Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2021-Q2

[Operator]

Welcome to today's Scandi Standard Interim report for the second quarter of 2021. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Otto Drakenberg to begin. Otto, please go ahead.

[Otto Drakenberg, Interim MD & CEO]

Good morning, everyone, and welcome to this presentation of Scandi Standard's quarter 2 results. I'm Otto Drakenberg, I'm the acting CEO of Scandi Standard. With me today, I have Julia Lagerqvist, our CFO. Welcome, Julia.

[Julia Lagerqvist, Chief Financial Officer]

Thank you.

[Otto Drakenberg, Interim MD & CEO]

First, a few words about myself as this is my first quarterly presentation for Scandi Standard. I took on this role in June because I think this is a fantastic opportunity. With my background with blue chip fast-moving consumer goods companies and my experience from a number of turnaround situations, I am very much looking forward to the journey that lies ahead of us. Moving on to the next slide, please. Overall, Scandi Standard delivered a growing top line in the quarter during -- with a 7% increase in local currency, driven by recovery in food service and in the Ready-to-eat business. During the quarter, we have faced several challenges currently impacting our results negatively, which I will revert to in detail in this call. We firmly believe that the challenges are manageable, and we will be dealing with them with the new leadership in force in Scandi Standard. A number of the items are being addressed in the short term, but it will take some time for some of these measures to impact the P&L. More structural items will be dealt with through a comprehensive improvement program, which will be communicated by me later this year. Moving on to the next slide, please. Scandi Standard has a history of strong top line growth and stable EBIT margin of around 4% over the last couple of years. Profitability is currently deviating materially from historic earnings for the following reasons: firstly, a negative result of SEK 35 million in the Danish Ready-to-cook business due to a combination of imbalance between supply and demand of high-end products and lower export prices. Secondly, low export prices are also impacting other parts of the business driven by bird-flu related export restrictions and low global demand from food service. Thirdly, there is also a lag effect in passing through the historically high increases in feed prices that we are experiencing. And fourthly and finally, we have also had some costs related to recent management changes. Next slide, please. This is an overview here of our segment contribution in the quarter. Most of our current challenges are tied to Ready-to-cook, representing 3/4 of our total net sales. Although we saw a strong rebound for the Ready-to-eat business, driven by recent food service recovery, this does not offset the disappointing performance in our Ready-to-cook business. Other business, including our Ingredients business and corporate overhead contributed negatively. Ingredients was weak and corporate overhead was impacted by the cost for the recent CEO change. Next slide, please. Taking a closer look at our Ready-to-cook business, we faced a number of challenges leading to moderate growth and unsatisfactory margin of 3.3% during the second quarter. EBIT amounted to SEK 65 million compared to SEK 98 million in the same quarter of last year, mainly due to the losses in Denmark, bird flu effects and time lag effects in passing through the large raw material cost increases that I mentioned recently. We experienced issues in Sweden in the quarter, which I will come back to, and those caused a 7% drop in sales during June. Next slide, please. Looking at sales per channel and starting with Ready-to-cook. We can conclude that there has been a clear channel shift towards food service in the quarter, and we're now back to a more normalized situation as was the case pre-COVID. Looking at sales development by country. We can see that there was strong growth in Norway and Finland. Sweden's growth was 3% impacted by negative public attention in June, and we saw a decline in Denmark. Next slide, please. On this slide, you see the EBIT development for the second quarter for the Ready-to-cook business. As you can see, the development was mainly driven by higher raw material prices being partly offset by price increases. Next slide. To summarize, our key focus for Ready-to-cook during the quarter has been twofold. Firstly, to address the challenges in the Danish operations where the main issues of the poor execution of the slow-growing bird strategy that, that was introduced some time ago. Secondly, low flexibility in bird intake. Thirdly, high plant complexity. And finally, we are experiencing cost structure challenges in our Danish business. Those are the first set of challenges. Secondly, we have also been working hard to close the deviation of standards in our Swedish operations. The current status is that the majority of the deviation have now been closed. A few remain, and we aim to have full focus on this until we have resolved them fully. Animal health and food safety are business critical factors for us, and our goal is put deviations from the company standards if they arise, shall be at the lowest possible level. And this is a central part of our continuous improvement work. And this is important to note that after having thoroughly investigated the deviations, I'm confident that consumers' health and safety in Sweden was never jeopardized due to our backup systems. Also, we can conclude that no increase in consumer complaints has been recorded during the period. Further, we have initiated an investigation to identify and handle deviations from standards in other plants in the group. With the intention of developing an action plan to prevent and handle any deficiencies in our production and quality process in all our markets. And even if some of these measures may have a short-term impact on results, I am confident that this will put us in a better position for profitable growth in the longer term. Next slide, please. Looking at our business in Ready-to-eat, I'm pleased to announced that we delivered a strong performance in the quarter. The business was well prepared and able to lever off a rebound in food service demand. This resulted in a strong top line growth of 26% and a substantial margin improvement. It's also pleasing to note that the injury rate and level of complaints remained low in the quarter in spite of much higher level of activity in our Ready-to-eat business. Next slide, please. There was a strong growth in food service. As was to be expected, we could see 25% growth versus same period last year. We could also see a strong performance in retail, which is a sign of lasting demand increase for our Ready-to-eat products in the retail channel following COVID-19. Ready-to-eat saw a strong performance in all the 3 major markets where we operate. Next slide, please. Looking at EBIT in Ready-to-eat, it was mainly driven by higher volumes, normalized pricing and lower fixed costs and raw material prices, resulting in a substantial improvement of our EBIT to SEK 35 million in the quarter. Next slide, please. For us at Scandi Standard, sustainability at the core of our business is also a key driver why many consumers prefer our brands. We're committed to reporting key sustainability data demonstrating our progress in core areas. This quarter, we had good performance in all areas, except injuries, affected by a higher level of injuries in our plant in Ireland, and we're now addressing those vigorously.Next slide, please. So let's remember why this is such an exciting business and industry to be in. There are strong underlying drivers for chicken as a climate smart protein, having only 1/10 of the carbon footprint compared to red meat. Also, and currently, Nordic chicken consumption is only at the 35% to 40% level of the same market or consumption in the U.K. And the chicken consumption in Sweden or in the Nordic countries is only half of that of the U.S. consumption, representing a sizable opportunity for Scandi Standard. And I think most important to us all, it's all very tasty. And with that, I hand over to Julia.

[Julia Lagerqvist, Chief Financial Officer]

Thank you, Otto. If we move on to Page 15, coming back to the overall group P&L. As Otto shared previously, we have had top -- positive top line development, but for a number of reasons, we do not see the same development in EBITDA. And on top, we've had increasing depreciation due to the high investment in recent years. We have also had increased finance costs this quarter, driven mainly by revaluation of share and pension funds. The quarterly tax rate was 20%, all this leadings us to a net income of SEK 41 million versus SEK 73 million last year and a low earnings per share of only SEK 0.61 versus SEK 1.19 last year. Coming to Page 16 and looking at our 2 main return measurements, we see declining returns versus last year, driven then mainly by the poor results in the first half of 2021, and also the high noncomparable posts in the last half of 2020 and totaled SEK 59 million, mainly related to the adjustment of the earnout debt attributable to the acquisition of Manor Farm. Still, worth noticing that when looking at the adjusted returns, we were in line or better than the same period last year. And the equity ratio is improving to 29% versus 28% last year. Coming to Page 17 and looking at our working capital. Working capital is similar -- at a similar low level as in the last quarter. We see -- had a positive contribution from COVID-19 state related -- state aid, allowing for postponed tax payments. I'm very pleased to see the reduced inventory also in this quarter. At the same time, we see it was up mainly driven by increased sales. Looking at the working capital to sales ratio, we have a long-term target level adjusted for financing to be around 6%. Adjusting for COVID-19 state aide, and our financing elements, we are currently above this, and we are working continuously with this. Coming to Page 18 and the cash flow. The operating cash flow is obviously affected by the reduced EBITDA. Working capital is that we saw stable compared to the previous quarter, while capital expenditure is slightly up versus lower than average last year, all this leading us to an operating cash flow far below quarter 2 last year. Taxes were also higher versus last year, and we have in the quarter 2 of this year paid dividend of SEK 81 million. In total, the NIBD is increasing somewhat in the period, but it is in line with the rolling last 12 months. Finally for me, I will comment a bit on our cash flow guidance. The CapEx for 2021 is still estimated to be around SEK 400 million versus the SEK 355 million that was spent last year. It is a combination of efficiency, capacity and ESG investments on top of the ongoing maintenance. Given the current poor results, we are doing a thorough review of the investment process at the moment. The paid interest is estimated to still be around 3% to 3.5%, and the tax rate is to be around 20%. We also still have our continued liability in the shape of the Manor Farm acquisition. It consists of the 3 earnout tranches and the final tranche is due in 2021. Looking at our dividend, we did pay, as we previously said, a dividend of SEK 1.25 per share now in quarter 2. And the Board will come back to the question of a second dividend that was announced in the report in the -- for the first quarter. And just as a reminder, the dividend policy for us is to be around 60% of the net earnings over time. And with that, I would like to hand back to Otto.

[Otto Drakenberg, Interim MD & CEO]

Thank you, Julia. So to conclude, quarter 2 was impacted by headwinds and operational challenges. In the short term, we have focused on operational improvements in Denmark, and we're closing outstanding deviations in Sweden in our production. We have initiated the group-wide investigation to identify and handle any deviation from standards in other plants. Even if some of those measures may have a short-term impact on results, I'm confident that this will put us in a better position for profitable growth in the longer term. With respect to the third quarter, we have unfortunately experienced plant downtime in 2 areas: an increasing number of cases of COVID-19 in the production site in Ireland, which have a significant impact on production, and the heat wave in Sweden during July, causing disruptions in production and delivery. In parallel, we're working on developing a group-wide improvement program that I will come back to during the second half of 2021. With the strong competence inherent in our organization, coupled with clear leadership, I'm confident that we'll tackle the current challenges and the improvement program that is now taking shape will enable us to capitalize on the dynamic opportunities in our markets and create shareholder value in line with our potential over time.And with that, I will open up for question and answers.

[Operator]

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

[Daniel Schmidt, Research Analyst]

I hope you can hear me.

[Julia Lagerqvist, Chief Financial Officer]

Yes. We can hear you.

[Otto Drakenberg, Interim MD & CEO]

Yes.

[Daniel Schmidt, Research Analyst]

Yes. A couple of questions from me then. And starting with what you mentioned in terms of phasing of feed prices, you saw some compensation in the quarter but not fully. Would you expect full compensation when it comes to higher raw material costs in the coming quarters or will it -- coming quarter? Or will it take longer?

[Julia Lagerqvist, Chief Financial Officer]

This is Julia. We still expect there to be a certain lag going forward as the prices keep on moving.

[Otto Drakenberg, Interim MD & CEO]

But over time, as you alluded to, our principle is always that input price increases shall over time be passed on to customers and consumers.

[Daniel Schmidt, Research Analyst]

And does it take -- is it your opinion that this is an extraordinary situation that sort of the catch-up is taking longer than in a normal case?

[Otto Drakenberg, Interim MD & CEO]

Yes, that's my observation. Although I'm new to the industry, I think we're experiencing, and that's what my people are telling me also that the raw material and especially feed prices are -- the increases are exceptionally high. So yes, this is an extraordinary situation that we're dealing with, and we will deal with it the right way. And I think also, it's a matter of us raising up to the challenge and be as good as and as strong as possible in our interaction with our customers.

[Daniel Schmidt, Research Analyst]

And is it in any way sort of an extreme situation also for you, in particular, given the production irregularities and the media scandal during the spring. Is that making it harder for you to compensate for raw material and feed prices in the Swedish market?

[Otto Drakenberg, Interim MD & CEO]

The deviation from production standards that were discovered and published in quarter 2 are to a majority dealt with, and we have closed most of them. We could see in consumer demand, a drop of 7% of sales in June. And already in July, we could see that the consumer demand was bouncing back. So that is not the material explanation for any changes after quarter 2. And the customer relationships have been virtually untarnished because we've been in very close contact with all our major Swedish customers throughout this process.

[Daniel Schmidt, Research Analyst]

Okay. There were some discussions during that phase where municipalities were out saying that they were stopping sort of imports from Kronfågel. Is that no longer an issue?

[Otto Drakenberg, Interim MD & CEO]

That is no longer a significant issue, no.

[Daniel Schmidt, Research Analyst]

Okay. And just on your sort of response when it came to the Swedish consumer, and it seems like the scandal is fading, as you say. But how can you sort of make sure that, that's the case? Of course, you also have this production problem that you mentioned in Q3. Is it very sort of obvious for you that the drop of, I think, it was 12% in July is related to that and not to the consumer response on the back of the production in regularities during the spring?

[Otto Drakenberg, Interim MD & CEO]

Two answers to your question there. First of all, as I said, consumer demand bounced back in July after the public attention. We also -- during that period, we have backup systems in our production facility so that consumer health was never in jeopardy. And we also had no increase in consumer complains the whole period. So that's one item of reassurance. The events that you're referring to that we published in our report here for quarter 2, supply issues caused by the heat wave. They are -- this heat wave that came all over Europe that was very much dominating the situation for our plants outside [indiscernible] is a completely isolated event and had nothing to do with production deviation or consumer sentiment. So completely isolated event.

[Daniel Schmidt, Research Analyst]

All right. And did that affect your competitors as well in the Swedish market when it comes to supply?

[Otto Drakenberg, Interim MD & CEO]

I have not heard of those kind of supply issues caused by the heat wave that I think we all experienced this summer in some way. So I haven't heard of the same size of issues for our competitors. But I guess that's rather a question for them.

[Daniel Schmidt, Research Analyst]

Okay. So would you say that your supply chain is more agile?

[Otto Drakenberg, Interim MD & CEO]

No, I wouldn't say that. I just say that we had an extraordinary situation, and we have production in several European countries. And in no other region where we are operating and producing, we experienced the extreme heat that we did in our Swedish plant. And during the 30 years, and I talked to people who have been involved in the operations there for the last 30 years, they have never experienced anything like it. Now we all know that with climate change, the unlikely and extreme is becoming less extreme. So we are doing now a full review of all our plants to make sure that we have the right resilience and the right contingency plans for this and other extreme effects that could happen in our production. So that's something that's taking place during the fall to make sure that we to a meaningful extent and handle extreme events for our production going forward.

[Daniel Schmidt, Research Analyst]

All right. You mentioned July, and clearly, sort of the weather has normalized now during August. Does that mean that your production and supply chain is back to normal in Sweden?

[Otto Drakenberg, Interim MD & CEO]

It's absolutely been normalizing since the heat wave. I guess everybody who deals with production have challenges here and there. And now we are -- we have since some time dealt with that -- with the heat wave in July, and things are getting back to normal.

[Daniel Schmidt, Research Analyst]

Okay. And on that topic, you also mentioned Ireland when it came to COVID, where are you in that -- sort of where are we in that situation?

[Otto Drakenberg, Interim MD & CEO]

Well, the situation exists as of today. And the outburst, the greater outburst of COVID cases came in August. And it's burdening our production and disturbing our production at this very moment. And I guess, we have all learned the last 1.5 years that it's difficult to predict COVID, the spread of it, et cetera. We are in close cooperation with the authorities. We have taken extraordinary measures so that we can still have the plants running at highest possible capacity but it is absolutely a disturbance. And it's to the best of our knowledge and assessment is going to continue to be a disturbance for us throughout the quarter.

[Daniel Schmidt, Research Analyst]

Okay. But can you in any way quantify the impact when it comes to Ireland?

[Otto Drakenberg, Interim MD & CEO]

Well, we don't do numerical projections and forecasts, at least we don't share them. So that's not something that I think would be the right thing to do here. So I will just refer back to what I said initially, that it's absolutely something that is disturbing our operations today, and we expect it to be continually so throughout the quarter.

[Daniel Schmidt, Research Analyst]

Okay. And on -- there's a lot of things that you need to look into, of course, and it's been a hectic period. But on the matter of sort of declaring a plan, an action plan for the group, and you will be back during the second half of this year. Could you say anything about sort of the Ready-to-cook business in Denmark? And if that's a possible divestment in the coming 12 months?

[Otto Drakenberg, Interim MD & CEO]

I will start -- I will give you a few answers on our Ready-to-cook business in Denmark, but let me first say that we are poised to turn the Danish business around, and that's our only focus within Scandi Standard. The Danish business and Ready-to-cook is struggling with profitability as we all know due to poor execution of the slow growing bird strategy, low flexibility in bird intake and also we are -- we have a high plant complexity. We're currently taking a number of measures to deal with these issues to restore profitability in the short term. The long-term plan for Ready-to-cook in Denmark is an important part of the improvement program that you just alluded to in your question.

[Daniel Schmidt, Research Analyst]

Yes. Okay. So it's undecided yet, I guess. But you said SEK 35 million in operating loss in Q2. What is the sort of the last 12 months loss in that business?

[Otto Drakenberg, Interim MD & CEO]

The loss between the 12 -- last 12 months leading up to June 2021. Is that the loss you...

[Daniel Schmidt, Research Analyst]

Yes, exactly. Yes.

[Julia Lagerqvist, Chief Financial Officer]

Yes. I will -- sorry, we never look into the numbers. But obviously, for the first half year, which has been extreme for us, the loss has been SEK 85 million. So obviously a large room for improvement.

[Otto Drakenberg, Interim MD & CEO]

Yes. So the first half of your question was SEK 85 million.

[Julia Lagerqvist, Chief Financial Officer]

Yes.

[Daniel Schmidt, Research Analyst]

Yes. And do you have any number on the full year 2020, maybe that's easier?

[Julia Lagerqvist, Chief Financial Officer]

Yes. We haven't shared those numbers specifically.

[Daniel Schmidt, Research Analyst]

But was it -- what is -- it was a negative number. Is that fair to say?

[Julia Lagerqvist, Chief Financial Officer]

Yes, that is fair to say.

[Daniel Schmidt, Research Analyst]

A meaningful negative number. All right. And we haven't -- what I've seen -- at least seen any more bird flu cases in Denmark or Sweden during July and August, correct me if I'm wrong, that -- does that give you any hope that sort of the worst is behind us when it comes to that particular issue?

[Julia Lagerqvist, Chief Financial Officer]

We did see one case in Denmark in the early July, but we do we expect -- we do expect to have a similar effect also now in the to Q3, but then gradually improving.

[Daniel Schmidt, Research Analyst]

And what's the lead time? If we don't see any more cases since early July, what's the lead time for sort of the export market to normalize?

[Julia Lagerqvist, Chief Financial Officer]

It's hard to say because it's not -- still not only this one impacting the export market, of course. But normally, we say that it depends also [indiscernible] in different markets, but they are 3 to 6 months, I would say.

[Operator]

[Operator Instructions] We've just received a follow-up from Daniel Schmidt of Danske Bank.

[Daniel Schmidt, Research Analyst]

Okay. So if there's no others, I can continue then. So sort of what's your opinion, Otto, coming into this company when you look at sort of the CapEx need, and I think you guided for SEK 400 million also this year. i.e., close to 4% or above 4% of sales. Is that a necessary level to be at medium term, you think?

[Otto Drakenberg, Interim MD & CEO]

Let me comment on what we have stated. And for 2021, you're very correct, we expect to spend around SEK 400 million in CapEx for the group in a combination of maintenance, efficiency, capacity and ESG investments. I expect that we would -- that we will keep to that level throughout 2021. Despite the extra investments that we are now doing to handle production deviation. Looking ahead, I think that's very much a question for our group-wide program. So we are looking over not only how we can become a much better player in terms of P&L, but also on the return side of things where I see potential but exactly what type of potential and the ranges, I would like to come back to. But I think it's fair to say that we have significant opportunities on both profit and loss and the balance sheet in this company.

[Daniel Schmidt, Research Analyst]

Yes, and coming back to Denmark then, which is a significant soft spot in the business and has been so for some time. And although this will be part of your communication at a later stage, but could you answer if there's any sort of -- is there in any way if you look at Ready-to-cook Denmark, is that production intertwined in any way with the rest of the company or is it freestanding?

[Otto Drakenberg, Interim MD & CEO]

The Ready-to-cook business is freestanding and focused on the Danish market. Our Ready-to-eat business and plant in Denmark supplies several countries. But the answer is yes, Ready-to-cook plant in Denmark is the aim for the Danish market.

[Julia Lagerqvist, Chief Financial Officer]

There is a small part of the sale is going into Sweden, but the majority is local.

[Daniel Schmidt, Research Analyst]

So that means that sort of the production set up is -- has its own production step up simply?

[Julia Lagerqvist, Chief Financial Officer]

Yes.

[Otto Drakenberg, Interim MD & CEO]

yes. So throughout Scandi Standard, the plant predominantly produced for the home market.

[Daniel Schmidt, Research Analyst]

And has there been any thoughts historically, maybe you can't answer that, but Julia to divest this business before COVID?

[Julia Lagerqvist, Chief Financial Officer]

No, there is nothing. Like Otto said, the main focus has been to try to turn around the business. Of course, we never close any doors and leave any options. But for the moment and also for the last year, the focus has been to turn around the business.

[Daniel Schmidt, Research Analyst]

And is there any sort of door opening effects of keeping this business running? Or what would sort of -- would there be any other implications of just closing the business? Then what I can think about here now.

[Julia Lagerqvist, Chief Financial Officer]

I mean at the moment, we're just sticking to the plan and focusing on turning the business around.

[Otto Drakenberg, Interim MD & CEO]

So that's taking up all the time that we spend on the market to improve Denmark, I am confident that we'll be able to make significant inroads and improvements with the Danish business. Some of it shorter term, some of it structurally longer term. And it's a challenging market, Denmark. And I think with the right people, not only investments, but the right people and right strategies in place, I'm convinced we can improve significantly.

[Daniel Schmidt, Research Analyst]

All right. And when you say short term effects, is it sort of fair to assume that the SEK 50 million and the SEK 35 million in losses that you had in Q1 and Q2 is that really hopefully, the trough in sort of the impact for the group even though it will be tough also in the second half of this year? Are we leaving the worst behind in terms of losses?

[Otto Drakenberg, Interim MD & CEO]

I will not comment on whether the trough has been passed or not. But I speak with confidence when I say that the approach we have to the root causes of the Danish situation, the slow growing bird strategy that wasn't executed in the right way, the low flexibility and the bird intake from farmers and also the high plant complexity, we're working hard on all those areas. So without commenting on the -- or comparing with the previous quarters, I'm convinced we'll see gradual improvement.

[Operator]

We have no questions from the phone lines, so I hand back.

[Otto Drakenberg, Interim MD & CEO]

So thank you. Thank you all for attending this quarterly call. And until we talk next time, I wish you a great day. Thank you.

[Operator]

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