Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to today's Scandi Standard Interim Report for the First Quarter 2023. My name is Bailey, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Jonas Tunestål, CEO. Sir, please go ahead.

[Jonas Tunestål, executive]

Good morning, everyone, and welcome to this presentation of Scandi Standard's Results for Q1 2023. I'm Jonas Tunestål, CEO and Managing Director, of Scandi Standard. With me, I have Julia Lagerqvist, our CFO, and I'm pleased to have her by my side today to report a strong result in a challenging market. So next slide, please. And on this slide, you can see this is another step towards full recovery. We have had 18% growth, and we have compensated for part of the inflation, and we also delivered strong export markets. So we have delivered an EBIT of SEK 93 million, and it's a strong EBIT improvement compared to last year, but still, a material gap to be closed. We have also decided to change the sequencing of our LTE investments. I will come back to that later. And it's also important to state that we take earnings before growth. And then on a macro level, we see declining input costs due to lower prices on the commodities. And the Board has proposed SEK 1.15 dividend to the AGM. So next slide, please.This slide presents a positive trajectory after the inflation downturn. And as you can see in the graphs, we have a history of strong growth and stable margins. The sudden inflation broke our trend over some quarters, and we are now gradually recovering our margins. So I'm optimistic that we will take further steps towards full recovery over the coming periods, and the focus will be to close the remaining gaps. So next slide, please. And if we look into how inflation impact, we see that the consumer demand is sensitive at current price levels. Hence, encouraging to see declining input costs, although still at very high levels. We also see that the labour negotiations are to be set and they seem to be manageable for us. And as you can see in the graph [indiscernible] is well positioned in the current environment. We also see that pork prices are starting to increase. And if we go to the next slide, you see the strong macro drivers for growth in poultry. So I'm enthusiastic about the long-term opportunities in our industry, and we see very strong historic growth in our consumption. And the trends for poultry, they expect it to continue to be driven by versatility and health trends, sustainability metrics and not least in this environment, affordability. The next slide, please. And this slide presents Scandi Standard's very strong market position in all our 5 markets, and each country is highly consolidated. These markets have large entry barriers and they can individually be regarded as the same in closed markets due to the strong consumer preference for domestic produce. And due to our strong market position and our own supply decisions had a meaningful impact on the market balance, which has helped us in the recovery process from inflation. So we have adjusted the volume to recover for the inflation. Next slide, please. And this slide presents the export prices, and we see continued increasing export prices within the quarter. We think that we will see more stable prices into Q2, but we also focus on building a more solid export business with European and Southeastern retail and food service customers. And we are focusing on broadening our export permits to the most attractive export markets in order to get more value out of the Board. Next slide, please. And this table just shows the reconciliation of our segments. We see positive contributions from all areas compared to Q1 2022. And to explain the other that includes ingredients business and our corporate costs. So next slide. And then we go and look into our segments. In our RTC segments, we are on a journey towards full recovery and represent an EBIT of SEK 31 million compared to minus SEK 2 million last year, and that's a strong improvement. We also see a strong improvement in our LTI performance, but we are still challenging our antibiotic use in Ireland, but we're improving quarter-for-quarter. Next slide, please. In this slide, here you can see that we've been able to increase our sales prices significantly. And in spite of the massive price increases implemented, our EBIT is still 0.64 below the 2019 level. So we are proud of being able to increase the prices, but there's still a gap to be close to our level in 2019. At the same time, you can see that our ingredients business, which is imported under others, is more profitable than earlier ever also, and it's closing some of the gaps in our total [indiscernible]. Next slide, please. Then Ready-to-cook Denmark. And as we explained before, we are in the process of reversing an unsuccessful full implementation of the slow-growing birds strategy. And the peak of slow-growing is in Q4 and Q1. And now in Q2, we're expecting sequential improvement, and we're gradually changing our product offer to be more aligned with the demand. So we're going to take down the amount of slow-growing birds and increase the Rossport and get more in the balance of the consumer demand in total. So that is an important step that we take, and that start in Q2. Next slide, please. And on this slide, you can see the channel development in more detail. Through these details, you can note the strong increase in food service channels in the quarter, which is driven by both price and volume, and we see somewhat slower development in retail, which is due to price elasticity in this channel. Next slide, please. And then when we go into Ready-to-eat so we can gladly present another strong quarter. We have an increase of 90% in net sales, and we can present an EBITDA of SEK 45 million compared to SEK 35 million last year. So we have increased our margin from 5.5% to 5.9%. So we see a strong traction in our Ready-to-eat business. But if we go to the next slide. So our Ready-to-eat business has experienced exceptional organic growth and trend drivers are particularly strong for convenience products and our 2 main types of business, it's breaded business, and then we have our integrated local business. So our Ready-to-eat business yields a significantly higher return on capital employed compared to Ready-to-cook. And after 40% growth in 2022, we have now experienced reduced orders for breaded products for some of our European markets outside the Nordic region and Ireland. And as our existing capacity will therefore suffice over the next periods, we have decided to front-load investment into our LTE business in Norway instead in 2023. So we take Ready-to-eat investment in Norway before in Q, and then we will look into expanding our LTE business. So the planned expansion in our breaded business is far is still being prepared and can be initiated on short notice when required. So next slide, please. And here, you can see in the figures, it's, of course, very encouraging to see that Ready-to-eat is growing and outperforming pre-pandemic sales. The development is driven by increased sales in the food service channel. But during the quarter, we also see that RTE is growing in the retail segment. So growth in this segment will be a priority of the coming years. Ready-to-eat will be an important tool of developing the EBIT per kilo, so i.e., increasing the value of our protein. And with that, I will hand over to Julia for more detail in the financials.

[Julia Lagerqvist, executive]

Thank you, Jonas. Then going to Page 17, we come back to the overall P&L. As you've seen, the quarterly performance showed a clear improvement versus the previous year with an EBITDA at SEK 196 million and an EBITDA margin at 6%. There were no noncomparable items booked in the quarter nor for the entire year of '22, and the EBIT landed at SEK 93 million in Q1. Finance costs are increasing with the higher base rates as seen in previous quarters. All in all, the net income for the period landed at SEK 44 million, which was far above last year and indicated an earnings per share of SEK 0.83 for the quarter. Looking at the feed conversion ratio of feed efficiency, this is measured as the kilo feed that is needed to produce 1-kilo live weight. And here chicken has one of the lowest levels of animal proteins. In Q1, it was at 1.51 kilos and has been stable for the last year. Coming to Page 18, we look at our return measures. Return on capital employed was 7.8% for the last 12 months, which is an increase versus the previous low year. It is also an improvement versus the previous quarter. So we are on a positive trend. And looking at annualized return based on the Q1 results, the return on capital employed would have been at 8.4%, another step towards getting back to historic levels. At the same time, our equity ratio has improved to 33% from 30% last year. This is mainly related to retained earnings and exchange rate differences related to translation to our foreign operations. Moving to the next page, we have our cash flow overview. And EBITDA, as I said, is improving versus previous years. We have an increase in working capital, and I will come back to this in the next pages. We kept the investments low in the quarter. Paid financing items are increasing, driven by the increased base rates as previously mentioned. We see high tax payments in this quarter. This is the same as last year, and it's related to tax for last year as per regulations in some local markets where they're only paid 2 times per year. All in all, our net interest-bearing debt at the end of the quarter was at the same level as in the year-end '22. Coming to Page 20, we have our working capital overview. The inventory has increased versus the same period last year and versus the last quarter. This is an important focus area for us, and I will share some more details on the next slide. Payables and receivables both increased last year and were mainly driven by cost and price increases. We've also seen an increase in receivables versus the last quarter, driven by increased sales in countries with longer payment terms. Further, we have also paid some yearly customer bonuses in Q1. This leads us to a working capital-to-sales ratio of 0.9% in the quarter. Our target level for working capital sales, excluding financing items, remains to be around 6%, and we are finely somewhat above this level. Looking at our inventory values on Page 21. They are increasing versus previous periods. Both values and volumes are increasing, but this mainly is related to compensation for a factory close during Easter and the volumes are still slightly below the end of 2021. But inventory remains, of course, a clear focus area going forward. We try to use the flexibility and bold intake to balance supply and demand. We always work to optimizing the sales and operations planning to make sure we produce the right products, and we also use export channels for surplus sales to not interfere unnecessarily with domestic prices. We, of course, continue to monitor closely our inventory levels going forward. And we are ready to take forceful measures if needed. We do not speculate in our inventory as we know that the first loss is normally the lease loss. On Page 22, you have our cash flow guidance. Our CapEx for '23 is still estimated to be around SEK 400 million versus SEK 311 million in '22. What we have, as Jonas was explaining, we prioritized RTE investment in Denmark in favor of expanding our RTE plant in Norway and also investing in efficiencies in LTC in Finland and Ireland, where we see -- expect to see quicker returns. In addition, we also have our European implementation on top of going maintenance. Paid financing costs is estimated to be around 67% of the average net interest-bearing debt. This includes interest payments, leasing and factoring and vendor financing. And the blended tax rate is expected to be around 21%. Finally, the dividend proposal from the Board to the AGM is at SEK 1.15 per share, which is close in line to the policy of 60% of net earnings over time. Coming to Page 23, you have our sustainability KPIs. In the table to the left, you see our Q1 performance compared to last year and target. We are currently working on making our new 2030 growth operational and breaking them down by years, but the targets shown here are still the targets. As Jonas previously mentioned, we are pleased to see that the LTI, which is the lost time related to injuries in our factories, keeps decreasing through targeted efforts. The use of antibiotics, which is mainly driven by the Irish performance is starting to come down. The added group resources here to address the issues are taking effect and the focus is to continue to work to '23, which is reflected in the '23 targets. However, as reported in the last quarters, we have had unaccepted high figures for our animal welfare indicated footpad score. This is also mainly driven by Ireland. And here, we have further work to do, focusing group businesses on the issue. CO2 intensity is slightly up, among other things, this is driven by the fact that we have to use more oil as a gas burner of a smile functioning for a week. And we need to set additional projects to reach the ambitious target for '23. We're happy to report that we had 0 critical complaints in Q1, which is a good step towards the ambitious target of 0 complaints for the full year. Feed efficiency, as I talked is somewhat increasing, but at a stable level. The target is to improve slightly in '23. And with that, I hand back to back over to Jonas.

[Jonas Tunestål, executive]

Thank you. So on Page 24. This presents the 4 strategic pillars, which is important for us for building the fundamental Scandi Standard and bringing the company to the next level. It's about building the winning culture, ramp up our efficiency end-to-end and increase the value of our protein and the future-proof company. And going more in detail, we can look at the areas of large potential on the next slide. So Slide 25. And this slide presents the 6 areas where we see the large potential. And the first one that's domestic supply and demand, it's so important for our business, an agile S&OP process for optimizing the domestic supply and demand is crucial because we have this strong preference for the local produce. And then when we go to the next value of the whole bid, it is our focus to utilize as much value as possible from the whole book. You can see it in our Ingredients business, where we're trying to step up and take out more value, but it's also an important part of our RTC business to increase the EBIT per kilo. That is an important measure for us. And another important area is the Ready-to-eat potential. We see medium and long-term large potential in increasing our Ready-to-eat business. And we are focusing on building business and building profitable business there. So we will see change throughout the years in our Ready-to-eat business to find the right setup to increase the value even more of the book. The quality and production processes and that is part of the efficiency end-to-end. It's important for us in the FMCG segment to have the right quality and production processes to be as efficient and good quality as possible. Then we are focusing also in Scandi Standard. We had a statement that we have 5 P&Ls and one Scandi Standard. And the important thing of being one Scandi Standard is using these cross-border activities. So we actually can take benefit of the best practice in the different countries. But also when you look then in the last area, export business, so we can gain the benefit of being one Scandi Standard when we're exporting too. So with that said, we can say the next slide. So to summarize, we can say we take another step towards full recovery. We have a positive outlook for the future. Our primary focus on regaining EBIT per kilo in Ready-to-cook. We're expecting demand support from an increase in pork prices. We have seen the potential to reduce input costs and increase our efficiency. We're expecting sequential improvements in Ready-to-cook Denmark. And we're also prepared for profitable growth in our Ready-to-eat segment. And then we have our overall ambition to increase the value per bird processed over the coming years. And at last, we have a dividend proposal of SEK 1.15 per share to the AGM. So with that, we open up for questions.

[Operator]

[Operator Instructions] Our first question today comes from the line of Daniel Schmidt from Danske Bank.

[Daniel Schmidt, analyst]

A couple of questions from me. You say that you have compensated some part of the cost inflation. And at the same time, you're alluding to energy and feed prices moving from a headwind to a tailwind as we go into the spring and the summer is my interpretation at least. Should we read that as you guys getting close to full compensation for cost inflation as we go into Q2 and onwards?

[Jonas Tunestål, executive]

We will continuously improve both in terms of -- I agree with you, we will see lower input costs. but we also have a delay in those input costs. And we are focusing on increasing our EBIT per kilo as we presented, we have this 0.64 in GAAP, and we will try to close it quarter-by-quarter, and it will be supported by lower import prices. But there's a delay in that due to that, we always are hedged in feed and then we have our indirect costs with the price for the board where we don't have the fee. So you will see a sequential increase of closing that gap.

[Daniel Schmidt, analyst]

Yes. And could you maybe give us some more light on the hedging? How much do you hedge? And when you apply new hedging and sort of what is the step change in that? Are you seeing that now? Or is that something that you will see towards the end of Q2 and into Q3?

[Jonas Tunestål, executive]

It's both indirect, mostly it's indirect through what we paid for our live birds. But we also -- but we will -- we also gradually hedge our feed, and that is particular to our Iris business, where we have our feed mill. And that would die enhance. So in half a year ahead, so we always can plan for our price to the customers. So we have from different countries. So it's a complex picture, and I can't be into every country and present that. But you will see and gradually that we will catch up and if the input cost would be more stabilized. [indiscernible].

[Daniel Schmidt, analyst]

Just maybe -- sorry for the detailed question here, but on feed, and it does relate to weak prices. Correct me if I'm wrong. And they have continuously moved down quite a bit in the past year. I think they've halved and are still sort of moving south. Do you think that could sort of be an even bigger tailwind as we get into the second half of this year? Or is there anything else that we should need to consider in that sort of equation?

[Jonas Tunestål, executive]

Yes. The feed prices, they are more complex than wheat. It's soy as well and then there's a currency thing. And then there's a demoting. So it's those parameters. But the wheat price has come down, and you will -- and now stabilized on a lower level, but a lot of security in that, but we have seen, for example, in Sweden, an exchange rate that has been a little bit challenging. And that, together with the GMO-free soy delays the feed prices a little bit. So it's a complex mix, and then we are -- then it's indirect in most of the countries. But you can see the feed prices on the slide.

[Daniel Schmidt, analyst]

Looking ahead a bit given where the wheat price is now. Sure. Okay. Good. And as you stated before, we should see improvements when it comes to Ready-to-cook Denmark. I assume you mean more meaningful improvements from Q2 and onwards, as you make changes to the balance when it comes to sort of your output in terms of slow growing versus conventional birds. I think you've mentioned and correct me if I'm wrong again, that you expect and hope this business to be at breakeven at the start of '24. Is that still sort of valid?

[Jonas Tunestål, executive]

What we have stated is that we will change, and it will change from slow going into a more balanced way. That one will be during 2023. And then we will be in that balance at the end of the year. So that's what we have said, but we are not guiding on the results.

[Daniel Schmidt, analyst]

No, but I hope that being at that balance is that you're targeting to be not loss-making.

[Jonas Tunestål, executive]

The thing that is important is that we have had the highest rate of slow-growing Q4 and Q1. And now we're starting this change in Q2, and that is a major change for us. And that will be changed throughout the year. And it's more complex than just a build that we are also changing how many days we produce and so on. So we have started the biggest change in Q2, and we will see a more balance between the raises at the end of the year.

[Daniel Schmidt, analyst]

Yes. But I still assume that the target of doing these changes is to get to a situation where you're not losing money.

[Jonas Tunestål, executive]

We're not guiding on the results, but of course, we want to do profitable business in all our markets.

[Daniel Schmidt, analyst]

And maybe I missed it, Jonas. But the reason why you're redirecting the investments away from Ready-to-eat in Denmark for the time being, at least even though you're ready to do those investments and focusing on Finland, Norway and Ireland instead where you see a quicker return on investment. What was the reason for that again?

[Jonas Tunestål, executive]

We have seen this tremendous growth in 2022 of 40%. And that has, of course, challenged our supply chain of how we produce. Now we see that the demand in some QSR markets is flattening out. And then we have increased our -- how long series we produce. So the efficiency in that plant has gone up a bit. And then we see a little bit of flattening in growth. And then we see that the capacity will, for the coming short term, be enough. Then it's important because we have a long list of good investments that we want to do. Then we move those investments, and one of them is an e-investment in Norway and the other one is to say, 2 RPC investments in Finland and Ireland. Then we take them before in the queue, and we're still preparing for this investment so that it can be ready when we see that we are reaching the roof once again.

[Daniel Schmidt, analyst]

And there has been reports when it comes to bird flu outbreaks in Denmark, I think it was in January and March and now also in April. And I know that sort of the way that this is conducted has been moving in the right direction at central regionalization of the outbreaks. But can you state or give an estimate of how much this has impacted your export business during the quarter and what the current impact is even though it's probably much less?

[Jonas Tunestål, executive]

Yes, not at all from Denmark and Sweden. And as we said, we're trying to get more counters approved to export and some of those counters, for example, Ireland. And there is a delay for improvement and that we're trying to catch up now so we can get imports from more countries, and that has some reason for the bird flu. But in the countries that we are approved and recognized, there is no impact at all.

[Daniel Schmidt, analyst]

Okay. So is that implicitly meaning that the outbreaks that we've had in Denmark are not really close to where you source your birds?

[Jonas Tunestål, executive]

Yes. Denmark to any of our farmers or [indiscernible].

[Daniel Schmidt, analyst]

Okay. Maybe just coming back to sort of compensation for cost inflation and also the discussion that we had on Ready-to-cook in Denmark and the statements that you've had in terms of getting back to basically above the profitability that you have between 2015 and 2020 striving towards that at least. Is that something that sort of you see in the near future, i.e., a year from now or a bit more maybe?

[Jonas Tunestål, executive]

What we have said is that we want to recover our earnings. And also, we have stated that we see our 4% margin that we're going for. And this is a journey towards that road. And we see that there has been a stronger EBIT per kilo in 2019. And of course, the cost inflation that hit us hard. And even though we have increased the prices really much, we are still 0.64 behind. And that is an important KPI for us to follow this EBIT per kilo. And that's why we're presenting it because we're starting to get back to this one cleaner per kilo. And I will not guide on when we will achieve that, but we will try to recover our margins and then get back to growth again and grow the volume. But as we stated at the beginning [indiscernible]

[Daniel Schmidt, analyst]

Yes. But it sounds like you're sort of on the path for stability, profitability and then growth.

[Jonas Tunestål, executive]

Yes.

[Daniel Schmidt, analyst]

Good. And do you think that anything has changed in the competitive landscape that is going to make it more difficult for you to get back to closing this gap versus 2019 in EBIT per kilo?

[Jonas Tunestål, executive]

I don't see that. The thing that we talk about is, of course, that we see there's a bigger price sensitivity among the consumer. And of course, that challenge us with the import of low-cost products and of course, the balance. But I also think that on the other hand, we see that the highly efficient protein as poultry is strong in this market. And I think that we, as a company in Scandi Standard are getting our hands on the market how to play that right. And of course, we have a long journey of things to do, but I really think that we're on the right track to get back to better profitability and where we will come from.

[Daniel Schmidt, analyst]

Because I think you mentioned that pork prices are moving up now. So I guess that's something that you've been waiting for.

[Jonas Tunestål, executive]

Yes. We really see that the latest month, there has been a movement in pork prices in Europe. We don't see that so much yet on the domestic pulp prices in our whole market, but the big -- if we call them the big trading prices or the commodity prices of pork in Europe, that we see an increase mainly linked to Germany.

[Daniel Schmidt, analyst]

And has there been a historical lag between Continental Europe and the Nordics?

[Jonas Tunestål, executive]

Yes, they are a little bit more stable. The domestic meat is a little bit more stable than the trading or trading needs, so to say.

[Operator]

[Operator Instructions] The next question today comes from the line of Christian Nordby from Kepler.

[Christian Nordby, analyst]

So I have a question on the cost base. You report on Chart 4 that the personnel cost is 17% of total costs. And then you also talk about the changes in the feed price, packaging and energy cost. What's the share of the total cost base for feed packaging and energy?

[Jonas Tunestål, executive]

In rough numbers, the feed is 25% of our cost base and the energy, of course, is due to what energy prices is, but about 3% to 4%.

[Christian Nordby, analyst]

And packaging?

[Jonas Tunestål, executive]

The packaging number, I don't have them from my head because it's differed so much due to what type of products we have. But I can get back to you on that one.

[Christian Nordby, analyst]

So what I'm basically alluding to is we know that personnel costs are coming up, and we see that feed prices, packaging and energy are coming down. If we assume that the price of the chicken is going to be stable from current levels, how much lower do the feed packaging and energy prices need to go for your EBIT per kilo to become one?

[Jonas Tunestål, executive]

Yes, on that, we need to get back to exactly answer that question. You see we have -- it's a little bit complicated because we both have a direct link, but even more an indirect link between both our cost base. And then it's, of course, different in our total tonnage to what the EBITDA kilo will be. So then I need to calculate that one because of too many variable parameters.

[Christian Nordby, analyst]

And are you worried that the price of the chicken will come down with lower energy prices and feed prices? Or do you think they'll be going to stay quite flat as things look for the moment?

[Jonas Tunestål, executive]

The price of the light birds or our sales?

[Christian Nordby, analyst]

No, on just commodity light bird.

[Jonas Tunestål, executive]

Yes. I think that it's also different from country to country. Where we have the feed, I think that the rest of the cost base of the bird is such a small part that will be stable. But where we control the feed, we will see decreasing. I also think that we will see a decrease in the price on the bird in the different markets. But that's, of course, a delay when there are some 1 middle man between us and the feed price. But we will see lower prices in the fold. That's in most of our markets if I shouldn't say in all our markets.

[Operator]

[Operator Instructions] There were no additional questions waiting at this time. So I'd like to pass the conference back over to Jonas Tunestål for any closing remarks.

[Jonas Tunestål, executive]

Yes. Thank you very much, everyone, for calling in. And with that, I think we close the conference call. Thank you very much.