Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, welcome to the Scandi Standard Interim Report for the Second Quarter 2020 Webcast. My name is Ruby, and I will be your moderator for today's webcast. [Operator Instructions] I will now hand over to your host, Leif Bergvall Hansen, to begin. Leif, please go ahead.

[Leif Stig Hansen, CEO, President & MD]

Thank you. Good morning, everybody. Welcome back from your holiday. On the front page, you see how that we delivered strong organic growth over several years. And this quarter, we have got a more stable development due to the COVID-19 impact. You also here see a stable EBITDA margin over time. And in this quarter, we deliver a very strong margin.All in all, due to the COVID-19, we see a strong shift from Foodservice to Retail. Retail's share is up about 10 percentage points, so representing about 70% of business. Foodservice is down about 6 percentage points of the total business, representing about 15%. Also good to see that we are, during the end of this quarter, experiencing a clear sign of the overall growth pattern reverting.And with that, I'd like to go to Page 3, where we, in this quarter, delivered a record margin and a strong cash flow. As mentioned, we delivered stable sales in this quarter and a record 5% EBIT margin, up from 4.6% in the corresponding quarter last year. Strong operating cash flow, and it's overall showing the business is resilient to COVID-19 effects.Going on to Page 4. We see the retail growth offset the COVID-19 effects on Foodservice. We delivered 5% growth in overall Retail sales, now representing 70% of revenue. We have, all in all, seen a very strong demand in all our domestic markets. We also, generally speaking, have less campaign activity. 20% drop in Foodservice, now representing 15% of revenue, basically reflecting the reduced activity level that we have seen within this channel during this period. All in all, we have a positive mix effect of higher retail sales, driven in the main by the Chilled Ready-to-cook product.Going on to the next page, Page 5. We see the retail demand remains strong despite normalizing Foodservice activity during the latter part of the period. We've seen strong increase in Retail sales, positive Foodservice momentum through the quarter and into Q3. We have seen -- we do anticipate that Foodservice demand remain volatile for some time, basically as these restrictions are being gradually lifted or changed. We are seeing the industry are adapting to these changing restrictions. In August -- so far, in August, we have seen a 15% drop in sales versus the same period last year, just underlining that the volatility we anticipate. Retail remained strong in August, and you can see this on the chart. So in August, we recorded a 7% increase in revenue. All in all in Q3, we anticipate about 4% growth in net sales.Going on to Page 6 and showing net sales by product category and country. We report a 9% growth in Ready-to-cook Chilled, being primarily sold through retail and being a significant margin driver. We've seen 11% drop in Ready-to-cook Frozen, reflecting the part of the reduced campaign activity. We have seen a 17% drop in Ready-to-eat, basically reflecting the high Foodservice exposure of this product category.By country, it's -- you have a bit of a mixed development. We've seen Sweden, Norway and Ireland and Finland having a large retail exposure. In Sweden, we have a drop in sales due to limited campaign activity in this quarter. And in Norway, we have a 6% increase in local currency versus the 6% decline when it's converted into SEK. Denmark is the country with clearly the highest Foodservice exposure.Going on to Page 7. This is the quarter where we have the 5-year record EBIT margin of 5%. We -- as part of the uplift in margin comes from volume, was positive volume, particularly in Ready-to-cook. We also have a net positive effect of price/mix and COGS with positive mix effects, and there are some price decreases that we implemented during the latter part of last year to pass through lower feed prices that affected the COGS effect. We have overall a good cost control, and there is some currency effect driven by the weakened NOK. This, on Page 8, is just to remind you that the Ready-to-eat category is a very important one for us, so a strong growth over a long time. And once things normalize within Foodservice, we anticipate the growth will pick up again here. It is a platform that we believe is very important for the future. And based on a lot of our experiences within Ready-to-eat and the key clients we have in here, we are looking actively in to evaluate some non-meat or plant-based concepts that we believe might fit well into the offering within this category.Going to the countries, Page 9. Sweden delivered strong margins. We have an increased proportion of high-margin business, continues to be strong retail demand. We have implemented a reduced campaign activity in Retail, particularly on Frozen products. And we have seen a soft Foodservice demand in this quarter, although picking up towards the end. Good cost control overall, and we report 6.8% adjusted EBIT margin, which is up from 6.1% in the corresponding quarter of last year.Going on to Denmark. That's where we have a strong negative impact from COVID-19, a 3% decrease in net sales. We reported 2.2% adjusted EBIT margin to be compared with 3% in the same quarter last year. We have a significant shift from higher-margin Foodservice categories into other channels, basically leaving what is very much a buyer's market for these products that needs to be placed elsewhere. We have some nonrecurring items covering the -- where we have closed a number of lines producing Foodservice products in April and part of May. They are now reopened, and there's some provisions for inventory write-downs that they've also taken here.Going on to Norway, record margin. 6% increase in net sales in local currency versus a 6% drop in SEK. We have continued strong demand from retail clients, particularly impacting the demand for Ready-to-cook products. We continue to see a very solid operational performance through the entire value chain in Norway. And the 10.7% adjusted EBIT margin is the highest we have recorded to be compared with 9.8% in the same quarter of '19.Going on to Ireland. Also here, record margin, 6% increase in net sales. Strong demand from Ready-to-cook products being the main driver. And we continue to see operational improvements, as more and more best practice are being shared and implemented within the supply chain in Ireland. The adjusted EBIT margin come in at a record 7.7%, which is up from 6.3% in the same quarter of last year.Finland take another step in the right direction. 12% growth in net sales, continues to see a strong domestic growth. And in Finland, we have a limited exposure to Foodservice. We see continued margin improvements, delivered 5.3% in adjusted EBITDA and 1.4% of EBIT, and the EBITDA margins to be compared with 4.4% in the same quarter of last year. There are some investments underway to enable us to continue to grow in the Finnish market.With that, I'd like to hand over to Julia, please.

[Julia Lagerqvist, Chief Financial Officer]

Thank you. Let me move on to Page 14 for the group income statement. As said, net sales were minus 1% in the quarter but flat in local currency. The adjusted EBIT is 7% up with last year, which then leads us to an EBIT margin of 5.0% in the quarter, which is a 5-year record.We have posted some COVID-19-related nonrecurring items. They are mainly related to the closure of production line focusing on Foodservice products, as Leif presented, total of SEK 13 million. The rest is a shift of provisions. We released some of the provisions in May in quarter 1 for bad debt related to Foodservice customers. At the same time, we increased the provision for inventory write-down. The net effect is SEK 4 million.The net financial items in the quarter was SEK 19 million, which is less than last year, driven by the fact we had a positive currency impact this year with a strong SEK, while we had a negative currency effect last year.We have an overall low tax rate of 15% driven by country mix. All in all, this leads us to a net earnings per share of SEK 1.19, which is 53% up versus last year. And the adjusted earnings per share is at SEK 1.46, which is 49% up versus last year.Moving on to Page 15. Looking at the statement of our financial position, we see continued improved returns. The adjusted return on capital employed is now at 11.1% versus 10.4% last year. The adjusted return on equity is at 16.6%, which is down versus last year, but that is purely driven by the increase in equity. And the overall equity ratio is at 28.1% versus 26.7% last year.And looking at our working capital situation on Page 16. It has been further reduced, and it's mainly driven by the increased factoring and vendor financing solutions we have in place. But also in this quarter, worth mentioning that we have received some COVID-19-related state aid that has allowed us to postpone the VAT payments and also other tax payments, so there's an impact, overall leading us to a low working capital to sales ratio of 1%.Our target level, if you would adjust it for financing, is still at 7%. And then as a comment, if we were to have adjusted our Q2 results for the COVID state aid received, it would have been a 2% working capital to sales ratio. And also, if we would have adjusted it for the finance element, as mentioned, we would have been at 7% versus 8.1% in the same quarter last year.Moving on to Page 17. We have a strong operating cash flow, mainly driven by the increased EBITDA. At the time, we also have a significant working capital release. We have had a low quarterly capital expenditure in line with the reduced yearly estimate we had. And we had an overall low quarterly paid tax, which leads eventually to a positive net cash flow. And the net cash flow per share is at SEK 1.16.Finally, some comments on our cash flow guidance on Page 18. As Leif have referred to, CapEx for the year is estimated to be at around SEK 300 million versus SEK 419 million last year. And the paid interest is estimated to be at 3% to 3.5%. The blended effective tax rate long-term is still the 20% to 21%. We have a lower one this year, driven by the country mix, and we'll review the long-term effect. And just to remind you that we have a contingent liabilities in the shape of the Manor Farm acquisition, where there are 3 tranches there to be paid: one we paid last year of SEK 133 million; and the next one to be paid this quarter 3; and the final one in 2021.Finally, on our dividend policy, the policy is that we should be paying around 60% of net earnings over time. However, the 2020 dividend has been suspended as a precautionary capital measure in light of the uncertainties we've seen around COVID-19.And with that, I hand back to you, Leif.

[Leif Stig Hansen, CEO, President & MD]

Thank you. Going on to the next page, this is just to remind you of the framework we have for all our sustainability work across the entire business.Going on to the next page. We have continued focus on the COVID-19 prevention. We do take a lot of health and safety measures across our -- all our sites and all our offices, something that we are ongoingly updating and strengthening. We continue with a very solid dialogue with local authorities, and we actually also have a number of sharing of best practice with other food businesses.We have taken important steps to strengthen and secure the overall sustainability governance in this first part of the year. Our sustainability target is even further integrated in the planning and the activities within the different business units to ensure that we have even more local ownership. We have introduced that sustainability KPIs. It's integrated in incentive programs for management and also for a number of other key roles across the business. And we're also introducing an enhanced Clean Label Policy, meeting growing demand for transparency for -- in product content and labeling.With that, I would like to go to provide the sum and give a little bit of outlook for the business. Overall, I'm very happy to show the business resilience to COVID-19 effects across the entire business. We are very happy to show you record margins in this quarter, 5% EBIT. We have a number of contingency plans in case of business disruptions, plans that we continue to update and strengthen, and all the time trying to do what's recommended and a bit more. We have a solid balance sheet and a strong liquidity situation. We have enhanced both, as so for the precautionary measures taken during this quarter. We continue to follow structural opportunities closely, and I'm also very proud to report a strong start to the third quarter.With that, we would like to take any questions you may have. Thank you.

[Operator]

[Operator Instructions] We have a question from Daniel Schmidt of Danske Bank.

[Daniel Schmidt, Research Analyst]

Leif and Julia, I hope you can hear me. A couple of questions from me then, and starting with price reductions that you referred to in Q2 on the back of lower feed prices. Could you quantify them? Or maybe you did, or I missed it.

[Leif Stig Hansen, CEO, President & MD]

No, it was price reductions we did last year when we saw feed prices coming down. So that's when you then look at the overall price achievement, they are then impacted by those lower prices. It was in a number of markets, in particular in Sweden.

[Daniel Schmidt, Research Analyst]

And any sort of percentage number that you think that you, on average, lowered them by?

[Leif Stig Hansen, CEO, President & MD]

Yes. Well, not really. We'll not really go into that. I think it's fair to leave that.

[Daniel Schmidt, Research Analyst]

Okay. But it's still sort of meaningful to mention, and so I guess, a couple of percentage or...

[Leif Stig Hansen, CEO, President & MD]

Yes, it is. It is. It is part of the reason why we report lower net sales increases this period compared to what we have seen over several years. So it is meaningful.

[Daniel Schmidt, Research Analyst]

And hence, we could come to the conclusion that volumes should be -- or volumes are up a little bit than in the quarter. Is that correct?

[Leif Stig Hansen, CEO, President & MD]

Yes, that is correct. We actually quantify it on Page 7, but the volume effect is 6% -- or SEK 6 million, sorry, of the increase, so page...

[Daniel Schmidt, Research Analyst]

Yes. Okay. So okay, a little bit. Okay. Good. And then coming back to sort of COVID-19-related extra cost that you had in the quarter of SEK 17 million, and I think you said that mostly refers to April and May and plant closure and so on. But at the same time, you're also saying that you still see volatility in the Foodservice market with sort of improving trend in June, but although -- or it seems to be coming down again in August means minus 15%, if I read you correctly. Do you still believe that sort of these resetting costs are behind us? Or would that be something that you think could occur in Q3?

[Leif Stig Hansen, CEO, President & MD]

I do believe that it is mainly behind us, unless we get some setback that we can't see at the moment. It is -- the majority of these nonrecurring items relates to the closure of a number of production lines. And those lines we put off, they are now fully in operation, and they were -- have been fully operational for sort of mid-summer or late summer onwards.And I think on your comment on volatility, it's very -- we just give you the actual numbers here because it is very hard for us to kind of predict how we see Foodservice bounce back. It is clearly improved activity within Foodservice across our -- all our domestic markets, but it's also coming on the back of kind of a meltdown when all the restrictions were imposed back in early March across all the markets.So we are in a normalization traction, but it is likely -- in our opinion, it's likely to be volatile for some time as different sectors are opening up. Some are opening up and maybe have to close down a bit and what is -- so it is -- we remain this -- we anticipate this to remain a bit up and down in the coming months but clearly, a lot more activity than what we have seen earlier on.

[Daniel Schmidt, Research Analyst]

Yes. And just sort of adding the parts together that you give us numbers on when it comes to the trend in August, and you're saying that Foodservice is down 15% but Retail is up by 7%. And just sort of doing the math, it still looks like you're growing in August, if you assume that the rest of the segments are flat basically. Is that a fair statement?

[Leif Stig Hansen, CEO, President & MD]

Yes. And that's also why we have been trying to guide a little bit. When you look at all our Q3, we anticipate about 4% growth in all of net sales. There was some phasing on a couple of the key clients in Foodservice between July and August, so some stock building in July. You see Foodservice were actually flat or even up a bit, and that impacted August. So that's part of the information, but it also shows that this is unlikely to be a straight line but much closer to index 100 compared to what we have seen before.

[Daniel Schmidt, Research Analyst]

Yes. All right. And then just moving on to the fact that you have been sort of -- despite COVID-19, you have been able to grow earnings if you look at underlying earnings. And at same time, of course, you've suspended the dividend, and you have a stronger balance sheet now than you had 6 months ago. Is there any chance you think that you would come to the conclusion that you want to reinstate the dividend for this year?

[Leif Stig Hansen, CEO, President & MD]

It's, of course, a question for the Board. I think the Board would like to see a bit more of the year under the belt. But I don't know. They might be considered later on, but it's a -- we're very clear that it is suspended for now.

[Daniel Schmidt, Research Analyst]

Yes. And then a final, you mentioned that you have projects ongoing to evaluate non-meat concepts. Could you shed some more light on that?

[Leif Stig Hansen, CEO, President & MD]

Yes, I can do that. It's basically that we have seen a lot of success within us going heavily into Ready-to-eat concepts, different kind of concepts in all our markets. And some of our production lines can do products with chicken or they can do them with plant-based alternatives. And we are basically evaluating the feasibility of us launching some plant-based products. And we will probably come back to this later on when we can put a bit more meat on the bone, so to speak, or plant on the bone.

[Daniel Schmidt, Research Analyst]

Is it sort of reasonable to assume that you could have such a product in the market next year? Is that too early?

[Leif Stig Hansen, CEO, President & MD]

Yes. No, no. That is reasonable.

[Daniel Schmidt, Research Analyst]

Okay. And you have that sort of in-house knowledge to make that happen. Or is that something that you need to invest into?

[Leif Stig Hansen, CEO, President & MD]

No, we do. That's what we have added.

[Operator]

We have a question from Mikael Löfdahl of Carnegie.

[Mikael Löfdahl, Research Analyst]

Yes. So a few questions from me. First, on your sales guidance for Q3, up 4% for net sales. If I do the math correctly, there should be a negative FX impact here of around 3%, 3.5% or so, which would then take you to an organic growth of 7%, 7.5% or so. And on top of that, you still have a price headwind from the price reductions last year, probably around 2%, 3% or so down, which would imply a volume growth, all else equal, of some 10% or so up. And that seems very, very strong. Is there anything I'm missing here?

[Leif Stig Hansen, CEO, President & MD]

Julia, do you want to take that one? Thank you.

[Julia Lagerqvist, Chief Financial Officer]

Yes. So some of the pricing decreases we did last year were already happening in Q3. You don't get all of that effects, for example, coming in. I don't see the ForEx effect that you're seeing and maybe not as high as we are now calculating.And then we also have some mix effect within it, so that's not only volume driving this, but you also have the mix effect that we talked about in this presentation as well. So there's a positive mix effect in some of the countries when you move from Foodservice to Retail, for example.

[Mikael Löfdahl, Research Analyst]

Okay. But how can the FX be lower than -- I know that you have a bigger proportion in Norway, but...

[Julia Lagerqvist, Chief Financial Officer]

So it is in the area you were saying, but we don't see a volume effect of 10%. It's more in the area of 15%, what we're seeing this quarter, I would say, minus more the positive mix effect.

[Mikael Löfdahl, Research Analyst]

Okay. Okay. And on that mix, just a question on the Ready-to-eat segment. I know that it's heavy in the Foodservice sales channel, and that has been negatively affected. But can you say anything about how much are you selling here to the Retail segment? What is the mix within the Ready-to-eat segment? I guess people are buying more Ready-to-eat products in the retail stores, and that should be very good margins for you as opposite to lower margins when you sell to the Foodservice segment. Can you say anything about that mix?

[Leif Stig Hansen, CEO, President & MD]

Do you want to take that, Julia?

[Julia Lagerqvist, Chief Financial Officer]

Are you saying in how much we sell in the Foodservice? Yes, I have to say in Retail, I have already...

[Mikael Löfdahl, Research Analyst]

I mean, yes, this is -- I mean, this is part of the structural growth. Now the positive growth outlook for Scandi Standard is that we eat more and more convenient food and also buy them in retail chains and so on. And I guess, that has gotten a boost now from COVID-19 that we buy chicken salad and what have you in the retail stores. And that is, I guess, included in the Ready-to-eat segment in that distribution. So of the 7% -- 17% that you have in Ready-to-eat, how much of that is sold to the Retail segment compared to Foodservice? And how has that changed on a year-on-year basis?

[Julia Lagerqvist, Chief Financial Officer]

I don't have the numbers right in front me. I need to look them up. Can I come back to your question at the end of the call? And then...

[Mikael Löfdahl, Research Analyst]

Yes. Sure, sure.

[Julia Lagerqvist, Chief Financial Officer]

Thank you.

[Mikael Löfdahl, Research Analyst]

Another question on earnings. You mentioned some government support in terms of paid taxes and the postponed tax development. Was there any government grants in the earnings in the P&L?

[Julia Lagerqvist, Chief Financial Officer]

Yes, it was as well. So we have received a certain amount specifically related to sick leave in Sweden and then for short-term layoffs in some countries and then also some reduction in social fees, so basically covering part of the increased cost that we've had in these areas.

[Mikael Löfdahl, Research Analyst]

Could you specify how big they were?

[Julia Lagerqvist, Chief Financial Officer]

They were in the area between SEK 10 million to SEK 15 million.

[Mikael Löfdahl, Research Analyst]

SEK 10 million to SEK 15 million? Okay. And -- but you're saying that the costs were bigger than that. Does that include also then if we don't mix this up with the nonrecurring items that you're posting?

[Julia Lagerqvist, Chief Financial Officer]

Not exactly. So they're obviously excluded from the numbers going out, so [indiscernible].

[Mikael Löfdahl, Research Analyst]

Okay. And could you then say something about the trend here on a month-to-month basis and where we are right now in terms of government grants in Q3 and in August now? I guess they are diminishing. And also, the costs for -- the more direct costs for COVID-19 should also be diminished. Are they diminishing in the same pace? Or...

[Julia Lagerqvist, Chief Financial Officer]

Yes. Yes, I would say so. I mean, maybe what I forgot to [ mention ] also the cash, the cash income from the state aid is basically being reversed in Q3 because it's just performance for payments, and they are -- the state aid that affects the P&L is very limited, what we seen so far at least in the Q2.

[Leif Stig Hansen, CEO, President & MD]

Yes, it was mainly related to the time when we had basically one entire factory, Foodservice factory closed. That was more relating to the April and May period, where we had some significant losses, and that was -- they were partly covered by some of these brands.

[Mikael Löfdahl, Research Analyst]

Okay. Final question on Norway. Obviously, extremely strong margin in the quarter. And we know that Norway has obviously good leverage in this business, and it's very well driven. But is the mix effect bigger in Norway when it comes to Retail versus Foodservice? I guess that could be the case. But you have much of your Foodservice in Denmark, so maybe it doesn't impact Norway that much.

[Leif Stig Hansen, CEO, President & MD]

No, but I will say, Norway is probably close to the average for the group in terms of the split between Retail and Foodservice. So there is a relatively significant Foodservice business in Norway also. But a very strong development all in all.

[Mikael Löfdahl, Research Analyst]

So was the mix effect bigger in Norway?

[Leif Stig Hansen, CEO, President & MD]

There's positive mix mainly coming from more Ready-to-cook products being sold, particularly in Retail. So that is clearly positive. But the other part of your question, if I understood correctly, was the -- is the balance between Retail and Foodservice different in Norway than it is in the group. And I would say Norway is close to the group average.

[Mikael Löfdahl, Research Analyst]

Okay. A final question from me. On the balance sheet and M&A opportunities here, you have 2 tranches left in your Manor Farm earn-out payments. And as we look beyond that, the balance sheet will strengthen quite rapidly. And you have been talking about acquisitions now for quite some time and the consolidation opportunities in Europe. I guess with COVID-19, discussions have probably become a bit harder to have, at least to meet people. But can you update us anything on that progress?

[Leif Stig Hansen, CEO, President & MD]

Yes, you're right that COVID-19 hasn't made it easier to travel, but still the conversation goes on. And I would even say that this strategic study that we did earlier in the year have done that we feel even more prepared, so to speak. I think also the way we have seen new businesses in Norway, Finland, Ireland, the way we have integrated those businesses, I think, and then the way the results are coming through also prove that if we find an attractive candidate, the business is ready to move.

[Julia Lagerqvist, Chief Financial Officer]

Maybe Mikael, I can go back to your question that you were saying before about the share of -- Ready-to-eat part in retail. So I mean, we have quite -- a large part of our Ready-to-eat business goes to -- [ is key ] for our customers as well. So the share that we sell in Retail used to be around 12% to 14%. And then now if I look in the last quarter, it's more in the area of 20%. It has increased for sure, like you say, but it's still at a fairly low level.Did I answer your question?

[Mikael Löfdahl, Research Analyst]

Okay. Okay. Yes, that's helpful.

[Operator]

We currently have no further questions. [Operator Instructions] We have a follow-up question from Daniel Schmidt of Danske Bank.

[Daniel Schmidt, Research Analyst]

Could I just -- I think I didn't hear Julia especially, it was quite hard to hear.

[Julia Lagerqvist, Chief Financial Officer]

I'm sorry.

[Daniel Schmidt, Research Analyst]

But can you just clarify what you said on government grants? I think you said SEK 10 million to SEK 15 million in the quarter. Is that also included in sort of what you regard as an extraordinary in the quarter, the SEK 17 million? Or is -- how should we view that? Can you give us some clarification?

[Julia Lagerqvist, Chief Financial Officer]

No, no. They are basically offsetting costs that we had for -- they are netted out. So they are non-comp, you could say. You could say that it's sort of on top.

[Daniel Schmidt, Research Analyst]

Sorry, you have a bad line. Can you just repeat, sorry?

[Julia Lagerqvist, Chief Financial Officer]

No. No, no. So you had -- the state aid we received, that is obviously offsetting some of the increased cost we've had. And then on top of that, for example, the plant closure cost is more related to the overhead that we have not been able to get any state support for.

[Operator]

We have a question from Florent Thy-Tine of Midcap Partners.

[Florent Thy-Tine]

Just a follow-up question on the non-meat concept. Do we have to expect some M&A on that segment? Or are you able to develop these projects by your own? And will you be able to sell non-meat product on all your countries or not?

[Leif Stig Hansen, CEO, President & MD]

Initially, it's -- it will be products we will be producing ourselves. So we don't foresee initially any M&A activity here. And in terms of where to sell the products, we see demand and opportunities both in our domestic markets but also on export markets.

[Operator]

So we currently have no further questions. [Operator Instructions] We have no further questions.

[Leif Stig Hansen, CEO, President & MD]

All right. Thank you, everybody. Thank you for your time, and have a great day.