Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2018-Q1

[Operator]

Good morning ladies and gentlemen. Welcome to the Scandi Standard Quarter 1 Results Call. My name is Nundaja and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host Mr. Leif Bergvall Hansen to begin. Mr. Hansen, please go ahead.

[Leif Bergvall Hansen]

Thank you and good morning everybody. I will initially give the highlights of the Q1 report. We saw on a pro forma basis a 5% growth in revenues. We saw a strong growth in Denmark and Ireland and in Finland, a quarter with stable sales in Sweden, and a moderate drop in revenue in Norway.On EBIT we delivered a 7% growth in adjusted EBIT on a pro forma basis, so delivered by improvements in Norway, Ireland and in Finland. We delivered weaker margins in Sweden, stable Denmark, and also stable for the group coming in with a pro forma EBIT margin of 3.8% versus 3.7% last year. The investment in Farre in our ready-to-eat plant is going according to plan. It was a quarter where debt increased mainly driven by currency and a little bit by extraordinary high investments in this quarter driven by this investment I just referred to.We -- if we go on to Page 4, we bring in a bit of new information in this report, a couple of new bridges and a couple of pie charts. And we're going to spend a little bit more time on what we intend to do before just to make sure that it is clear information we are trying to provide here. If you look at the first bridge on Page 4, it gives a little flavor of how our margin performance, profit performance are being delivered. Sweden still struggling with the price pressure; Denmark impacted by large market investments, I'll come back to that; Norway delivered a quarter with best-in-class margins, but with reduced revenues as mentioned; Ireland, strong improvement in a number of different areas; Finland, another significant step towards breakeven; and as we play more additional cost mainly driven by an upgraded sustainability effort and also more investment in retail.Looking at the second bridge on the Page 4, you see what are the drivers between the margin improvement or the profit improvement volume as one component mainly delivered from Ireland and from Finland, positive mix development coming from a number of different areas, cost of goods sold going up slightly and the fixed cost as mentioned before also up slightly in the quarter, but that's the breakdown.Going on to Page 5, this is to give you a little bit of an explanation to a product and channel breakdown that we're going to look at the actual numbers on the following page, but if you look at our actual product offering, you can split it into a number of categories. One is ready-to-cook or raw chicken that can either be chilled or frozen and that can obviously be sold in a number of different formats. Another category is ready-to-eat where the product is cooked, and that we sell either frozen or chilled, and then there's another category.So that's the product breakdown that we're going to give you some more information on, on the following page. Sales channel, I think that's pretty straightforward, retail foodservice. Export we define as what we say last part of our 5 domestic market and then some -- yes, that's the export. And ingredients, that's industrial sales and some pet food sales as well other being in the main day-old chicks and some hatching eggs.And if you then look at the actual numbers, I suppose that's the most interesting part, looking at the top one on page 6, sales mix is changing towards higher value categories. We saw a strong growth in the chilled category growing 9%, chilled all-in-all represented 56% of sales for the group. The less profitable frozen segment continues to decline in this quarter going down with 11% and representing now 19% of group revenue. We saw a continued strong growth in the ready-to-eat category. That category as you recall that we have put a lot of effort into growing over a number of years and in this quarter we grew with 21% versus the same quarter last year.Going into the sales channels, the second pie on the same page, retail increased to 4%; foodservice clearly up from other channels with a growth of 20%; and increasing to smaller bit, [indiscernible] increased by 3%, export a bit of a decline.Then going into the markets on Page 7, starting with Sweden, Sweden are still facing some challenging market conditions in this quarter. We have adjusted throughput to meet these temporary challenges. There's some oversupply in the market from -- on the producers' side leading to an inventory overhang, and we have seen an adverse sales mix more skewed towards frozen sales.The bird flu effect is becoming marginal. We report SEK 6 million of the -- as the impact in the quarter and anticipate that into Q2 there will be an impact of SEK 1 million to SEK 3 million per month. We see some encouraging signs of improving market, some growth now coming into the market after a number of quarters where we haven't seen that and we also see some signs of a better market balance. And with that, we will anticipate the market gradually to normalize during the second half of the year. In other words, Q2 we'll anticipate to be a bit more [indiscernible]. The adjusted EBIT margin in the quarter was 4.8% versus 5.4% in the same quarter last year.Going on to Page 8, talking about Denmark, it was a quarter with strong focus on differentiation and also in our capacity expansion project. We delivered a 9% revenue growth, driven both by retail sales and also by this ready-to-eat category. Margins came in slightly below Q1 '17 at 3.5% versus 3.6% the same quarter last year. And then the main driver behind that was some significant market investment that's impacting our cost in the quarter.It's investment in both marketing, but also in additional sales-force to drive this premium concept we call Danish Family Farms that we are now working hard to establish further in the market. Probably we call it this concept with the slow-growing breed, it hatched at the barn, and it's raised completely antibiotic-free and we won a few [indiscernible], hence the additional cost that we are taking here initially. And the whole point of that is to de-commoditize and drive profitability of the Danish business over time and we anticipate these investments to impact margins in a similar way also in Q2, but with an impact -- positive impact in the medium term. We -- the investment in the ready-to-eat plant at Denmark of about SEK 150 million is on time and is developing according to plan and we will be inauguration just after the summer break.Going on to Page 9, you can see some pictures of that expansion. As you can see it's part of the capacity expansion that we are underway -- have underway.Going on to Page 10, talking about Norway, another quarter with strong performance, limited underlying growth, but still a bit. We saw a 5% decline in revenue in local currency. If you break that down, retail sales were in line with market, but the rationalization of our foodservice range that we have talked about as part of our factory efficiency program is the driver that have taken revenue down in this quarter. Best-in-class margins continued. We improved margin from 7% to 7.2% driven by strong product portfolio and some successful efficiency investments that are paying off also in this quarter. Looking a little bit ahead, we see limited scope of growth in the -- within the existing contract structure, and we anticipate to develop in line with the market revenue-wise going forward.Moving to Page 11, talking a little bit about Ireland, a quarter with strong performance and where the integration is developing according to plan, 10% revenue growth driven by volume, but also driven by currency, about half-and-half. Strong margins, up to 4.3% in the quarter versus 3.8% in the same quarter last year, driven by improved yields. We've seen a number of cost improvements in a number of areas and we are also seeing the first impact of some of the expansion projects that we are working on with the Irish team.We have been running a separate integration governance structure since the acquisition end of August last year, and we are now so far advanced in that process that we are swapping through a normal structure so that Vincent Carton, the Managing Director for the Irish business, is now part of group management and the business is now fully integrated into the group.Going on to Page 12, talking about Finland, it's another quarter with a significant step towards breakeven. Not quite there yet, but coming close. Strong growth in revenues, revenue up with 50% in the quarter versus the same quarter last year, 17% growth versus Q4 of last year. And it was mainly driven by increased sales in the main segment in Finland with the chilled retail with some positive mix effect.Margins coming in at minus 4.8% versus minus 18% in the same quarter of last year. Still see a solid market growth, also in the first quarter of the year. We achieved the first milestone of a positive EBITDA, small but still there. It's driven by better product mix and improved yields, and looking ahead we obviously continue strong focus on improved product mix yield and cost to get to the next milestone of a positive EBIT.With that, I would like to hand over to Anders for the income statement.

[Anders Hägg, Chief Financial Officer]

Thank you Leif. So then flipping to Page 13, as Leif already alluded to, we had stable margins in the quarter compared to last year, and then if we compare versus the 2 quarters, the reported numbers for the 2 quarters, most of the increases are related to Manor Farm. That is the case for depreciation and amortization. And also the higher net financial items is a result of a higher net debt, again, related to the acquisition of Manor Farm. And also we see a positive development in EPS growth, well-driven by the Manor Farm acquisition. Taxes in the quarter of SEK 11 million is 20% of earnings before tax.Moving then to next page, Page 14, a couple of return measures there. Pretty similar story on both return capital employed and return on equity. Marginal improvement Q1 '18 versus full year '17, and a fairly significant improvement Q1 '18 versus Q1 '17. We also see a strengthening of equity to assets ratio improving almost 2 percentage points.Flipping page then to working capital, Page 15, you will see that there's an increase in working capital as percentage of sales, but if you look at the underlying working capital, it's largely stable as most of the increase in the working capital is related to currency. With that working capital released in Sweden, Ireland and a fairly substantial one in Finland, we see some increases and they are driven by seasonally inventory decrease -- sorry, increase in Norway and also inventory increase related to the Farre expansion in Denmark. And we still have too-high inventories in Sweden, which need to and which will come down further into the second half of 2018.Flipping page again to Page 16 then, cash flow, maybe just starting with the fact that we did have a positive operating cash flow and that improved compared to last year. But as you can see, the net debt has increased by SEK 53 million and that is again primarily related to currency that's SEK 41 million reported on the other items that relates to currency retranslation.Moving forward to the next page then 17, a couple of outlooks with regards to some cash flow parameters. Dividend policy, our policy as you know is to have 60% of net income over time. We expect as we said before capital expenditure for 2018 to be at SEK 350 million and just with the caveat that we are looking into an investment program for Ireland, but the SEK 350 million is equivalent to 143% of depreciation.We expect paid interest to be in the range of 3% to 3.5% of net debt and the blended tax rate somewhere in the range of 20% to 21%. And also not to forget when it comes to cash flow, we have continued liabilities related to the Manor Farm acquisition which is the 3 earn-out tranches which are payable in the beginning of '19, '20 and '21.And with that, back to you Leif.

[Leif Bergvall Hansen]

Okay, thank you. And going on to Page 18 to give you a flavor of some of the group-wide priorities that we are working on, a lot of efforts is going into developing our already leading position within the premium segment and a couple of that is the Danish Family Farms concept that we are fueling as much as we feel makes sense. We see some further innovations and a lot of focus to further deliver higher penetration of the ready-to-eat category and just to give you a flavor that products that are un-breaded cooked, skewers, meatballs, sausages and so forth.We work on strengthening our position within foodservice, that's both within our domestic market by sharing best practice, but it's also working very closely with some international quick-service restaurant chains to develop a position there for us. We have taken up measures to improve profitability in Sweden and also in Finland. The integration process in Ireland is developing well. We have a number of work streams that run in parallel and there are a number of learnings that go both ways, which is very encouraging to see.The investment program will be announced in second half of the year, we have alluded to that before. A lot of projects are still continuing to improve. We have yields within the group, efficiency and some cost-cutting projects as well, within [indiscernible] and within procurement as 2 main examples.We established a dedicated ingredient division in the second half of last year dedicated to expand the value creation within a number of side streams and we already see the first cost to re-price of the efforts within that group of people. And last but not least we are working on strengthening our sustainability focus even further and if you're going on to the next page, you can just -- give you a little bit of the headlines of what we are working on there, define the Scandi Way -- not the Scandinavian way, but the Scandi Way to focus and to align the way we work to make a difference promoting health and well being for people whether it's consumers or employees for the chickens and for our planet and further into the space you can see our 9 dedicated focus areas, but I'm not going to go further into that at this call.Going on to the last page, Page 20, summarizing the Q1 outlook, all in all a satisfactory quarter given the weak situation in Sweden. So solid performance in Norway, in Ireland very encouraged by the strong sequential improvements that we experienced in Finland also continuing in this quarter. We see the effects from bird flu in Sweden becoming insignificant, but still impacting Q2 of SEK 1 million to SEK 3 million a month.The market investment in Denmark that I have referred to expected to have an impact on this also in Q2 of this year. We anticipate the markets to be coming to more of a balanced situation in Sweden during the second half of the year. In other words, Q2 we anticipate to be more of the same as what we have seen in Q1. We are following a number of structural opportunities within Europe very closely and so all in all we have a general positive outlook for the second half of the year.Okay, with that, we would like to answer any questions you may have. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Mikael Löfdahl from Carnegie.

[Mikael Löfdahl, Research Analyst]

Couple of questions if you could. [Indiscernible] by perhaps in Denmark, we know about the investments and the cost that you are taking, but is it possible to be a bit more specific on these and how long they will sort of being a bit more -- having a positive effect? And if we saw any positive effect in Q1 on sales from these initiatives?

[Leif Bergvall Hansen]

Yes, we are definitely seeing a positive sales development since we launched the concept in December of last year. Increased penetration, a number of new products being received well, and that's also the reason why we have decided to fuel it further with some additional marketing investments and also with an increase to the retail sales-force, working on the presentations and the penetration within the market. We are not giving an actual number for investment, but it has a track on margins in Q1. We do anticipate a track also in Q2, but then we will anticipate that these initiatives will at least starting paying for themselves so to speak. So we anticipate this to have a positive impact in the second half of the year, but we will continue those activities so that you will anticipate that the sales and margin development delivering from this concept was -- will paying for -- will start paying for the actual investment in the second half of the year.

[Mikael Löfdahl, Research Analyst]

And also could you comment on how we should think about Easter being in Q1 this year? I think Q2 last year, the impact on your sales and margins?

[Leif Bergvall Hansen]

Yes, we haven't really gone into the Easter breakdown because this is a little bit of a mixed pack, it has a negative impact on revenues in Norway and have a little bit of a positive impact in Sweden and so we have actually -- and it's always very difficult to estimate the Easter impact, and as Easter is just in the end of the quarter. So we've actually said that it's probably on balance, not having a huge impact for the group, but it does impact Norway negatively revenue-wise in the quarter.

[Mikael Löfdahl, Research Analyst]

And this investment program in Manor Farm, do you have any ballpark of how much we should expect from this?

[Leif Bergvall Hansen]

No. That's exactly what we're working on and also first of all also to sign is that this is what should be phase 1 or should be phase 2. So we're not in a position to give a number right now.

[Mikael Löfdahl, Research Analyst]

The final question from me then regarding Finland, you are now obviously close to cash flow breakeven at least, but it seems that it's very much up to the top-line. Is there anything more to do on the cost side? You are mentioning that you are implementing further measures, but there's nothing specific, more to do on the cost side or is it a pure revenue play from here?

[Leif Bergvall Hansen]

No, it is a number of different initiatives and all those we are now coming closer, it is -- there's not sort of one big thing we need to fix, there's a number of work streams on a number of different areas. We are -- we were actually cash flow positive also in the quarter, but we're still with a negative EBIT margin as mentioned. We will still anticipate to see some growth that will be one component, but we also clearly see an opportunity on some further mix improvements, more branded sales, relatively more retail and foodservice and less export and less industrial sales will also have -- will also be a component in getting into black EBIT numbers in Finland.

[Mikael Löfdahl, Research Analyst]

And the Finnish market as such, I mean we saw each case has gone reported this morning as well and that they are ramping up production on the poultry side. Where do you see this market in the coming year? So I guess you've had an opportunity now to gain market share because of perhaps a bit of capacity constraints among competitors, but how do you see this developing in the coming year?

[Leif Bergvall Hansen]

If you look back a number of years and look sort of on the average growth rate in the Finnish market 5 years back, they have -- it has been between 7% and 8% per year. So it has been a market with very solid annual growth. And if you just look at the first 3 months of the year, the market has been actually up with 12% in spite of any capacity issues that might have been in the quarter. Still 12% margin growth is a very healthy growth rate. So -- and we do -- we probably don't anticipate 12% going forward, but high single-digit we will anticipate. One still have to keep in mind that Finland is the country within Europe that's not eating chicken -- eating the least amount of chicken per capita. So there is still a huge opportunity in Finland to drive the white meat transformation. And so we are not concerned about the growth prospects in the Finnish market.

[Operator]

[Operator Instructions] Gentlemen, we have no more further questions online.

[Leif Bergvall Hansen]

All right. Thank you everybody. Have a great day. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.