Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, everyone, and welcome to the Scandi Standard Interim Report for the First Quarter 2022. My name is Seb, and I'll be the operator for your call today. [Operator Instructions]

I will now hand the floor over to Jonas Tunestål to begin. Please go ahead, Jonas.

[Jonas Tunestål, executive]

Thank you very much, and good morning, everyone, and welcome to this presentation of Scandi Standard's results for Q1 2022. I'm Jonas Tunestål, the new CEO and Managing Director of Scandi Standard since the 1st of April. With me today, I have Julia Lagerqvist, our CFO, and I'm extra pleased to have her by my side since I joined Scandi Standard after the quarter that will be presented today.

And as some of you might know, I have spent all my career in the meat industry, having been with KLS Ugglarps and Danish Crown for 23 years, the latest 8 years in group management in Danish Crown and responsible for the Swedish business, KLS Ugglarps. And Danish Crown is one of the largest meat industries in the world.

Before we get into the numbers of the quarter, I would just like to add that, through these turbulent times, I'm very happy to have joined Scandi Standard and I think there is a great potential in this sustainable white protein and also in Scandi Standard as a company. I will get back to you in more detail with my take on the next development step of the company during the year. But now let's focus on Q1.

Next slide, please. As expected, the first quarter was challenging. Further, the uncertainty of political development in Europe magnified the ongoing cost inflation. Though Scandi Standard had a top line growth of 10% in fixed currency, the company experienced a sharp decline in adjusted EBIT compared to last year. And as you can see in the chart, it's SEK 37 million compared to SEK 88 million last year.

During the quarter, price increases were implemented in all markets in order to balance the significant cost increases on input goods during the second half of 2021, which continued into 2022. The losses in RTC Denmark continues. A number of measures are under implementation, which I will get back to later in the presentation.

In addition, we also see improved export prices in the quarter. The war in Ukraine drives further cost increases. It has an impact on most of the business all around the world, but for us, it's a major impact due to the high feed prices, which is directly related to the grain prices. Ukraine and Russia are major exporters of grain into the world market.

New round of price negotiations with our customers are ongoing, and our customers have shown that they understand the situation requires additional significant price increases.

And at last, we have a new 5-year sustainable linked bank financing agreement. We have secured a stable but at the same time, flexible financial basis for the next leg of our journey. Given that, we are in the middle of a challenging phase, we appreciate our bank's trust in our ability to regain momentum in our business.

Next slide, please. Scandi Standard has been a stable business with around 4% margin and continuous growth throughout the years. But in 2021 and Q1 '22, we have seen a significant margin drop in earnings due to macro and operational challenges. The cost inflation that I mentioned in the previous slide has had an effect on the results even though we have worked hard to cut the lead time through an agile pricing strategy in the latest quarters.

Our action is now aiming to address both the macro and operational challenges to get back on historical earnings. The Ukraine war and the uncertainties created by the volatile market will impact the timing, though. But pricing, that's the most important thing in our short term and I'm confident that Scandi Standard has the ability to make these price increases happen, and I will elaborate in the slides to come about that.

So if we can turn to the next slide, please. In this slide, on the right-hand side, we see examples of cost inflation. We see a steep increase in feed prices, which has a major impact since it accounts for a significant part of our cost base. The first round of cost increases had largely been mitigated by price increases during the previous quarter. But the war in Ukraine is certain creating further cost inflation, driven mainly by feed prices, as I mentioned before, and we aim for further substantial price increases in the market.

We also push for faster implementation. In general, price adjustments have historically only been made once or few times per year. But we see now that the healthy customer dialogues during recent quarters have paved the way for a more flexible approach toward price adjustments, which is crucial during these circumstances.

And our customers also have shown that they understand the situation requires additional significant price increases in order to ensure long-term domestic food production and a sufficient supply of chicken products in our home markets going forward. So price increases have the highest priority in our organization right now.

Compared to the price level of last year, we estimate that the end consumer might be facing a price increase of approximately 30% and this might, of course, affect the consumer demand. But we also know that chicken is well-positioned compared to other animal proteins and will continue to have long-term competitive relative price points. And actually, this is one of the things that attracted me to the poultry industry in the first place: the efficiency of this protein and the healthy part.

Due to the short lead time in the poultry value chain, we will be first movers on price and it may, in some markets, have short term effect on volumes. But in the medium term, as mentioned before, I'm convinced that chicken will come out very well. And you can see the resource efficiency and price point in chicken in the lower table on the right-hand side.

So next slide, please. And as you can see in this slide, we see recovery in export prices, but the export business continued to have a negative effect on earnings during the first quarter of '22. The background is that we have been in a period with low export prices due to both global oversupply, and in specifically European oversupply on proteins.

And that's impacted by the COVID-19 restrictions. That has affected the whole European protein sector a lot. And there have also been import restrictions related to outbreaks of bird flu to a number of Asian markets, and that had a great impact as well.

However, export prices are now increasing, driven by reduced chicken production in Europe. This is in part related to the war in Ukraine and the rapid -- the increased feed prices. So at the same time, we see an increased demand from restaurant sector around the world as a consequence of the release of the COVID restrictions. And personally, I'm also convinced that it's a result of increased consumer interest for poultry. And back to that again, we see a healthy sustainable product and really efficient product.

We still see that we have significant earnings shortfall when the cost inflation is taken into account. Even though it's a small share of total sales, the export business is important to us, especially when it comes to improving the anatomical balance, meaning how we utilize the full bird, necks, wings and feet and breasts and so on. But we need to reduce our exposure to both export and focus more on, for instance, Ready-to-eat to benefit the full potential of an integrated company.

And with that, next slide, please. And as you can see in this slide, RTC Denmark remains the largest challenge for Scandi Standard, and export prices is important for the Ready-to-cook Denmark. We are, in addition, handling the negative impact of the implementation for the former strategy for slow-growing goods and the previously mentioned cost increases. Despite the challenges, we see a positive tendency even though it's not largely reflected in the numbers in Q1.

So we have a number of measures under implementation to improve the situation. They include a significant decrease in slaughter volume in Q1 to balance supply and demand better, we see staff reductions in production, an updated product assortment to increase carcass balance. Work is also ongoing to implement a new strategy for slow-growing birds in order to meet the customer demand, which is expected to increase within both Danish retail and restaurants, as well as the public sector.

So the positive effect of these efforts are expected to show primarily during the second half of '22. In the coming period, I will spend my time, together with the Danish team, to carefully follow and continuously update and review the recovery plans in order to turn the business around as quickly as possible.

So with that, next slide, please. And as you can see in this slide, it's clearly that Ready-to-eat that drives the results here in Q1, bringing us back to the top line growth in the quarter. The results within Ready-to-cook are far from satisfactory. There has been a significant drop in Q1. That will be my clear focus: to get the base business back on track.

And as mentioned before, some of our markets relying on bulk exports and an important focus will be to increase anatomical balance. And an important part of that is growing our RTE business. I will come back to that later this year when I'm presenting our next steps in development.

Next slide, please. Ready-to-cook, weak quarterly results as expected with following plan. The headwinds I had talked about primarily relates to our Ready-to-cook business. So we see an increase in revenues driven by price increases to mitigate the cost inflation. However, this has also resulted in temporary retail demand pushback would affect the price realization negatively.

We have, at the same time, lowered slaughter volumes in Sweden, Ireland and Denmark and that's affecting EBIT. All in all, negative EBIT of SEK 2 million compared to the SEK 70 million in the same quarter last year.

And from a sustainability point of view, we are at a good level with our main animal welfare and food safety parameters. During 2021, we had an adverse development regarding worker safety, mainly driven by higher staff turnover during the pandemic. This trend has now been turned by forceful measures at all levels during Q1.

So next slide, please. On this slide, you can see the channel development in more detail. Through these details, you can notice the strong increase in foodservice and the export channel in the quarter and the flat development in retail. And that's illustrating the pushback that I talked about in the previous slide.

So next slide, please. Looking at our Ready-to-eat business, we delivered a good performance in the quarter with net sales of SEK 643 million. That's an increase of 40% for the quarter in fixed currency and an operating income increase by 34% to SEK 35 million during the quarter.

So price increases execute on long-term customers in foodservice, retail, QSR and export. And cost inflation was, to a large extent, mitigated and the EBIT margin landed at 5.5% for the quarter.

And then we can jump to the next slide. And it's, of course, very encouraging to see the Ready-to-eat are growing and outperforming the pandemic sales. The development is driven by increased sales in foodservice, but during the quarter, we also see that RTE is growing in the retail sales channels, indicating a more permanent setup in the retail demand, showing an increase of 19% in the quarter.

So to address the demand, Scandi Standard will invest to further increase the capacity of the company's largest production plant in ready-to-eat products in Farre in Denmark. So the Ready-to-eat, we have really good growth and looking forward to continue that growth.

And with that, I will hand over to Julia for a more deep dive on the financials. So welcoming Julia.

[Julia Lagerqvist, executive]

Thank you, Jonas. With that, let me move to the overall P&L on Slide 13. And as you've seen, the quarterly performance was weak. However, EBITDA is still at SEK 136 million during the quarter. And there were no noncomparable items in the quarter nor was it in the same quarter last year, meaning that EBIT was at SEK 37 million versus last year at SEK 88 million.

We had somewhat higher financing costs in the quarter impacted by ForEx. And the income for the quarter landed at SEK 10 million, leading to an EPS of 0.1 million -- SEK 0.1.

Looking at our return measures at Page 14. The declining results, of course, led to a large drop of return on capital employed from 8.4% last year to 4% this year. However, given our cash preservation measures, our equity ratio remained stable at around 30%.

On Page 15, we continued to see a low level of working capital. Inventory has decreased versus the year-end. However, this is more than offset by increased receivables with increased sales and the negative timing factors. Our target level for working capital adjusted for financing items remains to be around 6% of sales. At the moment, we are currently somewhat above this.

Looking at the cash flow on Page 16. We do see that the operating cash flow during the quarter was negatively impacted by the low EBITDA and the increased working capital. This was partly offset by the low CapEx spend in the quarter as part of our cash preservation measures. I'll talk more about this in the coming page.

We had high taxes paid in the quarter due to local regulatory timings of yearly payments. This was the same last year. All in all, leading to a closing NIBD of just above SEK 2 billion, which is SEK 54 million higher than the previous quarter.

On Page 17, you have our cash flow guidance. CapEx for 2022 is estimated to be around SEK 330 million, same as in previous estimate. This is quite low, particularly in light of the large portion being reserved for a new ERP system. In addition, as Jonas already said, we have a clear focus on facilitating further growth in Ready-to-eat, meeting the demand we see in that segment.

Paid interest level is estimated to be at 4% to 4.5%. This has somewhat increased due to slightly higher margin and increased base rates. And the blended tax rate is estimated to be around 21%.

As mentioned, we have our finance -- new 5-year financing in place. It is a sustainability-linked facility that also has increased leverage ratio covenant headroom in the first quarters. We are very pleased that we have this secured, which is a solid and flexible financial basis, specifically in these turbulent times.

As previously communicated, and as a result of cash preservation measures, the Board has resolved not to propose a dividend for 2021 to the AGM, which will be held later today. However, the dividend policy remains unchanged.

Coming to Page 18, we look at our sustainability KPIs and we are, in general, pleased with the development. Our main animal welfare KPI is in line with expectations. It's higher than the previous quarter, but this is because Q1 is normally higher than average due to the cold and wet weather. And CO2 is developing and improving in line with targets.

Use of antibiotics, however, is unacceptably high. This is driven by use in Ireland as the Nordic countries are close to 0, and the main reason is poor quality in day-old chicks. We have our Scandi Standard expert on site now in Ireland to identify and resolve root causes for this with utmost urgency.

On the other hand, what is pleasing to see is that we have improved results on LTI, as Jonas mentioned. This is lost time related to injuries. Here, the action plan that was put in place to mitigate previous poor results is delivering and we see an improvement of 31% versus the poor 2021 average.

Sustainability is high on the agenda for Scandi Standard, and we are pleased that we have been able to incorporate our main target in our new sustainability-linked financing. The targets included are related to CO2, LTI and the use of antibiotics.

And with that, I hand back over to Jonas to take you through the final slide.

[Jonas Tunestål, executive]

Thank you, Julia. Yes, to conclude, we are heavily affected by the development in the war in Ukraine. As an effect, we see large cost inflations in the market. For Scandi Standard, as the feed cost increases that has the most significant effects. And our most important focus is to get the price increases through to recover our margins. We see good momentum for rapid implementation of required price increases as our customers recognize the gravity of the situation and the importance of maintaining domestic supply.

So short term, consumer response may respond to the price increases in an area of uncertainty as chicken products are likely first movers on price. However, medium term, we're well positioned for successful implementation of price increases given the low price point and the lower absolute and relative price increases required.

So as a new CEO, my immediate focus is to ensure that Scandi Standard navigates through the ongoing volatile situation on markets with least possible impact on our earnings. As market leaders in the Nordic region and Ireland, we are well positioned to succeed in this. And though our new bank finance agreement we have secured a financial basis for the next leg of our journey, and given that, we are in the middle of a challenging phase, we appreciate our bank's trust in our ability to regain momentum in our business.

So I really look forward to leading the work with a further development of Scandi Standard's potential, together with my new colleagues. And with that said, I will open up for Q&A.

[Operator]

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

[Daniel Schmidt, analyst]

A couple of questions from me then, starting with price increases that you mentioned, Jonas. And clearly, you're on top of this it sounds like. Should we sort of read into what you did in Q1, was that just the start of being much more aggressive entering the second quarter?

And you talked about sort of increased flexibility when you speak to your customers to do faster and higher price increases than in any sort of -- in a normal market. Is that what we're entering into now or did we see that already in Q1?

[Jonas Tunestål, executive]

I would say if we go back to the fourth quarter where we saw these cost increases and we pushed the prices through in Q1. And now Q1, we're aiming for new price increases, but we're pushing for shorter lead times and bigger steps to mitigate the cost increases we see as an effect of the war in Ukraine and the high cost inflation.

[Daniel Schmidt, analyst]

So there is some sort of change to the sort of pattern or behavior that you can exercise now compared to before the war, basically, which is more acceptable now than a couple of months ago. Is that correct?

[Jonas Tunestål, executive]

Yes. We see in Q1 that -- due to these high cost increases, we see better acceptance for the customers to push the shorter lead times and mitigate the cost increases that we see in the market.

[Daniel Schmidt, analyst]

Okay. Good. And when you talk about positive effects in Ready-to-cook in Denmark in the second half of this year, and obviously sort of looking at the performance in Q1, it was the same level of loss as in Q1 last year. What do you mean in terms of positive effects? What magnitude are you looking for in terms of improving profitability in the second half versus the run rate currently?

[Jonas Tunestål, executive]

Yes. My mission is to improve the profitability for the group, and we cannot quantify the improvement that -- and I've been here for a month. So my focus right now is to get grip on Denmark together with the team and see how we can proceed this forward. But we cannot quantify the improvement and I cannot do it right now.

[Daniel Schmidt, analyst]

But you see meaningful improvements coming through. Is that fair?

[Jonas Tunestål, executive]

Of course, we're looking into the business and I'm looking into all the different segments and all the different countries. And of course, the development in Denmark have increased my focus. And the thing I'm really into now is that focus on doing the right things for the future. And I think that we have a good team in place, and we are working really hard to get a grip on this. And we see, as I mentioned in the report, an increased retail demand in Denmark for the slow-growing birds.

[Daniel Schmidt, analyst]

All right. Okay. Then just moving on to the export prices moving up, which, of course, is a good thing, and you mentioned sort of decreased production and improved demand from foodservice, if I remember correctly. Did you see that kicking off in mid-February when the restrictions lifted? Or did you see that before? Will we have the sort of the full effect of that in Q2 and only half of effect in Q1 in terms of sort of the demand coming through a bit better towards the end of Q1 into Q2?

[Jonas Tunestål, executive]

I can't predict the future. But what I see and my comment about the Q1 and what's happened in Q4, we see an increased export price and it is, as you say, an effect of the COVID-19 restrictions that have been taken away. But we also see lower supply that increased the demand on the export market. So as you can see in the graph, we are increasing in the export pricing during this Q1.

And now when the bird flu restrictions are taken away, we can access many more Asian markets. But we can't guarantee, of course, what's happening with the bird flu. But for now, we see better access to Asia. But except for that, we also see an increased demand on the export business within the -- as the graphs are showing.

[Daniel Schmidt, analyst]

All right. So the bird flu thing I don't think you mentioned, but that's been a theme, of course, for quite some time. So what you're saying is that the restrictions, there hasn't been any new cases in the past 3 months. Is that what you're saying? And now they were recently lifted when it comes to Asia?

[Jonas Tunestål, executive]

Yes. And I will also comment on the oversupply in the European market that we talked about. There has been an oversupply of primary pork in the European market due to the ASF, the African swine fever, and they had restrictions. So now we're seeing that the production of pork is down in Europe as well and that's a part of the increased demand for chicken as well.

[Operator]

[Operator Instructions] And we have no further questions on the call. Sorry, we do have a follow-up from Daniel Schmidt.

[Daniel Schmidt, analyst]

I can continue if there's no others on the line asking questions. But just summarizing all the things that you're saying in terms of more flexibility on price increases and export prices moving up and demand coming back in foodservice.

And my understanding, at least looking at the market, that is sort of -- has been a gradual development through the quarter given the lifted restrictions in most markets by early February. Is it fair to assume that sort of the start of Q2 has been better than the start of Q1?

[Jonas Tunestål, executive]

We can't comment on Q2 at all. So we are presenting the Q1 numbers and there we have seen an increase in the export pricing.

[Daniel Schmidt, analyst]

Yes. I was more sort of trying to look for the entire picture, given all the commentary that you had if you summarized all that.

[Jonas Tunestål, executive]

I won't comment on Q2. The thing that I can say about Scandi Standard in total in the business and the industry in total is -- we mentioned it a couple of times in the report as well, I think it's really important that we are focusing on optimizing the anatomy of the carcass balance as it's called as well. And a really important thing to gain profitability in the industry is to have a good utilization. And we are focusing on improving our utilization over time.

[Daniel Schmidt, analyst]

Yes. I appreciate, of course, that you've only been in the company for a month. And you're right that you will be sort of returning with some sort of plan on how to go forward and it's still early days. But when do you think that you will have a clearer view that you can communicate to the market? Will that be in connection with Q2?

[Jonas Tunestål, executive]

I will later this year get back and I think that we will -- I will present it later this year. I can't totally specify that, but about when we come to the Q2, Q3 I will be able to present to the market how I see it.

But I'm looking really forward to spending time to actually dive into this business. I have this experience working with the industry my entire life. So I have my thoughts on what we're going to do and how we're going to process -- progress this forward together with my colleagues. But I need to have this time and it's early. It's 1 month. But later this year, I will certainly present how we see the business going forward.

[Daniel Schmidt, analyst]

Yes. But given your background, if I sort of got it right, you're Swedish across, but you've been working in a Danish company in Denmark, and correct me if I'm wrong, and that's where you have your biggest challenge and has been for some time.

Do you feel that you're hitting the ground running when you sort of -- when you came into this company? Or is there sort of still a learning curve to be had?

[Jonas Tunestål, executive]

If you mean for me personally?

[Daniel Schmidt, analyst]

Yes.

[Jonas Tunestål, executive]

Yes. Of course, there's a learning curve. And I have a lot of things to learn into the poultry business. But I think, and I'm really confident of my background spending my entire life in the meat industry, that I hopefully pretty fast can contribute into the company. And as you mentioned, I've been a part of a Danish company and part of group management, but my responsibility has been as a CEO in our Swedish subsidiary, as an example, but working both national and international, of course.

So I think I can contribute. And of course, after 23 years in that company and a company that I really like and admire a lot, it really needs to be something special for me to jump from that company into a new company, and I really saw the potential in Scandi Standard and the things that we can do together. So of course, I'm confident of what we can do together.

[Daniel Schmidt, analyst]

Yes. And then maybe just another topic coming back to the price increases as a final question and given the scandals that you were through in the Swedish market last year, do you feel that -- or is it your impression speaking to others in the company that that has hampered your capabilities to raise prices in any sense?

[Jonas Tunestål, executive]

Yes. We need to bear in mind that the thing about Kronfågel, of course, is just a part of Scandi Standard. But we see some impact on demand, but it's not linked directly. It's hard to say, but we don't think it's linked directly to consequences of this scandal. It's more about we see huge -- or large price increases and we will see a temporary pushback, but we are really focused on rebuilding the confidence on the Swedish customers.

And actually, I think that we are gaining trust. And I think that we see that poultry will now in medium term actually be an efficient protein that can handle the price increases, both in terms of efficiency compared to other proteins, but as a protein itself.

[Operator]

[Operator Instructions] We have no further questions on the call. So I will hand the floor back to Jonas.

[Jonas Tunestål, executive]

Thank you very much, and thank you for listening in to this presentation and the Q&A. And with that said, we say thank you very much. Bye.

[Operator]

This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.