Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2024-Q1

[Jonas Tunestål, executive]

Good morning, everyone, and welcome to this presentation of Scandi Standard's results for Q1 2024. If you can move to the next slide, please. My name is Jonas Tunestål, and I'm the CEO and Managing Director of Scandi Standard. With me, I have Fredrik Sylwan, our CFO, and I'm pleased to have him by my side today. I'm also glad to report a significant volume and profit growth within the quarter.

Next slide, please. While the first quarter of 2023 was dominated by substantial price hikes for input goods, energy and transportation costs, market conditions have now returned to more normal levels. The situation has enabled price reductions that has benefited consumers in parallel with stimulated demand for our products. So overall, this has resulted in a significant volume and earnings growth, even though net sales were lower for the group.

So we have increased the volumes with 8% in the quarter. We have increased our EBIT with 32%, and that is SEK 122 million, compared to SEK 93 million last year, and that is margin improved from 2.9% to 3.9% in the quarter. The improvement was driven by a strong quarter in Ready-to-cook, and Ready-to-eat and Ingredients was, however, weaker as expected.

We have a strong balance sheet, however, the cash flow was impacted by timing effects as explained in the last quarter. And we provided a dividend of SEK 2.30, compared to SEK 1.15 last year, and the dividend will be paid in 2 equal installments.

So next slide, please. And we are proud to have passed a successful turnaround process and recovered our earnings after a tough period for Scandi Standard, and we have taken action as forceful volume contractions to support required price increases, and new course implemented in Ready-to-cook Denmark, and our balance sheet strengthened through capital discipline and divestments.

And with recovered earnings and a stronger balance sheet, we have now entered the next stage in our journey. And we see a strong demand and has recently allowed us to ramp up a volume of 8%.

The next slide, please. And we have seen a long period of sharply increase in input cost, which has [ necessitated ] radical price increases to consumers. Market conditions have now started to be more normalized. Key input costs are trending downwards. And as presented on the first page, input cost has a link to our top line.

But although we see calmer waters now, we have, however, needed to be prepared for further volatility and uncertainty, but the short production cycle compared to other proteins enable us to be more agile in our supply chain. And when we look at other costs as packaging and energy, we see that those costs are at a more stable level, and we are hedging a major part of our electricity exposure.

So next slide, please. And price has always been important for customers, and that focus has increased even more in the present inflationary environment. And chicken is affordable in all segments, from high-end to low-end segments, and fillet, which is our high-end cut, is even competitive in the lower-end segments. So we see further opportunities to drive more value out of the chicken due to its affordability.

So next slide, please. And this slide, I have shown that a couple of times, reminds you on our strong market positions in all our 5 home markets and the countries that are highly consolidated. And these markets have large entry barriers, and they can individually be regarded as semi-closed markets due to the strong consumer preference for domestic produce. And due to our strong market position, our own supply decisions have a meaningful impact on market balance, and that has helped us in the recovery process from inflation.

Next slide, please. And as you can see on this slide, we're expecting strong growth in consumption. We have had 44% growth in poultry in the period from 2010 to 2023, and Rabobank, they are expecting 13% growth until 2030.

So next slide, please. And as we have explained in detail during the Capital Market Day, drivers for the growth of these 3 areas. It is responsible, safe and nutritious, is convenient, versatile and tasteful, and it is affordable because it's sustainable. It's 3 important areas to drive our growth.

So next slide, please. And then we're looking to Ready-to-cook, and this table shows the reconciliation of our segments. We see strong positive contribution in Ready-to-cook, and a decline in Ready-to-eat and others as expected in Q1 2023. And we also want to remind you that the category other includes our Ingredients business and our corporate costs.

So next slide, please. And here, we look into our Ready-to-cook segment. We have an increase in net sales of 3% and a volume growth of 8%, and the difference is driven by lower input costs and change to breed in Denmark. And we present an EBIT of SEK 96 million, compared to SEK 31 million last year -- first quarter last year. And it is a strong improvement driven by turnaround measures and increase in demand in several markets. We also see improvement in our animal welfare metrics, mainly driven by Ireland, and that is mainly improving food pad scores and lower antibiotic use. We also see strong focus -- we also have a strong focus on our LTI performance and our continuous improvement in that area.

The next slide, please. And here, we can see it over time, we see a solid recovery in our Ready-to-cook with an EBIT per kilo of SEK 1.37, compared to SEK 0.47 per kilo last year. Net sales per kilo is slightly down due to its link to input costs, and lower input costs convert into more attractive consumer pricing, and we see a volume growth in this quarter of 8%. However, Sweden is still operating at 85% of historical volume level. And although we see great improvement, we have a long way to go, which is reflected in our ambitious financial targets.

The next slide, please. And here, we're move into export, and we have seen a 4% decrease in export prices versus Q1 2023. We focus on building more solid export business with strategic international retail and Foodservice customers. And the aim is to be less exposed to the commodity market, which has and will have a positive impact on our export business.

We're also focusing and broaden our export permits to the most attractive export markets in order to get more value out of every bird. And one achievement in the quarter is that Ireland has granted export permission to South Africa.

And when we look at the export prices, we see the stabilization in the export prices, even though the uncertainty is still high due to macro factors.

So next slide, please. Yes. And on this slide, you can see the channel development in more detail. Through these details, you can notice the increase in all channels in the quarter, which is driven mainly by volume, and we have seen a strong demand growth in several of our markets in the quarter and particular, Finland, also fantastic growth at the moment.

So next slide, please. And now we move into Ready-to-eat. And as explained last quarter and quarter before, we have a temporary reduced activity level. The net sales are down 22% and represent an EBIT of SEK 25 million, compared to SEK 45 million last year. And that is due to loss of contract in Central Europe. And the margin drop is driven by plant utilization, as communicated last quarter. And volume growth compared to Q4 is up when we hit the bottom in Q4.

We do see adverse development in lost time injuries, and we have made corrective actions to taken to prevent recurrence, and continuous work to ensure preventive measures.

Moving to next slide, please. But we continue to rebuild our Ready-to-eat order book after the loss of breaded contract. The high volume of low-margin business is phased out now. And volume in EBIT has bottomed out in Q4 2023. The lost business has made room for new opportunities with a more long-term diversified and profitable portfolio. And we have a good traction in replacing lost business. Retail sales is the main contributor in the quarter, and we have historically seen a strong but uneven demand, and we expect continuous growth over time.

And growth in this segment, it is important to say that, that comes in sequences. And we have a lot of potential customers in the pipeline. And now we're using this period of low utilization to upgrade and maintenance to meet high standards and prepare for the future expansion.

So Ready-to-eat, is an important cornerstone in our strategy to reach our financial target. And we are expecting gradual EBIT improvement quarter-by-quarter.

Next slide, please. And here, you can see it in figures. And it is, of course, very encouraging to see that the continuous growth in retail. However, the development in the Foodservice channel is declining due to the reasons mentioned in the former slide.

Growth in this segment is and will be a priority for me in the coming years. We are confident that we will replace the lost volumes with other more profitable volumes in the coming year, and we have already slowly started to fill up with new orders, and we'll continue to do that in the coming periods.

So Ready-to-eat will be an important long-term tool in our aim to developing our EBIT per kilo. That is our aim, increasing the value of our protein.

So next slide, please. So I'm not very concerned about recovering the recent lost volumes in the coming period. We have historically seen a strong but uneven demand, and we expect to continued growth over time, and growth in this segment, as I stated on the last slide, comes in sequences. And the trends are particularly strong for convenience products.

And we have these 2 main type of businesses. It is the international breaded business, where we have our [ Farre ] factory. And then we have our integrated local business in Sweden, Norway and now also Finland. Our Ready-to-eat business yields a significantly higher return on capital employed compared to Ready-to-cook. And I also want to highlight the strong organic growth in this segment over the years, and that is including the 40% growth in 2022.

And with that, I hand over to Fredrik for a more deep dive in the financials.

[Fredrik Sylwan, executive]

Great, many thanks, Jonas. Good morning, everyone. Next slide, please. As Jonas has mentioned, Q1 was strong. It was actually our strongest first quarter ever with improved profitability and strengthened margin.

Sales was lower than previous year, which was expected. And the main drivers are the RTE contracts phased out during last year, Ingredients had high prices previous year, and they are now more normalized, and lower input costs that has benefited our consumers. And this was partly offset by the very strong RTC performance.

EBIT increased by 32% to SEK 122 million and the EBIT margin strengthened with 100 basis points to 3.9%.

Our finance costs have increased compared to previous year, and that increase is mainly attributed to higher interest rates, partly offset by reduced net interest-bearing debt.

Our net income was SEK 70 million in the first quarter, which is an increase of 59%.

Despite some challenges in sales, our feed efficiency remained stable at a strong level. Feed efficiency is measured as kilos feed needed for 1 kilo live weight, with chicken as one of the lowest levels for animal proteins.

We're focusing heavily on employee safety and are making progress rolling 12, but Q1 is higher than previous year. There are several ongoing initiatives to keep accidents to a minimum.

Next slide, please. Our return on capital employed and return on equity continued the positive trend, and we have significantly improved versus previous year. We are now back to historic levels, and main drivers are increased profitability and more equity.

At the same time, our equity ratio has improved both versus the fourth quarter and previous year, and is now just south of 37%.

Next slide, please. Here we have our cash flow overview. As we said in the fourth quarter, net interest-bearing debt was impacted by exceptionally low working capital at year-end. In Q1, we had strong sales, the week before Easter, resulting in higher accounts receivables. CapEx is significantly higher than previous year, supporting our journey for higher effectiveness and efficiency.

And in the quarter, paid tax was positively impacted by a refund of preliminary corporate tax in Sweden. Overall, our net interest-bearing debt increased with SEK 138 million in the quarter, and leverage is now at 1.9x, which is significantly lower than previous year and also our target of 2.5x. The net interest-bearing debt was reduced with almost SEK 300 million versus Q1 last year, which is very positive.

All in all, our financials are stable, which is giving us improved strategic flexibility going forward.

Next slide, please. Our working capital is close to flat in the quarter, impacted mainly by accounts receivable. Inventory is slightly higher and accounts payable together with other are in line with year-end. As previously announced, target levels of working capital to sales, excluding financing items, remains around 6%, and we're currently in line with target. Focus going forward is to closely monitor development and optimize it.

Next slide, please. This slide shows our inventory development, and you can see that it's under control. This, of course, remains a clear focus area going forward. And we, for example, are working on optimizing the sales and operations planning to make sure we produce the right products, and we use the export channel for surplus sales, not to interfere with domestic pricing.

Next slide, please. CapEx for 2024 is expected to be around SEK 500 million, which is a substantial increase versus last year. This aims to support the journey to reach the recently revised targets and the priorities are the expansion of the RTE business in Norway to meet the increased demand with approximately 30% capacity announcement.

Also to increase the deboning capacity in Ireland and Denmark as well as Finland, declined the value ladder.

We also invest in product differentiation in Ireland as well as increased efficiency with the new packaging line, for instance. And we also have our ERP implementation where we successfully went live with the first country now just a couple of weeks ago.

Also in the beginning of this second quarter, we successfully concluded the acquisition of a leased production and packaging facility located in Norway. The asset was procured with a dual objective of safeguarding a critical strategic resource and enhancing our EBIT margin. The transaction was executed at the valuation of NOK 190 million.

The interest rate on bank financing is approximately 5.5% per year. But if we add the IFRS interest components of leasing and factoring in vendor financing, paid financing cost is estimated to be around 8% of net interest-bearing debt. And we proposed to divide the dividend into 2 installments with separate ex dates to balance our cash flow between the second and the third quarter.

The next slide, please, and back to you, Jonas.

[Jonas Tunestål, executive]

Thank you, Fredrik. Next, I will talk a little bit about one of our cornerstone and our license to operate. And there are 3 key areas when it comes to creating trust for what we do. It is responsible and welfare. It is safety for our customers and consumers and it is nutritious products. And this has a close link to our sustainability scorecard.

If we move to the next slide, please. And here, I'm proud of the progress that we have made during 2023, including meaningful improvement in lost time injury frequency rates, antibiotic use and our main animal welfare indicators that food score. We see a slightly higher LTIs in the first quarter compared to the first quarter last year, but we're putting a lot of efforts to reach our long-term target for 2024.

And during 2024, we will continue to refine our road map towards 2030, and including development of our climate transition plan as well as implementing the EU Corporate Sustainability Reporting Directive, and that is called CSRD. The implementation of CSRD will further strengthen the integration of sustainability in our strategy, value chain and operations, and facilitate comparability and further transparency. So it is important for us to reach the standards and follow a structured way of working with sustainability.

And if we move into next slide, please. And here on this slide, you can see that our structured efforts is resulting in recognition in form of improved ESG ratings. So we have an A- in the CDP rating and A- rating that only a few companies within the food industry have obtained. It's actually only 2 companies in the Swedish food industry that has achieved that, and we are one of them.

We also scored higher in other ESG ratings, for example, in Sustainalytics, where we are top 10 out of 360 companies in packaged goods -- packaged food globally. And we are, in our ESG work, focusing on the whole value chain from farm to fork with data collection, target setting and reduction initiatives.

So moving to next slide, please. And for the ones of you that have followed us for a while, you have seen these pillars before. And these are our 4 strategic pillars that will support us in achieving our goals. And it is, increase the value of our protein, ramp-up efficiency, and all of this we need to do with sustainable means in every step of the way as one company making us constantly better together. And better together, that is the belief and practice we strive for to make us more effective, successful and impactful when we collaborate, work as a team and leverage each other's strength. And it empathize the collect effort, shared goals and team cooperation, and that lead to improved performance and outcomes.

So if we move into next slide. Here, we can see our financial goals. And we want to create a Scandi Standard to be proud of, trusted by everyone and where people can develop. And with this comes earnings, and with earnings, our right to grow. And at the right-hand side, you can see our financial target for 2027 and our sustainability targets for 2030. And we are expecting strong growth over the coming years, and we set a target for 2027 of 5% to 7% net sales growth. But as we presented before, we need to be aware of that we're coming from a high inflation with high feed costs, and that will affect the net sales for 2024. And as I mentioned before, our business has typically high exposure to cyclical raw material prices as feed, but due to our dynamic pricing model with more than 80% of our sales linked, we have the ability to pass through feed costs. So in 2024, we expect fee to come down, which will affect our 2024 sales number, but that will not affect our volume and add per kilo expansions in 2024.

And in addition to this, we have the important supporting target of SEK 3 EBIT per kilo grill weight, and that we consider as one of the most valuable targets for us.

We can move to the next slide, please. And on this slide, you can see the essence of our clear road map to achieve SEK 3 per kilo. We see a large potential to climb the value ladder, and we also see a large potential to set up a better efficiency in our value chain. And that's why we have stated these 2 headlines, find the value ladder where it is about to balance supply and demand in our [ Phillips ]. It is about value creation and move more into convenience. It is about differentiation and our branding opportunities, and it is to utilize all part of the bird, including Ingredients.

Then we also see large efficiency potential in the value chain, and that is optimized utilization of our sustainability metrics. It is better organizational performance and scalable platform and a structural collaboration between our different end markets. We see product standardization and optimization, and we see a supply chain standardization and digitalization because we see a more fragmented value chain today that we want to make more streamline and take more efficiency out of it.

And if we move into the next slide, please. And to achieve our goals, we're building a robust vehicle to serve our home markets and beyond. And we are launching this SEK 2 billion investment program in the period. And our investment program's aim is to support Ready-to-cook investment, support a 2% increase in throughput in our plants and to support better utilization of facilities. It is to support the ramp-up of our Ingredients business, and it's also preparing for significant growth in our Ready-to-eat segment. And we have also earmarked investment of more than SEK 200 million for meeting our sustainability goals.

And as you all know, sustainability and efficiency is linked together, it's only different measures of how you can use resources in a more efficient way.

So if we move into the last slide, summary and outlook. In the quarter, we have seen a significant profit and margin expansion, we see an encouraging demand. We're expecting continued profitable growth in Ready-to-cook. We have a strong and disciplined focus on replacement of new orders in Ready-to-eat. We have a clear strategy to reach our long-term goals. And we see the large potential in climbing the value ladder. And then we have our dividend proposal of SEK 2.3, compared to SEK 1.15 last year, and the dividend will be paid in 2 equal installments.

So with that, I want to say thank you, and open up for questions.

[Operator]

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

[Daniel Schmidt, analyst]

Just a couple of questions from me then. And starting with maybe the Foodservice business. And I think it's quite clear that you're mentioning that you should see a gradual recovery and that you are hopeful that you will be able to replace the lost contract. But could you give us any sort of time line where you should -- what we should expect?

[Jonas Tunestål, executive]

We -- what we have said is that we will gradually get back to it, but it will take a couple of quarters and a time into next year until the factory is filled up by that, but it's more important for us to focus on getting the right orders and getting -- have a low complexity and drive better margins out of the business in total. So it's -- the important for us is to find the right orders to fill up for, for building a long-term diversified portfolio in that business. So that is more important for us than actually achieve a certain volume in a quarter. But we see really good progress in it. We have a lot of good discussions, a lot of orders that we are -- have already achieved, and we have a clear plan on filling up our RTE business. And as you see -- as we said in the last quarter, we bottom out in Q4.

[Daniel Schmidt, analyst]

Yes. The fact that the reported number is lower for Q1 versus Q4, is that price? Or is that seasonality when you look at Foodservice in Ready-to-eat?

[Jonas Tunestål, executive]

Yes, Ready-to-eat Foodservice. Yes. It's more about that we have seen and growth in our retail segment, where we have taken into -- where we have taken a new business in Ready-to-eat. When you see Foodservice, in general, we see actually a pretty okay, strong demand in the Foodservice sectors as well. So the numbers that you see there and if you take away the big Foodservice customer lost contract before, it is more seasonal when it changes. So we see a pretty strong Foodservice market in the period -- in the coming period.

[Daniel Schmidt, analyst]

Okay. But if you look back, it doesn't look like it's a lot of seasonality between Q1 and Q4, but maybe it has developed in that way.

[Jonas Tunestål, executive]

Yes. It's -- when you look into the historical volumes, the Foodservice has been, as we presented before, on a few really big customers with a more even flow. Now we are filling up with a different kind of customers, but we don't see this big seasonality around, but there will be changes throughout the quarters, and especially now when we are filling up the factory.

[Daniel Schmidt, analyst]

Okay. But what you're saying is that the bottom was in Q4, and although the number for Q1 is lower than in Q4, the underlying trend is positive.

[Jonas Tunestål, executive]

Yes.

[Daniel Schmidt, analyst]

Yes. All right. And then just moving on to Ready-to-cook. You don't mention any sort of specific number for the Danish business. You've done that before. Could you provide that? Or could you say anything if it's now making profits? Or where are we?

[Jonas Tunestål, executive]

What we did is before we are reporting on total segments and when we had this crisis in the low numbers enabled in Ready-to-cook Denmark, we presented that as a special note in our presentation. Now when we have come back to breakeven, we are not reporting on country-for-country, but the progress is heading the way that we want and as we had predicted before.

[Daniel Schmidt, analyst]

Okay. And do you see sort of that business medium term being on average with the rest of the group? Or is that still something that's going to be slightly less profitable, although you've done quite a lot of improvements in the past year?

[Jonas Tunestål, executive]

I think that if we look into different countries, there will be different margins, but we see -- we will see an improvement in Denmark. We don't expect Denmark to reach the highest margins in our group, but we're expecting the normalized margins. And we also, as we presented in the strategy plan, we see a strong integration between our Ready-to-eat factory and Ready-to-cook factory, and actually utilize the best of -- the most value of our book, and when we are utilizing that, we can create a market in Denmark that is interested to be in for Scandi Standard. So it is a journey that we will move on. We don't have expectation that it will reach the highest levels in margins in Scandi Standard, but a good profitable business.

[Daniel Schmidt, analyst]

Yes. Good. Just a question on export prices. Are export prices, in general, impacted by input costs? Or is that just more sort of supply-demand driven pricing?

[Jonas Tunestål, executive]

It is impacted in, what you should call it a logical way, in feed costs. But at the moment, we see some constraints when it comes to broiler capacity, and that has also an impact on the sales prices. So we have seen them come down, but we are actually predicting a stable level in export prices going forward. But with that said, I also mentioned that on the export slide, the big uncertainty due to the macro factors that is hard to predict at the moment due to war and what will happen with raw material and inflation and so on. But when we look into the supply and demand, we actually see that is stabilizing in the European market.

It's also impacting of -- wherever there will be import restrictions or the level of import from Brazil, Thailand and Ukraine into the European market.

[Daniel Schmidt, analyst]

Yes. Okay. And just maybe a final question on input costs and feed prices have, of course, clearly come down over the past year, and you sound like you think that it's going to continue to stay low or go even lower. And most of that is pass-through for you guys, but you do have the Irish business, right? Is that benefiting from lower feed prices?

[Jonas Tunestål, executive]

It has. As mentioned before when we had this increase of feed pricing, we are hedged in that one. So we had a more flat curve than what we see on the spot prices. And of course, when the feed prices come down, we see a more flat curve, a more slightly decline there as well. But of course, it's is beneficial for us when we can -- when the gap increases between the sales prices and our biggest input costs. But we have -- as presented before, we have 80% of our business is linked to a model where it's linked to the feed price. So of course, that lowers our risk, but it also creates less headroom for driving margins when the feed price falls.

[Daniel Schmidt, analyst]

I didn't hear the last part, but you still have 20% that's not linked. So doesn't that mean that if feed prices come down, that's a positive?

[Jonas Tunestål, executive]

Yes. That's a positive. That's actually what I'm saying. Most of it is linked. But of course, doesn't affect when we see lower prices. And then we have the hedge that was always due. So there also a slightly delay on the effect compared to spot prices.

[Operator]

[Operator Instructions] It appears we have no further questions. I'll hand back to the management team.

[Jonas Tunestål, executive]

Thank you very much. Then, if there's no further questions, I would thank you, everyone, for listening to this session, and -- where we presented our Q1 results. So thank you, everyone, and goodbye.

[Fredrik Sylwan, executive]

Indeed, many thanks.

[Operator]

Thank you, everyone. This does conclude today's call. You may now disconnect your lines, and enjoy the rest of your day.