Scandi Standard AB (publ)

STO:SCST

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Jonas Tunestål, executive]

So let's start the presentation. And good morning, everyone, and welcome to this presentation on Scandi Standards results for Q2 2024. My name is Jonas Tunestal, and I'm the CEO and Managing Director of Scandi Standards. With me I have Fredrik Sylwan, our CFO and I'm pleased to have him by my side today. I'm also glad to report a strong volume and profit growth in the quarter.

Next slide, please. We see a strong demand at slightly lower prices. We have increased volumes with 3% in the quarter. We have increased EBIT with 5% to SEK 127 million compared to SEK 121 million last year. And we have also improved the margin from 3.5% to 3.8% in the quarter. The improvement was driven by a strong progress in Ready-to-cook. We're also seeing improved sequential performance in Ready-to-eat. And in the Ingredients business, we have a continued downwards normalization in the rendering prices. We have a strong balance sheet and a positive operating cash flow. Net cash flow is however impacted by the acquisition of Jaeren and the dividend payouts. And the second and final part of the dividend will be paid in SEK 1.15 per share and will be paid in September.

Next slide, please. And this slide displays the financial history of Scandi Standards with strong organic growth and stable margins only broken by the disruption of COVID-19 and the inflation. And we are proud to have carried out the successful turnaround process and recovered our earnings after these disruptions. And we are now well positioned to deliver on our financial targets to continue the strong growth and increased EBIT margin that we have set to above 6% by 2027.

Next slide, please. And here we can see stable feed prices. So after a long period of increase in feed prices, we now see a normalized market. There are still uncertainties and we need to be prepared for further volatility. Our model have most of the input costs linked to our top line. That's also why we can see a correction in our top line when the feed prices fall back. But there are also short production cycle compared to other proteins and that's enabled us to be more agile in our supply chain. And when we look at the packaging side, we see that both packaging and energy, they are at more stable level and we're hedging the majority part of our electricity exposure.

So, moving to the next slide, please. And here we can see that price has always been important for consumers and the focus has increased even more in the current environment of high food prices. Chicken is affordable in all segments from high-end to low-end segments and fillets is our high-end cuts and that is even competitive versus the low-end segments. And this gives us further opportunities to drive long-term volume -- value creation. And we see future opportunities to drive more value out of the chicken due to its affordability.

So next slide, please. And this slide reminded on our strong market position in all our 5 whole markets and the countries are highly consolidated. These markets have large hurdles for new entrants. They can individually be regarded as semi-closed markets due to the strong consumer preference for domestic produce. And due to our strong market position, our own supply decisions have a meaningful impact on the market balance which has helped us in the recovery process from inflation.

So next slide, please. And on this slide you can see we're expecting strong growth in consumption. We have had 44% growth in poultry since 2010 and Rabobank is expecting 13% growth until 2030.

And next slide, please. And here we explain in detail during the Capital Market Day the driver for growth, and it is these 3 areas. And it's important for us because this is the basis for growth in poultry and it is that it's responsible, safe and nutritious, it's convenient, versatile and tasteful, and it is affordable because it's sustainable.

So moving to next slide, please. And this table shows the reconciliation of our segments. We see a strong positive contribution in RTC, also see a decline in RTE and Others, but that is as expected and it is compared to Q2 2023. And we want to remind you that the category Other includes Ingredients business and our corporate costs. So Other is Ingredients and corporate cost together.

So next slide, please. And then we look into our RTC segment. We have an increase in net sales of 2% and a volume growth of 3%. And the difference is driven by lower input costs and change the breed mix in Denmark and we present an EBIT of SEK 98 million compared to SEK 48 million last year. It is a strong improvement driven by turnaround measures and decrease in demand in several markets. We also see improvement in our animal welfare metrics and that is mainly driven by Ireland and mainly improved foot pad scores and the lower antibiotic use. We see negative development in personal injuries in the quarter and it's solely driven by ammonia leak incident in Denmark. And thankful to our routines that it worked out well and nobody was severely injured.

So moving to next slide, please. And here we see a solid recovery of Ready-to-cook with an EBIT per kilo SEK 1.41 compared to SEK 0.72 per kilo last year. And net sales per kilo is slightly down in the quarter due to the link in the input costs that we have explained before. And lower input costs converts into more attractive consumer prices and we see volume growth of 3% in the quarter. Sweden is still operating at 85% of historic volume and it's pending on improved demand. And -- but I'm pleased to see strong improvement. I'm also confident that our ability to extract additional potential which is required to reach our financial targets.

So next slide, please. Our realized export prices, they were flat in Q2 compared to same period last year. We are focused on building more solid export business with strategic international retail and food service customers. And the aim is to be less exposed to the commodity markets, which have and will have a positive impact on our export business. And this is an ongoing work and continuous work that we work on every day to make a more solid export business. And I think that we are working out well and I think that we are getting more and more control and focus on our export business and actually taking more into strategic customers and we're really glad for that.

So let's move into the next slide, please. And on this slide, you can see the channel development more in detail. And through this detail, you can notice the increase in most channels in the quarter which is mainly driven by volumes. Retail is impacted by the change of breed mix in Denmark and that is due to the change in breed mix but also due to the mix in sales in Denmark. And we have been seeing a strong demand growth in several of our markets in the quarter.

Next slide, please. And then when we move into Ready-to-eat, we are still impacted by lower plant utilization and net sales is down 11%, and we present an EBIT of SEK 38 million compared to SEK 59 million last year, and that is due to the loss of contracts in Central Europe. But it's also -- Q2 2023 is positively impacted by an insurance settlement of SEK 11 million. So if we compare to last quarter, we see a strong improvement though versus Q1 and that improvement is SEK 13 million. So we've said that we're going to bottom out in Q4 and build from there. And I think that there are improvements from every quarter since then. We see adverse development in lost time injuries though corrective action is taken to prevent recurrence and continuous work to ensure the preventive measures.

So let's move into next slide. And on this slide, you can see that we continue to rebuild our RPE orderbook, after the loss of the breaded contract. The high volume and low margin business phased out and the volume in EBIT has bottomed out in Q4 2023 and the lost business have made room for new opportunities with more long-term diversified portfolio. We have a good traction in replacing lost business. Retail sales is the main contributor where we start with seeing a strong but uneven demand and we expect continuous growth over time, and growth in this segment comes in sequences, and we have a lot of potential in the customer pipeline. And we are using this period of low utilization to upgrade the maintenance to meet the highest standard and prepare for future expansion. And just to mention again, Ready-to-eat journey is a cornerstone in our strategy to reach our financial targets and we expect gradual EBIT improvement quarter by quarter.

Moving to next slide. And here you can see it in figures. It's of course very encouraging to see continuous growth in retail. Ready-to-eat, however, the development in Foodservice channel is declining due to the regions mentioned in the former slide. And growth in this segment will be a priority for me in the coming years. We are confident that we'll replace the lost volumes with other more profitable volumes in the coming year and we've already slowly started to fill up with new orders and it will continue in the coming years.

Next slide, please. So I'm not very concerned about recovering the recent lost volumes in the coming periods. We have seen historically strong but uneven demand, and we expect continuous growth over time. And there are 2 main types of business, the international breaded business that we see in our plant in Farre, and then we have the integrated local business in Sweden, Norway and now also Finland since a couple of quarters. And our Ready-to-eat business yields a significantly higher return on capital employed compared to Ready-to-cook. And I also want to highlight the strong organic growth in this segment and you can see that includes a 40% growth in 2022.

So, with that, I hand over to Fredrik for more detail in the financials.

[Fredrik Sylwan, executive]

Great. Many thanks, Jonas. Good morning, everyone. As Jonas mentioned, the second quarter was strong, actually our strongest second quarter ever with improved profitability and strengthened margin. Sales was lower than previous year which was expected and the main drivers are the RTE contract that was phased out until the third quarter last year. Ingredients had very high prices last year which are now being normalized and the lower input costs that benefit our consumers, as Jonas also mentioned. This was partly offset by the strong Ready-to-cook performance.

EBIT increased 5% to SEK 127 million and the margin strengthened by more than 20 basis points to 3.8%. If removing the positive SEK 11 million one-timer last year, the EBIT was up 15%. Our finance costs have increased compared to previous year and the increase is mainly attributed to negative FX effect and slightly higher other financial costs. Interest rates are up but fully offset via lower net interest-bearing debt.

Tax expenses are also up, driven by Ireland and Sweden. So net income is down 3% to SEK 71 million in the quarter. But looking at the first half of the year, we're up 20%. Our feed efficiency remains stable and at a strong level. And as a reminder, feed efficiency is measured as kilo feed needed for 1 kilo live weight, where chicken has one of the lowest levels of animal proteins.

Employee safety is a key area and we had an ammonia leakage in Denmark in the quarter. 14 persons were taken to the hospital and luckily no one was severely injured. This incident in itself had a material negative impact on LTI. LTI was low during the quarter if excluding the ammonia incident, and we're running ongoing initiatives to keep accidents to a minimum.

Next slide, please. Our return on capital employed and return on equity continued a positive trend and we have significantly improved versus last year. And we're now back to historic levels, and the main drivers are increased profitability and more equity. And also at the same time, our equity ratio has improved.

Next slide, please. Cash flow was strong in the quarter including the increased CapEx to fuel higher efficiency and automation. We also acquired a cutting and packaging facility in Jaeren in the beginning of the quarter and that was previously leased. And during the quarter, we also paid half of the full year dividend and the remaining 50% will be paid in September. Overall, our net interest-bearing debt increased with close to SEK 90 million in the quarter, and leverage is now at 2.0 which is significantly lower than previous year and our target of 2.5. Our financials are stable which is giving us improved strategic flexibility going forward.

Next slide, please. Our working capital is negative SEK 72 million in the quarter and inventory is further decreased and accounts receivable is slightly reduced versus the first quarter, but it's up versus year end driven by strong sales. Accounts payable together with Other are in line with the year end. As previously announced, target level for working capital to sales adjusted for financing items remain around 6% and we're currently slightly below target. Focus going forward is to closely monitor and optimize our working capital.

Next slide, please. As you can see on this slide, our inventory development, it's fully under control, but of course it's a clear focus area and we are working to optimize the sales and operations planning in order to drive inventory levels to an optimum level. Linked to this, we do have the export channel for surplus sales, not to interfere with the domestic pricing.

Next slide, please. Capital expenditures for this year is estimated to be around SEK 500 million, which is a substantial increase versus last year's level and they aim to support the journey to reach the recently revised target. Example of priorities are the Ready-to-eat expansion in Norway to meet demand with an approximately 30% increase in capacity, increase the deboning capacity in Ireland and Denmark as well as Finland to climb even further in the value ladder, also to invest in product differentiation in Ireland as well as an increase in efficiency, for example, value added, new packaging line, et cetera. And we also had our ERP implementation where we successfully went live with the first country now during the second quarter.

And as said in the beginning of the quarter, we also successfully concluded the acquisition of leased production and packaging facility located in Norway. The asset was procured with the dual objective of safeguarding critical strategic resource and enhancing our EBIT margin. The transaction was executed at the valuation of NOK 188 million. Interest rate on bank financing is approximately 5.5% per year. But if we add on the IFRS interest cost components of leasing, factoring and vendor financing, paid financing cost is estimated to be approximately 8% of the net interest-bearing debt.

Next slide, please, and back to you, Jonas.

[Jonas Tunestål, executive]

Thank you, Fredrik. Next, I would like to talk about one of our cornerstones in license for us to operate. There are 3 key areas when it comes to creating trust for what we do. And that is responsible animal welfare and it is safety for consumers and employees and it is nutritious products. Those 3 things are super important to actually assess what Scandi Standards is and it is a license to play and our license to operate.

So if we move into next slide, please. And here you can see the exceptional improvement in antibiotics results in Q2. So I'm proud of the progress that has been made during the year, including meaningful improvement of lost time injury frequency rate, antibiotic use and mainly animal welfare indicator, the foot pad score. But we had, as Fredrik mentioned and I mentioned before, this ammonia leakage in Denmark that makes a bad result in Q2. But the long term trend in lost time injury is very positive.

And during 2024, we will continue to refining our roadmap towards 2030, including development of the climate transition plan as well as implementing the EU CSRD, Corporate Sustainability Reporting Directive. And the implementation of CSRD will further strengthen the integration of sustainability in our strategy. And that includes the whole value chain from operations and facilitates comparability and further transparency. And that is an important thing with the CSRD that it includes the whole value chain and we create transparency, so we can measure it from form to form.

Next slide, please. And as a reminder on this slide, you can see that our structured efforts is resulting in recognition in form of improved ESG ratings. And we have an A minus in the CDP rating, an A rating that only few companies within the food industry have obtained. So really proud of that. We also score high on other ESG ratings. For example in Sustainalytics, where we are top 10 out of 360 companies in the packaged food globally. So we are focusing on this and we'll work in structure to actually improve our ESG ratings and be in forefront and on top on the sustainability agenda.

Moving to next slide, please. And for the ones of you that have followed us for a while, had seen these pillars before. And this is mainly what it's all about for us. It is about increase the value of our protein and what we are talking about climbing the value lateral to take out the most value out of our protein using all parts. That's important for us in terms of our margin increase, it's important for us to our sustainability KPIs, and it's important for us in our whole DNA how we work. And this is super important part of our roadmap to reach our financial targets.

Then we have ramped up our efficiency and that pillar, it is about get the most efficiency out of the value chain. It is a long complex value chain. But if we have this transparency and can be really expert on optimizing the whole value chain and make it as efficient as possible, this will create profitability, higher margin, but it will also make better KPIs when we look at sustainability and when we look at the understanding of how to drive the value chain going forward and future [ proof ].

Then in sustainability that would be an integrated part of our whole business. From the CapEx decisions that we take, we always measure the sustainability effect too that actually when we're talking to customers, it's an integrated part that it's super important for us and a license to play, but it's also something that we want to focus on for our future development. And then we have the better together. And better together means that we are strong in our local markets with strong P&L focus in every market, but we're better together as one Scandi Standards and use the synergies that we have all across different countries.

So if we move into next slide, please. And here at the right hand side, you can see our 2027 targets. And we want to create a Scandi Standards to be proud of, trusted by everyone and what people can develop. And with this comes earnings, and with earnings, you earn your right to grow. So we're expecting strong growth over the coming years. We set target for 2027 of 5% to 7% net sales growth. In short term, however, our top line remain impacted by the inflation reaction, which is stimulating demand. But we also target an EBIT margin in excess of 6% by 2027. And internally we're measuring the progress of EBIT per kilo and that is supporting that we want to get above SEK 3 per kilo. The measure will also receive more attention in our external communication going forward.

Next slide, please. And in order to reach our target for our EBIT margin, we need to increase our EBIT per kilo. And as explained in the former slide, you can see our EBIT per kilo at the moment and it's SEK 1.83, and we're aiming to get above SEK 3 per kilo. You see a positive trend here, but it's a long way to go to SEK 3 per kilo. But we are confident that we will achieve it and we have building blocks to actually be able to achieve it through 2027. So really confident that we're on a good journey towards SEK 3 per kilo. And that is once again climb the value ladder, it's about increase the value of our proceeds, it is about large efficiency potential in the value chain and to actually focus on better together.

And if we move into next slide, please. And to achieve our goals, we are building a robust vehicle to serve our home markets and beyond. [Technical Difficulty] SEK 2 billion investment program in the period. And the investment program aims to support. It is the Ready-to-cook investment to increase 2% throughput in Ready-to-cook and is supporting a ramp up of our Ingredients business, what we internally call Ingredients 2.0. And it's preparing for significant growth in Ready-to-eat and that we talked about in the former slide to rebuild our orderbook and then we're going to be on that. We also have earmarked investment of more than SEK 200 million for meeting our sustainability goals. And as you all know, sustainability and efficiency are linked together. It's only different measures in how we use the resources in a more efficient way.

And to summarize it all, we see another quarter of solid improvements. We see encouraging demand, we see volume and margin increase, and all these are supported by measures and investments. We also see clear progression towards long-term targets, we expected continued profitable growth in Ready-to-cook, we see strong focus on disciplined replacement in Ready-to-eat, we see a large potential in climbing the value ladder, and we see clear efficiency potential in the value chain. And at last we have this SEK 1.15 per share dividend to be paid in quarter 3.

So with that said, I want to thank you all for listening in and open up for Q&A.

[Operator]

Thank you. [Operator Instructions] We have a question from Simon Brun of ABG Sundal Collier.

[Simon Skaland Brun, analyst]

Yes. Guys, well done. Good quarter. I'll start off with a few questions on Ready-to-cook. In Denmark you've indicated previous quarters that you're basically break even. Now, is that still the case for Q2 or any changes there? And to follow up, what sort of -- how can you think of the next step up in terms of margin improvement towards a target of low single-digit EBIT margin in RTC Denmark? That's the first question.

[Jonas Tunestål, executive]

When it comes to Denmark, we're not reporting on single countries, but we are in the process. We got up to breakeven and we're working to take the next step and improve it further. We have a strong idea of how to increase the margin in Denmark and I think that it's working as planned. But we have started the journey and we are continuing that journey. And that is, of course, about optimizing our export business, it's about optimizing our local retail business, but it's also about integrating our business even more with our plant in Farre. And I think that we're taking steps every quarter and I'm confident that, that there are a lot of -- we see a lot of steps in the future as well to be taken. And I think that that's a good progress.

[Simon Skaland Brun, analyst]

And so just to understand sort of because -- as I will come back to the very strong recovery, at least sequentially in RTE, but that hasn't done anything with sort of like margin or break even results in Denmark for Q2. Is that right? So the development in RTE still hasn't improved the margin in Denmark RTC, if that's correct.

[Jonas Tunestål, executive]

Actually, that's correct. We see further potential in increasing the margin when we can link Ready-to-eat in Denmark and Ready-to-cook Denmark even stronger and that we're just in the beginning. If that was the answer to your question.

[Simon Skaland Brun, analyst]

Yes. And on Sweden, some minor signs of improvements in Ready-to-cook. But you still note that low utilization hampers results somewhat. Are there any signs of relief in terms of demand in Sweden going forward do you think?

[Jonas Tunestål, executive]

I think that we see in all our markets see a good demand and that the demand is coming back and encouraging demand in some markets, some other markets have been a little bit slower, but we see a positive trend and a strong momentum for chicken, even in Sweden, but we have, as we have presented, 85% utilization and we increase that slowly when we see that there are room for that. But we see improvement in Sweden as well, yes.

[Simon Skaland Brun, analyst]

Great. Just turning quickly to Ready-to-eat, very impressive sequential growth, as you said. So well done to the team on that. But should we interpret the sequential growth from Q1 that you sort of have exploited the low hanging fruits now and that the improvements going forward will not be as severe or how should we think of that?

[Jonas Tunestål, executive]

I think that we should think of it, it comes sequential. And I think that we have a good improvement from during the last quarter and we will see the sequential from the growth, but we will see a continuous growth. And now we make a -- did a big jump from quarter 1 to quarter 2. And of course we cannot expect that in every quarter.

[Simon Skaland Brun, analyst]

Got it. And just a final question, just briefly on the process in Ready-to-eat from here. Is it just about sort of continuous dialogue with customers, increasing size, complexity of orders? Or are there like some tenders with large clients, customers that you are working with that could sort of make a material impact on the volumes ahead?

[Jonas Tunestål, executive]

Yes, we're working on both the Ready-to-eat strategy and when it comes to production in Farre, it's about -- of course there can be smaller tenders and there are. And we're telling you, we have a growth out of that, but we want to have low complexity. And those minor tenders or the growth that we have in retail is mainly due to -- that we want to have the same recipes and so on. And then, of course, our bigger tenders, and we are into a couple of them as well. But the difference between Ready-to-cook business and Ready-to-eat business is that there are longer lead times in Ready-to-eat when it comes to taking on bigger customers and bigger orders compared to Ready-to-cook, where it's more fresh flow that you can adjust quicker. So we are working with big tenders as well, but that's a process of doing that that's not close from one day to another.

[Simon Skaland Brun, analyst]

Okay. That's all for me. So have a good holiday when you get there, guys. Well deserved.

[Jonas Tunestål, executive]

Thank you very much. Thank you for the question.

[Operator]

[Operator Instructions] We have a question from Florent Thy-Tine from TPI Capital.

[Florent Thy-Tine, analyst]

Hi, gentlemen. Just 1 question [ myself ] a follow-up on Denmark. Can we have an idea of the performance in Foodservice excluding the loss of their contract? First question. And the second question, regarding pricing effect in H2 what can we expect and what do you expect regarding raw material prices?

[Fredrik Sylwan, executive]

The second question about raw material prices and what we see, I think that we see more stabilized prices. We see an encouraging underlying demand in Europe, while we see prices of fresh chicken being strong and improving, and we see a stable on the raw material. What we define as raw material prices, as the feed prices. The raw material prices in terms of fresh meat into Ready-to-eat business, I think that we will see increasing prices, but it's hard to predict. It's a volatile market and it's changing -- changes.

The first question I didn't get, can you repeat that, please?

[Florent Thy-Tine, analyst]

Yes. It was regarding Denmark in Foodservice. Can we have an idea of the performance of the foodservice activity, excluding the loss of their contract?

[Fredrik Sylwan, executive]

Yes, I think that we have seen a little bit -- there's been historically strong growth in the QSR segment of the foodservice, that's the quick service restaurant segment. I think that we have seen more stabilized growth there, but we have seen a strong underlying growth in the other foodservice segments. But we're expecting foodservice to grow in the future. So we see strong growth in both foodservice and retail going forward. And that is mainly supported by transition from red meat into white meat. But we also see a surprisingly strong foodservice market in general, even though there has been an inflationary environment and high cost all around. So we are expecting a growth in the future in foodservice.

[Operator]

[Operator Instructions] It appears we have no further questions, so I'd like to hand back to the management team to conclude.

[Jonas Tunestål, executive]

So thank you very much for listening in, and thank you very much for the questions. And I really want to wish you all a good summer and nice weather. And hopefully barbecue a lot of chicken. So thank you very much for listening in.

[Fredrik Sylwan, executive]

Thank you.