Viva Wine Group AB

STO:VIVA

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to Viva Wine Group Q2 2024. [Operator Instructions] Now I will hand the conference over to the speakers; CEO, Emil Sallnäs; and CFO, Linn Gäfvert. Please go ahead.

[Emil Sallnäs, executive]

Good morning, and welcome, everyone, to our Q2 '24 presentation. This is agenda for today. And before we go into the quarterly update on financials, I just quickly want to start by giving you a short introduction to Viva Wine Group. We have 2 major segments, Nordics and eCom. In the Nordic monopoly market, we are the market leader in wine, and we also have a profitable eCom business in Europe.

Our operating companies are in the Nordic monopoly markets, Sweden, Finland and Norway, while our eCom business is based in Germany, which is also our main market for eCom. Within eCom, we are operating 3 platforms, Vicampo, Weinfürst and Wine in Black. And in total, we are now present in 11 different markets.

And now let's move on to the quarterly update and the performance summary. In the quarter, we once again reported record high market shares in the Nordics, and we continue to strengthen our position as #1. Net sales for the group increased by 6.4% in Q2 with an organic growth of 6.6%. We can also report that we are again showing some organic growth in the eCom segment.

Finally, we are very happy that our adjusted EBITDA margin of 9.6% shows a significant increase versus last year. There is some news in one of the markets in Finland, where a new law amendment in Finland came into effect in June, allowing sales of wines up to 8% in grocery stores. We were well prepared and positioned for this change, and [ our ] 8% alcohol wines are based on line extensions of our strongest brands.

This has been very well received by the Finnish consumers, and we have further strengthened our position in the Finnish market. Now it's time to look at the financial performance, and I will hand the word over to Linn.

[Linn Gäfvert, executive]

Thank you, Emil. We have a positive net sales growth of total 6.4% for the group. The underlying business continues its strong development and group organic growth is even slightly better with 6.6%. The Nordics is the driver and all countries in the segment, Sweden, Finland and Norway contribute. eCom shows a stabilization in the quarter and has a slight organic growth. We see a strengthened adjusted EBITDA margin, both segments contribute main part from the Nordics and comes from increased sales, stronger gross margins and good cost control.

Well-balanced price adjustments have had a positive contribution to our gross margins and our solid sales development proves that consumers have remained loyal to our strong portfolio of brands. We will continue adjusting our prices in the next pricing windows. Our net working capital is in line with last year. The net working capital towards net sale, hence, is improved. Our net debt is well within our targets.

Taking a look at the cash flow. We have a very strong operating cash flow from the ongoing business. We have a planned inventory increase related to the increased sales and the new product category of 8% wines in Finland. We also have onetime effect related to payment of our previous bonus provision to eCom founders of [ SEK 33 million ] from us. That is now settled. In addition to this, the financing activities were affected by the dividend paid during the quarter, our amortization is at lower level in the quarter compared to last year as a result of the refinancing finalized in Q3 last year.

[Emil Sallnäs, executive]

Thank you, Linn. So now over to the performance by segments. We have a continued very strong momentum in the Nordics. Our sales once again increased more than the market, and we reported record high market shares in the quarter in all the Nordic monopoly markets. The timing of Easter had a negative effect on total market sales, while the underlying trend remains soft. So we are growing very strongly in a market that is going down at the moment.

For the Nordic markets combined, we reported a market share of 22.9%, which is an increase of a whooping 2.5 percentage points from last year. We thereby strengthened our position as the #1 in the market. Our great performance in the Nordics is proof that our agile and consumer-centric model delivers also in more challenging times when the market is not growing.

In Sweden, we exceeded 29% market share in the quarter and beat the market in all wine segments. We saw strong growth in white wines annual sales, also sparkling wines continue to be important in the second quarter. And one example is the newly launched Isabel Acosta, which you see on the left-hand side of the picture, a Sparkling one from Spain, which has sold over 70,000 bottles since the beginning of May, which is a very strong start for a new product launched in the ordering assortment, which means that it did not have any guaranteed distribution from Day 1.

Also in Finland, we continue to beat the market. Our long-term strategy to increase market shares in white wines is clearly showing results. An example of a new white wine is the Stretto Prima Riesling bag-in-box from Italy, which you see in the picture as well. As for Norway, we made a jump in market share to 6.3%. The increase in volume and market share in Norway is driven both by organic growth and by our latest acquisition, Target Wines.

We gained market share in all line segments. One highlight from the quarter in Norway is [indiscernible], which is a tender win, which was successfully launched in May. It's also one of the first products of Viva Wine Group once upon a time, the producer as such.

[Linn Gäfvert, executive]

And looking at the net sales for the Nordics, it increased with 8.2% in the quarter. The increase was driven by both volume and price increases. In addition to our strong momentum seen in previous quarters, we also benefited from the supply problems that affected some of our competitors as well as the initial rollout of the 8% wines in grocery stores in Finland.

The adjusted EBITDA increased along with the adjusted EBITDA margin in the quarter. The main driver is the increased sales and improved gross margins in the period.

[Emil Sallnäs, executive]

Moving over to the segment, Viva eCom. In this quarter, we have seen the anticipated stabilization of the eCom market in Europe. Organic growth showed cautious positive figures and a slight improvement versus previous year. However, the market is still soft, and we expect the coming quarters to be somewhat of a bumpy road. Growth has been positively impacted by our initiatives to strengthen customer offer and changes in organizational structure.

Our focus, as mentioned in last quarter, is now continued growth in 11 countries where our total addressable market is over 230 million consumers.

[Linn Gäfvert, executive]

And taking a look at the numbers, the eCom segment had a positive development in organic growth for the quarter even though with modest figures of plus 0.1%. Net sales, however, was slightly down versus previous year due to discontinued businesses during last year. Consumer sentiment continues to be at low levels also in Q2. We continuously work, as Emil said, on improving our operating excellence, and we expect to see results gradually impact both net sales and EBITDA level.

The gross margin continues to be very strong, reaching almost 41% in the quarter, resulting in an improved adjusted EBITDA margin versus last year.

[Emil Sallnäs, executive]

And now a few words on our sustainability. During the spring, during the quarter, we have strengthened our sustainability organization as an integrated part of our business, both at group level and more importantly, in our operating companies. Further on our work on the CSRD implementation is progressing according to plan.

Before our final remarks, I would like to comment on our financial targets. When it comes to our growth target, we are once again reaching and beating the organic growth level for the Nordics and are well above 4%. In our eCom segment, we are not reaching our target, but as already mentioned, we have seen improvements in Q2, but expect a bumpy road going forward. Regarding our profitability target, both Nordics and the eCom segment are now within touching distance of our target of 10%. Our net debt-to-EBITDA ratio is below our target of 2.5x. Finally, the dividend for 2023 was paid out in Q2 with SEK 1.55 per share.

To summarize, Q2 was a very strong quarter, and we have further strengthened our market position in the Nordics as the #1 wine supplier. Our focus on the margins in the Nordics has now started to show real results, and we continue to have a high focus on improving the margins in the Nordics moving forward. In eCom, sales growth is our main focus. And as mentioned in Q1, we -- and previously in this call, we aim to grow in our 11 existing markets.

When it comes to M&A, we are a company that always has been active in the M&A field and are always evaluating potential targets. Finally, we see a strong potential going forward. Driven by our biggest segment Nordics, we have a very strong momentum with both higher sales and stronger margins. We are, therefore, confident that 2024 will finish strongly for Viva Wine Group.

That concludes our comments. And now it's time for the Q&A session.

[Operator]

[Operator Instructions] The next question comes from Fredrik from Ivarsson (sic) [ ABG ].

[Fredrik Ivarsson, analyst]

This is Fredrik, ABG. Can we start on with the Nordics maybe? And on the gross margin, we saw it up 2 percentage points from Q1. How should we think about this as we look ahead since currencies are, I guess, reasonably flat, but there is a pricing window coming up during the fall season.

[Linn Gäfvert, executive]

Yes. As mentioned also in Q1, we expect to see gradual improvements during the year going forward as well. But now we have had a 2% uptick but in Q3, we expect gradual improvement, but the pricing window, as you mentioned, is at the end of Q3. So therefore, an extra uptick will be in Q4. So gradual improvement is expected during the year.

[Fredrik Ivarsson, analyst]

Okay. That's very clear, reassuring. And then second question is staying in the Nordics, but focusing on OpEx, you spent, I guess, around SEK 60 million in the quarter and when I look a few years back, you spent closer to SEK 80 million. So what's the key drivers for this lower OpEx spend? And is this new level sort of sustainable as we look into the coming years?

[Linn Gäfvert, executive]

Yes. Well, we have made improvements and efficiencies during last year. However, looking at the year, Q1 and Q2, we have some timing effects. So looking at in Q3 compared to last year, we don't expect to see savings. We expect to see some increase in Q3. Looking at Q4, we expect to see pretty much the same level or slightly below last year. And in total, of course, this will give us a year where the ratio, net sales to OpEx, will be somewhat better, but no significant decrease in the coming 2 quarters compared to last year.

[Emil Sallnäs, executive]

Maybe to add also, I mean, obviously, the -- our focus on margins gives us a result. And if you look at the EBITDA level as well. I mean the gross margin is as Linn explained, but also marketing as part of the OpEx. And in order to look more for margin than growth, now we get the growth anyway, but that's also a shift that you have seen.

[Fredrik Ivarsson, analyst]

That's also very clear. And then jumping to eCom, obviously, very reassuring to see the market coming back. Curious there, if you've seen any sort of changes in customer acquisition costs as the market pressure sort of eased or is the level similar to what we saw a couple of years back?

[Emil Sallnäs, executive]

It still stays fairly similar. We don't see a huge difference in the customer acquisition costs, unfortunately. But once the sentiment comes back, we expect that to go down as well.

[Fredrik Ivarsson, analyst]

Okay. Good. And last question from my side before I jump back in the queue. Maybe to Linn on working capital. You said it was up partly due to strategic initiatives, what kind of initiatives are you talking about? If you could give some sort of color to that statement.

[Linn Gäfvert, executive]

Yes, the inventory levels.

[Fredrik Ivarsson, analyst]

Whatever strategic initiatives you referred to?

[Linn Gäfvert, executive]

We have increased our inventory levels as you see compared to last year, and that's partly due to the increased sales, but then we also have this new line of 8% wines in Finland. There is a new initiative that we built up to be able to support new product line to the market. And also looking at our eCom segment, last year, we had the move of our warehouse and so, but I would say that the main part is from the new product category and the sales increase in general.

[Fredrik Ivarsson, analyst]

Okay. So that's the main reason for the higher inventory?

[Linn Gäfvert, executive]

Yes.

[Operator]

The next question comes from Markus Augustsson from Carlsquare.

[Markus Augustsson, analyst]

This is Markus from Carlsquare. So I have a question regarding the product mix in the Nordics. How has that [indiscernible] changed in a scenario of improved economic conditions? I mean, you are now seeing a trend towards lower price bag-in-boxes, how would that change in the improved market and economic conditions?

[Emil Sallnäs, executive]

Well, it's a complicated question to answer. But in general, I would say how we work is that we do increase price on our historic products in order to gain margin while we also launched a huge number of new products, which is also an important part of our business model. So we meet the demand for lower-priced bag-in-boxes with new products, where we can, to a large extent, also have better margins than we would have had if we only had the old products that were launched with different -- under different circumstances.

I don't know if it makes sense, but we always move product up in the price ladder, and then we replace the ones in the lowest part with as good margins as you can get in that segment because obviously, in the low-price segment, that's not where the greatest margins are. But if you launch a new product and you know the conditions, the exchange rate, all the costs around it, then you can actually have products with a very decent margin from the start.

[Markus Augustsson, analyst]

You mentioned that you will increase prices during the next windows, I mean, I think there is one coming up in September. But there are also more windows for price increases coming up. You will continue doing that for rather months or how long can we expect prices to be high?

[Emil Sallnäs, executive]

It is a continuous work. And we always said that we do not increase prices in one go, in one period. We have done this basically the last 2 years, in every pricing period, we have been quite active in that part. But we try, of course, to be -- to increase the price slowly towards the consumer, so we keep as much sales as possible. And we know, of course, since the information is in that we will increase prices now also in September, October, depending on which Nordic country you talk about.

Then looking into March next year, it's more difficult to say, but we do have a very strong focus on the margin. So obviously, we want to get above those 10% and moving upwards somewhat if you look at the EBITDA margin.

[Markus Augustsson, analyst]

And on eCom and marketing efforts, how in the marketing effort in current markets and how would the change in the market with better conditions. And also the final question there is, how would increased intensified marketing affect your profitability in the eCom segment?

[Emil Sallnäs, executive]

In general, I would say that our marketing within eCom for us is very dependent on total demand, whether it comes to traditional digital marketing, the total demand is, of course, people searching Google searches, which is the easiest example. Of course, it's much more complicated than that nowadays. The more people that look to buy wine, the easier it is to acquire a customer and the cost should thereby go down.

Then, of course, we do have, in the case of Google, there, but business model against us. So I mean, those prices tend to go up. But then if you look at the leaflet marketing that we do for some of the brands where we send leaflets in other eCom players products, which is a very, very efficient marketing effort.

Then of course, we are dependent on total demand within eCom. And looking at eCom in total in Germany, our main market, it is weak, not only for wine, but also for eCom in general. So that's how we see that marketing costs will go down if the total demand or the sentiment then goes up from the consumer side.

[Operator]

[Operator Instructions] The next question comes from Rauli Juva from Inderes.

[Rauli Juva, analyst]

It's Rauli from Inderes. Just one question from my side. I wanted to ask on the Finnish legislation change, how do you see that impacting going forward, first of all, your volumes since there will be obviously lower volumes in the monopoly chain with the change. And then secondly, on the margins with this 8% wines in the grocery have a different margin profile than the kind of average you have.

[Emil Sallnäs, executive]

When it comes to the 8% category, if we stay at that, it is way too early to say something. It has been well received in general, if you look at the total market. Now we know from the latest info we have gotten in July and August that it's a little bit cooling down the interest on the consumer side. So I mean we -- for our volumes, we do not expect. We are growing very strongly and still grow in market share. We didn't grow totally because of the seasonal effect in Q2 for Finland. But we expect to continue growth in our term. So the 8%, let's see. But as mentioned, we do feel that we have our fair market share in the grocery part as well.

When it comes to the margin, [ fair market ] and with that, I mean that we have a similar market share. As far as we can see, the numbers are still a little bit opaque, because everyone has not published their numbers yet. But when it comes to the margins, yes, they are somewhat lower in the segment. But if you look at our Finnish business overall, we do not expect margins totally to go down for the Nordics in terms of our segments.

[Linn Gäfvert, executive]

Yes. And we also think that we have gained market position with this new product line since we have not decreased our volume, we have increased our market shares in the [ ALCO ] business sites. So it's an addition and from seeing the numbers, we have increased the total market position.

[Emil Sallnäs, executive]

We do have a couple of -- sorry, there's one more question from Nicolas.

[Operator]

The next question comes from Niklas Elmhammer from Carlsquare.

[Niklas Elmhammer, analyst]

I was just wondering about -- I mean it's encouraging to see the relative improvement in eCom. At the same time, you mentioned that you see a bumpy road ahead. If you could elaborate on that, please?

[Emil Sallnäs, executive]

Yes. I know that bumpy road is not in the financial school books, but our definition of a bumpy road is that it can go up a little bit, it can go down a little bit in the coming 2, 3 quarters, and it's very much related to consumer sentiment. We have so far seen a quite a direct relation between various consumer sentiment indexes in Germany and the total development.

So if we now say that we see that it's still quite negative, and you would see that if you looked at it as well, you would see that Q3 started not great. So that's what we can say at this stage. But a bumpy road for us is going up a little bit, going down a little bit. It's not like a clear break that we are now going upwards only.

[Niklas Elmhammer, analyst]

Yes. Do you still expect positive growth in second half? Or is that too early to?

[Emil Sallnäs, executive]

It's way too early to say. Within eCom, it's so dependent on Christmas sales, Black Friday or Black Week nowadays. So it's very, very early to say. And considering the sentiment, we don't want to say anything specific on that. But Q4 is, of course, in all eCom, a very important quarter.

[Niklas Elmhammer, analyst]

Okay. And just on the financial details. You had an impairment charge in the quarter. So what was that related to, please?

[Emil Sallnäs, executive]

It is an old financial investment in a wine producer, which we now unfortunately have to value at 0 and that is the total impairment. We do not expect -- or there is not anything more to impair. And this is the only kind of -- that's the only investment of this kind that we have had. So it is truly a onetime thing, which -- it's more than -- it's pre-IPO stuff, so to speak.

Yes. So we do have a couple of questions. Let's start with Alexander. Can you elaborate on the gross margin in the second half of 2024 as well as for 2025, if we assume steady state in the [ Euroset ] from current levels.

[Linn Gäfvert, executive]

Yes. We have discussed the gross margin a bit, and we expect to see gradual improvements during this year. And if currency effect stays flat, as you say, also next year.

[Emil Sallnäs, executive]

Second question, on your conference call for Q1, you indicated flattish OpEx levels in 2024, but OpEx is down 10% year-on-year in the first half of the year.

So I guess, it's fair to assume that OpEx is down for the whole year of 2024? Or should we expect a steep ramp up in H2. I think you partly answered already.

[Linn Gäfvert, executive]

Yes. I partly answered that one, and there is some timing effect. So we expect Q3 to be at higher levels than last year, but Q4 pretty much in line or slightly better than last year. So looking at the total OpEx level for the year, it will be a better ratio towards net sales.

[Emil Sallnäs, executive]

And then finally, can you elaborate on the start of Q3 in eCom, the same trend as in Q2? Or are you seeing further improvement?

Well, as already indicated, we expect this bumpy road, and I think Q3 has started within those parameters, not up, but down a little bit.

Next question from [indiscernible] [ Gratitude Capital ]. Approximately how much was the positive revenue effect from the logistical issues with one of your competitors?

While we suggest that you look at the Q1 organic growth, which was around 6%. Now we did have 8% in this quarter. And I think the difference between the 6% and 8%, you will find the truth. But please note that we have seen that we have kept quite a lot of consumers that have changed to our products and not changed back, so to speak, to our colleagues. So somewhere in between those two.

I think that concludes all the questions. Thank you very much, and hope to see you soon again.