Comment by the CEO
The second quarter of the year was challenging, particularly due to weak demand in the organic products category, but also due to the weak SEK and, to some extent, NOK. Sales amounted to 893 SEK million (956), a reduction that was entirely attributable to terminated distribution agreements. These distribution agreements had combined net sales of SEK 66 million in the comparison period. For our conventional brands in the health foods category, development was highly favourable. Friggs grew by 19 percent for example.
The Nordics achieved good progress despite terminated distribution assignments and unfavourable exchange trends. North Europe experienced weaker development compared with the previous year as a result of lower business volumes, while South Europe experienced organic growth but with continued production challenges that we expect to resolve during the third quarter.
Diminishing market for organic food
Households' rapidly increasing living expenses have brought a temporary shift in consumers' purchasing patterns for organic products. Although we do not have any precise figures regarding market trends, they decreased in all of our geographic markets as consumers increasingly chose private label products in the lower price segment or conventional products in the health foods category. For Midsona this brought a reduction in volumes. Over the upcoming quarters, we will compensate for the decline in volumes by producing conventional products and we are working actively to identify new volume sources. We perceive extensive interest and have submitted multiple offers.
The gross margin improved supported by price increases
The gross margin for the quarter was significantly improved compared with the previous year. Although this is a direct effect of implemented price increases, the improvement would have been considerably greater if it weren't for negative currency effects, continued high prices for inputs and lower sales volumes.
The greatest negative impact came from the unfavourable development of SEK and NOK against EUR and USD, causing such a substantial negative effect that we are considering new price increases in certain geographic markets. Our costs for inputs also remained high. Over the quarter, prices on organic raw materials, for example, fell only marginally and not as much as one might think given the market’s high inventory levels and decreased demand. Future price levels for organic raw materials will be largely determined by upcoming harvests, although it remains too early to comment on the outcome.
Continued efficiency enhancements
Our process to enhance the efficiency of the Company’s and its product portfolio continues. Over the quarter, we discontinued unprofitable and under-performing brands and products, reducing complexity and, in the long run, strengthening profitability. Although the cost savings announced to date have achieved the intended effect, the weak volume trend requires that we further reduce our operating expenses.
The EBITDA, before items affecting comparability of 39 SEK million (34) was an improvement on the same quarter in the previous year, which was the first time in nearly two years that we saw such an improvement in earnings. Although we are not satisfied, we nonetheless see this as an initial indication of a turnaround. We remain focused on working capital and inventories in particular, where the capital tied up in inventories has been reduced by more than SEK 100 million compared with the corresponding period in the previous year.
Despite the challenging situation, we take a confident view of the future
Despite a challenging quarter, we take a positive view of the future. It is unfortunate that organic foods, which are both healthy and sustainable, are currently declining to the benefit of less sustainable alternatives, but I am nonetheless convinced that long-term prospects remain positive. We are continuing to implement numerous measures to strengthen earnings and, on the whole, look ahead with confidence.
President and CEO