Release Date: July 18, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Midsona AB (FRA:9KF, Financial) returned to organic sales growth in Q2 2024 after seven consecutive quarters of negative growth.
- The company significantly strengthened its margins and operating results, with EBIT before one-off items amounting to SEK22 million compared to minus SEK1 million last year.
- All three divisions reported improved volumes and stronger operating profits.
- The gross margin increased to 28.9% from 26.4% the previous year, despite high raw material prices.
- New business generation efforts were successful, including new listing agreements for the brand Davert and several private-label contracts.
Negative Points
- The cash flow from operating activities was negative, landing at minus SEK19 million, which was SEK36 million weaker than last year.
- The Nordic division saw flat sales due to the termination of unprofitable contracts and weak market conditions for organic foods in some Nordic countries.
- The South Europe division continued to struggle with negative EBIT, despite improved production efficiency and price increases.
- The company still faces significant supply chain challenges, particularly in the North division.
- Market conditions for organic foods in France remain depressed, impacting sales and profitability.
Q & A Highlights
Midsona AB (FRA:9KF) Q2 2024 Earnings Call Highlights
Q: Hi, Peter and Max and thanks for the presentation. To start off, I'm a little curious on your recent marketing campaigns such as the one for current market, have you seen any positive impacts from your recent marketing campaigns, can anything be said about that?
A: Yes, I would say that this is something that we have launched during the year. And first of all, the consumer response has been very good to that. We did not grow the brand in the second quarter, but I would say that that is more due to the fact that it's still a quite depressed market for organic foods, but we are much closer to grow now compared to a few quarters ago. So things are moving in the right direction and are a clear ambition is that by good marketing, good product as well as we should get the market the new or different brands back to growth.
Q: Would you say that the issues in South Europe are out of your control or would you say that most of these challenges are something that you can help influence operationally in order to make the division profitable? I hope that question is clear.
A: No, I think it's two different things one is our production abilities in Spain and we are for sure improving. But of course, we cannot be happy with a negative EBIT. This is something that continues. We are right now working on a major implementation project to streamline the factories in Spain, and that's work in progress right now. So I have good hopes that we will continue to improve in Spain. In France, it's a little bit were of a sales issue and it's especially the organic health trade in (inaudible) has been seeing some declines, which has impact was quite turbulent. So we're also working on a plan to make our offering even more relevant in that segment. But of course, we would also be helped from better market conditions at that's hard to make a judgment on how market conditions will develop. But my overall assumption would be as in flies inflation subsides and the consumer sentiment gets better, the market should get back to grow also in France.
Q: I know that you tie up quiet little capital. Would you say that the new product mix generally requires less working capital tie-up?
A: We tied up less maybe than you anticipated. We are still saying there is room to be continue on this level and yes, there is a difference dependent on the product mix as we -- and it's not product mix. It's only -- it's also business mix in the sense that I highlighted that we have a distribution agreements that now has an increased scope and it dependent of how these are set up, these can actually require more work -- working capital. However, they have a good scale autonomy when it comes to earnings. Then yes, our focus of streamlining the portfolio have, of course, also have a clear intention to improve our working capital situation. So we have a better mix in our portfolio for better optimized working capital in our own brands currently.
Q: Can you provide more details on the financial targets you mentioned and how you plan to achieve them?
A: We have set a target to achieve an organic growth of 3.5% per year. We're actually getting quite close that in the second quarter we achieved 2.7%. This was a good step in the right direction. So we have an EBIT margin target of 8%, and we are quite some way from this in quarter two by (inaudible) December, quarter two is typically the quarter of the year, but there was margin compared to the same quarter last year were improving by 2.5-percentage-points and leverage are already below that target level. This means that we are financially sound. Short term, we will focus on further strengthening our balance sheet, but long term that this could open up for M&A activity.
Q: What are the main drivers behind the improvement in your gross margin?
A: The improvement in the Group's earnings were mainly driven by the sales increase and also by the higher gross margin that we saw in quarter two, it really was a result of good price management and also streamline arrangers. We are focused on best sellers and the termination of a number of less profitable contracts. We also saw efficiency improvements introduction, the short read the impact in this quarter and the gross margin increased to 28.9% before welfare, one of items again compared to 26.4% at the previous year. And this was actually despite continued quite high raw material prices.
Q: Can you elaborate on the performance of your divisions and their contributions to the overall results?
A: All three divisions showed improved operating profit compared to last year. In the Nordics, we saw flat sales due to the termination of unprofitable contracts and weak market conditions for organic foods in some Nordic countries. The North division was the standout performer with 11% growth despite supply chain challenges. We are addressing these challenges by installing extra shifts and improving production efficiency. The South division improved its EBIT to minus SEK2 million from minus SEK9 million last year, mainly due to improved production efficiency in Spain and the implementation of price increases and termination of unprofitable contracts.
Q: How are you addressing the production constraints in Germany?
A: We are now addressing those production constraints and are adding new shifts to the German operation. The demand for our products remains high, and we believe that by increasing our production capacity, we can better meet this higher-than-expected demand.
Q: What are your plans for future growth and achieving your financial targets?
A: We are focused on increasing profitability and strengthening our market position for the future. To achieve this, we will build a strong organic platform, develop our health food brands, and achieve greater efficiency and harmonization across the organization. We are confident that over time, this will bring us to our financial targets. We have also announced a new organization to deliver on our strategy and meet our financial targets, which includes centralizing functions like marketing, innovation, purchasing, and HR to increase coordination and create the right conditions for profitable growth.
Q: Can you provide more details on the new listing agreements and private-label contracts you mentioned?
A: We had new listing agreements for the brand Davert and signed a number of private-label contracts. The main boost for the brand Davert was the contract we signed with a nationwide grocery store chain in Germany, which started in April. This has significantly contributed to our improved profits.
Q: How do you plan to address the challenges in the organic foods market in France?
A: We are working on a plan to make our offering even
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
