Comment by the CEO Interim Report January-September 2022
The third quarter was challenging and was characterised by high inflationary pressures. At the same time, we saw good demand for our products, especially in private label. To meet the exceptional level of cost inflation, we are implementing a number of further measures with the ambition of fully offsetting our increased costs.
Demand for healthy food remains favorable
Sales for the quarter increased to SEK 944 million (893), which for us serves as proof that consumers want to continue eating healthily. We saw a continued strong development for our own brands in the healthfood category. In organic products we saw a weaker development among our own brands while our private label sales grew stronger.
Continued exceptional cost inflation
The shortages and dramatic price increases for virtually all the input goods that we saw in the first half of the year – mainly as a result of the war in Ukraine – persisted in the third quarter when we were struck by 1) the marked strengthening of the US dollar against all currencies relevant to us (EUR, DKK, SEK, NOK), 2) higher energy costs, 3) strong price increases announced by sub-suppliers and 4) general upwards index adjustments. We aim to fully offset cost inflation by passing on cost increases to the next level as quickly as possible. We have raised our prices and are planning for further price increases, which will mainly have an impact in the first quarter of 2023. In general, our price announcements have been well received because the causes of the cost inflation are well known.
Additional cost saving program
During the quarter, we accelerated our cost savings program of SEK 40 million on an annual basis, which means that it is now well ahead of plan. Among other things, we have reduced our administrative staff by about ten percent and by hiring staff in our production units instead of relying on more expensive temporary staff, we have reduced our costs in production as well. Cost-saving measures and price increases implemented so far improved earnings monthly during the quarter. Cost inflation was, however, so high that the profit for the quarter deteriorated compared to the same period in the previous year. Therefore, we are now expanding the cost-saving program with the ambition to save roughly another SEK 20 million on an annual basis. EBITDA, before items affecting comparability, amounted to SEK 50 million (80) and was improved sequentially with the support of price increases and cost savings.
Forecasting the continued cost trend for input goods is difficult and the volatility in both raw material prices and currencies (USD and EUR in particular) remains a challenge. However, the results of this year’s harvests look better and many raw material prices have stabilised in local currencies. For this reason, we are more optimistic about the price situation today than earlier in the year.
Strong cash flow
Although we are building up some inventories for the important Christmas sales, we can show a positive free cash flow of SEK 22 million (–8) for the third quarter.
Rights issue and impairment losses
Today, the Board of Directors decided on a new share issue of approximately SEK 600 million with preferential rights for existing shareholders, subject to approval from an Extraordinary General Meeting. The main shareholder, Stena Adactum AB, has undertaken to subscribe for its pro rata share of the new issue and issued an underwriting guarantee for the remaining part of the issue. The purpose of the issue is to reduce the debt/equity ratio, strengthen our financial position in order to promote a long-term sustainable capital structure and increase our financial flexibility. In light of the weaker earnings trend, the Board of Directors has also decided to recognize impairment losses on intangible and tangible assets of a total of approximately SEK 475 million in the cash generating units North Europe and South Europe. The impairment losses have no cash flow impact on the quarter.
We take a confident view of the future
Despite the challenges, we view the future with confidence. We are fully focused on strengthening our earnings and see the stable sales as a good sign that interest in healthy food remains high. We see that the price increases we have made and that the cost-saving measures we have implemented are getting better and better. Consumers are making sustainable choices, regardless of higher prices, as is reflected by our price increases generally being accepted well and achieving a gradual impact. We plan for further price increases that will have an impact on sales mainly in the first quarter of 2023. We hope and believe that we have the largest cost increases behind us and look to the future with confidence. The strong underlying consumer trend for sustainable and plant-based products remains.
President and CEO