Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, everyone, and welcome to the Scandi Standard Q3 2018 Results Call. My name is Seth, and I'll be coordinating the call for you today.I will now hand you over to Leif Bergvall Hansen to begin.

[Leif Bergvall Hansen, CEO, President & MD]

Yes, good morning, everybody. If you start on Page 1, just to -- seeing the picture of a very solid growth story where the company has, over the last 4 years, has grown 7% to 8% per year, so that continued into this quarter and also have shown very stable EBITDA margins of 7% to 8% over the same kind of period.Going more into the details of the quarter, going on to Page 3. We saw 9% growth in revenue pro forma in the quarter, while all geographical segments contributed. In local currency, the growth was 3%. The adjusted EBIT came in at 4.4% or SEK 100 million, which is to be compared with SEK 94 million in the quarter last year and 4.5%. We saw improvement coming clearly through in Norway, in Ireland and in Finland. And we had a quarter with some margin pressure in Sweden and also in Denmark.In the quarter, net interest bank debt increased with SEK 54 million, and that was to be explained by the positive net cash flow before consolidation effect from the Rokkedahl merger. We'll talk a little bit about -- a little bit more about this merger later on in the presentation. EPS went up with 33%, driven in the main by the acquisition of Manor Farm. It's a quarter where we have seen full recovery of demand in Sweden during the quarter this quarter.Going on to Page 4. The quarter where we have seen some raw material inflation that we have managed to cover through price increases and some mix improvements on top, otherwise a relatively stable picture.When you look across the countries, we are seeing Sweden being impacted by some stock clearance. Denmark, impacted by some investments and some costs in establishing the new brand. Norway, best-in-class margins and clearly an uplift from last year. Ireland, also a good quarter with an uplift from last year. And Finland, another step towards breakeven and had quite a significant uplift from the result of last year.Going on to Page 5, giving you a picture of product categories and sales channels. On a pro forma basis, we're seeing the quarterly growth being spread quite evenly across all the main product categories, with Ready-to-eat segment, that has been doubled over the last 4 years, representing now 18% of revenue. And that's the area where this investment that we have conducted in Denmark is to give up additional capacity to continue that growth in the future.The revenue development within Frozen have been impacted by some inventory clearance in Sweden, and all in all also impacted by the -- the sales growth, generally, impacted by the weakened Swedish krona. In terms of the sales channels, we have seen strong growth in both Retail and in Food Service. And as mentioned, all countries contributed to the growth.Going a little bit deeper into Sweden, on Page 6, a quarter where we have seen clearly the market being recovered, the demand being back, both in Frozen and in Chilled. But is -- but where we -- our performance were impacted by some stock clearance, Frozen stocking that has been built during the course of the period where we have had stock demand in the market. We delivered a 5% revenue increase in the quarter, which is more or less in line with retail market. We have seen a strong improvement in demand for fresh products and also a solid growth in the Ready-to-eat category.Margins -- EBIT margins came in at 5.1%, which can be compared with 6.3% in the same quarter last year and are clearly up from 4.3% in Q2 of this year. Stock clearance is the main factor that I have been tracking down margins versus last year in the quarter, and there's still some stock clearance to take place during the course of Q4. So once we are through Q4, we do anticipate that, that stock builds have been clear.There's some nonrecurring items in the quarter of SEK 11 million that relates to discontinuation of a pilot plant within hatching that was, as I mentioned, was taken through the quarter. As mentioned, the underlying fresh market is currently fully recovered. And we do anticipate, once the stock is clear, then we will get into more normalized margins from 2019.Going on to Denmark on Page 7. Some market investments and some cost pressure, 12% revenue growth, 3% in local currency, and that continues to be driven in the main by Retail and also by the Ready-to-eat categories.We have seen reduced margins versus last year coming in at 3.9%, but increased margins versus Q2 and we delivered 3.2%. We saw that being impacted by investments in sales and marketing for the new brand, and also we have still some open exposures to raw material increases for the Danish business.We have seen a positive development for the Danish Family Farms that is now over here representing 14% of domestic sales. And we do anticipate that this new brand and then category will be -- will deliver positive contribution from 2019. We have completed successfully the investment in a new line in our Ready-to-eat factory in Denmark, and we are now ready to produce from there going forward. In this quarter, we merged our high-end range of organic and free range with another player in Denmark with a dedicated -- smaller-scale manufacturing operation dedicated for this kind of product. We made that merger that will -- where the combined business will be better situated to grow that market going forward in a profitable manner.Going on to Page 8. The quarter where we, in Norway, saw another strong performance, 7% revenue increase. It was a flat in local currency, driven by the fact that we have rationalized our food service range quite significantly. We saw strong margins coming in at 7.8% versus 6.5% the same quarter last year.It's the most profitable geographical segment within the group. We saw the very successful investments that we have made over a number of years, mainly to drive efficiency and also to deliver better yields in operation. A lot of best practice have been transferred into the Norwegian operation, and we see the impact of that.In addition to improvements in that field, we have also seen a clearly strengthened product offering. And a good example of that is what -- there is a picture you have on this page, which is this Flamme Grillet chicken fillet that is the ready-to-eat -- another ready-to-eat product that we have launched and has been very well received in Norway. It's a good illustration of our business potentials where our best practice come together.Going on to Ireland, a quarter with strong performance and where the integration is going according to plan. We have seen a 13% revenue growth, 4% in local currency. Still a strong domestic market, and also where Manor Farm is the clear market leader has strengthened its position. Another example of a lot of successful best practice exchange, both within operation, within the live operation side, but also within realizing better value per bird that has clearly been achieved in the Irish market.We have some significant investments planned for 2019 to make the plant to increase capacity, but also to increase efficiency and also some measures to improve animal welfare and then food safety. We delivered a margin in the quarter of 4.8% versus 4.7% in the corresponding quarter of last year.Going on to Finland, a quarter where we delivered further improvements and also cash. We've seen a 24% revenue growth, 13% in local currency, and where we took another step towards breakeven. And a clear improvement from last year where on the -- where we delivered a negative EBIT margin of 3.3%, positive EBITDA margin of 2.6%, which is clear improvement from where we were last year, driven by better product mix and also better yields.It's another quarter where we have positive EBITDA and also operational cash flow. And also, when you look on the total of 2018, we have seen positive EBITDA and also positive cash flow. Having said that, we have a continued strong focus on improved product mix, yield and cost to get to our next milestone of positive EBIT. And we do expect a sequential improvement towards that goal.With that, I'd like to hand over to Anders for the income statement. Thank you.

[Anders Hägg, Chief Financial Officer]

Thank you, Leif. So then look at the income statement and we compare this quarter versus reported numbers last year, we see that we have grown net sales by 24%, and we have grown adjusted EBIT by 19%. We also see an increase in depreciation, which relates both to the high investments and the acquisition of Manor Farm, and we also seen increase in amortization, which is related to the acquisition of Manor Farm.As Leif already mentioned, we had nonrecurring items in the quarter, mainly related to the discontinuation of the pilot hatching facility. We also see improved net financial items, which is mainly related to that we don't have the big negative currency effects that we had in the quarter last year.The effective tax rate in the quarter is 21.7%. And as Leif already mentioned, the EPS growth is driven, to a large extent, by the Manor Farm acquisition. Also, if we look at the margin -- EBIT margin for the quarter of 4.4%, which is slightly below last year, but it's ahead of the 4% we reported in Q2 this year.Then moving to Page 12, where we see that the returns on both capital employed and equity has improved in this quarter compared to the same quarter last year. And we also see equity-to-assets ratio improving from 26.3% to 28.1%.Then moving on to the next page, 13, on working capital. We see basically a flat working capital compared to the Q2 despite a very good inventory release in Sweden, which was then partly offset by the increase in receivables. We still have a bit too high inventories from Sweden, so we should expect some further release in Q2. Working capital as a percentage of sales is flat, still at 7.5%, and I would still expect that to come down to close to 7%.Okay. Moving on to Page 14 and the cash flow. We had a positive operating cash flow in the quarter of SEK 50 million despite the high investments in finalizing the Ready-to-eat expansion in Denmark. We've also then in the quarter, as mentioned by Leif, we have assumed SEK 95 million of debt as part of the Rokkedahl merger. And due to that, net cash flow is minus SEK 54 million, which brings the net debt up to just below SEK 2.1 billion.On the next page then, cash flow guidance, Page 15. No changes versus what we have talked about in previous quarters, except for the fact that we also now talk about 2019 capital expenditure, which we expect to be another year of significant investments. Here, we talked about SEK 380 million, and the big chunk of that is going to go into Ireland. Okay. And then moving on to the next page where we talk about sustainability, which is at the core of everything we do at Scandi Standard, which is labeled under The Scandi Way, which is the way we work every day to make a difference, promoting health and wellbeing for people, the chickens and our planet. And the intention is that we do sort of a snapshot or highlights in each quarterly reports. And in this quarterly report, we talked a lot about transportation, where we talked about the fact that we moved to biofuels in Sweden, where we -- basically all the transports to and from our factory in Valla has been using biofuel, which has a significant positive impact on lower CO2 emissions.Thank you. Yes.

[Leif Bergvall Hansen, CEO, President & MD]

Thank you. Going on to summarizing the Q3 report. 9% organic growth, saw an underlying market in Sweden now being fully recovered. And then we do have a solid outlook for '19 once this remaining stock clearance have been taking place during the course of the remainder of this year.We have seen strengthened margins coming through in both Norway, in Ireland and also in Finland. We are confident of a stepwise path towards breakeven in Finland.Coming to the Danish market, we have a bit of a mixed outlook. This brand initiative to de-commoditize part of Danish business is continuing to progress well and will drive some costs. And we do have some -- still some open exposures when we come to raw material increases. We have continued strong growth expectations within the Ready-to-eat segment, and that's clearly supported by the investment in Farre in additional manufacturing capacity. We do anticipate strong cash flow in Q4 of this year, and we continue to follow structural opportunities closely to see if anything relevant comes about.With that, we'll like to take questions. Thank you.

[Operator]

[Operator Instructions] We have a question today from Tone Hanstad from DNB.

[Tone Bjørnstad Hanstad, Analyst]

I have a question regarding the cost inflation you are mentioning. Could you give some more flavor to that? And also, you say more normalized margin expected in Sweden. What's your view at a more normalized margin in short term and longer term?

[Leif Bergvall Hansen, CEO, President & MD]

Well, this -- it is clear that there is some cost inflation relating to the fact that there's been a drought in this part of the world. We have been in negotiations with our clients and are still in negotiations with our clients in our domestic markets. We have landed quite a significant part of those negotiations successfully so that we can compensate the farmers fully for this cost inflation. There are still some ongoing negotiations left, but our ambitions and aspirations and aims are clearly the same to ensure full recovery of this cost inflation, and we anticipate to land them.

[Tone Bjørnstad Hanstad, Analyst]

And the margins in the short term?

[Leif Bergvall Hansen, CEO, President & MD]

Okay. About Sweden -- Sweden margin, we do anticipate that the margins from the beginning of 2019 will be much more normalized compared to what we have seen over the last 1 year, 1.5 years as we, by then, would have cleared this excess stock that has been built during the period with upped demand.

[Tone Bjørnstad Hanstad, Analyst]

Could you give some more flavor on the level you expect?

[Leif Bergvall Hansen, CEO, President & MD]

On the margin expected?

[Tone Bjørnstad Hanstad, Analyst]

Yes.

[Leif Bergvall Hansen, CEO, President & MD]

In Sweden, we think that we expect getting more into more normalized margins. And, of course, we don't anticipate that to happen on day 1, but we are pretty confident that we will see a relatively quick return to normalized margins once this stock overhang is cleared.

[Operator]

The next question comes from Alexandra Barganowski from Nordea.

[Alexandra Barganowski, Analyst]

I have a question regarding the Danish margin that we are seeing some weakening because of your investments in sales and marketing because of the launch of the new products. And I just wondered whether you had somewhat of an outlook of how long we're going to see somewhat of a weaker margin in Denmark?

[Leif Bergvall Hansen, CEO, President & MD]

Well, we have -- the Danish businesses is more exposed to competition than our other units. We have sort of communicated that once you'd anticipate a margin in Denmark over time to be in the right -- in the region of 4% to 5%. The initiatives that we are taking to build this premium brand, the Danish Family Farms, are going well. And, of course, that is aimed at stabilizing the margins in Denmark and in the higher end of that range and also to make it more stable over time. And -- but we are overinvesting at this point in time, and we will anticipate to overinvest for some few quarters more. So we do anticipate that in next year, this new range will be contributing margin-wise to the group.

[Operator]

[Operator Instructions] We have a question from Mikael Löfdahl from Carnegie.

[Mikael Löfdahl, Research Analyst]

First of all, in Sweden, is it possible to sort of strip out the effect from the inventory reduction to get a sense of how the underlying fresh meat business is developing year-on-year in this quarter?

[Leif Bergvall Hansen, CEO, President & MD]

Yes, we can give some flavor to it. Of course, it is always, when you try to do the estimation, it compares to what is normal. But I would say that if you say there's a sort of around the SEK 10 million plus/minus impact in this quarter, the effect of stock clearance, then you're probably not way off. But as I said, it is -- you need to be taking a look into self.

[Mikael Löfdahl, Research Analyst]

Okay. And in Q4 then, one would assume at least that this effect is diminishing, so it should be smaller in Q4 relative to Q3. Would that be fair to assume?

[Leif Bergvall Hansen, CEO, President & MD]

Well, we are not saying that. We do see that we are actually having -- when we came from Q3 into Q4, we still have a clear overhang of excess inventory that we are clearing as we speak. And that will have a negative effect also in Q4. But we do also anticipate that once we come into next year, we would have put this issue behind us.

[Mikael Löfdahl, Research Analyst]

Okay. On the CapEx guidance, could you say more about the underlying CapEx, excluding the Manor Farm and what you're doing there? That's the first question. Second is, will all of these investments related to Manor Farm coming in 2019? Or should we expect it to continue to be a bit higher than normal in 2020 also for the group?

[Leif Bergvall Hansen, CEO, President & MD]

We would -- the -- we can't normalize -- CapEx will probably be in the region of a bit more than SEK 200 million, you will say. But we do see an additional CapEx to come through in Ireland in '19. There might be some coming into '20 also, but it is quite solid projects that we have been working with the Irish team since the acquisition of planning, some with some margin impact and some is more to establish capacity for future growth.

[Mikael Löfdahl, Research Analyst]

And do you think this will boost growth or margins or both in Ireland?

[Leif Bergvall Hansen, CEO, President & MD]

Over time, it should impact both.

[Mikael Löfdahl, Research Analyst]

Okay. The final question from me, I think. Given the -- I don't know exactly what you said in the previous quarterly report actually, but you are speaking again about the consolidation or the potential to further consolidate the European market. Could you say something about that when you expect to be ready to do more? I mean, given that you are boosting CapEx now, for instance, in Ireland, what can your balance sheet bear? I know that you could always bring new shares, and I guess that it's likely that you will do so in case of an M&A. But when do you think you could be ready? And what is the pipeline like out there?

[Leif Bergvall Hansen, CEO, President & MD]

I mean, one would say that the -- if you look at across Europe, the industry are quite consolidated within the market, as what we see here. The acquisition in Ireland, I think, it's a very good illustration of what could be a good match for the group. Strong management, strong market positions, an eagerness to exchange good ideas across border and also an acquisition that has not been -- so there has been a lot of manage -- strong management has come into the group through such a move. And if we could find a similar one, we will be open to, let's say, going to more discussions. But we have, of course, we have -- we cannot be any more specific than that.

[Mikael Löfdahl, Research Analyst]

Okay. Sorry, one final. Just on the bird flu, now that we can sort of leave that behind us for at least for now. I guess, eventually, it will, I guess, come back at some point again. And how would you say today that you are more prepared in case of another bird flu epidemic in Northern Europe? I guess, you did change and sort of steered over your export to other markets than China, for instance. And would that mean that you are better prepared to do so in case of a new bird flu and thereby, limit the earnings impacts in future events?

[Leif Bergvall Hansen, CEO, President & MD]

Yes. I would say that we have -- we do have taken a number of measures in terms of client base, in terms of the product range, in terms of how we handle the products so that if a bird flu outbreak will come again, we do anticipate that the impact on us will be lower than what it was last time. That's correct.

[Operator]

And the next question is from Alex Aukner of DNB.

[Stein Alexander Aukner, Senior Analyst]

Yes, sorry, my answer was -- my question was actually answered, so no question for me.

[Operator]

[Operator Instructions] Okay, it looks like there are no further questions on the call. So I hand back to you, Leif.

[Leif Bergvall Hansen, CEO, President & MD]

All right. Thank you, everybody, and have a great day. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you all for dialing in.