Midsona AB (publ) (MSONB) Earnings Call Transcript

[Audio Gap] Presentation. [Operator Instructions] Now I will hand the conference over to the speakers. President and CEO, Henrik Hjalmarsson and CFO, Niclas Lundin. Please go ahead.

Good morning, everybody, and welcome to the presentation of Midsona's Third Quarter 2026. My name is Henrik Hjalmarsson. I'm the President and CEO. And with me, I have Niclas Lundin, CFO. We'll spend the coming 20 minutes or so going through an overview of the quarter as well as a deep dive into the financials by Niclas, after which there will be plenty of time for questions. . But for those of you who are new to us, just a quick introduction to Midsona. So we're a European natural and healthy food group. We are positioned in categories with clearly structurally growing demand driven by health and sustainability trends. We combine a strong local brand platform with a scalable group of European brands. And we have a vision to become a leading European player within natural and healthy foods. We've got sales of roughly SEK 3.6 billion the last 12 months with a 4.3% EBIT margin, roughly 700 employees in 7 European countries and 50 owned brands. Starting then with a summary of the third quarter, and I thought we'd use the boxes here on the right-hand side to go through the overview of the quarter. So total sales grew by 1.7% in the quarter, driven then largely by the acquisition of Risenta in Sweden that we completed earlier in the year. Total organic growth, however, was a negative 3.7%, driven mainly by a sales decline in contract manufacturing, where we're consistently optimizing for improved profitability, but also partially by own consumer brands, which declined by 0.2% organically, then mainly driven by the development in Division North, and I'll come back to that. If we continue right, EBIT margin was stable year-over-year, leading to an EBIT growth of SEK 1 million to SEK 46 million. That was fueled by gross margin expansion by 0.3 percentage points to 29%, which in turn then was driven by a better mix, however, with a slightly negative net price cost arbitrage, which I'll also come back to in a little bit. The EBIT was also negatively impacted by increased investments in marketing and a one-off credit loss in the Nordics. The investments in marketing, however, is clearly in line with our strategy to fuel our brands for continued profitable growth. Finally then, cash flows continue to improve to 75 -- sorry, SEK 57 million, an improvement by SEK 9 million year-over-year which then led us to a net debt to adjusted EBITDA of -- a considerable improvement versus the same time last year. If we look then briefly at the year-to-date numbers, so the first 3 quarters of the year, we've seen continued strength in profitability and growth in our own consumer brands. So net sales has a 2.1% decline year-to-date organically, however, again, driven mainly by contract manufacturing, partially linked to the fire in Spain that we had during last year, but also continuously optimizing our contract manufacturing business to drive the margin. However, that's been mitigated by growth in our own consumer brands, which have grown by 0.7% organically so far in the year. If we look on the profit side, EBIT has strengthened considerably. First 9 months by SEK 25 million to SEK 111 million, which corresponds to an EBIT margin growth of 0.9 percentage points to 4.1%. That, again, driven by a gross margin expansion, which is driven mainly by mix, partially then the growth in own consumer brands and a decline in contract manufacturing, but also through improved overhead efficiency, partially linked to the cost saving program that we launched at the back end of last year. Although we, also seen in the first 9 months, have increased investments in marketing, which then has a slight negative impact on our EBIT short term, but is very good and in line with our strategy for the longer term. Cash flow also first 9 months clear improvement versus last year and again, leaves us in a very good position in terms of our balance sheet. Looking then briefly at the development in the different divisions in the third quarter. We saw -- starting with the Nordics, where we saw an organic sales growth of minus 3%. However, own consumer brands growing considerably then or growing positively at 1.9%. And the organic sales growth -- negative organic sales growth, largely driven by a decline in contract manufacturing. Gross margin, slightly down by 0.1 percentage points, temporarily pressured by rising prices for transport and packaging, which is yet to be recovered in prices to customer and consumer. And then hence, a slightly reduced EBIT margin, partially then linked to the gross margin, but also with increased investments in marketing and the one-off credit loss that we saw in the Nordics, however, partly mitigated by the -- by overhead cost savings linked to the cost saving program. Looking then at Division North, where we had a tough quarter in the third quarter with weak sales, an organic change of minus 10.3%, driven largely by own consumer brands, but also on B2B brands, which have lost some of the transition momentum. Gross margin saw a decline, mainly then driven by a negative mix move as we had a more negative sales development for own consumer brands than we did for contract manufacturing, and the consequential EBIT margin decline mainly then related to a lower fixed cost coverage or a negative operational leverage development as we saw a sales decline in the quarter. Lastly, in Division South, with a more positive development continuing the year-over-year profit improvements with organic sales increasing by 10.2%, largely driven by licensed brands, but also some of the own brands developing strongly and more profitable contract manufacturing in France. Own Consumer Brands in total came in flat year-over-year. However, it's fueled by continued strong growth in French grocery trade, while we have some more challenges in the French health resource business. And a materially improved gross margin driven then by continued efficiency improvements, but also improved sales mix. Looking instead at it by sort of from a portfolio perspective, by category, starting with the organic products, where we had a total organic sales development of minus 2%. However, we did see growth in our own consumer brands where the marketing and innovation initiatives and the investments we're doing in our brands is paying off for several brands with strong organic growth. I'll come back to one such example in a little bit. However, also with some challenges, particularly in Division North, but we should also recognize that the unusually hot summer in Continental Europe, has impacted the total category negatively with actually total industry-wide negative growth numbers at the first -- at least the first half of the quarter as consumer habits have been impacted by the heat wave. The brand growth is still not enough to compensate for contract manufacturing development. We are partially impacted then by the fire in Spain, but also the previously alluded to optimization for profit. Looking at Health Foods, we saw an organic growth at minus 7%, which is driven by the optimization of contract manufacturing. On the branded side, we saw a mixed picture with several brands performing well, such as Friggs. I'll come back to that, while some brands face challenges. And we've seen the Risenta brand off to a strong start as a fairly new part of the group and contributed then to structural growth. Lastly then on the Consumer Health side, an organic sales growth of minus 3% with some key brands lagging behind our growth plans that requires additional focus to drive the implementation of the strategy and the growth trajectory. Again, I'll come back to that. And some brands being negatively impacted on the top line perspective by a conscious optimization for profit. Just want to make one example of the initiatives we're doing on the consumer health side gathering our strong consumer health proposition with our strongest brand, Friggs, bringing supplements to the masses. So launching a new range, and this is just a few examples of a mass market-focused relatable product, very much in line with the popular and growing niches. So focusing on very popular, highly growing products, like, for example, Creatine but in a very approachable format, chewable tablets and under the mainstream and very approachable brand, Friggs. Launching this into the grocery trade, so approaching -- getting access to the mass market with a very positive initial receipt both from customers and from consumers. So we are excited by the opportunities that this launch starts to open up, bringing 20 products into a more approachable and mass market format. I also thought I'd relate back to the point I made about the strong growth that we see in parts of the organic portfolio, where we're doing a very good job leveraging a strong local position. The Helios brand in Norway is a good example, where we've, over the past 2 years, achieved strong growth in combination with increased profitability. Thanks to successfully leveraging clean eating interest in trends with agile innovation and marketing plans and very disciplined omnichannel execution. So really proving that the logic and structure of the strategy is right and when successfully implemented, drives strong results. I'm also pleased to see that whilst the -- whilst we're pleased with the profit improvement of SEK 1 million in the quarter, and we're pleased with the strength in cash flows, underlying, we are not happy with the total progress we're making in the quarter, and we think that -- and our ambitions are considerably higher than the growth that we achieved in the quarter. But structurally, we're still happy to see that we are in a longer-term perspective, making clear progress towards our targets with a material improvement on both the organic growth of our own consumer brands, our EBIT margin as well as our leverage over the past couple of years. And with that said, a few points on our short-term priorities to continue that trajectory and accelerate it even further. First of all, and most obviously, looking at turning around the development in the Division North after a tough quarter. So accelerating improvement, focusing -- with a focused revamp on -- or a focused revamp of our brand proposition as well as a cost overlook to continue to optimize the business. We are working on accelerating the strategy implementation on the Consumer Health portfolio. I mentioned one example of this just a little while ago, but we see a material improvement to accelerate the growth in this category with a strong starting point that we have. And then lastly, make sure that we maintain the positive momentum on several brands. Again, I mentioned one of those, Helios, just recently. But we have several strong brands in the organic and health portfolio, where we also have a positive development that we want to continue to accelerate. With that, I'm going to hand over to Niclas, who's going to take you through the details of the financials.

Thank you, Henrik. And let me start with the financial summary for the quarter. Net sales were up by SEK 15 million, including Risenta impact of SEK 40 million. Adjusting for currency impact, total organic growth came in at minus 3.7%. In line with Henrik's earlier comments, total gross margin improved by 0.3 percentage points, mainly from improved sales mix with a gradual and deliberate shift from sales of lower profit contract manufacturing to higher profit owned consumer brands. In consequence, EBIT improved by SEK 1 million with an unchanged EBIT margin of 5.0%. And apart from the increased gross margin, we saw a clear positive impact on EBIT from the cost reduction program initiated in 2025. This was, however, partly offset by increased sales and marketing initiatives as well as a larger bad debt provision in Norway. The financial net continued to improve versus last year this quarter with SEK 9 million to plus SEK 2 million, which during this quarter mainly was driven by positive FX effects. We also see the longer-term positive impact from more favorable conditions in the new financing agreement as well as lower indebtedness. Net result landed on SEK 39 million, taking net IAC of plus SEK 1 million into consideration. IAC during the quarter was mainly made up by received insurance compensation related to business interruption insurance in Spain, plus SEK 7 million and costs related to a fraud incident, minus SEK 5 million. This incident has led to a further reinforcement of the internal control environment, and we hope that most of the loss will be covered by the group's insurance. This is, however, not yet reflected in the accounts. Cash flow from operating activities came in at SEK 57 million, which was an improvement of SEK 9 million versus last year. About 1/3 of the improvement was related to the P&L and 2/3 were related to changes in working capital. And the quarter ended with a leverage of 1.0x, a substantial improvement versus last year, where we stood at 1.6x. Now moving over to the sales development for the quarter. And as already mentioned, net sales increased by [ SEK 15 million, ] equivalent to 1.7%. Structural growth from Risenta contributed SEK 40 million and FX effects, an additional SEK 8 million. In consequence, the organic sales development was negative with minus SEK 33 million, equivalent to minus 3.7%. It's worth noting that 90% of the organic sales decline is referable to contract manufacturing and business-to-business sales, but it's parts of our business where we have taken a strategic decision to phase out and gradually replace contracts with low profitability. And this development for contract manufacturing and business-to-business is also visible in the graph on the right where we see a double-digit organic decline for both contract manufacturing and business-to-business. Our contract manufacturing business showed a decline in Division Nordics and Division North, respectively, mainly related to the discontinued low-profit contracts. But in Division South, contract manufacturing sales increased mainly related to new and more profitable contracts in France. And the B2B branded business in Germany is still under transition to focus on profit over volumes. In Q3, we saw a positive effect on margin. However, volumes of new, more profitable contracts were not enough to compensate for the replaced old contracts. The license business declined by 2.2%, mainly referable to certain consumer health brands in the Nordics offering seasonal products. And to round off net sales analysis, our own consumer brands came in with a slightly negative organic growth of minus 0.2% for the quarter. Besides a few exceptions, in particular, related to division North, we generally see good sales development for our larger prioritized brands, most of them within our organic product range, but there is also good progress for our largest brand, Friggs within the health food category. And in line with what Henrik previously touched upon, on a rolling 12-month basis, organic growth of our own Consumer Brands portfolio has improved by 3.7 percentage points versus Q3 last year. Okay. So let's head over to the quarterly EBIT development compared to last year. Higher volumes and improved gross margin jointly resulted in SEK 4 million more gross profit. This improvement, including impact of Risenta and FX adjusted was mainly driven by a favorable sales mix. Sales, marketing and administration expenses increased by SEK 7 million net, also including Risenta impact. We now see the full effect of our cost reduction program for 2025. This positive impact was, however, largely offset by increased investments in direct sales and marketing activities to facilitate future profitable growth. And OpEx in Q3 were also negatively impacted by a bad debt provision of SEK 3 million related to a customer in Norway going into reconstruction. The majority of other income of SEK 2 million came from sale of equipment and the FX effect from translation and revaluation was SEK 2 million compared to last year. And to conclude, EBIT landed on SEK 46 million, which was an improvement by SEK 1 million with an unchanged EBIT margin of 5.0%. And on the right-hand side table, we illustrate the quarterly and the rolling 12 EBIT development during the last 2 years, and it's encouraging to see the gradual improvement with rolling 12 EBIT increasing to SEK 158 million this quarter end, which is SEK 36 million higher than by the end of September last year. And consequently, the rolling 12 EBIT margin has improved from 3.3% to 4.3%. Let's continue to the quarterly cash flow. In Q3, we saw a continued buildup of inventory, partly seasonal, however, on a substantially lower level than in Q2 and much in line with Q3 last year. Receivables increased during the quarter, in part due to higher sales volumes and following the same seasonal pattern as in 2025. This negative working capital impact was partly offset by an increase in payables, in part related to renegotiated and improved supplier credit terms. To summarize, the operating cash flow landed at SEK 57 million, an improvement by SEK 9 million versus last year. And as previously mentioned, about 1/3 of the improvement was related to the P&L and 2/3 were related to changes in working capital. The right-hand side illustrates the cash flow trend, displaying an increase of rolling 12 operating cash flow by SEK 68 million compared to Q3 '25, up to SEK 254 million. So we're approaching the end of the financial review, summarizing our cash and debt situation. The quarter ended with SEK 789 million in available cash, an increase of SEK 44 million versus last quarter and plus SEK 133 million versus Q3 last year. And available cash now represents 22% of the last 12-month sales, which is a very healthy level. And finally, let's look at the net debt situation. In Q3, IFRS 16-related debt was increased by some SEK 30 million related to new rental contracts, taking IFRS 16-related net debt to SEK 132 million. Despite this increase, total net debt decreased by SEK 16 million to SEK 301 million during the quarter. And this means a continued historically low net debt in relation to adjusted EBITDA, including Risenta pro forma effect of 1.0x, an equivalent to 0.7x, excluding IFRS 16 effects. The current leverage is well within our financial target, establishing our strong financial position going forward. That rounds off the financial review, and back to you, Henrik.

Yes. Thank you very much. So with that, we will open up for questions. Over to you, operator.

[Operator Instructions] The next question comes from Alice Beer from ABG Sundal Collier.

Can you hear me?

Yes.

Great. You've said that -- starting off, you said the packaging and transport costs are rising and the raw materials could follow this autumn. How much of the price increases you need have been accepted by retailers? And how long a lag should we expect before prices catching up?

Yes. Alice, good question. So those -- most of those -- that varies a bit by geography in all fairness. And most of those negotiations or discussions are actually ongoing right now. But if we look at the situation as it stands now, we remain, let's say, fairly optimistic to get coverage for what we see so far. However, we should recognize that given the unusually hot summer and given the geopolitical situation, there is a risk that we will see more inflation coming through as the full impact on harvest after sort of this -- now we're in the harvest period still is seen. So far, we're quite optimistic in getting through what we see to protect the margins. But partially, that remains to be seen as we see the impact on the rest of the harvest.

Okay. Great. And moving on then to -- on contract manufacturing in the Nordics, how much of this low margin volume has led to exit? And how much of the fixed cost in the product facilities can you adjust and when?

Yes. So I think there is less and less to do where that has been a sort of a conscious strategy over the past year or so to both do the thorough analysis and also the optimization of the portfolio, there might be some small parts still to optimize, but less so than what we've seen here in the past couple of quarters. And we have done some good fixed cost optimization. In all fairness, we also have to recognize that even from a fixed cost coverage perspective, some of the contracts we've exited were questionable in terms of the marginal contribution. But what I'll add is there's an important piece of the puzzle here. This relates particularly to one manufacturing cycle in the Nordics, and that is also the manufacturing site where we are moving in the Risenta production. So the Risenta production is also part -- Risenta production in-sourcing as part of the solution and the optimization of this puzzle. So basically, very simply put, we are exiting low-margin contract manufacturing business to give room for production of own consumer brand in the shape of Risenta.

Great. You talked about more transformative alternatives for Spain? Is the divestments being actively marketed? And what's the book value and run rate loss attached to the Spanish operation?

No, marketing of the business is not actually pursued. And when we talk about more longer-term transformative alternatives. I think it's -- here and now, we're very committed to drive business into a profitable growth and positive cash flows. And longer term, actually, the fullest broad spectra of alternatives are available in terms of upping the investment levels further to accelerate the growth in -- the vast majority of what we manufacture market in Spain is tofu and tempeh, and that is a category on a European basis that's growing very rapidly. But there could also be all the way to parts divestment alternatives. But there's nothing actively marketed at this point. And I think second question, we can't really answer off the top of our head. So we have to come back separately on that.