Midsona AB (publ) (MSONB) Earnings Call Transcript & Summary

Welcome to the Midsona Conference Call. [Operator Instructions]. Now I will hand the conference over to the speakers CEO, Peter Åsberg. CFO, Max Bokander. Please go ahead.

Thank you, and welcome to today's call. I, Peter, with -- together with Max, will take you through the quarter 4 results and also paint a picture of the actions we are taking in 2023.Before we go into the main presentation, I just want to make you aware that this presentation may contain forward-looking statements and that such statements are based on current expectations and are subject to risks and uncertainties. So the summary of quarter 4. The quarter was challenging, and it was characterized by the same trends that we received early in the year. That is high inflationary pressures, but an underlying interest in healthy and organic food. We did continue to implement cost-saving measures and prepare price increases with the aim of fully offsetting the cost increases that we have had. And I will come back to what we have done and the effect that we see going forward. Sales grew slightly to SEK 1,027 million compared to SEK 1,012 million last year with the growth mainly coming from pricing and FX. Adjusted EBITDA decreased to SEK 45 million compared to SEK 61 million last year, and this is fully explained by the lower gross margin that we saw in the quarter compared to last year. And needless to say, our main focus is to restore the gross margin. And I will present in details what we have done and the positive effects that we will see starting in quarter 1 2023 and forward. We have worked to reduce our cost base but also to strengthen our cash flow. And the result of this has been that we have a free cash flow of SEK 120 million compared to minus SEK 25 million last year. And this was the strongest individual quarter-to-date, something that we're very proud of. And this is thanks largely to more efficient inventory management. We also did a new rights issue of SEK 600 million. And this, together, we are very much improved cash flow means that we have a much more stable platform going forward. We are and have been taking forceful action to manage the challenges that we have had. The by foremost important one is to restore the gross margin via price increases. As already flagged in the quarter 3 call, there was limited pricing action in quarter 4 because there were no customer pricing windows. We are now implementing price increases for quarter 1. So the effect will come gradually as of Q1. We are in the process of implementing the highest price increases ever across all parts of the business and in all geographies. Those actions will start to have a positive effect in quarter 1, 2023, and the full effect we will see in quarter 2. This is because, first of all, we expect customers to start paid in anticipation of the price increases, and the bulk of the price increases take effect from mid-Feb to end March, but we also implemented a few ones in the month of April. So a greater improvement in quarter 1 and a full effect in quarter 2. We have lost 2 cost-saving programs in 2022 totaling SEK 60 million, and we are on track to deliver those cost savings during 2023 and also already in 2022, so a good effect of the measures taken. We have stabilized the supply chain and we have a few exceptions, our delivery position has been good in quarter 4. We'd also take action to strengthen our balance sheet via new rights issue an extension of our financing agreement by the banks and a strong focus on cash flow primarily via inventory reduction. I would like to spend some extra time on our price management efforts. As I said earlier, this is by far the most important task that we have had and have in front of us. If you look at the left-hand side, you see that the gap is closing from 4.7 percentage points in quarter 2 to 3.9 percentage points in quarter 3, and the gross margin gap in quarter 4 was 1.3 percentage points. In other words, it's getting better, but it's still not good enough. So what are the actions that we're taking? And what are the trends that we see in the markets right now? As already mentioned, we are implementing the highest price increases ever in quarter 1 across all markets and all channels. Negotiations have been challenging, but overall, we are coming through. The majority of the price increases are happening from end of February to end March. So we will or see a gradual improvement in Q1 and the full effect in Q2. If we look at the well-below cost of goods, we do see a stabilization of raw material prices and some conventional food products have started to trend down. Organic products, that pictures more mixed, but prices do start to stabilize. Exchange rates, we are helped by the strength in Danish Krone and Euro against the U.S. dollars but are negatively affected by the weak Swedish Krona. Energy prices are trending down. The exception in South Europe, where we had contractual obligations at higher levels, but those are costs that you are pricing for now in quarter 1. We have also seen significantly higher cost of water consumption and treatment in Spain due to new regulations from the authorities. These negative effects are in our mind unfair as our increases are driven by the investments that we have made in our plant in Spain. So creating jobs in the region, and we think that we have been, in that sense, unfairly treated. We now have constructive discussions with the authorities and the ambition is to solve the issues during quarter 1. A few words on our product portfolio. The market's organic products continue to be challenging. There's a lag in market data, but I will conclude that we see market declines in all of our core markets. We are holding up quite well, but it does not help as long as the markets do decline. Consumers also seem to be choosing products at lower price points, and our private label products have outpaced growth of our brand advance. And to strengthen consumer likability for organic trends, we are now working on a lot of different projects in terms of marketing, campaigning because there still are consumers out there who want and can afford our top quality branded organic products. [indiscernible] is generally performing better and key brands such as Friggs, Gainomax and Swebar all grow in the quarter. Friggs, despite the fact that we had some continued supplying issues, which is something out of stocks, we expect the situation for Friggs in terms of supply to become better. We have seen some improvements already in quarter 1, and it should continue to improve as we come into the year. Consumer health saw a slight decline with growth from our own brands but quite a heavy decline for our high-value licensed brands. A few words on sustainability also. Midsona has been recognized for its climate change strategy once again, and we did again achieve an A- score from CDP. This is actually a very strong score and placed us amongst the best listed companies in the world in this respect. Sustainability will continue to be an important part of our company, and this is something that we will focus on continuously in 2023 and forward. I hand over to CFO, Max Bokander.

Thank you, Peter. And I will start with a short financial summary. As already mentioned by Peter, the net sales grew with 1.5%, but the gross margin and EBITDA was weaker than last year. The net results landed on minus SEK 15 million, impacted by higher restructuring costs and financing costs compared to last year. Besides the high interest rates, the financial net also includes SEK 8 million negative FX effects as a result for our extra amortization of the loans following the rights issue. The net results was, however, positively impacted by a deferred tax income as a result of capitalized losses for the entities in mainly North and South Europe. Finally, on this page, as already also mentioned by Peter, we delivered a strong cash flow, actually a record cash flow quarter to date, and I will come back to that more in detail. The net sales grew with 1.5%, but it was fully driven by a positive currency translation effect. The organic growth landed on minus 3.5% with private label growing 6.1%, while owned brands and license brands had a weaker development during the quarter. When our sales to private label increased more than sales of our own brands, this has a negative impact on our margin -- gross margin, but not necessarily our EBITDA margin. The EBITDA during the quarter landed of SEK 45 million. The negative organic sales growth compared to last year or, in this case, labeled as volume effect resulted in SEK 9 million lower contribution. The lower gross margin due to mix, temporary high production expenses in Spain and continued time lag between cost increases and price increases resulted in an additional minus SEK 11 million compared to last year. However, I would like to highlight that for Nordic, there was a slight improvement in the margin in the quarter. The savings from the restructuring program and the strict cost control improved sales and admin expenses with a positive net of SEK 9 million. This SEK 9 million, you could say, offset the negative volume effect, but the negative margin effect has -- could drop through, and that's why we have a negative variance and landed SEK 45 million in the quarter -- for the quarter. We have had high focus and still high focus on executing the restructuring program and also having strict cost control. And looking at the sales and admin expenses, the net cost per labor reduced with SEK 9 million compared to last year. This is, of course, more reduction if we also consider inflation, salary increases. Additionally, the strict cost control reduced other costs, which, however, was offset by higher costs for outbound freight and slightly higher investments in own brands compared to last year. But as you can see, the cost in relation to sales improved compared to last year. The free cash flow, as said, was record high in the quarter and was thanks to well-managed working capital, and in this case, driven by inventory. We landed the inventory actually SEK 100 million lower in December last year and on the same level as December 2021. And considering that we have had an inflation, we have significantly lower quantities in inventory. We still are in a high -- or we are on a level of inventory days where we see we can stabilize this level and maybe could have future improvements as well. The good cash flow and the rights issue helped us to improve the available cash and reduced the net debt with SEK 701 million during the quarter. With that, I hand back to you, Peter.

Thank you, Max. I've got a [indiscernible] here during the presentation that the sand did fall out for some time. I don't know exactly when that happened, and I'm sorry about that. But the more important then that I do summarize the key takeouts of this quarter 4 report. And then more importantly, what we're doing to manage the future in terms of the outlook for 2023. We all clearly reaching higher, and there are a number of tasks that we are implementing and measures that we're implementing. The by far most important one -- the by far most important one is to manage the price increases. And as stated in the presentation, we are implementing record price increases in quarter 1. This will, all else equal, have a very positive effect on the margins. We are also seeing some signs that raw material inflation could ease up somewhat. We have, and we continue to implement cost-saving measures. We will intensify the focus on our brands to be able to give superior customer and consumer value, and we will definitely continue to drive our sustainability at [indiscernible]. Simply said, we're looking forward to a better 2023. I thank you for the attendance and open up for questions.

[Operator Instructions] The next question comes from Nikola Kalanoski from ABG Sundal Collier.

All right. I just have a few follow-up questions. So the gross margin in Q4 came in around 450 basis points better than the one in Q3. And considering that the next set of price increases comes in February '23 as well as the rather significant difference of 450 basis points itself, I'm wondering if you could elaborate on this increase and what the drivers have been.

The drivers of -- I'm not sure I understood the question.

Compared to Q3.

Yes, precisely. So the difference in the gross margin is rather significant compared to Q3. What were the differences between the 2 quarters?

I can -- I mean the improvement we see in the quarter 4 compared to quarter 3 is solely driven by that we have had better prices in quarter 4. And still, so that quarter 4 is a very low margin compared to our ambitions and also historic performance over quarter 4. But yes, we have seen gradual improvements of the pricing effects we have done, but we should see more of that now in quarter 1 and then fully in quarter 2.