Viva Wine Group AB
STO:VIVA
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Earnings Call Analysis
Summary
Q3-2023
The company reported a strong quarter with net sales up by 5.6%. Despite facing significant FX impact in the Nordics affecting the EBITDA margin, which stood at 8.1%, down from last year, the company showed resilience through proactive measures like price increases and cost control. The Nordic segment boosted its market share from 19.5% to 20.8%, indicating growth in a declining market. Strategic refinancing led to improved terms, enhancing the company's capability for future initiatives. Investments in Eastern European e-commerce markets are being prioritized, where potential is seen as higher than in the Nordics. The company expects to slowly reach its growth targets, and although the margin improvement hinges on FX developments, the company remains optimistic, encouraged by recent positive currency trends.
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Good morning, and welcome to Viva Wine Group and our quarterly call. Today, we will present an agenda consisting of the following parts where we will do a brief introduction. We will go into the quarterly out -- into the quarterly update in words and then followed by some numbers. Then we will talk a little bit about sustainability and then we will have some final comments on the totality of the quarter.
Viva Wine Group is a business that has two major segments. We are 80% in the Nordics, where we are the clear market leader in wine in the stable monopoly markets, Sweden, Finland and Norway. The #1 position is for the combined of the 3 monopolies. 20% of our business is in a profitable European e-com business, where we are seeing great growth potential.
In the -- in addition to that, we are also very focused on sustainability and have been for a very long time a pioneer and an industry leader. Our operating companies are in Sweden, Finland, Norway and in Germany. And if you look at the map for Germany -- sorry, if you look at the European map, you will note that we have a new market in Romania.
So our business is based in Germany, but selling in many European markets. The quarter started very well, and we've had another quarter with increased market shares in the Nordics and continued strong margins in the e-com. Our market shares in the Nordics increased to 28.8% compared to 19.5% last year, which is very strong despite the weak underlying markets.
Our net sales increased by 5.6%, while our EBITDA margin was 8.1%, which was down compared to last year, but it is still at a strong level, considering the significant FX impact in the Nordics.
Yes. And during the quarter, we have proactively renegotiated our financing. We are very happy with the result. We had one bank solution for current debt. We now have established a bank syndicate consisting of SEB, our long-term partner, but we have also added Danske Bank, and we are very proud to have those two aboard.
The term loan was reduced and our conditions was renegotiated. That will have a positive impact on our cash flow going forward. Revolving credit facility was also established and our refinancing creates more headroom for strategic actions going forward.
And then I would like to revisit the Winefinder court case that we talked about in our last call. So first of all, repeating on what has been decided. First of all, it is legal to sell -- have e-com sales of wine to Sweden from another European Union country, which is -- but not from a Swedish warehouse and you have to pay Swedish alcohol tax.
In addition, the court case confirmed the status of the retail monopoly. And our view, which we have promised to come back a little bit on after having analyzed this in the last period, we still see that there is no major changes in the current market conditions for us to be expected. The e-com sales have existed in Sweden for 5 to 10 years. So it's really nothing new.
On our side, we have evaluated the potential in relation to other markets. And for now, we choose to focus on our e-commerce business in Continental Europe and specifically in Eastern Europe, which we see as more promising than the Nordics at the moment.
And taking a look at the group total view on the financials, we, as me and Emil mentioned, have a very strong net sales growth in the quarter of 5.6% where Nordics are contributing a lot. We also have an organic growth in the quarter of 4.5%. Our gross margins continue to be pressured and it's mainly related to the FX effects in the Nordics.
Our eco market continued to deliver strong gross margins even higher than last year at the same quarter. Our adjusted EBITDA margin decreased during the quarter, mainly during the mentioned FX effects from the Nordics. Also, we have some cost pressure as all other businesses are experiencing in distribution and freight.
However, we are very proud with what we have been able to mitigate. We have worked with price increases. We have worked with cost control. We have worked with renegotiating prices wherever we can to get the best possible cost base. And this has in addition that we have been able to grow our business contributed positive. So I would say we're very happy with the actions that we are taking. We are seeing results and growing our business at the same time.
Our adjusted EBITDA margin landed at 8.1% in the quarter. And taking a look at our segment view. We have the strong contribution from the Nordic market in net sales, but also nice to see that we have a green for e-com in the quarter. So that's very nice to see.
On EBITDA level, we have the major effect coming from the Nordics on the negative side.
Our net working capital is according to plan and stable. Our net debt is well within our targets. Looking at our cash flow. We have a stable operating cash flow. In the quarter, we have -- in the financing activities, we have effects from our refinancing. And as mentioned before, the refinancing will actually have a positive impact for us going forward. We have now a lower debt. We have better conditions, and we have lower amortizations.
Thank you, Linn. So now over to the performance by segment. So as already mentioned, our Nordic segment increased a lot. We went from 19.5% to 20.8% market share. And this is despite the market decreasing quite significantly. In Sweden, we increased to 26.3%, which is up 1 percentage point.
In Finland, we increased with more than 3 percentage points to 19.2%, while in Norway, our market share increased with 0.8%. Again, very impressive by the teams in the Nordic countries. And this growth is driven -- basically driven -- is driven from organic growth and has -- the reason for it is line extensions, product launches, new formats and tender wins.
In Sweden, the market share growth -- it is slightly different explanations for the different countries. In Sweden, it has a lot to do with successful launches and are very quickness to adapt to the current market conditions. In Finland, it is the result, as we mentioned in the last call as well, a result of a long-term product strategy to increase white, rosés and sparkling wines, which shows good results. While in Norway, it's a little bit of a broader product mix and increasing distribution levels on many products that is the main fact.
In the product assortment, we have launched various products. For example, the [indiscernible] that you have seen before, which has been a big success, is already now available in a winter edition, which is a good sign because you will never do a winter edition unless you know that you are on a good sales level.
From [indiscernible], one of our partner brands. We have launched both, terta in Sweden and organic tetra as well as a pouch -- [indiscernible] pouch in Finland. The pouch being essentially a bagging box, but without the box, so more sustainable than a bag in box if that is at all possible.
Another partner brand that we launched products with is Schenk and Il Vero Siciliano, which is on the -- in the Swedish segment, very well received also in -- at a very good price point of NOK 89. In Finland, we also launched another Spanish wine from Piqueras, the Gold Edition, gold label, which has been very successful as well. So -- and together with our own brands, which is Crazy Cat here, [ Falernian ], but also [ Vekaria ] that we launched in Norway. You see that we are launching our own brands in all the Nordic markets. Over to you, Linn.
Yes. And taking a look at the Nordics segment. Here, we can see the strong net sales growth of 6.6% in the quarter, driven by both volume and price increases. Organically, it reached 5.8%. Our adjusted EBITDA margin decreased in the quarter mainly due to the FX effects and some pressures from distribution and freights compared to last year.
However, as mentioned, we have worked a lot with price increases to mitigate this negative FX effect and also, of course, working on getting the best prices and also working with cost control. And that gives us an adjusted EBITDA margin of 7.6% in the quarter. So overall, we think that we have outperformed the market according to our own estimates, both net sales wise, but also EBITDA-wise.
In the e-com, we continue to have strong margins and are well positioned for further growth. And our sales have, as you've seen, stabilized, and we do see a brighter outlook and positive signs for the e-commerce business. We have continued to launch in new markets. In this quarter, we launched wine freeze concept in Romania and Switzerland.
Romania being a totally new market to us, while Switzerland is a market where already and wine in black was present. We've also finalized our fulfillment center, which is the last step in our strategy to combine our platforms into one headquarter, one warehouse and one team, creating quite obvious synergy effects. This warehouses based in Mainz or slightly outside of Mainz in Germany. So very close to our headquarters.
This new e-com logistics hub will support our capacity for organic growth, but we'll also have spacing capacity for bolt-on acquisitions.
And taking a look at the numbers for Viva e-com in the quarter, we have a slight small net sales increase in the quarter. Our organic growth was flat or slightly negative. And we have continued strong gross margins and it's impressive work, being able to increase our average order values. And therefore, keeping the margins as one factor.
Our adjusted EBITDA is actually higher than last year's quarter 3. So it reached 10.3%, which is within the company target. So very good development.
So then I'd like to talk a little bit about seasonability. And first of all, during the quarter, we have implemented a software solution for climate reporting across all our Nordic business, which means that we can control and very quickly see our CO2 impact from transports. And this is a CO2 impact, which is much lower than our peers, a lot thanks to the fact that we transport on trains instead of trucks, but also thanks to innovative packaging solutions like pouches, tetras, PET bottles and many others that you've seen in the presentation so far.
The remaining CO2 impact, we mitigate through annual investments in [indiscernible], which is a fantastic project, which basically both supplies water purification and carbon compensation in one. And actually, it's even a triple win because [indiscernible] improves the health through the water purification, reduces the CO2 emissions, thanks to reduced need for fuel, but also contributes to generic quality since it has been traditionally in these countries, the work of women to fetch both the water and the fuel.
So over to my final comments. We usually comment on the financial targets. And we are, of course, very satisfied that we are reaching and beating the growth level for the Nordics. So we are above 4%. We are not yet there with the e-com, but we are seeing, as mentioned, signs that it flattens out and we have a slight positive growth. In the M&A, we continue to be active. On the profitability, as Linn mentioned, the e-com is delivering above a profitability target, while the Nordics is still lagging a little bit due to the currency effects. However, still, I am very proud and very satisfied with this profitability level, considering the macro impact that we had in the last 9 months -- or in the last year, more than a year, which we are very happy with.
On the capital structure and dividend policy, nothing really to report. We are well within the targets. Looking forward, I'm repeating the message from the last call that we are well positioned for further growth. We have had yet another quarter with solid growth and increasing market shares in Nordics, which is driven both by strong performance of our own brands and also our partner brands. As you saw in the presentation, we are growing in all parts of our Nordic business.
In the e-com, we are happy to see the strengthening margins and also the stabilization of sales. And our estimate is that we are outperforming the market both in the Nordics and in the e-com, both on sales and on EBIT. So this, again, means that we are very well positioned for growth, should the macro climate changes somewhat. We are screening the M&A market actively. Market conditions are still volatile. But as you all can understand, this also creates opportunities that we are ready to seize if we can, and we will do that if we can.
In total, we remain very confident in our business model, our understanding of the consumer and the long-term growth of the company and the profitability, of course. So all in all, I'm standing here being very positive for the future and still proud of the Q3 result. So now you will get the opportunity to ask questions, and there will be some instructions following.
[Operator Instructions] The next question comes from Johan Fred from SEB.
My first question is in regards to the strong growth displayed in Norway and Finland. Could you add some color on the organic growth profile in terms of how much is relating to price and how much is product mix?
It's related to volume and price increases. So we have increased our volumes, for example, in Finland. We have increased volumes a lot. And I would say the price mix -- the product mix doesn't affect that much. It's more of a volume-driven and price increase that has affected the most. And I would say that, that goes for all countries. Of course, in Sweden, we have been very quick to market with new products, and that means that we have launched bagging boxes in the lower price segments, but still overall picture is that it's the price increases and the volume increases that contributes to the net sales growth.
Okay. And maybe you have -- maybe you answered this question already. But how should we think about the growth contribution from Finland and Norway going forward given that you've -- or given that we've entered colder seasons and that the positive effect came from, as you write, the white, rosés and sparkling wine, which I would assume typically performs better during warmer parts of the year. Any color on sort of seasonality in terms of product mix would be much appreciated.
First of all, we -- the reason for us going into these categories was that we are very strong on red. So red wines are our strong segment already from the beginning. And also in red wines, we have many new products coming into the market, gaining new distribution. So I would see the Finnish market in the short-term, continue to grow on a similar pattern, of course, for every quarter to be -- last quarter becomes a bit more difficult, but I would expect the growth to continue as you have seen it.
Very clear. And jumping to the e-com segment. You see signs of the market bottoming out, any color on trading so far in Q4?
Not really. Q4 is very dependent on the current sales in Black Week, which we are in the middle of ending on now on Friday and on Christmas sales. So it's difficult to say. We do feel that it's our e-com business that is bottoming out, as I mentioned in another interview, the German market as such is still quite has not a great consumer sentiment, but our business as a total is working very well. So we have to do the difference between how our business is developing and the e-com market in total. So I mean, we -- it's a little bit too early to say, and we don't want to give any flavor, but we are standing here being quite positive. And I think you can read that as a sign of where we expect things to go, but we can't be sure.
So in terms of sort of quantifying the growth for coming quarters, should we expect growth to be in line with your financial targets? Or is that still a bit optimistic?
That's a bit optimistic, but I'm still slowly moving towards them if you compare with how the development has been from being -- having a negative growth to positive growth, I mean, in the same kind of steps.
Okay. Makes sense. Perfect. And the final one for me here. You've mentioned that you've already launched your e-com business in Romania, could you also elaborate on your plans to continue to roll out the platform in Eastern Europe. Is this purely organic? Or are you targeting any -- or are you seeing any attractive bolt-ons that you are considering in the region? Any color on that would be much appreciated.
No, difficult to comment on in detail. We do see an interesting market -- somewhat underdeveloped market where our wine [ feast ] concept is working very well. There are other countries in the vicinity that is on our radar. So yes, you will see some organic growth into new markets. When it comes to M&A, it's super difficult to say, but I wouldn't say that we specifically look in that part of Europe, we are looking everywhere.
The next question comes from Fredrik Ivarsson from ABG Sundal Collier.
I have three questions. I think I'll take them one by one. First one, maybe on consumer behavior, we've been talking about down trading for quite a while, obviously, maybe you're sort of gaining on the back of that due to your product exposure, but it would be interesting to hear whether you've seen any changes in terms of consumer behavior during the last few months, if you will. And also maybe if you can give an indication of what you've seen ahead of Christmas trading as well.
Well, I think that, in general, this trend continues, and I don't think you have to be very knowledgeable about the Swedish consumers to understand that this period is probably not a great period for Swedish consumers, so we are continuing to see down trading. But at the same time, we are seeing restaurant sales slowing down a little bit, meaning that there is more consumption at home, so we get a slightly positive effect from that. In terms of the Christmas sales, it's a bit too early to say. I would say that for every year, and this has been the trend for 10 years, people are shopping later and later with the big exception of COVID when people shopped earlier. So in terms of Christmas sales, it's a bit too early to say, but I would expect the same, although, of course, for the big holidays, there tends to be a little bit more budget than maybe for your normal weekend.
Right. But you wouldn't say that the sort of down-trading trend is accelerating at the moment, but more sort of flat from Q2 to Q3 and potential Q4?
I think it continues to be where it is. There is not -- I mean, there's not a lot to slow down from. So I think that there is -- it will be the same. And if you look at, I think, both at the market and our numbers, you will see a quite similar continuity compared to the previous quarters.
Yes, that's clear. And then another sort of general question or overall question maybe, earnings have obviously been sort of pressure due to FX. And now we've seen the Swedish and Norwegian currencies have strengthened a little bit versus the euro. Do you think that earnings or operating profit might be even growing in Q4 on the back of current FX rates?
I would say that's a bit early to say. And also, we must take into the fact that our inventory when it comes in, then it's the rate at that time. So currently, we have the inventory levels at the day that we see today, and that will roll out in Christmas. So it would take for the whole group level, we have a turnover of 6x, so I would say, 2 months of inventory. So then you can go back 2 months and see where we will end up. So we will have a positive effect, but it will take like 2 months to realize it fully.
Yes. Of course, Yes. That's good color. Fair. And then lastly, a question on e-commerce. The margin here, as you alluded to, Linn, has been very impressive, even expanding versus last year, if we look at the 9-month period, despite the top line growth, I should say. What's your focus going to be like going into next year? It sounds like you expect topline growth and then you should get some operating leverage on the back of that. Will you sort of reinvest that growth into further growth investments, if you get my question? Or will you be more -- or continuously focus on the margin and expanding that going forward as well?
Well, we will -- I wouldn't say like the gross margins will increase very much. It's more of keeping them or expanding them somewhat. But of course, we always keep the balance between investing and -- investing into customer acquisition costs. So I would say it's a balance to keep the margins. But as we sell more, we get more to invest, of course, since we get this effect from the -- yes, as you said, on the bottom line.
We are definitely working slowly to reach the growth levels that are in our financial targets. And of course, in e-com, it is quite obvious connection between that and marketing spend. But as Linn says, it will be step by step -- as the sales grow, the marketing budget available will also grow.
The next question comes from Rauli Juva from Inderes.
It's Rauli from Inderes Equity Research. Two a bit broader questions from me. First of all, on your market shares, you have obviously gained quite nicely those, but do you have any ambition level on your market shares probably varying in different countries? For example, in Finland, do you see it realistic with the current structure to reach the kind of market shares you have in Sweden?
Very broad question. We are never -- we are never aiming at market shares per se. I think market share is really the result of our growth ambitions and ambitions to always find the right products for the consumer. I think that then going back to Finland, the development has been very, very impressive, and it's partly thanks to a great team, but also to the fact that they are also benefiting a lot from the Viva structure and the fact that a lot of the brands that we are selling in Finland were created in Sweden.
So in terms of finding products, they have, let's say, a bigger portfolio to choose from. So I mean, the Swedish level is very, very impressive, but I do expect the all things equal. Obviously, in Finland, there is this slight political risk as well over time. But we expect to grow -- if you look at the monopoly, we do expect to grow continuously. -- at least for the foreseeable future.
Okay. That's helpful. And then secondly, on the margin on the Nordic business, if we compare that to the financial target levels you have? Is it only a question of the FX and kind of the related pricing, which is keeping you below your targets? Or is there something else kind of hitting negatively your margins at the moment compared where you would like to be?
I would say it's mainly related to the FX effects. And in the Nordics, we have three markets where Finland, obviously, not as affected by this currency effect. So I would say that in Finland, we have been able to slowly increase our prices to cover up for the last periods of price increases that have been in society. But in the Nordic -- other countries, Norway and Sweden, we will be somewhat dependent on when we will be back at the higher level that we're aiming for. However, we are quite happy with the fact that we have been able to mitigate almost, I would say, 2/3 of the negative FX impact that we have seen in Norway and Sweden.
And on a gross margin level, that has been related to price increases, volume increases and also we have, of course, worked with negotiating best prices. So it will depend a bit on the currency development for when we will be back, but we will keep on taking steps forward, and we have taken steps for all price increase period that we have seen, and we will keep taking steps forward. So when it will happen, we are increasing and looking at getting there.
But the currency development is, of course, helpful, should it continue to be like that.
Yes. Just to follow up on that, have you seen all of your competitors also making similar price increases? Or has there anybody who has been kind of trying to take some market share, if you're keeping lower prices?
In terms of market shares, I think that we were very early -- sorry, in price increases, we were very early. We started already like three periods ago. So we were really the first ones to increase prices, which means that we increased prices a lot in the beginning of this period and then a little bit less over time. Whether our competitors have focused on keeping market shares, I mean we do have a lot of private companies, which has a totally different set of owners and can have different strategies. I know because I used to be one.
And of course, as a smaller company, you could initially feel that we keep the price in order to gain volume. Now I think the development overall for all the cost means that by March '24, everyone will have had to look over the prices. There is really no possibility for anyone to not have -- not adjust prices upwards, specifically Sweden. And this is Sweden, Norway, of course, Finland, for the moment is a more stable market in terms of those price effects.
[Operator Instructions] So I hand the conference back to the speakers for any written questions or closing comments.
Thank you. So we do have a question on the chat, a fairly detailed question but in two parts. So cost control is outright -- it is from Gratitude Capital. Cost control is outright impressive. Please help us understand how we are able to manage cost? Looking at the Nordics, how is the cost reduction split between full-time employee costs and other operating expenses and what items in other operating expenses has driven down the cost? We'll stop on that first.
Yes. Well, as mentioned to previous question, we have, of course, been able to work with our gross margin levels as well. So price increases and negotiating the best prices, so that, of course, gives a positive contribution to mitigate FX effects. And then we have done what we can for the rest of the cost structure to mitigate the FX effects. And there, we have personnel and marketing. And of course, we spend marketing as effectively as we can. And seeing our market share development, it has not affected that. We are managing with doing it more effectively. And looking at our organization, we don't have any big restructuring programs going on.
But also looking at the time up until Q3, we haven't really cut any employees at all. We are always looking at it, and there might be some developments in that area as well as we try to make our business more efficient, but there is no real big cutting, I mean, like some other businesses that I've listened to, that are making big cuts in their full-time employees. We need our employees because they are the reason for our growth.
Yes. And if you look at the e-com business, there, we have some efficiencies in the structure, in the cost structure, and it's related to the fact that we now have one team, one warehouse and one team means that it is a reduction on personnel costs, of course, but that we will -- we see it already in local currency. And of course, going forward, these efficiencies will be seen in further going forward.
And this answers the second part of the question, how these costs will develop. And I did forget I spoke about the Nordics and including the e-com, we have, of course, reduced employees, but that was already more than a year ago in terms of when these things were taken action on. Second part is about guidance, which I don't think we will be able to answer very clearly. [indiscernible] guides for e-com sales growth from Q3 to Q4 of 50% to 60%. Do you see the same pickup in sales on a sequential basis, which essentially would reverse last year's year-on-year decrease and take you back to around the Q4 '21 level?
I do not recognize these numbers. So I would not expect this at all. You should expect us to slowly going towards our growth targets of 10% to 15% in the similar sequence as we have seen in the last quarter. So that is not something we can confirm.
All right. I think that concludes everything. So thank you very much, and hope to see you soon again, and Merry Christmas, [indiscernible], and Happy New Year.