Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2022-Q2

[Operator]

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

I'll now hand the call over to Jonas Tunestål, CEO, to begin. Jonas, please go ahead.

[Jonas Tunestål, executive]

Good morning, everyone, and welcome to this presentation of Scandi Standard's results for Q2 2022. I'm Jonas Tunestål, the 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 the results for the first quarter under my head. So next slide, please. All of us are currently expanding a challenging market environment with lots of uncertainties. And I'm very pleased to report that we have managed to largely compensate the cost inflation, we've been exposed to during the last year. However, we have chosen to terminate some projects, which have resulted in write-downs of assets. We have made a provision related to an old conflict with a third-party and had losses related to Q2 fire in Farre. So together, this has impacted EBIT negatively with SEK 55 million in the quarter.

So the positive development in underlying EBIT is driven by a successful implementation of price increases, strong Ready-to-eat performance and higher export prices. So as usual we will revert to later in this presentation, we have generated a strong operational cash flow of SEK 135 million in the quarter. Although our costs are -- have recently stabilized, there are still high uncertainties in our macro environment. As a market leader in many of our markets, it has been important for us to allow necessary turns for our farmers in order to ensure a long-term domestic food production and sufficient supply of chicken products in our home markets going forward. So next slide, please. Scandi Standard has been a stable business with around 4% margin. We had strong organic growth throughout the year. In the second half of '21 and Q1 '22, we have experienced a significant drop in margins, mainly due to the lead time in obtaining compensation for high cost inflation and low export prices. But in Q2, we have largely managed to compensate inflation but margins are still lagging due to the earlier mentioned specific items. During a period with lower activity level and investment, we have started a number of initiatives to gradually strengthen our efficiency end-to-end, and I'm actually now in the middle of developing long-term plans together with the organization to secure Scandi Standard as a future-proof company. So next slide, please. And on this slide, you can see the inflation is largely compensated. So during the last period, our cost above EBITDA line has increased by about 33% per kilo. And the figure on the right that shows a strong impact on earnings during the last period and progress in underlying earnings during Q2 '22. And this has been possible for a combination of things, significant price increases that has been implemented in the first half '22 and also significant improvement in export prices and a strong Ready-to-eat performance. But I will revert to that later in the slides. So next slide, please. Here, you can see at the table on the top that shows massive inflation in some of our main cost items. And of course, feed prices, our biggest item, feed prices have stabilized during the summer, even though we see have still large uncertainties about the European drought and the Ukraine exports. So it is stabilized, but we see uncertainties for the future. Further, we see the electricity for Q3 and Q4, that also indicates cost increases, and that will affect us and the rest of the industry.

Chicken products though, are well positioned compared to protein peers. We have a low absolute and relative price point to consumers, which is in medium-term likely to drive substation in our direction. The short production cycle has allowed us flexibility in throughput, and we are also exposed to the positive consumer trends related to health and sustainability. And one of the most interesting thing is the flexibility through a short production cycle, and that's a big difference between my former jobs with other proteins as pork and beef. And I see that is some competitive advantage for porkless protein. We'll also have a higher frequency of price discussions with the customer, and that is positive for more well-functioned price model. This lowers our inflationary exposure, which in turn benefits the entire value chain. So next slide, please. And here, we look into the development in the export prices and we have seen a significant price increase in our export business during the second quarter. However, export prices have now increased significantly, although not to the same extent as inflation. This is mainly driven by a reduced number of chickens in Europe. At the same time, we see interest demand from restaurant sector around the world as a consequence of the release of COVID restructures. Our price achievement in the quarter has been positively impacted by less export restriction related to bird-flu. And there, we have made progress in our efforts together with the industry organization and authorities to reduce our exposure to such restrictions where regionalization is the most important element. But we're also in the process of strengthening our export model aim to gradually strengthen our competitiveness in the market over the coming years.

So we are focusing on strategic client relationships, improved sales and operation planning. And with that, we mean selling the right product to the right market but also increased flexibility between export and our Ready-to-eat factories with respect to the raw material. So next slide, please. This table shows the reconciliation of our segments, and it's clearly that Ready-to-eat that drives results in Q2. When adjusting for the exceptional items mentioned earlier, the results within Ready-to-cook are still lag in Q2 '22. The category other includes our ingredients business which has performed very well in the quarter due to strong price increases on pet food, MDM and biogas as well. This business secure an optimal usage of the whole animal, and that's a focus area for us, both in terms of the profitability, but also from a sustainability point of view. The next slide, please. Now we go to the Ready-to-cook segment. And it's important to understand that chicken is first mover on price due to the short production cycle. And the recovery in our underlying earnings has partly been facilitated by lowering the volume with 10% -- 12%, sorry. But -- and then with scope for gradual rebuild of volumes in line with demand of cost. But I'm also happy to report that we have improved our LTI performance. But in Ireland, we're struggling with two of our animal indicators, mainly related to external parties, but we have allocated group resources to come to terms with these deviations. Next slide, please. And then we have Ready-to-cook Denmark. And as you all know, we have realized large losses during the last periods, and one of the problem has been the lacking contractual flexibility with our counterparties, which has been a barrier for implementation of required changes. It is important to obtain more balance in this contract to the best of our long-term prosperity of the entire value chain in Denmark. But we are in the midst of carrying out changes to the slow-growing bird business. We try to go net volume and price better and align them better with the domestic retail clients. And we also try to higher flexibility in mix between breeds and reduced costs. So in the current market conditions, we have strengthened our export market as well. On the other hand, we have a higher price awareness among Danish consumers and that might impact the implementation of slow growing bird strategy. But I'm happy to say, for the first time in 7 quarters, the combined business, including Ready-to-eat and ingredients in Denmark, shows a positive EBIT in the quarter, which is a good from a marginal point of view. But obviously, it's crucial to develop a sustainable platform in Denmark with a satisfactory return on capital. So I'm spending large time to facilitate this together with the local management, and we will focus on continuous improvement. So next slide, please. Yes. On this slide, you can see channel development more in detail. Through these details, you can notice strong increase in food service and export channels in the quarter, which is driven both by price and volume. We'll also see lag in development in retail, which is due to the price elasticity in the channel. So it is this channel we see future more potential of the substitution from other proteins. So next slide, please. And then we go into the Ready-to-eat business. And looking at our Ready-to-eat business, we delivered a good performance in the quarter. We have net sales of SEK 748 million, and that's an increase of 39% for the quarter and an EBIT increase of 37% to SEK 51 million. So price increases is executed on long-term customers in food service, retail and QSR and in export. We have also skewed our mixes towards higher-margin products, so cost inflation was to a large extent mitigated and the EBIT margin landed at 6.8% for the quarter. LTIs were in line with the levels seen in the last 12 months and it is our priority to gradually bring it down towards the low level seen in Q2 '21. So next slide, please. And this slide, we want to show you some examples of our Ready-to-eat products. You can see those three products up in the left corner, right corner and down in the center that is typically products that we sell in retail. And we also have a big business together with the QSR and producing a lot of nuggets and hamburgers for the QSR industry as well. So our three businesses, we have a good growth now, and we're really proud of the product that we can present. Next slide, please. It is, of course, very encouraging to see Ready-to-eat are growing and outperforming pre-pandemic sales. The development is driven by increased sales in food service channel. But during the quarter, we also saw that Ready-to-eat is growing in the retail and indicate a more permanent setup in retail demand, showing an increase of 90% in the quarter.

So to address demand, Scandi Standard invest further to increase the capacity at the company's largest production plant for Ready-to-eat products in Farre in Denmark. And further investment in this segment will be a priority for me in the coming years. So Ready-to-eat will be an important tool in development EBIT pacing i.e., increase 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. If we then move to Page 15, we come back to the overall P&L. And as you've seen, the quarterly performance was weak. However, EBITDA was still at SEK 172 million in the quarter, which is in line with last year. There were no noncomparable items booked and EBIT landed at SEK 42 million. The finance cost was flat compared to the same period last year. And all in all, the net income for the period landed at a low SEK 7 million. If you look at Page 16 and our return measures, the declining results in the last quarter has, of course, led to a large drop in return on capital employed from 8.4% to last year to 3.2% this year. However, looking only at the annualized Q2 results and also adjusting for the mentioned exceptional items, the return on capital employed would have been above 8%. At the same time, our equity ratio remained stable at around 30% supported by the cash preservation measures that we have taken during this turbulent period. To go to Page 17, we continue to see low levels of working capital. Our inventory has been further decreased versus the year-end. This to targeted actions to drive down frozen inventory. Payables and receivables both continued to increase, driven by the cost and price increases we have seen but we also, in the period, reduced some of our factoring solutions. This gives us in the end our working capital to sales ratio of minus 0.5%. Our target level for working capital to sales, excluding financing items, remains to be around 6%. And at the moment, we are somewhat below this level. Coming to Page 18, we have our cash flow overview. As Jonas has mentioned in the beginning, we reported strong operating cash flow in the quarter despite the quarter earnings. There are several items booked in the quarter did not have a cash impact. The EBITDA was in line with last year. We have the release of working capital. And similar to last quarter, we have kept a low level of investments as part of our cash preservation measures. And in total, the net interest-bearing debt was reduced by SEK 84 million in the quarter. So all in all, we have managed recent periods without deteriorating our equity ratio and with a stable EBIT. On Page 18 (sic) [ 19 ], we have our cash flow guidance. The CapEx for 2022 is estimated to be at around SEK 330 million, which is in line with previous statements. As Jonas said before, we had a clear focus on facilitating further growth in Ready-to-eat segment, meeting the strong demand we see there. Another major project is our ERP implementation. Year-to-date June, we had invested only SEK 75 million. So we plan for a ramp-up in second half.

The paid interest level is estimated to be at 4.5% to 5.5%, increased due to the slightly higher margins we have on our loan and increased base rate as we were seeing. The blended tax rate is estimated to be around 21%. And as previously reported, we have a new 5-year sustainability-linked financing in place since mid-Q2. Finally, the dividend policy remains unchanged at 60% of earnings over time.

Moving to the next page and looking at our sustainability KPIs. We are pleased to see that LTI, which is the lost time related to injuries has stayed at the same level as we saw in Q1, coming down from the higher levels of 2021. Here, the action plan that was put into place to mitigate the previous post results is delivering improvements, and we will continue this important work every day in the organization. On the other hand, our main animal welfare indicator, the foot pad score and the use of antibiotics are unacceptably high. This is mainly driven by our Irish operations, and we have our standard experts on site to address the issues. Report lower CO2 emissions in the quarter, partly related to a more detailed reporting practices, specifically around logistic heating emissions. But in addition, we also have a lower natural gas consumption at some sites. We also want to share that we have in the quarter finalized a detailed carbon inventory, including Scope 3, which Jonas will now elaborate a bit more on. So I will then hand back over to you, Jonas.

[Jonas Tunestål, executive]

Thank you very much. Then we are at Slide 21. And thank you, Julia. And as Julia mentioned, one aspect of our sustainability efforts in the comprehensive product carbon footprint calculations that we've undertaken now certified by an external expert that Carbon Trust. So together with them, we have developed a bespoke cradle-to-grave model, giving us a very stable knowledge base for our improvement work on the climate area. So together with our own work and with our own carbon inventory at group level, the calculation shows that the majority of Scandi Standard's climate impact is linked to feed production and feed conversion, actually around 85% [indiscernible] Scope 3 around 3.5% to 4% comes from Scandi Standard's own operation in Scope 1 and Scope 2. So it's important for us to measure all scopes and work with continuous improvement within the total value chain. And I strongly believe that our products will benefit from the development of a more holistic, accurate and transparent measurement system for the CO2 emissions. And that's why we do this certification and inventory of the total scopes 1, 2 and 3.

Next slide, please. And looking into this slide and this work that I mentioned in the previous slide is one aspect of building a future-proof company. So one of the pillar in the strategic framework that we have developed to take Scandi Standard to the next level. And as you all know, my primary focus during my first period with Scandi Standard has been and is recovery measures. But in parallel, we have also started the work together with the organization to develop our plans for taking Scandi Standard forward. Apart from building a future-proof company, it is about increasing the value of our protein, it's about ramping up our efficiency end-to-end. And of course, it's always start with the people and the culture. So although this will require a lot of hard work, and I'm confident that we will be able to gradually lift our performance over the coming years. So next slide. So to summary all this. Inflation is largely compensated in the quarter, and we have done that through domestic price increases and we also see a strong export market and then our good performance in our Ready-to-eat segment. We see that feed prices have stabilized during the summer but still with a lot of uncertainty for the future. We are well positioned for the consumer response to the inflationary environment, so we're expecting a normalized EBIT level during the second half in '22. And we have a structural work for gradual improvement over the coming years. But with that said, we're humble for the fact that we see a large macro uncertainty and that we need to deal with throughout the coming quarter in 2023. With that said, I think we are finished, and we will open up for Q&A.

[Operator]

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

[Daniel Schmidt, analyst]

A couple of questions from me. Starting with maybe an nitty-gritty, but of course, important for the cost base, feed prices have stabilized you mentioned. Could you say anything about the lead time between soft commodity pricing and lead prices? Because clearly, we've seen soft commodities coming down quite a lot during the summer?

[Jonas Tunestål, executive]

So the soft commodity price, we see that -- we have seen the feed prices and the connection to the grains and so on. We see grain prices goes down. We have seen soil prices actually go up a little bit. And that's a little bit difference between the prices for the grain and the prices for the feed. And that to us a little bit due to which contract our farmer has and so on. But for us, where we have the feed production in Ireland, we will see a little bit more stabilized price for the future. But when we look into, for example, [indiscernible], we see lowering price for the grain, so it defers the mix between the feed price and the grain price. If that was the question.

[Daniel Schmidt, analyst]

I was of the impression that sort of the grain prices were the more imported, but maybe I'm wrong. But when I look at it now, you still had also a downturn in soya prices, at least compared to where we ended in June. And it's been moving up then as of late maybe, but if you put all these combined, it looks like a fairly decent step down to me, at least in the past 2 months.

[Jonas Tunestål, executive]

Yes. Totally agree. And as you say, the grain prices are the majority part, and we're also seeing the soya price goes down and then they have come up lately. But we will -- it will have effect. But for our purpose, it's important for us to, of course, follow the prices for the grain and our efficiency in the market. But they are not totally linked, but that will, of course, be uncommon discussions of what's the price level and what our competitors do.

[Daniel Schmidt, analyst]

Yes. All right. Okay. So a little bit of mixed signals, but still a clear sort of cooling down at least in the past 2 months when I look at it, even though soya has been moving up as of late, okay. But moving on then maybe, you mentioned, and clearly, this was sort of the Q2 numbers for a clear improvement in my eyes, at least. And you mentioned that you should be able to reach normalized profitability in the second half of this year and you are new to the company. What in your eyes is normalized profitability in the second half?

[Jonas Tunestål, executive]

We can't comment on a specific number for the second half. But our comment is that it will be normalized and then we need to look to the historical numbers as we talk with a normalized savings.

[Daniel Schmidt, analyst]

And maybe following on to that, then you also mentioned that you want to establish a new stable level of earnings beyond the margins that you reported in 2015 to 2020. And just trying to get my head around that, you did report actually 5% EBIT margin in 2020, if you adjust for one-offs. You mentioned 4% as a stable margin in the period 2016 to 2020, what should we sort of relate that comment to? Because it is quite a difference between 4 and 5, sort of is the target to get to a stable level above 4 or above 5?

[Jonas Tunestål, executive]

We can't comment on that, but the thing that we can say in the presentation, we have presented our 4% margin, as we say. And our focus has been to recover EBIT earnings to historical level. And from there, we will have a long-term continuous improvements in trying to increase the profitability over time.

[Daniel Schmidt, analyst]

But the 5% underlying EBIT margin that you did report in 2020 is sort of not relevant in your reflection on what is the stable historical normalized margin? That's rather the 4% that you put in the presentation then, is that how you should view it?

[Jonas Tunestål, executive]

Yes. If we look back to the historical number, the table EBIT margin that we present on Slide 3 is 4%.

[Daniel Schmidt, analyst]

Yes. Okay. Okay. Good. And when you talk about Ready-to-eat and the performance that was, of course, very strong and especially in Food Service, but you also mentioned retail. And was it up 17% or 18% maybe, how much of that is volume? Is that all price or...

[Jonas Tunestål, executive]

Yes, it was up 18.7% in the retail development.

[Daniel Schmidt, analyst]

And is that all price? Or is that volume as well?

[Jonas Tunestål, executive]

Yes, it's a combination of price and volume, and the estimate is about a 5% volume increase.

[Daniel Schmidt, analyst]

And did you mention anything specific because you do sound a bit surprised by the retail performance? Is there anything that has sort of in your assortment that has pushed volumes higher in retail? Or is it just general demand when it comes to consumer?

[Jonas Tunestål, executive]

It's just the products that we presented that we showed you, new product lines that we come with all the time. And the thing that we have seen in the macro market is that we have seen a trend for increased Food Service in total instead of retail. Therefore, we think with our innovation, we're proud of the development in retail as well.

[Daniel Schmidt, analyst]

And then maybe final just check. We have talked about bird-flu for a long time, maybe a little bit less now in this year. I haven't looked recently, but has there been any new cases of bird-flu during the past couple of months in the Nordics or Ireland?

[Jonas Tunestål, executive]

No. That's a high pressure on bird-flu in the Nordic in general, but no cases.

[Daniel Schmidt, analyst]

But it's still present on the European continent, right?

[Jonas Tunestål, executive]

Yes. It's still present in European continent, but not commercial -- in commercial forms for our -- in the Nordics. And that's what we have talked about in our presentation that we together are trying to get it regionalized now that will decrease the risk for us going forward. But no decision about that, but we are in the middle of the work on that.

[Operator]

[Operator Instructions] We have a follow-up from Daniel Schmidt of Danske Bank.

[Daniel Schmidt, analyst]

Just a follow-up. When you guys -- you reiterated your CapEx plans for the full year, which I think was SEK 330 million. And you've only done was it SEK 75 million in the first half of this year. Do you see an acceleration of the CapEx sort of need going into '23? Or sort of is this how you have sort of -- this is just how you sort of planned for the year to have a lot in the second half?

[Jonas Tunestål, executive]

Just to comment on the numbers. So our focus has been to recovery, and therefore, we have been tight on the CapEx on the first half. Then we'll get back to that in the Q3 report and what we're doing going forward.

[Operator]

[Operator Instructions] At this time, we currently have no further questions. I'll hand back over to Jonas for any closing remarks.

[Jonas Tunestål, executive]

Thank you, everyone, for listening. And with that, we close.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.