Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, welcome to the Scandi Standard Interim Report for the Second Quarter 2023 Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Jonas Tunestål, CEO. Please go ahead, sir.

[Jonas Tunestål, executive]

Good morning, everyone, and welcome to this presentation of Scandi Standard's result for Q2 2023. I'm Jonas Tunestål, CEO and Managing Director of Scandi Standard. And with me, I have Julia Lagerqvist, our CFO, and I'm pleased to have her by my side today, and I'm glad to report continued earnings improvement and a strong cash flow in the second quarter. So next slide, please.

So this is another important step on our journey to full recovery. This gradually allows me to turn focus on a turnaround to long-term value creation. And as you can see, 12% growth. We have encouraged demand in several markets. We're also starting to increase volume in some markets, even though we set earnings before growth.

We have delivered an EBIT of SEK 121 million and a strong cash flow, and the strong EBIT improvement is supported by strong quarter in Ready-to-cook but a still material gap to be closed. We see some pressure on the European market, which has an impact on export and ingredients prices. And although there is still high uncertainty, commodity prices seem to be on track towards normalization.

Then worth to mention is also that we have sold our 51% stake in Rokkedahl Foods. And with that, we get a more focused business with less complexity. It ties up less capital while we still can deliver organic chicken into the Danish market. So overall, a positive outlook with good prognosis in Scandi Standards despite some international and market headwind. Next slide, please.

And this slide presents a strong positive trajectory. And as you can see in the graphs, we have a history of strong growth and stable margins. The sudden inflation broke trend over some quarters, and we are now gradually recovering our margins, so I'm optimistic that we will take further steps towards full recovery over the coming periods. And focus will be to close the remaining gaps. But the successful turnaround allows me to turn our focus towards long-term value creation, and I look forward to presenting our thoughts on this late November in our Capital Market Day. So next slide, please.

And if we look into how inflation impacts, we see that consumer demand is sensitive at current price levels. We see that input costs are leveling off but with really high uncertainty. Our labor negotiations ended in line with markets. And we see some pressure on commodities, which impact ingredients and some of our export prices, but we expect commodity prices to normalize, but we will get back to this later in the presentation. But in the current inflationary environment, chicken is well positioned to peers, and that recently also was supported by increased pork prices. The next slide, please.

And here, you can see our strong basis for future profitable growth. We have strong macro drivers that's supporting our business, and I'm enthusiastic about the long-term opportunities in our industry. You can see in the graphs that we have a very strong history of growth in consumption. And the trends that we see, they are expected to continue, driven by versatility, health trends, sustainability metrics and, not least in this environment, affordability. So if we move into next slide.

And this slide presents Scandi Standard's strong market positions in all our 5 home markets, and each country is highly consolidated. These markets have large entry barriers, and they can individually be regarded as semiclosed markets due to the strong consumer preference for domestic produce. So due to our strong market position, our own supply decisions have a meaningful impact on the market balance, which has helped us in the recovery process from inflation. So if we go into next slide.

And here, we can see the thing that I mentioned before in the presentation. We see a drop of export prices in the quarter, and it's driven by global supply, mainly import pressure from Brazil and Ukraine, and it has put some pressure on the European meat commodity prices. But we also focus on building more solid export business with European and Southeast Asian retail and food service customers to be less exposed to the commodity market, which has and will have a positive impact on our export business. And we're also, as a part of our export, focused on broadening our export permits to the most attractive export markets in order to get more value out of the book. And we see stable export prices into Q3. So if we go to next slide, please.

And this slide just shows the tables, the reconciliation of our segments. We see a positive contribution from all areas compared to Q2 2022, and the category Other includes our Ingredients business and our corporate costs. So next slide, please.

And here, we look into our segments. So in our Ready-to-cook segment, we're on a journey towards full recovery, represent an EBIT of SEK 48 million compared to minus SEK 16 million last year, and it's a strong improvement driven by turnaround measures and recovery in demand in several markets. We also see a strong improvement in our LTI performance, but we are still challenged in our antibiotic use in Ireland, but we're improving quarter-to-quarter, and we have a strong focus on that.

And if we take a stick deeper in our Ready-to-cook business, and as you can see here on the slide, we've been able to increase our sales prices significantly. In spite of massive price increases implemented, our EBIT per kilo is still SEK 0.46 below 2019 level. But at the same time, you can see that our Ingredients business, which is reported under Other is more profitable than earlier, and it's closing some of the gap. Then we can move into the next slide.

And on this slide, we just want to show you some ongoing initiatives that support our improvements in the business. And we have an increased investment in automization in Ireland. We've invested in packaging machines in our plant in Shercock. We're also investing in our hatching business in Sweden. So I've been there [ Ystad ]. We are investing at the moment. We're also an acceleration of breed changeover in Denmark. We have talked about that the latest quarters by a change from slow-growing into conventional birds and, together with our partners, put up a hatchery in Denmark. But most importantly, we're investing in increased bird value and reduce our export reliance with putting in leg deboners in our plant in Shercock in Ireland and also in our plant in Denmark. Then we can move into next slide.

Then we look into Ready-to-cook Denmark, and stepwise improvement is expected. We are in the process of reversing an unsuccessful implementation of slow-growing bird strategy. And we have seen that there's a peak in slow growth in quarter 1 and quarter 4, and we will see an improvement during the quarter, and we are expecting to have the optimal breed mix from year-end 2023. And we also should mention that compared to other countries, Denmark is more exposed to the export market. And to mitigate this, we are in the process of increasing the integration with our Ready-to-eat plant, which also will be made possible by the changeover to a high proportion of conventional bird. Next slide, please.

And we are at Slide 13. And on this slide, you can see the channel development in more detail. And through these details, you can notice the strong increase in retail channel in the quarter, which is driven both by price and volume, and we have been seeing a strong demand growth in some of our markets in the quarter, particularly Ireland and Finland.

Then we move into next slide, Slide 14. And now we go into our other segment, Ready-to-eat. And we see a good quarter. We have an increase of 3% in net sales and an EBIT of SEK 59 million compared to SEK 51 million last year and an EBIT margin of 7.7%. I must mention that it's positively impacted by SEK 11 million in insurance compensation for the fire in Farre last year. But we also see a little bit softer QSR demand after a period of exceptional growth, but in medium and long term, growth is expected to be high.

We also to mention that we have a loss of a breaded contract to Continental Europe. So we will see a sequential drop in volume from Q3 and Q4 2023, but we are confident and gradual but more profitable customer replacement into the Farre factory. And we will use this window of low utilization to prepare for future expansion. And at last, I also want to mention that we have improved our work-related injury score, the LTI score, in our RTE business.

And if we move to the next slide, Slide 15, and take a dig deeper into our Ready-to-eat business. We see a strong uneven demand trend, and it is expected to continue. We have -- over the latest 7 years, have 6x organic growth, and it's typically 2 main type of business. It's breaded processes in Denmark and sales to Northern Europe, and then we have the integrated local businesses in Sweden and Norway. And we also see that our other countries in Ireland and Finland are picking up in the sales as well.

Then we also want to mention that we think that these products are aligned with consumer preferences. It's easy to compare, and it is convenient product, and it is a better return on investment versus Ready-to-cook. So we will continue to invest in this area. And one thing in that is that we are expanding in Norway. So we'll see new capacity now, and we expect it to become effective in the mid-2024.

So then we move into next slide, Slide 16. And here, you can see it in the figures. It's, of course, very encouraging to see that Ready-to-eat is growing in retail. However, the development in foodservice channel is slightly declining due to reasons mentioned in the former slide. Growth in this segment will be a priority for me this coming years. So in short term, we will see a volume drop due to lower sales market outside our home markets, but we're confident that we will replace it with other more profitable orders in the coming year. And Ready-to-eat will be an important tool on developing EBIT per kilo, i.e., increasing the value of our protein.

So with that said, I want to hand over to Julia for more detail in the financials.

[Julia Lagerqvist, executive]

Thank you, Jonas. Then we go on to Page 18. And we come back to the overall P&L. And as you've seen, the quarterly performance showed an improvement versus the previous year, with an EBITDA of SEK 230 million and an EBITDA margin of 6.7%. There were no noncomparable items booked in this quarter nor in Q1 or the entire 2022, and EBIT landed at SEK 121 million in Q2. The finance costs are increasing, with the higher base rates as seen in the previous quarter. This is partly compensated by lower credit margin due to lower leverage. All in all, net income for the period landed at SEK 74 million, far above last year, indicating an earnings per share of SEK 1.11 for the quarter.

Looking at feed conversion ratio or feed efficiency, this is measured as the kilo feed needed to produce 1 kilo live weight, where chicken is one of the lowest levels for animal proteins. In Q2, this was at 1.5 kilo, and it has been at this stable low level in the last year.

Looking at our return measures on Page 19. You see that the return on capital employed is now at 9.3% for the last 12 months, an increase versus the previous low year. But it's also an improvement versus the previous quarter, and we are in a continued positive trend, now close to in line with historic levels. If we look at the annualized return based on the Q2 results, return on capital employed would actually have been 10.6%. At the same time, our equity ratio has improved to 33% from 30% last year. This is the same levels as we saw in quarter 1 and mainly related to retained earnings and exchange differences related to inflation on our foreign operations.

Moving to next page. We have our cash flow review. And EBITDA, as I said, improving with this previous year. We've had also a substantial improvement in working capital, mainly driven by lower inventory. I will come back to this on the next pages. And we kept investments low in the quarter, leading to a strong improvement in operating cash flow. [ Paid ] financing items are increasing, driven by the previously mentioned increased base rates. We also saw some negative effects coming from currency fluctuations. In addition, there has been changes towards net leasing asset values. None of these has a cash impact. But all in all, our net interest-bearing debt at the end of the quarter was slightly below year-end 2022. This including payment of dividend of SEK 75 million.

On the next page, Page 21, we have a look at capital overview. Inventory has increased as in the same period last year. But as mentioned, we are improving versus previous quarter and end of last year. This is a continued important focus area for us, and I will share some more details on the next slide. Payables and receivables both increased versus last year, was mainly driven by cost and price increases. We do, however, have some positive net timing effect in the quarter, improving our working capital. This all leads us to working capital close to 0 in the quarter and, hence, working capital-to-sales ratio of 0%. Our target level for working capital to sales, excluding financing items, remains to be around 6%, and we are currently at this level.

Looking then at our inventory levels per quarter on Page 22. It has, as I said, decreased in Q2. It is both in value and volume through targeted actions, and we are now below the year-end '22 levels. We do have some positive seasonality effects driven by higher sales in the barbecue season, but at the same time, it was a negative ForEx effect driven by the weak SEK. Inventory, of course, remains a clear focus area going forward. We always try to use flexibility in bird intake to balance the supply and demand. We work on optimizing the sales and operations planning to make sure we produce the right product, and we use the export channel for surplus sales to not interfere unnecessarily with domestic pricing.

If you come to Page 23, we have in our cash flow guidance. And the CapEx for '23 is still estimated to be around SEK 400 million versus SEK 311 million in 2022. Priorities for us are the RTE expansion in Norway and then upgrade in Denmark and, in addition, investing in RTC efficiency in Finland and in Ireland. We also have our ERP implementation on top of ongoing maintenance. The paid financing costs is still estimated to be around 6% to 7%, and the blended tax rate is expected to be around 21%. In the quarter, we paid dividend of SEK 1.15 per share, which is closely in line with the policy of 60% of net earnings over time.

Then we look at our sustainability KPIs on Page 24. It's a fairly busy slide. In the table to the left, you see our year-to-date performance compared to the first half of last year and the targets. And in the graphs, you can see the performance per quarter. LTI, lost time injuries, continued to improve on a year-by-year basis. Year-to-date, we're up 17%. Improving health and safety practices at the sites continue to be a clear priority for the total organization.

Use of antibiotics is mainly driven by the Irish performance as antibiotics use in the Nordic countries continues to be very close to 0. We are improving versus last year, even if we have some way to go to reach our targets. We note that the result in Q2 was slightly higher than Q1. This is partly driven by increasing Irish production, making Ireland a larger share of total production, hence driving up the average.

The CO2 emissions are improving versus Q1. But here, we also have continued work to do to deliver on our targets.

We are glad to report that the animal -- the key animal welfare indicator, the foot pad score, is improving, and also here, the focused work's ongoing in our Irish operations. Important to remember here that there is a seasonality to this KPI and that Q1 usually is the worst performing quarter due to weather.

We have also had 0 critical complaints to date, which is a very good step towards the ambitious target of zero complaints for the full year 2023. And the feed efficiency or feed conversion is, as when we talk, at a very stable level, targeted to improve slightly in '23.

And with that, I would like to hand back over to Jonas.

[Jonas Tunestål, executive]

Thank you. And if we move into next slide, Slide 25. And here, you can see this presents our 4 strategic pillars, which is important for building the fundament of Scandi Standard and taking us to the next level. And we have talked about this in the formal presentations. It's about building a winning culture. It's about ramping up our efficiency end-to-end, and it is about increase the value of our protein. Then at last and an important thing for us is a future-proof company. And one example of that, how we work with a future-proof company is our work with Science Based Targets. And if we move into next slide, Slide 26.

So here, sustainable food production is a crucial factor in the fight against the climate crisis. And as a market leader, we want to increase transparency and take a clear leadership in the industry's ongoing transition. So we were happy to announce that in Q2, Scandi Standard's climate targets were approved by Science Based Targets initiatives after a lengthy process. So the official target includes both emissions in our own operations and in our own value chain and shows that we take this seriously and that climate strategy is an integrated part of our corporate strategy.

So we are one of the few Swedish food producers who have obtained a validation of the targets, and the targets are ambitious, aiming at having -- halving greenhouse gas emissions by 2030, which is in line with both 1.5-degree target in the Paris Agreement. And we are now working on a detailed plan that will be developed during H2 2023.

And then I'm also happy to announce that in August 2023, Morningstar Sustainalytics published an updated ESG rating and ranked Scandi Standard as top 10 out of 360 companies in the packaged food industry. So we are working hard with this, and I'm really glad to present these 2 things.

And if we move into next slide, Slide 27. This shows our 6 areas where we see large potential. And the first one, match domestic supply and demand, it is really important for us to actually take out the most value of the bird in every -- each home market. And now when we have talked about in the former slides with some pressure on the European meat commodity prices, it's even more important to have this agile S&OP process. And so we are really able to increase the value of the book.

And then we have the Ready-to-eat potential. We also talked about that. Even though we see some changes quarter-to-quarter, we see a long-term trend, and we will invest in Ready-to-eat business that has a growth over time. And I think that the thing that we've done in Norway is a good example of developing that area.

And then, of course, quality and production processes, really important for our efficiency and actually deliver the product to our customers that they expect in the right quality. And the last one, the export business, it's also important for us to have the right export customer to get deep, good relations with our retail and foodservice client throughout Europe. So we're not selling a lot of products in the European commodity market, and that is also an important thing to increase the value of the book.

So if we move into the last slide, Slide 28, to summarize it and make an outlook going forward. We see another quarter of improvement. We see a strong demand growth and increase in profitability in several of our markets. And our primary focus is still on regaining EBIT per kilo in Ready-to-cook, and there's still a gap to be closed. We see reduced input costs and increased efficiency. We are expecting further sequential improvement in Ready-to-cook Denmark, even though they are more exposed to the export market.

We see some macro headwinds ahead, temporarily reduced activity level in Ready-to-eat and reduced pricing in export and ingredients markets. But the underlying improvement is expected to compensate for the headwind. So I'm really going to say that I'm gradually shifting from a turnaround focus to a more long-term value creation focus in Scandi Standard, and our ambition is to significantly increase EBIT per kilo over the coming years.

So with that said, we want to open up for questions.

[Operator]

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

[Daniel Schmidt, analyst]

A couple of questions from me then. Starting off with maybe some of the negatives, there was, of course, a lot of positives as well. But you mentioned softening demand in QSR business. It sounded like that softened a bit during the quarter. So I just wanted to ask if that was sort of the development of the trend going into the second half of this year. And is that a function of sort of worsening economic conditions when you look at the consumer in sort of the HORECA business? Or how do you explain it?

[Jonas Tunestål, executive]

I would say we see it certainly in demand. But if you look at the long-term growth, it's increasing, and then it comes from -- it reached on top, and then it's softening a little bit, and then the growth come back again. And I think that it's more about in some segments that are not growing. And in other segments, I actually think that we will see a good growth coming ahead. But the thing that's happening in our RTE business is the one that we explained about the customer contract that ended and that will have an effect on the volume in Q3 and Q4, and then we are changing the mix into more profitable customers, but that will take a couple of quarters and during 2024 to make that change.

So they have seen exceptional growth, and we see some declining as we saw a couple of years ago, but we see the long-term trend is growing. And then we have the change in customer mix.

[Daniel Schmidt, analyst]

But the loss of that contract is a separate thing, right? Just so we don't sort of mix pears and apples here, what you're saying in terms of QSR is more a general reflection on demand. We're coming from sort of high levels, and you're seeing some softening. And then on top of that, you have this loss of the contract. Is that correct?

[Jonas Tunestål, executive]

Exactly. And if you look back to the slide that we presented in Slide #15, you can see the growth, and then it takes a little bit dip, and then the growth come back again, and that is the same pattern that we will see here.

[Daniel Schmidt, analyst]

Okay. All right. And this loss to contract, is that sort of meaningful in terms of top line and EBIT in Q3 and Q4? And how -- you mentioned that you have sort of good hope to be replacing that with other new contracts, but I assume that sounded like that could take a couple of quarters. Sort of could you give any sort of -- shed some light on what impact it will have for the second half of this year?

[Jonas Tunestål, executive]

Yes. Yes. In this RTE business is separate. It will have an impact on top line and EBIT, but we are really sure that in Scandi Standard total, we have good tractions in RTC that will offset that change as we saw before. But if we look into the RTE segment in long term, we are changing out from this customer to other customers that we expect them to be more profitable in the long term, but it will take some quarters and in 2024 to make the volume replacement.

[Daniel Schmidt, analyst]

Okay. But it sounds like you have basically other new contracts lined up, but it will take some time to get them going. Is that sort of how we should read it?

[Jonas Tunestål, executive]

Yes, we will gradually replace it. Some of them are already in place, and other ones is contracts that we are looking after. And we see this underlying long-term strong demand. So we are pretty confident that we are changing. So we have a pretty clear strategy of how to replace it.

[Daniel Schmidt, analyst]

Yes. Okay. Moving on maybe to RTC in Denmark, which we've talked a lot about, and clearly a good improvement sequentially and a slight improvement year-over-year in terms of losses. And you sound quite confident that we should continue to progress in the right direction and reach some sort of balance when it comes to the assortment towards the end of this year. Is that equal to reaching also balance when it comes to breakeven?

[Jonas Tunestål, executive]

We are not guiding on results. What we have said is that we will have the right balance in birds in the year-end 2023. And of course, there's a lot of things that we're working with continuously to chase customer contracts and change how we're having quality in [indiscernible] and how we use our production process and the thing that I talked about, the investment of deboning more and more and integrate together with our RTE business in Farre.

So there are a lot of things, actions that are taken, but we cannot guide on -- we will not guide on the results when we bring our breakeven. But we will have the right sort of mix at the end of 2023, and we are -- we'll see stepwise improvement, and that is expected. Even though I must say that, as you know historically, there are big -- high exposure to export market in Denmark compared to the other countries. And that is why we are focusing on integrating our business more and more with our Farre business, our Ready-to-eat business.

[Daniel Schmidt, analyst]

Yes. All right. But I assume that sort of selling your stake in Rokkedahl is making a bit more sort of independent in getting your sort of your mix to where it needs to be on the Ready-to-cook side in Denmark. Is that a sort of a correct observation?

[Jonas Tunestål, executive]

Yes. We sell of -- mainly 3 reasons. We want to reduce the complexity and be more focused on where we are. We, of course, free up capital. We're not owning this Rokkedahl stake, but we're still able to sell organic chicken in the Danish market. And I think that is a really good mix for us because then we can have the whole value ladder in the Danish retail and to the export but without tying up capital and without taking [ capital ] responsibility. But -- so I think it's one important step of our journey to be more streamlined, but it's not directly linked to the Danish main core business.

[Daniel Schmidt, analyst]

No. And I know that this deal was struck in middle of the summer, and you will have sort of a neutral effect on P&L but positive at [ SEK 170 million ] on net debt. When is that money cash flow coming in? And how does that sort of [ SEK 170 million ] stack up against sort of what this is booked at in terms of the stake?

[Jonas Tunestål, executive]

Yes. We will get back to that exact numbers in our Q3 report. And then we only talk about the thing that were presented in our press release, and there, we have stated this [ SEK 170 million ] and neutral P&L effect. But we will get back to the exact numbers and the exact effect in Q3 because it happened in Q3.

[Daniel Schmidt, analyst]

Okay. Okay. And then maybe just moving on to Ingredients, where you're also saying that market prices dropped towards the end of the quarter, if I read it correctly. Has that continued into Q3? And what is the pace of change here?

[Jonas Tunestål, executive]

We have said that we expect it to normalize to the level that has been in 2021 in the Ingredients part. We've seen some -- and as I mentioned in the commodity market, some pressure due to import and due to low energy prices, and Ingredients are more direct linked to energy. And there have been some change. So we have seen pushes, and we are expecting it to get back to a normalized level like it was in 2021, but it's also a broad segment. So it differs from product to product, what effect and the links are.

[Operator]

[Operator Instructions] So far, there are no more questions on the phone.

[Jonas Tunestål, executive]

Then...

[Operator]

Sorry to interrupt, sir. We have a follow-up question from Daniel Schmidt, if it's okay for you.

[Jonas Tunestål, executive]

Yes.

[Operator]

Okay. Please go ahead, sir.

[Daniel Schmidt, analyst]

Well, since there's no other questions, so I might have 1 or 2 more then, Jonas. So of course, you are, at the same time, seeing stabilizing input prices and even declining input prices. And as you mentioned, maybe there is a negative effect on Ingredients when it comes to energy, as you alluded to, but sort of the overall impact must be quite positive. Or am I missing anything?

[Jonas Tunestål, executive]

No, the overall -- do you mean specific in terms of energy or in terms of Scandi Standard [indiscernible]?

[Daniel Schmidt, analyst]

In general, if you look at feed prices, if you look at energy prices, packaging, they're all sort of factors and maybe sideways, but the others are moving in the right direction. And you've been suffering quite a lot from very elevated energy prices in the second half of last year and so on. Now it's the opposite. So of course, that will be something positive. Or is there any hedges that are sort of prolonging the negatives?

[Jonas Tunestål, executive]

Yes, we are hedging in different variances compared to what type of impact it has on us. So of course, those hedges, obviously, you can't look at the spot prices and the one-to-one then, and we will always do that. But as you mentioned, and as I said in the beginning in the presentation, we see some upside, both in demand, I know it's picking up, and we see some commodities decreasing. So we are -- we know that those type of improvement will mitigate the little bit slower demand we see in export prices and ingredients and so on.

[Operator]

Ladies and gentlemen, that was the last question. I would now turn the conference back over to the management for closing comments.

[Jonas Tunestål, executive]

Thank you very much, and thank you, everyone that come in, and have a nice day. Thank you. Bye.