Midsona AB

STO:MSON B

Earnings Call Transcript

[Peter Åsberg, President & CEO]

Thank you so much. And also Peter Åsberg, CEO, is present, and we can turn to the second page of the presentation. I will start by presenting the highlights of the fourth quarter and then Max will go into the financial details. Max is the new CFO since beginning of this month -- since the beginning of January, and I'm very happy to have him here by my side.And let's turn to the Page #3 and the key developments in quarter 4. I must say that we are very proud about the development in quarter 4. We think that we have indeed a very strong quarter. We record both record net sales and EBITDA. This surpasses the SEK 1 billion hurdle for the first time for a single quarter in net sales and also a strong development for EBITDA. Something that we're particularly proud of this quarter is the organic sales growth. We have an organic sales growth of above 10%, very much driven by a successful rollout of key brands in the grocery trade in Europe, and I will come back to the details on this. And on top of that, we also have acquisition-driven growth from System Frugt, which we took control of at the beginning of the fourth quarter.We turn to Page #4, and here, we see the quarter 4 highlights in terms of the numbers. And I think that they pretty much speak to themselves, but a few comments. As I said earlier, we are growing the sales both by M&A growth and strong organic growth for our prioritized brands. And this then propelled sales well above SEK 1 billion for the first time in a single quarter. One key metric of ours is that we always want to grow EBITDA ahead of net sales to show that we're actually reaping synergies also. And in the quarter, net sales is up 31% and EBITDA is up 41%. So indeed, we see good growth on both those important metrics.We turn to Page #5, which is a summary of the revenue development. We have growth, M&A pro forma, which is growth from the acquired company, System Frugt. System Frugt had a very strong, strong first quarter in the group. It's their prime season, the Christmas season and it turned out very, very well in terms of sales. So very happy with that acquisition. We are growing our prioritized brands at healthy rates and also the rest of the portfolio has been growing quite significantly in the quarter. And it's mainly very strong development for private label in mainland Europe.We turn to Page #6, which is a summary of the year then. It has, of course, been a very special year, very volatile due to the pandemic. First quarter, heavy hoarding products. Second quarter, still some pent-up demand. Quite weak in the third quarter. And then I would say that the fourth quarter is actually the most normal in 2020. We did not see any hoarding effects. We also did not see cautious spending from the consumers. I think it was quite normal. Maybe we had a little bit upside due to the restrictions in the different European countries due to the pandemic.And we are growing net sales by 20% for the year and EBITDA by 34%. So also here, the growing EBITDA significantly ahead of net sales. And that signifies the work that we have done in terms of increasing our efficiency, getting the benefits from increased scale in the business and synergies from the acquisitions that we have done.We are proposing a dividend of SEK 1.25, which is the same as last year. And this is, of course, a balancing act for us. We think it's very important to give a good dividend but we also see good opportunity to continue our focus on consolidating the European markets, perhaps with well-being products. So we are focused on acquisitions also in 2021, and we would like to give as much financial room and muscle to that as possible.We turn to Page #7. I've been the CEO of Midsona since 2007 and I've always seen us as -- Midsona journey as something of a military race or maybe even several military races after each other. And the first year of my tenure was very much about restructuring the company. And 2012, the Midsona focus on health and well-being was created. And we have had some spectacular growth in them. On average -- compound average growth rate, we have been growing net sales by a solid 20%. That's still growth from our prioritized brands, organic growth but also a lot of M&A-driven growth and EBITDA as 2019 compounded average growth rate.So we think that we do have a very good working model in terms of how to grow the business well by improving the performance of our own brand but also being a consolidator first in the Nordics and then lately also out in Europe. And this is also very much the strategy that we're employing looking forward to continue the strong growth focus both from our own brands and from M&A.We turn to Page #8. One major part of our strategy is to roll out our organic brands in the grocery trade across Europe. A lot of the sales in the organic trade is still done in specialty stores. But to really make organic mainstream in Europe, we think that it's very important to offer the product in the grocery trade simply because that, for most people, are doing their shopping. And we started the rollout of the Davert brand in the grocery trade in Germany in second quarter. It came to a temporary halt in the third quarter very much due to the pandemic and some execution issues that we had then. But then the rollout has continued at a very healthy pace in the fourth quarter.And we've also been stepping up our marketing investment to increase on consumer demand for the product. And I would say, by now, it's no secret that the chain where we are launching the product in [ Rewe ]. It's one of the major retailers in Germany. It's a very big retailer across Germany. And we have now the product out in about 70% to 75% of the [ Rewe ] stores across Germany.The same way, if you turn to the next page, we are working with the Happy Bio brand, which is our brand to the grocery trade in France and Spain. That's a brand that we're rolling out across both countries in the grocery trade. We have had some good success with major retailers. We have launched a product and we see very strong growth for the brand in the fourth quarter now.Please go to Page #10. Another part that I would like to emphasize is our organic beauty care concept under the brand, Urtekram. In the beginning of this year, beginning of 2020, we did a relaunch of the brand. We -- currently, we have new packaging for the brand and also upgraded formulations for the brand. And step by step, we're now seeing increased growth for the brands in the home markets in the Nordics, but also we're seeing some export success in a number of European markets with the brand.So this concludes the -- my first part of the presentation. I will come back to the summary at the end. I said that we are very happy about the fourth quarter. We think that we have made some major progress. Especially happy about the strong organic growth that we see across all markets. Max will come back to that, how it looks by division. So I leave the word to you, Max, and the financial review.

[Max Bokander, Chief Financial Officer]

Thank you, Peter. Then I would like you to go to Page #12, the financial executive summary slide. As you can see in the slide, we had a small improvement in the gross margin during the quarter. But I would like to emphasize that during this period, the underlying business demonstrated a strong improvement, and I will come back to that later.The quarterly EBITDA was a record and 41% higher than last year. This was driven by record sales and also continued positive synergy effects. The quarterly cash flow was on a similar level as last year, but please note that operating working capital ended on a slightly better level than last year and this despite us including System Frugt.I now ask you to move to Page #13. On this page, you see the sales growth divided into structural effects, currency effects and organic growth. And as already highlighted, we had a strong organic growth for the fourth quarter at 10.4%. For the full year, we -- the growth landed on 3.9%.And now I'll ask you to move to Page #14. And on this page, we present the organic development by our sales channels. And as you can see in the graph to the left, the growth during Q4 comes mainly from our deliveries into grocery trades or here called fast-moving consumer good retailers, where the organic growth was as strong as 16.7%. This proves that the strategy to focus and grow our power test brands deliver results. And both North Europe and South Europe had significant growth in this channel. North Europe, by launching the Davert product, as already mentioned, at retailer [ Rewe ], South Europe, as also already mentioned, by deploying Happy Bio, the brand for the FMCG channel.I'll now ask you to move to Page #15. This is the page I referred to in the beginning, where I will try to explain the gross margin development. And I would like you to start on the graph and look at the graph on the top. As you can see, we have a material positive effect on our EBITDA from System Frugt. It should, however, be mentioned that Q4 is the seasonal strongest quarter for System Frugt.I now ask you to look at the graph below. System Frugt has a lower gross margin than average group, resulting in a diluting effect on the overall gross margin. But as you can conclude, System Frugt are compensating the lower gross margin with lower indirect costs. And finally on this slide, I would like you to note, the underlying business have had a very strong improvement in the quarter, and this is driven by organic growth, favorable mix, positive effects from our synergy or structuring projects.I now ask you to move to Slide #16. In this slide, I want you to note that the structural effects for the full year includes, on top of System Frugt, cost that included division South Europe and Eisblümerl within division North Europe that was acquired during 2019.There is a similar pattern for these additions that they have a slightly lower gross margin when they joined Midsona. However, they are compensating that with lower cost and overall improved the EBITDA for the group. In this context, I also would like to mention that we are systematically working with continuous improvements to improve gross margin, and this will, of course, also help our newcomers.On this slide, you can see that during the year, for the underlying business, we have improved EBITDA. We have, though, struggled with the gross margin, and this is mainly within North Europe, where we have had negative effects from higher prices of raw materials and transports. And due to timing difference, these extra costs have not been able to fully be passed on to customers.I now ask you to move over to Page 17. This is the page where I would like to show some key highlights for division Nordic. Similar pages will follow for North and South Europe. Nordic had a record sales for the quarter and this, thanks to acquired System Frugt that added SEK 203 million in the quarter. And as you can see in the chart to the left, the organic growth at FMCG retailers was as high as 11.8%. This is compensating for weaker development in the other channels where we can see tendency of slight effect from COVID-19 still. For full year, synergies from ONE Nordic program and good cost control have continued to contribute and improved EBITDA throughout the year.And now I ask you to move to Slide #18. The overall organic growth from North Europe landed on 19%. This is the strongest growth we have within the group among the divisions. And as already highlighted, North Europe has successfully deployed the Davert products at the FMCG retailer, [ Rewe ], during Q4, enabling a total growth within this channel at astonishing 32.6%. And as Peter said before, [ Rewe ] is a large player in Germany and have, in total, 3,000 stores and we are present at more than 2,000 at the moment. Regarding the profitability at 7.4% for the quarter, as already mentioned, this is impacted by slightly higher costs than they have been able to pass on to customers.I now ask you to move to Page 19. Within South Europe, we also see a very strong growth within FMCG retailers and here landing on 32 -- 35.7%. And this is also driven by successful deployment of our own brands and the Happy Bio brand, especially here.Regarding the profitability comparison for South Europe, it needs to be highlighted that when the division was acquired in Q4 2019, the organization did not have all the necessary functions required for a division within the group. The division neither has the growth expenses on the level needed to generate long-term profitable growth. This has successfully been built up during the year and is affecting the comparative -- profitability comparabilities.And now I ask you to move to my final Page #20. As already mentioned, the quarter 4 cash flow was at a similar level as last year. This partly due to a strong cash generation overhead in Q3. And on the full year, the cash flow improved with 63%. And on top of already mentioned good working capital development, we have a positive comparison effect by spending less on CapEx during this year due to the cautiousness during COVID-19.With that, I would like to hand back to you, Peter.

[Peter Åsberg, President & CEO]

Thank you so much, Max. And we go to Page #21, which is the summary and outlook. As you have understood, we are very happy about the development in quarter 4. We are well above SEK 1 billion for the first time in net sales in a quarter and also have a record EBITDA. We're especially proud of the organic double-digit growth. It's very strong and shows that the strategies that we are employing are working and it resonates with consumers and customers across Europe.We haven't talked so much about the COVID-19 and the pandemic. But of course, there still is a major uncertainty looking ahead as we think that we are well positioned to actually tackle this quite new situation, and I think that we have proved that during 2020.A key focus in quarter 1 will be the continued rollout in grocery trade in Germany, France and Spain. As you have seen, we see some very promising results. We are very happy about them, and also see that we are getting repurchase from consumers, so it seems like we are on the right track there really.Integration of System Frugt, we are very happy so far with what we have achieved. The integration continues in quarter 1, and we will gradually start to reap the benefits from the synergy program that was announced in connection with the acquisition of the company.So the underlying business is strong. Still, we need to mention that we do cycle some pretty high comparative figures for current quarter due to the hoarding that we saw in especially March last year, which was some sort of an extraordinary situation. But the message is that we are very happy about where we are. We do have the strategy from the trends to also excel in the future.And thereby, I go to Page #22 and I open up for questions and answers. Thank you.

[Operator]

[Operator Instructions] And we have 1 question in the queue so far. That's from the line of Johan Dahl of Danske Bank.

[Johan Dahl, Analyst]

First of all, I just have to say that you did great with this increased disclosure in the presentation that you provided today, would provide much better insight into the company, in my view, at least. But just a couple of questions. Firstly, if you look on the full year, you talked about organic growth in the grocery trade of 7% to 8%. If you try to distinguish, what is pipeline filling of that growth in grocery trade due to launches that have occurred here during 2020? Just trying to understand what's some sort of underlying growth in sell-through to consumers.

[Peter Åsberg, President & CEO]

I would say that the majority of the pipeline filling, almost all of it was done in quarter 2. So in quarter 2, you have a pipeline filling effect. Then in quarter 3, we've got somewhat of a hold in the buildup. And what we see now in quarter 4, it's mainly repurchase that we see, so the majority of the buildup was done quite early in quarter 4. So I would say that there isn't that much pipeline in the figures in quarter 4.

[Johan Dahl, Analyst]

You talked about the Davert share in Germany was temporarily altered in Q3, then it sort of came back in Q4. So that's -- that should be read as sell-through then on Davert in Q4?

[Peter Åsberg, President & CEO]

Mostly it was sell-through because the pipeline filling was done in quarter 2. And then the retailer where we are launching had some executional issues due to the pandemic. They didn't have the operational ability to launch in other stores during quarter 3. So I guess the majority of it is, for sure, sell-through, yes.

[Johan Dahl, Analyst]

Okay. On the bridge you provided on earnings development here in Q4 versus Q4 last year. System Frugt seemed to have contributed some almost SEK 20 million, I guess, to EBITDA. I think when you announced this acquisition, I don't know, we talked about some SEK 40 million possibly earnings full year. What's your updated forecast for System Frugt? And how heavily tilted is earnings in the fourth quarter in System Frugt?

[Peter Åsberg, President & CEO]

We don't have an update on the quarter, but you're correct in the sense that the fourth quarter is by far the strongest for System Frugt. That's their main season due to strong Christmas sales of dried fruits and nuts. And then it should also be said that they did have a very good fourth quarter. So we are very happy about how they actually managed to sell into the customer but also sell out of the stores. So it was a strong season that they had. There, for sure, is a tilt but it isn't -- the tilt is not that they would do 50% of profit in quarter 4, so they have performed better than they expected in quarter 4.

[Johan Dahl, Analyst]

I understand. Okay. And the flip side of that is, of course, the organic earnings development. Can you just talk about why operating leverage on those organic sales increases is so low? You talked about further investment into driving volumes, i.e., marketing, et cetera. How does that look for 2021 in terms of cost increases?

[Peter Åsberg, President & CEO]

If I start by the quarter 4, we have stepped up marketing investment significantly, especially in divisions North and South but also, to some extent, in the Nordics. And it relates to the launches that we have done, Davert in Germany and Happy Bio in France and Spain. And to some extent, also the Nordics, a brand like Urtekram, the rollout of the beauty care lineup.And from our point of view, we think that we have a fantastic opportunity now to establish strong positions across major retailers in Europe. But that of course also requires that we see sales to the consumer and that's what we have done. I think that you can expect that we have slightly higher-than-normal marketing expense also in quarter 1 and quarter 2 of 2021 as a way to solidify our position with those major retailers across Europe.

[Johan Dahl, Analyst]

And how much money are we talking about roughly if you look on the fourth quarter compared to sort of previously an increased spend?

[Peter Åsberg, President & CEO]

That's a figure that I cannot give you because we are not usually giving up those for competitive reasons. But there are some major investments that we haven't done before. I mean you saw on the Davert page, we had -- we did a major outdoor campaign across Germany. There had been some other campaigns as well and also campaigning in the stores. So it's quite significant, but we think it's investment well worth doing as I said because it will really solidify our long-term position with those retailers and then something that we then should be able to reap the benefits of for years and years.

[Operator]

[Operator Instructions] Okay. As there seems to be no further questions coming through on the phone, so I'll hand back to our speakers.

[Peter Åsberg, President & CEO]

Then I would like to thank you so much for your attendance and we will hear -- we will talk to you again in the next quarter. So thank you so much.