebound that we have in January, I would say that from a top line perspective, FX-adjusted, we still are on the target of EUR 500 million.

[Calle Loikkanen, analyst]

And then if we look at the EBITDA margin, if you look at the past few quarters, the margin improvement year-over-year was quite high. Now in this quarter, the margin was broadly flat, and you mentioned the issues regarding the gross margin. But I was just thinking that is this kind of a new trend? Or do you think that this quarter was more of a kind of a temporary thing and you should get back to the similar type of margin improvement trend that we've seen over the past two, three quarters?

[Toni Rannikko, executive]

Yes, that's a good question, Calle. And we believe that the trajectory on the profitability is having a positive outlook towards the future. So kind of comparing our margins year-on-year, we are now clearly stepping upwards in gross margin. And that being the biggest lever on profitability as well as then continuing the tight cost control and other measures in the company.

[Calle Loikkanen, analyst]

So basically, I mean, I remember that the Q4 results call, you mentioned that you are looking for kind of a 13% exit margin at the end of '24, so that when we come out of '24, then the margin would be at a 13% run rate. Do you think this is still valid, this target and this kind of timeline?

[Toni Rannikko, executive]

It is still valid and achievable.

[Calle Loikkanen, analyst]

Okay. Very clear. Then I just wanted to check with the -- regarding the new countries. Again, I think at the Q4 results, you said that, hopefully, you could be announcing something within the next 6 months. I was just wondering with the bid in place now, have your plans or timing regarding new countries changed in any way following the bid? Have you, for example, needed to delay entering new countries or something?

[David Ronnberg, executive]

No. Nothing that has been impacted because of the bid. So we have been continuing kind of the growth journey even though the bid is there.

[Calle Loikkanen, analyst]

And then perhaps, you mentioned that you're still working on going to a new country. What boxes do you still need to tick before you can announce entry to a new market? I mean, what work is still left to be done?

[David Ronnberg, executive]

It's more our internal work, I would say, to be more ready. So, we can communicate it when we are more ready in a way when we enter.

[Calle Loikkanen, analyst]

And any kind of -- do you want to elaborate in any way on whether you will go to one or several countries at the same time and at what rate or speed are you looking to open up stores and so on? Anything that you would like to elaborate on that?

[David Ronnberg, executive]

The only thing we can say is that we're going to be -- it's going to be a light expansion. But we do it slow to start.

[Calle Loikkanen, analyst]

Then perhaps just you had the AGM today a few hours ago, I think. Do you want to summarize on anything regarding the discussion at the AGM regarding, perhaps, the Board composition and these kind of things?

[David Ronnberg, executive]

Yes, exactly. So, we will today publish the AGM reports and minutes as a stock market exchange release. So you will hear more during today. But unfortunately, they are not yet public and being worked on and checked on. Is there more questions on line?

[Operator]

[Operator Instructions]

[David Ronnberg, executive]

Okay. It seems that there are no more questions coming in. So, with that, thank you, everyone, for listening. Thank you.

[Toni Rannikko, executive]

Thank you.