Humble Group AB

STO:HUMBLE

Earnings Call Transcript

[Simon Petren, executive]

Good morning, everyone, and welcome to Humble Group's quarterly presentation for the second quarter of 2025. Thank you for listening in, in this hot summer day in Stockholm. My name is Simon Petren, I'm the Group CEO. And with me today, I have Johan Lennartsson, our Group CFO.

[Johan Lennartsson, executive]

Good morning.

[Simon Petren, executive]

So just to briefly elaborate a little bit on the second quarter and how things have developed, I can highly say that we have ended the quarter very strong with a record-breaking June and where we picked up the organic growth significantly, which summarized to a 12% organic growth for the quarter, which is rewarding to see because it's a trend change with our last quarters, and we can see that the growth engine that we have been investing in is working.

We can see that the gross margin was in line with previous year, and we had a bit of a mix impact there with the late Easter, which also added a bit extra sales to the quarter. But overall strong gross margin control in several of the segments if you look at this mix.

In terms of the profitability, we had a slight improvement from last year. And as we have elaborated on previously, we are investing heavily into sales and marketing for some of our growth brands. And despite that, we are able to increase the profitability due to the good cost control in our companies.

Cash flow has been an important factor for many quarters now, and the second quarter last year was a big disappointment. It is also the hardest quarter for us in terms of the seasonality with the stock buildup going into the biggest months of the year, which is in the second half. But despite that, we have been able to improve the cash flow quite significantly, and it's going to remain a high focus for us for the remainder of the year.

And we have also just recently secured a new financing agreement with our banks. We have extended our credit facility to SEK 300 million, and we also have quite significant improvement in our interest cost terms. So this is something that we've been working on for the last couple of years, especially since we did the refinancing of the bond, and we're very happy with the support from the banks.

And also, overall, we can see some really solid growth in our strategic brands that we are developing internationally. And this is something that is really rewarding because we have been investing in them for the last 2 years, and we are seeing tangible growth in especially the Nordic markets outside of Sweden and also U.S., both of them growing more than 40%, which is showcasing that our strategy going country by country, investing for growth is working.

And also looking into the coming quarters and next year, we have a really solid pipeline in terms of demand from our key customers, which is also something that makes us confident in investing in the capacity needed to scale them.

So let's talk a bit about the net sales more in detail.

[Johan Lennartsson, executive]

And when deep diving into the financials for the quarter, we are happy to see that we have a strong underlying demand for our products. Net sales came in on SEK 1.983 billion, which comprising a total growth for the quarter of 8%, but where the organic growth amounted to 12% and we had a negative currency impact of minus 4% for the quarter.

Looking at the segments contributing to the strong growth is mainly Nordic Distribution growing their net sales by 18% and the Future Snacking segment growing the net sales by 22%. And despite some challenges in the U.K. market due to some market-specific reasons, we had a decline in net sales in Sustainable Care with negative 10%, but despite that, held up quite well.

[Simon Petren, executive]

Yes. So let's look at the gross profitability and how it has developed over the quarter and the segments.

[Johan Lennartsson, executive]

Yes. Gross profit for the quarter amounted to SEK 629 million, corresponding to a growth of 7.5% quarter-on-quarter. As mentioned in the previous slide, we had two really strong segments, mainly Nordic Distribution, growing their gross profit with SEK 52 million and then Future Snacking also growing with SEK 32 million. The gross profit and gross margin for the quarter was stable quarter-on-quarter and came in on 31.7 percentage.

[Simon Petren, executive]

Yes. And also to elaborate more on the gross margin, as I mentioned previously, April had a really weak gross margin due to the extra sales from the late Easter. In June, we had a gross margin of over 33%. So we have a high focus to continue to develop the gross margin and our gross profitability. And we see a strong development in most of the companies.

[Johan Lennartsson, executive]

And continuing on the profitability perspective, our adjusted EBITA came in on SEK 144 million for the quarter, corresponding to an increase of almost 3%. The adjusted EBITA margin remains flat or more in line with the same quarter last year and reached 7.3%.

Happy to announce or happy to see that the Future Snacking segment nearly doubled their adjusted EBITA for the quarter, while we had some negative impact in the Sustainable Care segment, mainly due to the headwinds in the U.K. segment, as mentioned before.

[Simon Petren, executive]

Yes. And let's talk a bit about Future Snacking. I mean I think it's really rewarding to see. We've been talking about it for a couple of years now that we are investing. We have a really strong demand, more than 3,000 tonnes of candy that we can't deliver upon because the demand is so high. But we can clearly see here that the investments that we have made in our facilities to scale up here is actually reaping some really good profitability.

Increase of net sales of 22% and gross profit of 28%. And also, we can also see the operating leverage here with the EBITA up 98%. And mind you all, this is despite increasing some investments significantly into personnel, marketing and sales in our growth brands. And despite that, we're making money on them, which I think is quite hard to do in FMCG when you conquer new markets.

Pandy and TrueGum still remains very strong, ending on a strong first 6 months for the year, and we expect to continue to grow them for the last part of the year. Arena Confectionery, our manufacturers, we see some really tangible growth. And we have also, in Grahns, for instance, already made the same profit in the first 6 months that we made in the full year last year. So our strategy here to invest to scale is working, and we know that we have the demand.

Looking into Sustainable Care, this is the disappointment for the quarter, and there are some really specific reasons for that. U.K. market had, had a couple of different headwinds with changed labor laws. We had cyber incidents with -- not in our company, but with some of our key retailers that we supply the products. We had less than 70% reduction in volume intake for the first part of the quarter.

And this impacted specifically Solent Group, which has been a growth company for the last years that we have owned it. We expect the company to grow in solid double digit next year, and we are going to have a bounce-back in the second half of this year. But it has been a turbulent quarter in the U.K. Although we have some highlights, Amber House still doing very strong. [ Humble Co. ] are recovering nicely.

So just if we [ face ] those headwinds for the period that we've had, we are confident in the bounce back of this segment over time.

Talking about Quality Nutrition, in the last quarter presentation, I mentioned that I think we are going to have a recovery in the second half of the year. We have already seen that we are back to growth in this quarter. We do have some challenges with the gross margin due to the volatile raw material pricing. We are working intensively to see how can we utilize our group scale to help our companies here source at more efficient volumes and also cost.

What's really good to know here also is that our key customers in both powders and bars, which has been struggling in Q4 and Q1, they are back. They have increased their forecast and have a good outlook for the second half of the year.

In our last segment, Nordic Distribution, here, we can really see that our strategy of consolidation is working. The profitability is up 28% and more than the net sales growth. And this is due to the sort of platform consolidation we have made in a few of the companies, especially Privab Trollhättan. We can also see here that demand is really strong.

We had a bit of a push into April with the Easter products. But despite that, we have also, throughout the quarter, had a really solid growth. And we have also just invested in new warehousing for Privab Trollhättan because we have been running full days just to be able to deliver the products to our customers. So we see some really strong trend here, growing a lot faster than the market in general, and it's because we are doing a good job, and we've been able to secure several strategic partnerships.

So in terms of the cash flow?

[Johan Lennartsson, executive]

Yes. So looking at the cash flow for the quarter, we came in on SEK 129 million for the quarter in cash flow before changing net working capital. And after changing net working capital, we ended up in SEK 44 million, which is a significant improvement from same quarter last year where we had a negative cash flow of SEK 49 million.

And we could see the strong delivery in June. As Simon mentioned, the strong momentum and demand for our products also drove up the accounts receivable, especially in the net working capital that have a negative impact for the cash flow for the quarter with SEK 72 million, especially.

So with that said...

[Simon Petren, executive]

Yes, we could also mention that we paid a little bit extra tax, especially on our U.K. companies for the quarter, right?

[Johan Lennartsson, executive]

That's true, due to a change in -- regulatory change in U.K. where our U.K. subsidiaries now belong to a group, depending on the group size for Humble Group in total, they have -- they now pay the taxes in advance instead of paying them in arrear, which they have been doing in the previous year. So that had a negative impact with approximately SEK 12 million for the cash flow in the second quarter.

[Simon Petren, executive]

Yes. And lastly, talking about the leverage in the group, here, we haven't been able this quarter to reduce the leverage. We have been investing quite significantly into CapEx, which is something that we believe is going to drive long-term value. But this is a highly prioritized area for us.

And as I also mentioned in the CEO letter, we are going to focus going forward more on increasing the profitability growth rather than just prioritizing organic growth. So we think that this, in combination with having 2 strong quarters ahead of us in terms of cash flow is going to help us reduce our net debt faster.

Outside of this, we have, as I previously mentioned, also secured an updated financing agreement. And I think it really showcases the strong relationship we have with the banks, but also it gives us the financing structure that we should have as a company. In combination with the lowered STIBOR, we could see on a 12-month base that our interest cost was down from 6.9% to 4.6%. So it's a significant improvement in terms of interest cost with a lower margin to the banks and also the lowered STIBOR.

So let's round things up with the outlook. We had a really strong closing of the second quarter. We have a good momentum in most of our companies, and we are looking positively on the second half of the year. We have important initiatives to scale upon, especially in Quality Nutrition, which has been lagging a bit behind the timeline versus Future Snacking, but we are confident with our order pipeline, and we can see that our customers are increasing their forecasts.

U.K. market has been a headwind for us in the first half of this year, but we also believe it is temporary, and we are going to have a build back in the second half of this year, and we're looking at a good 2026.

Future Snacking, we believe it's going to be a strong year in full. We don't see any weakness really. It's all about enabling that capacity and scaling it in several markets that are reaping for more products. And demand is strong.

In terms of Nordic Distribution, we are working to scale the warehousing, so we are able to keep up with this strong demand. And we can see that the profitability is coming in nicely scaling with the operating leverage that we get from our consolidation.

And also, lastly, we have strengthened our financial profile. We have now paid most of our earn-outs, and we are looking forward to having this financial flexibility. And once we get down in leverage, we might be open to look into some potential acquisitions. But for now, we are focusing short term to really increase our capacity output for the full group.

With that said, let's open up for some Q&A.

[Johan Lennartsson, executive]

Thank you, Simon. And I was just going through the questions here. I'm not sure if they are published. So you can see them, but I will go through them one by one, so we can elaborate a little bit on them. First question from Victor at DNB Carnegie. It's regarding once we lower the leverage, what areas are we looking for potential M&A efforts? And yes, what do we think about synergies in future deals?

[Simon Petren, executive]

I mean we are going to tread lightly here. We have some really interesting bolt-on acquisitions, smaller ones that we know will tap into our platforms and where we are able to scale immediately with synergies and operating leverage. So I would say that, that would be the prioritized areas.

But with that said, as I mentioned and as we also mentioned in our Capital Markets Day, we have been prioritizing, as you can see in the first 6 months as well, to invest in our current facilities, and we have a strong plan for that as well. So I think we are going to start treading lightly with M&A with smaller acquisitions that fit really well into our platforms.

[Johan Lennartsson, executive]

Thank you, Simon. Paul is asking about things that the profit is quite low in relation to the high turnover. Do you have any thoughts about that?

[Simon Petren, executive]

I mean I think we also really need to consider, as we've been writing in the report, we have increased our sales and marketing spend significantly this year versus last year. Last year, we increased it by SEK 85 million versus 2023. And these are investments that we do for our brands, building value and conquering new markets.

With that said, I'm proud that we've still been able to keep up the profitability. But also, as we mentioned in the CEO letter, we are going to now look into our cost structure. We are happy with the sort of scaling we've done in terms of overhead in most of our facilities, and now we're just going to scale up the demand. So now it's time to start looking into, "Okay, how can we be more efficient with our cost structure and improve the margin in that sense as well?"

So I would say it's a combination of cost control, looking into efficiency in the companies, but also mindful scaling in sales and marketing. I think the levels we are at right now is quite sufficient for the growth.

[Johan Lennartsson, executive]

You mentioned about taking on new markets, a question from [ Jens ], what are the plans to make profits on the height of candy -- Swedish candy in the U.S.?

[Simon Petren, executive]

I mean we have already launched. We are starting to see some tangible traction. We have done it thoroughly. So we have launched our own packed B2B bags with the Swedish candy, which is a mix of most Swedish pick and mix candy favorites. Very grateful that the other candy companies out there want to join us on this journey. So that is one of the things we're looking into.

We are also looking into setting up potentially a B2B wholesale platform for the U.S. so we can scale with the B2B business, much like we have done here in the Nordics. But also, not about always but only about U.S., this Swedish candy prepacked bags is something that we are looking to scale globally, and it's packed in a way that it's really efficient distribution, which is what Swedish Candy has been lacking historically now in this trend.

[Johan Lennartsson, executive]

Thank you, Simon. And I think we can hang on to the candy perspective or candy questions because we have a question here from Alice at ABG Sundal Collier. Could you give us some more color on when we expect to pent up the confectionery demand and sport nutrition and when the investments we're doing start to materialize into sales?

[Simon Petren, executive]

I think we're already seeing it in Future Snacking. I mean our production facilities are growing like more than 30%, and our candy brand is very high as well. So -- but we are working diligently to continuously scale. And having this growth with our capacity, it is a challenging thing to do, but we can also see that we've been able to do it in a profitable way. But our plan here is to continue to scale in snacking for the remainder of the year and next year.

In terms of nutrition, we have invested in most of the machinery needed to scale. So now it's all about filling it up with new and profitable clients, both in powders, bars and drinks. And we have an interesting order pipeline for the second half of this year. And my ambition would be is that by ending this year, we should have filled up at least one shift in all of those facilities extra in -- going into 2026.

[Johan Lennartsson, executive]

Thank you, Simon. One question about the new credit facility. Jens is wondering if it could be a good idea to use it to repurchase shares when it's such a low valuation as it is today.

[Simon Petren, executive]

I mean repurchasing of shares is, of course, a tool that we have available now with the mandate from the AGM. But also looking into our strategy of delevering the business, I think that is going to come first. Once we are at a leverage that we feel confident with, we will evaluate how we can deploy capital and get the best returns.

And of course, repurchasing of shares could be an option if the share price is low enough or if we deem it better to invest in continuous CapEx or M&A. So it only depends on the return on deployed capital.

[Johan Lennartsson, executive]

Yes. Thank you, Simon. One question here from Daniel. Why can't you find Pandy at ICA or [ Coop ] or where can you find the products in Sweden?

[Simon Petren, executive]

Pandy, for instance, in ICA, we are closing into being the top 15 brand in -- of all confectionery companies. So in ICA, we have really good distribution. Axfood and [ Coop ], we are starting to get distribution.

And I think that's what's so interesting. Pandy is doing fantastically well, and we have a really good outlook for the year. Hard to keep up with customers. But despite that, we are below 40% distribution in Sweden. So even in our domestic market, there is so much left to do.

In Norway, instead, we have actually been growing faster because it's more centralized, and we have been taking a top 5 position of all the confectionery brands. So here, we have a strategy going into new market. We have a proof of concept that we know how to get it into the key retailers and quite quickly take a top position of all the confectionery brands. But Sweden, absolutely, we have much left to do here.

[Johan Lennartsson, executive]

Thank you, Simon. Sergei from [ IGO ] Capital here asks about if we can break down the components in the organic growth, how much was driven by price increases and underlying volume?

[Simon Petren, executive]

So overall, as we said also for 2024, a high majority is driven by volume. There might be a little bit of price in there, but it's not tangible. So it's still volume-driven for the group.

[Johan Lennartsson, executive]

I think that summarizes pretty much the questions we've received for today's presentation. Any closing words?

[Simon Petren, executive]

Thank you, everybody, for listening into this presentation. As I mentioned earlier, we ended the first 6 months on 7.7% organic growth. It's not as high as we want, but I think it's still a solid development given the headwinds we've had in one of our key segments in the U.K. market. And we end the quarter on a high note, which give us confidence going into the second half of 2025. And wish you have a really nice summer.

[Johan Lennartsson, executive]

Thank you so much for listening in today.