Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2020-Q1

[Operator]

Good morning, everyone, and welcome to the Scandi Standard Interim Report for the First Quarter 2020. My name is Seb, and I'll be the operator on your call today. [Operator Instructions] I will now hand over to Leif Bergvall to begin the call. Please go ahead.

[Leif Bergvall Hansen, CEO, President & MD]

Good morning, everybody. I hope you had a good start to the day. Starting on Page 1. Just to remind you of the Scandi Standard long track record of very stable results which continue into this quarter. So if you go on to Page 3. On behalf of everybody in Scandi, I'm very happy to report that the stability continued into Q1 in spite of COVID-19. The quarter with a strong operating performance, 1% revenue growth and 6% increase in adjusted EBITDA. A solid operating cash flow. And all in all, I'll say that the business is resilient to the COVID-19 effects to which I will talk a bit more about further into the presentation. We report noncomparable items altogether of SEK 42 million in this quarter. Going on to Page 4. We saw a stable top line development in the quarter, a growth of 1%, as mentioned. We see particularly growth in Retail, helped by people staying more at home and are shopping more in traditional retail outlets. And all in all, in the quarter, we've seen a 3% growth in our Retail sales. And Foodservice have been negatively impacted, and I'll talk a bit more about that a little later. But all in all, they even out each other when we look at data in the quarter. We have seen strong growth in 4 out of our 5 countries. Denmark is negatively impacted by some short-term gap in listings and some COVID-19 effects. Going on to Page 5, the 6% growth in adjusted EBIT, driven mainly by strong volume growth driven by Ready-to-cook sales. We have had some price decreases to pass through lower feed prices; some smaller OpEx increases, mainly in marketing and some general cost inflation; and a small increase in depreciation. Going on to Page 6. Looking at the product categories, we have seen a stable development in the Chilled Ready-to-cook, impacted by the reduced prices I talked about before and also that there's been this replacement of a retail client in Denmark that has giving us a gap in February through to April, but that's now revised. So adjusting for that, we have had an underlying growth in Chilled Ready-to-cook, up 7% in this quarter. We had stable quarterly development in Ready-to-eat. However, we saw 7% growth in the first 2 months of the quarter and a 14% drop in March due to COVID-19 effects. If you go on to Page 7, and trying to dive a little bit into the COVID-19 effects on Retail and Foodservice. Basically, sales-wise, these 2 channels canceled out each other. 2/3 of sales of Scandi Standard normally go through Retail channel and where we have seen a 7% decrease in April. If you look at Foodservice, it usually represents around 20% of sales and where we have seen around a 30% drop in sales in April. And these two, as mentioned, take out each other. There's been some operational adjustments required in -- within operation, basically to increase the throughput in production lines, reducing products for Retail and a temporary shutdown of some lines and operating fewer hours that are producing product -- Ready-to-eat products, especially targeting Foodservice in the main.We are reporting SEK 27 million of nonrecurring costs relating to COVID-19 in the quarter. And it's split down with SEK 9 million that relates to potential inventory write-downs, SEK 11 million provision for potential bad debt and some additional operating costs in the quarter linked to these swaps between lines producing for Retail and lines producing for Foodservice basically. In our trading update, we included SEK 8 million for plant closure cost in April and then those we have decided to take in Q2 rather than in Q1. Going on to Page 8, you will see a breakdown on a monthly basis between sales to Retail and sales to Foodservice just to give a little more flavor about this swap as I talked about. You see on the first graph how the Retail sales have gone up and you see on the graph to the right how Foodservice sales have gone down. And just bearing in mind that the March numbers is basically -- the COVID effect is basically from the second half of March, roughly speaking. So altogether, these 2 things take out each other more or less. Just on Page 9, we just want to remind you the way we focus on Ready-to-eat product areas in spite of the Foodservice channel currently having some challenges. And here on, you can see how we have developed sales to be 4x as those now represent about 20% of the group total revenue. And we will continue to focus in here, as we see, in spite of any short-term lag of sales, we see a clear potential for the future to continue to focus here. So I'm going to talk a little bit about each of the countries. On Page 10, we talk about Sweden, delivered a quarter here with solid growth and improved margins. Net sales is up 5% driven by Retail sales. We increased EBIT, adjusted EBIT, with 7%. And it was basically down to good efficiency through the entire value chain. There are some limited COVID-19 effects basically relating to higher sick leave and some bad debt provisions. Going now to Denmark. Denmark, we have a weak quarter. And we have, however, received new listings from May and we have seen progress in the differentiation strategy going forward. But this gap in connection with the shift of retail client impact us with February and March in this quarter and will impact us in April as well. We have achieved additional listings from May, as I talked -- from 1st of May, as I talked about, which means we will also anticipate that there will be best to sell on export markets where prices might be under pressure for the future. In Denmark, we post COVID-19-related nonrecurring items of SEK 11 million relating to production lines that has been closed down and also some provisions for inventory and a little bit of bad debt. Going on to Page 12. Norway, another quarter of strong growth and solid margins. Strong revenue development with 5% growth and 9% in local currency. And we continued to deliver best-in-class margins in Norway with some limited COVID-19 effects. Going on to Ireland. A very strong quarter, strong growth and improved margins. 8% revenue growth, 6% in local. Basically, good operational performance across the business. Higher efficiencies, good yields. There are some COVID-19 nonrecurring items of SEK 9 million, provision for bad debts and also some provisions for write-down of inventory. On Finland we delivered strong growth and good operational results. 9% (sic) [ 19% ] revenue growth, 16% in local and 4.9% EBITDA margin and limited COVID-19 effects. And we have some investments underway in Finland, so it's to debottleneck some of the capacity constraints we have had previously. Going on to Page 15. We have been going through a very thorough strategic review that we conducted in the latter part of last year and that was concluded in this quarter, basically focusing on trying to extract the best ideas across the entire organization with some assistance from outside, some benchmarks, and really refine our growth path going forward and also to focus on where to increase our earnings going forward. The focus have been split into two: one is the future strategic direction, basically where to play; and the other question is how to operate or how to play. There's been a number of decisions following this study and one of the decisions is that we will form new segments with the idea to focus on sharing best practice within these areas and refine the skill sets there across the organization. So we will be looking at Ready-to-cook as one segment and we were looking at Ready-to-eat as one segment, and we were looking at Ingredients as one smaller segment. With that, I would like to hand over to you, Julia, for the income statement.

[Julia Lagerqvist, Chief Financial Officer]

Thank you, Leif. As we turn to Page 16, we go back to the income statement. As you said now a few times, a stable top line, 1% growth in the quarter. We have somewhat increased depreciation levels. This is driven by the fact that we have investment levels above depreciation now. As already mentioned, total nonrecurring items of SEK 42 million, out of which SEK 27 million is related to COVID-19 and SEK 16 million is related to the strategic review process that Leif was just talking about. We have net financial items of SEK 33 million. The increase versus last year is mainly driven by currency. We also see a fairly low quarterly tax in this quarter, a tax rate of 15%. This is driven by a mix change between our countries. Overall, the EPS is lower than last year, which is driven by these external recurring items, that's SEK 0.51. But if you look at the adjusted EPS, it's at SEK 1.16, which is increasing versus last year. Moving to Slide 17, the overall financial position. We continued to improve our returns. The return on capital equity employed is now at 10.8%, and the return on equity is at 14.6%. And overall, the equity ratio is close to 29% now versus previous 27%. Looking at our working capital, we see a continuous reduction in working capital, mainly driven by factoring and vendor financing overall. So by now, the working capital to sales ratio is at 1.8%, so a fairly low level. If we exclude our financing items, our target level is to be around 7%. And if I look at the working capital rate to sales adjusted for financing elements, we are at 7.1% in the first quarter of this year. Last year, we were at 8.4%. So there's still a reduction. Moving on to -- looking at the cash flow on Page 19. As we said, we do see the EBITDA dropping due to the COVID-19 effects and the nonrecurring items that we have. However, worth noting is that here noncash provisions relating to bad debt and inventories is here listed under the change in working capital. We also have a significant -- well, we had to release, as we said, but at the same time, this is still impacted by a fairly high capital expenditure in the quarter. And overall, the net cash flow is at SEK 1.02. Just looking at our overall cash position. We have a fairly strong balance sheet with good liquidity position, and we have a fairly large headroom in terms of our covenants. However, these are uncertain times, so we had taken some precautionary cash preservation measures in this quarter. As we already said in our trading statement, the dividend proposal has been withdrawn. That was approximately SEK 147 million. We have reduced our capital expenditures for the year from previously estimated SEK 420 million to targeting SEK 300 million. In addition, we have also renewed credit facilities of SEK 200 million. And in addition, we have obtained from our lenders additional credit lines of SEK 200 million. In terms of our overall guidance. The paid interest is still estimated to be at 3% to 3.5% of average NIBD. And the blended effective tax rate is still targeted to be around 20% to 21%. We still have our contingent liability in the shape of the Manor Farm acquisition. As you know, there is an earn-out in 3 tranches. The first one we paid last year, that was SEK 133 million. This year, we paid the second one. And next year, 2021, we will pay the third and final one. And with that, I would like to hand back to Leif.

[Leif Bergvall Hansen, CEO, President & MD]

Thank you very much. Going on to Page 21, just to give you the framework of all the work change we have within sustainability under the heading of The Scandi Way. And in this quarter, we just want to focus a little bit to one of the very important components here, is the importance of lowering the antibiotic use. The antibiotic resistance is considered to be a global threat. It's often referred to as the silent pandemic. And I think the way we see it is that the COVID-19 outbreak just exposes the risk and the consequences of the global antibiotic-resistant bacteria. So preventing antibiotic resistance is more important than ever. We have a lot of work streams to ensure that we stay at very, very low levels, reducing the use. We have a very systematic approach here. And we see the Nordic level as the benchmark. It's the lowest level globally. We are at a -- we have a target of less than 1% of flocks treated. In '19, we delivered 0.1%, which is, I suppose, as close as 0 as you can get. And there's really no industry statistics globally that are kind of reliable, but it is without a doubt very high numbers. And we see, in some cases, up to 100% of flocks treated in a number of international markets. So it's very important for us to keep this 0 as our target basically. Trying to summing up this quarter. Overall, stable business, resilient to the COVID-19 effects. We delivered solid results in the quarter. And we have taken a number of contingency plans just in case that we see sort of business disruptions going forward. We, as a group, have a solid balance sheet and a good liquidity situation. We continue to follow structural opportunities closely. And I will also refer to that we have -- even though that we have some uncertain times around us, we have had a good start to the second quarter. And with that, I would just like to take any questions.

[Operator]

[Operator Instructions] Our first question comes from Daniel Schmidt from Danske Bank.

[Daniel Schmidt, Research Analyst]

First, a couple of questions from me then. And starting with sort of the current trading that you gave an update on when it came to April versus March and so on and we also had your statement at the beginning of April where you basically stated that Foodservice was down sort of 50% to 60% at the start of the month, and on the other hand, Retail being up 10% to 15%. They've seemed to sort of halved in both directions, so to speak, at the same sort of rate in the second -- for the full quarter -- for the full month, sorry. Looking into the rest of this quarter, do you see that they continue to cancel each other out? Or do you see any trend change as of late?

[Leif Bergvall Hansen, CEO, President & MD]

So we will anticipate that this will continue to cancel each other out. It is, of course, difficult to predict this as these sort of opening measures that's being taken where restrictions have been opened, how quickly would they transform into people eating more out. But it's very clear that people continue to eat a lot of chickens, whether they eat out or they eat at home. So we feel confident now having a couple of months of dealing with this demand under these virus circumstances, that it's basically equals each other out. It might not do so on a weekly basis, but all in all, it equals each other out. That's our fair view.

[Daniel Schmidt, Research Analyst]

Yes. And then if you sort of stack that up against the bad debt provisions that you've done, do you feel sort of equally confident on that compared to where you were a couple of weeks ago in that assessment? Or has that changed in any way?

[Leif Bergvall Hansen, CEO, President & MD]

No. We have seen so far very little of actually clients are basically going bust. But it's also an area where there's a lot of packages from different governments that are trying to assist and help out and so forth, but we just feel that there are a number of foodservice outlets out there that are having a very, very difficult time and we just want to make sure that we cover ourselves, that we have sort of flagged that there might be some losses there for the future, and we haven't changed our view. We do anticipate that there will be some impact here, and we have taken some provisions that we do believe represent the risk well.

[Daniel Schmidt, Research Analyst]

Okay. Good. And then, secondly, sort of the strategic review that you have conducted and you gave us a slide on that. Is that one of the reasons? It sounds like that you're a little bit more forward-leaning when it comes to consolidation being a bigger part of that strategy. Or is it the situation in the market in general when it comes to the crisis that is accelerating that thinking? Or could you give us -- shed some more light on that?

[Leif Bergvall Hansen, CEO, President & MD]

On the acquisition opportunities?

[Daniel Schmidt, Research Analyst]

Yes. Yes. It sounds like it has to do with your strategic review. Maybe I'm wrong, but...

[Leif Bergvall Hansen, CEO, President & MD]

Yes. But no, it's -- of course, doing a strategic review, we obviously wanted to make sure that we address our capacity and our structure in terms of, once we would be able to -- or be successful in inviting new family members into the group, that we were well-structured and positioned and organized and having the competencies available to actually deal with that in an efficient and prudent manner. So that has been part of the reason, but I wouldn't say it's been the main reason for the strategic study in any way. It was mainly looking at the existing business, looking at the strategies we currently have, the focus areas we currently have. And basically with a lot of inputs from a big group within the organization looking at how can we refocus, how can we adjust things currently to continue to grow in a profitable manner, other ways by which we can increase our margins going forward. So that has been a very interesting process, bringing a lot of people together across the group, sharing ideas and best practice, and we are taking a number of steps to ensure that we will get those benefits delivered in spite of a lot of focus, of course, being directed to the virus outbreak.

[Daniel Schmidt, Research Analyst]

Yes. And on that subject and especially the Danish market, which has been trailing the group average last year, and you took some measures when it came to debottlenecking and so on, and of course, nobody had any idea that COVID-19 will show up at the start of this year. But looking into sort of the full year 2020, do you still believe it's reasonable to get Denmark back closer to the average for the group as we get to the end of this year?

[Leif Bergvall Hansen, CEO, President & MD]

That's certainly our idea. I would say that this -- if you look at the proportion or the breakdown of the Danish business, we have a lot more Foodservice as you are aware -- Foodservice sales. And of course, the longer this foodservice market being under pressure, the more challenging that will be. But I'm happy to say when you look at it from a group perspective, these things take out each other, but we also do see the gradual returning to more normal patterns. I mean all our 5 domestic markets have entered into a path now on reopening, gradually, a number of steps. But I'm sure there's a lot of consumers out there who are very eager once it's possible, once it's safe, to go out and eat more -- spend more time out, so to speak. So we do certainly anticipate that Foodservice sales will pick up relatively quickly in line with these restrictions being lifted.

[Daniel Schmidt, Research Analyst]

All right. And just a final for me, you talked about this in connection with the Q4 report. If you look at the bird flu breakout -- outbreak in Eastern Europe and now also Germany, is that causing any concerns? Or what's your view on that? And are you sort of -- how are you looking at that basically?

[Leif Bergvall Hansen, CEO, President & MD]

It seems that it is relatively stable. We are doing, of course, a lot of measures to ensure it doesn't get into our supply chain. And we feel like we are well positioned to prevent that from happening. So we don't see any larger risk relating to this.

[Operator]

Our next question comes from Mikael Löfdahl from Carnegie.

[Mikael Löfdahl, Research Analyst]

Yes. So regarding your costs that you took in, in Q1 and also looking at what you did not take in Q1, I assume it was roughly SEK 8 million that you had guided for, which now, I guess, have been then postponed and are related to what you anticipated for April, which now maybe then will -- has come in, in April. So first, could you say something about SEK 8 million? Is that a good proxy for how much the COVID-19 situation for you is costing, given what you have seen in April, anyway, in terms of demand and the shift from Foodservice to Retail.

[Leif Bergvall Hansen, CEO, President & MD]

Yes. You're right, Mike. I mean I think SEK 8 million is a good proxy for how April ended up. It is, of course, difficult to predict exactly how these things develop. So far, I think we have managed this very well. We have seen a lot of stability in the business in spite of a lot of unstability out there, so to speak. So I'm very happy of how we have managed this so far. But I'm also sufficiently prudent to be careful of ruling out that there could be any sort of disruption going forward. I would be surprised -- or be very surprised and we are obviously doing a lot to prevent -- to secure a continuous, stable development, but we just want to be careful just to rule out that things might deteriorate. It is a new situation for all of us. But I think these 8 weeks, we have learned a lot and we have got into a mode where a lot of efficient processes have come into play on how to mitigate potential risk through the entire value chain.

[Mikael Löfdahl, Research Analyst]

And if we just play with that number, SEK 8 million, then that is for the closing down basically of the Ready-to-eat plant in Denmark and the cost for that, I guess? Or have you also, in that number, is there anything for the extra cost for adding hours to -- where you have capacity restraints in terms of the Retail channel and the production lines related to that? Is that included as well or...

[Leif Bergvall Hansen, CEO, President & MD]

This is mainly relating to the Farre factory, the processing, but that's also where we have seen the majority of the cost. The sort of additional costs we particularly saw in the beginning of the outbreak where there was a lot of hamstring going on. And we have seen a bit more, I would say, return to normal, to speak about. A bit more, let's say, stable development within our Retail sales. So a lot of overtime that we had initially have been lower as we've been going more into the process. But I'll also say, if you look at the Farre plant altogether, we've got 4 production lines there. One were closed down very quickly. Then we were closed for 2 weeks. And then we are gradually seeing the lines being put more back into operation and we will currently be operating on something like 60% to 70% of normal capacity. So things are, let's say, gradually normalizing. It's just very difficult to say how quickly that will happen.

[Mikael Löfdahl, Research Analyst]

If we -- or I don't know what you are sort of planning for when you're looking also at -- you reduced your CapEx outlook for this year. But if we assume that Foodservice will be down by, let's say, 10% for the remaining of the year on a year-on-year basis whereas you see some increase in the Retail side, that shift is, call it, permanent for at least another year, which could may as well move into new lockdowns and so on. Would that require you to do anything more significant in terms of more permanently shut down certain areas? Or is there an increased CapEx need in other areas to meet the demand from the Retail side? Or do you feel confident that you can handle a more long -- sort of prolonged situation with this shift in demand?

[Leif Bergvall Hansen, CEO, President & MD]

I think if you -- that can be many scenarios. But if you are, let's say, thinking that, let's say, Foodservice was more from now on being at 10% over to -- or 10% reduced demand and it will be replaced by Retail, that will be a sufficient small shift, but that wouldn't have a significant impact -- negative impact on performance going forward and there wouldn't be any additional CapEx relating to that. So -- but we would not -- we would also anticipate that Foodservice will come back within that time frame. But as you rightly say, there might be a second wave and what have you. But all in all, we have seen these costs primarily be linked to periods where we really saw -- we had -- also as we made in the trading update, we had a couple of weeks there where Foodservice was down 50%, 60%. Of course, that is a very different situation than if Foodservice were to be down 10%. We saw a couple of weeks there where Retail was down 30%, 40%. That was also -- we have some very challenging days there. That's also normalized, if we can say normalized now, so we have got a much more stable flow, still with some uncertainties, but a much more stable situation than what we had.

[Mikael Löfdahl, Research Analyst]

And regarding the Foodservice and the provision of inventory that you took in Q1, is -- has that played out as you have assumed so far? Or maybe that's not completed, but I guess you made provisions related to what you thought you could sell in other channels and at what price? Has that played out as you thought? And I guess now, as you have reduced production already in April, the level of inventory of -- to the Foodservice line, it's not a problem anymore or...

[Leif Bergvall Hansen, CEO, President & MD]

No. It is inventory for the Foodservice market is not really a big issue anymore. I think we have dealt with that very well. There's still -- there might be some inventory -- losses on inventory and we've taken provisions for it. Well, there will be a bit more, it's a bit hard to say. If you look at sort of across Europe, there is pressure on prices. There are a number of producers, particularly producers who are much more linked to Foodservice, and particularly, with kind of raw products or Ready-to-eat or Ready-to-cook products. So there is some surplus and pressure on prices in Europe. So if we were to want to do -- have to do a lot of, let's say, commodity export, the current situation will be pretty low prices. So we have been, I think, taking -- the provisions we have taken in Q1 reflect well the way we view the situation. But we, of course, kind of rule out that there will be a bit more to come. But we have -- the big risk in the Foodservice industry have been dealt with well.

[Mikael Löfdahl, Research Analyst]

Sorry for so many questions. I have two more, actually. First, on the raw material price, is that as you have guided for before as we enter 2020, that there will be lower -- less room for price increases on your side because of lower raw material costs? I guess that's something that you still expect compared to 2019, at least.

[Leif Bergvall Hansen, CEO, President & MD]

Yes. Basically, it relates to price adjustments that we did in the latter part of last year. So correct.

[Mikael Löfdahl, Research Analyst]

Okay. Final question, just on the countries, I know that you will report other segments going forward. But in terms of Norway and Ireland, if you look at those 2 countries this quarter, I mean, Norway, yes, they are at very good margins. But the margin declined quite significantly year-on-year and also a bit quarter-on-quarter, whereas Ireland was very strong but there's no -- nothing really explaining that, at least not in the report itself. But is there anything to do with mix or -- how come that you saw that development in Norway and Ireland?

[Leif Bergvall Hansen, CEO, President & MD]

I would say, in Norway, it is just normal fluctuations. Nothing significant to report on that. It is very stable, very solid performance, relatively limited COVID-19 effect. Ireland, as you said, a very strong quarter. A bit higher revenue than what we had anticipated, all in all. Probably also, when you look at the Irish business, there's not so much Foodservice in that business, mainly a Retail business. Not so much Ready-to-eat, it's more Ready-to-cook. So that impact the top line positively to some degree. But very, very, very solid result.

[Mikael Löfdahl, Research Analyst]

But in Norway, was there any mix in that number because sales was very strong in Norway as well, but still the margin declined.

[Leif Bergvall Hansen, CEO, President & MD]

Yes. I mean there was nothing sort of significant. I mean some improved product mix, a bit more branded sales, but it's relatively small moves, so that's also why we haven't listed out any explanation because there isn't really any one, so to speak. It's more down to normal fluctuations. But on -- in the very...

[Mikael Löfdahl, Research Analyst]

I guess there's no FX effect here. I mean it's a quite closed market. So what you buy and what you sell stays in Norway. So there's only translation in the reporting. But...

[Leif Bergvall Hansen, CEO, President & MD]

Yes. Yes.

[Operator]

[Operator Instructions] We have no further questions -- sorry, we had a follow-up from Daniel Schmidt at Danske Bank.

[Daniel Schmidt, Research Analyst]

Daniel Schmidt from Danske again. Just on Ireland, would you say that, just coming back to the margin improvement, would you say that you had some tailwind when it comes to raw material compared to what you don't really get in the Nordics?

[Leif Bergvall Hansen, CEO, President & MD]

No. I wouldn't say that that is the main driver. No. This is more related to operational efficiency. A number of the initiatives that we are taking there to improve efficiency, we see them paying off and then some operational leverage from the top. Those are the main points.

[Daniel Schmidt, Research Analyst]

Right. And then just a second question on the last writing in your wording on Page 2 in the report, Scandi Standard will reconsider its current cash preservation measures. You end up by saying if nothing sort of materially adversely changes in the coming months, is that foremost relating to CapEx? And maybe not so much the dividend?

[Leif Bergvall Hansen, CEO, President & MD]

We are prudent in a way that we do believe that things have, touch wood, this -- we have handled this very well. We have taken a number of initiatives on CapEx on available lines. And basically just if things, for whatever reason, really worsen, then we don't want to be taken by surprise, so to speak. We want to make sure that we have prepared ourselves even for a scenario that it might be difficult for us to predict at this stage. So that's the reason why we have been so cautious. In spite of looking at the numbers, it doesn't seem like that was basically justified. But still, the Board decided to -- not to do any dividend, to postpone the decision or -- so we will be, once we know more about how things develop, we will look at this again on -- we have taken CapEx down from a bit more than SEK 400 million to SEK 300 million. It is attractive projects that we have decided to push a little bit ahead of us. Still SEK 300 million is a high number, I mean it's higher than depreciation, so it's not like we are putting the development and the improvement in business on hold in any way. But we just want to review the situation on an ongoing basis. Have a great day, everybody, if there's no more questions.

[Operator]

We have no further questions on the call.

[Leif Bergvall Hansen, CEO, President & MD]

All right. Thank you. Thanks for your time. Bye-bye.

[Julia Lagerqvist, Chief Financial Officer]

Okay. Thank you.