Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, good afternoon, and welcome to the Scandi Standard Q3 results call. [Operator Instructions] I would now like to hand over to Leif Bergvall Hansen to begin.

[Leif Bergvall Hansen, CEO, President & MD]

Good morning, everybody. So our Q3 report, another quarter with solid development, 12% growth in net sales and 23% increase in EBIT. We saw a 13% increase in adjusted EBIT -- EPS, sorry, and a strong operational cash flow and also a 16% return on equity. Going on to Page 4. We have produced some breakdown on our strong top-line growth of 12%, 10% of which is underlying revenue growth driven by strong demand of Ready-to-cook products with very solid growth, like I'm going to show about -- show you a little about that later. We have seen the new capacity in Ready-to-eat is boosting sales, and we also have a positive impact from the price increases that we have implemented following the raw material increases earlier in the year. So those are the 10%. In addition to that, there is the consolidation of Rokkedahl Food, this is specialty chicken [ business ] that we acquired partly in Denmark. And also, there's a currency effect of 1%. So what are kind of the drivers behind this very strong organic growth? If you move on to Page 5, we see an increased consumer focus on sustainability. This chart just shows the CO2 impact of different kind of proteins, while chicken impact is about 1/10 of beef and is, in fact, similar to farmed fish and even some plant-based alternatives. And these metrics are increasingly becoming important for consumers' choice. On to Page 6, you see one example of how we are trying to leverage this attention and fuel it even more. This a campaign from Sweden, where we're focusing on the CO2 impact of various choices. And when we needed to do some analysis on this, it's clear that consumers would want to live more climate friendly, but it's also uncertain how can I do that. So that's why we are helping with facts on educating the consumer and making more climate-friendly choices. And we see that have a positive effect both on sales but also on our brand preference. Going on to the next page. You see just examples of all the efforts we do within The Scandi Way, our sustainability work chart. And there is a lot of different KPIs in many of these different fields that we follow and are communicating internally and externally to an increased extent, really, to develop and to deliver on our leading position within this field within the poultry space across Europe. Going back to the numbers on Page 8. So another quarter with a strong product mix, 4% volume growth in the quarter, deliver SEK 22 million of the uplift in earnings driven by Ready-to-cook and also by Ready-to-eat. We saw strong contribution from improved product mix driven mainly by an increased proportion of branded sales. You also see from this chart that the price increases have -- is driven by raw material inflation have been matched by the price increases. Really coming back to these relationships that we are working with our clients that raw material inflation are, to a large degree, are passed through. We saw in this quarter some OpEx increases and also a bit of impact from change to depreciation. On Page 9, solid development in our most profitable product categories with 13% growth in Chilled Ready-to-cook, main drivers being volume, improved product mix, but also some price impact, as I just mentioned. 31% growth within Ready-to-eat. We have increased capacity and we also see that, that capacity is largely being used. We have seen volume increases, both within the breaded and also within unbreaded categories. We see a lot of benefits coming through from a lot of innovation activities taking place within this product category. And that the less-profitable segments, i.e., frozen sales and export, are reduced in relative importance for the group also in this quarter. Going on to Page 10. We just have some improvement on how we see the Ready-to-eat category increasingly becoming an important part of what we do. The relative share of revenue have increased from 9% in '15 to now above 20%. It's a segment that we see strong growth. People are really demanding more and more convenience products. And we see this as very attractive platforms for future revenue and profit delivery.Going on to sales channels. We see a strong growth in both retail and Foodservice. Retail growth of 10%, a good mix between more off-market and discounters driving that, but also a very impressive continued growth in our Foodservice presence, while sales are up 30% in this quarter, driven by quick-service restaurants as an important category, but also with a lot of innovations and also that we have strengthened the organization in most of our markets to really try and capture increasing the fact that people are eating more and more out and are more -- putting more attention to chicken. We see the less-profitable export segment also on this chart reduce its relative importance.Turning on to Page 12. Sweden, continued significant improvements. Also in this quarter, Denmark delivering exceptional top-line growth, but also with some growth pains that imply some margin delay, as we talked about in the last quarter. Norway has continued to deliver very strong performance. Also in this quarter, Ireland, stable underlying performance. And Finland, coming in with an EBITDA margin of now 5.5%, a clear increase from before. Sweden, on Page 13, strong earnings improvement. 11% revenue growth driven by retail as the main, but also driven by some price increases following the raw material inflation earlier in the year. Adjusted EBIT is up with SEK 13 million or 37%, and partly driven by some fixed cost dilution coming from the growth. We do continue to have a positive market outlook for Sweden also in 2020. Going on to Denmark. Exceptional growth, but also the growth coming with some pain. 20% revenue growth. We see a continued positive development for the new brands, the Danish Family Farms. We see strong demand in Foodservice across Europe driving sales. And also there is additional capacity of Ready-to-eat products, we are using that to a larger degree. The earnings potential of this new volume is still lagging. There is some ramp-up costs that we are dealing with. And there are some measures that we have taken in Q4 that are likely to impact results adversely in that quarter. We see the situation to gradually improve or normalize in 2020 when it comes to profit. In terms of Norway, we see a continued very strong performance. 8% revenue growth, both coming from an increased volume and particular to -- within the retail segment. Strong margins with a solid product portfolio that continues to deliver. You've seen high efficiency within operation, and we have had a quarter with some exceptional supply of eggs driving revenue. I just want to remind you that Q4 is a seasonally weak quarter. Norway is our most profitable geographical segment, coming from some very successful investments that we have carried out in Norway over a number of years, transferring best practice from other parts of the business. And we see a continued very solid work on strengthening the product offering with some good results coming through in Norway.Going on to Page 16 on Ireland, a quarter with some margin improvement, 3% top-line development. Stable underlying earnings, that's been some positive revaluation of inventory. So the underlying EBIT is similar to that of last quarter -- last year's quarter. The investment in Ireland are largely completed with some cost efficiencies, some animal welfare and some safety improvements and also some additional capacity. Here, we just want to remind you that Q4 is normally a seasonally weak quarter in Ireland. Going on to Finland, some further improvement also in this quarter. 33% revenue growth, combination of better price realization and improved product mix. A 5.5% EBITDA margin driven largely by improved production efficiency apart from the other factors I just mentioned. There's a strong focus on further improvements, both in terms of mix, in terms of product innovations. We also see further opportunities within improving operation yields and also further efficiency measures within operations. With that, I'd like to hand over to you, Julia.

[Julia Lagerqvist, Chief Financial Officer]

Thank you. So we come back to the income statement. As Leif has stated, we have a 12% revenue growth driven by all countries, and it's also in line with the year-to-date numbers. The EBITDA is growing by 6%, it's an 8.2% margin. So this margin is still obviously is in line with yesterday's margins. As Leif has talked about, we do have a reduced depreciation driven by the fact that we have aligned these asset life across the different segments [ that is run ] in the third quarter of '18. We also see an increasing trend in the depreciation due to the fact that the CapEx is above the depreciation now. Although the adjusted EBIT is growing by 23% or 4.9% margin. We do have the financial items which are impacted by currency driving to be a bit above last year. The tax rate is at 21%, so in line with where we want to be. And this gives us an adjusted EPS increase of 13%. Looking at the financial position. We do have seen further improved returns for the return on capital employed, it is now at 10.5%, and the return on equity is 16.1%. As a reminder, the NIBD has been impacted by the IFRS 16 relative leasing by SEK 484 million. This is affecting these numbers in 2018, where it is visible. As a reminder also, the equity ratio is now at 28%, it was previously 26%.Moving on to Page 20. Looking at the working capital. There is a reduction in working capital by about SEK 100 million in this quarter versus last year, that is mainly driven by payables. Overall, working capital to sales is at 5.6%. It's still at a very low level, and we expect to be more around the 6%, 7% area. Moving on to Page 21. Looking at the cash flow. As you've seen, we have EBITDA improvement, which is right in this -- versus last quarter. Working capital is increasing slightly coming from a low level. At the same time, we also have a reduced capital expenditure, which is leading us to some improvements in the operating cash flow. We have the earn-out payment for the Manor Farm acquisition of SEK 133 million in this quarter, obviously driving down the net cash flow. But overall, the net cash flow per share is at SEK 0.74. Coming to the cash flow guidance. There's no change from the previous statement. The dividend policy is still to be at 60% of net income over time. As a reminder, we did pay SEK 2 in the quarter 2. Overall, the paid interest estimate is to be at 3% to 3.5% of the average NIBD. And the blended tax rate should be about 20% to 21%. Looking at the capital expenditures, we estimate this year to be SEK 380 million. The main focus has been special projects in Ireland. For next year, we're still working on the overall plan. We do also have our continued liabilities related to the Manor Farm acquisition. As we have said, we did pay the first earn-out tranche this year in this quarter, and we expect another one in 2020 and 2021. You can see more details in the appendix. And I hand it back to Leif.

[Leif Bergvall Hansen, CEO, President & MD]

Thank you, Julia. Trying to sum up our Q3. It's the quarter with a continued very strong revenue growth of 12%, year-to-date it's 13%, and improved results being up with 23%. We continue to see a very solid demand for our products, and that goes on in all our markets. The current growth rate is well above the 5-year CAGR of 6% to 7%, all of that being organic. Part of the drivers behind that is we see an increasingly strong consumer response to sustainability metrics of why chicken is a very attractive alternative to other big proteins -- or other proteins. We continue to gain market share driven by a lot of solid innovations in our different markets that are targeting how consumers want to live their lives going forward. And we also see a continued strengthening on our brands as part of the driver behind the improved results. We continue to have a positive market outlook. However, we just want to remind you that Q4 is seasonally a weak quarter for us due to Christmas. Revenue growth, we have seen, as mentioned, a very strong growth this year, exceptionally strong compared to the trend with 6% to 7% organic growth over time.And for 2020, we do anticipate the growth to come down -- the growth levels to come down, driven by these exceptional growth drivers that we have had in '19 is not going to give the impact in 2020, and there's some raw material prices that are coming down. But I'd also like to have some improved -- some impact on the top-line growth for 2020. We do continue to follow structural opportunities very closely in different areas. With that, we'd like to take any questions.

[Operator]

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

[Daniel Schmidt, Research Analyst]

A couple of questions from me, starting with what you ended commenting on the sustainability, the sort of marketing campaign that you're conducting and have been conducting in Sweden for a couple of months now. Is there any plans to roll that out, given the response that you've received, to roll it out also in Norway and Denmark or so many other countries?

[Leif Bergvall Hansen, CEO, President & MD]

Yes, absolutely. Some of it we're already doing. But it's -- we're really being encouraged by the response. It's clearly underlined that the climate impact of choices we do as consumers has really been something that we tend to somewhat -- some used to talk about but not to act upon. We really see consumers increasingly acting upon these metrics, and where we had an important role in communicating facts on why chicken is a very attractive alternative to others. So we continue to roll that out and see an increasing impact of those activities.

[Daniel Schmidt, Research Analyst]

Okay. Good. And the flip side of that is across the higher marketing spend that you also saw in Q3, and I think we saw it in Q2 as well. Is that going to stay then elevated if you look into the coming quarters? Or do you see any sort of change to that? Or how should we view it?

[Leif Bergvall Hansen, CEO, President & MD]

We would say that the current spend is something that we would -- we will anticipate to see going forward as well. The importance of getting consumers to eat -- more food to eat, the importance of getting consumers increasingly to choose our brands versus alternatives is important levers in terms of delivering improved results going forward. And that does require some investment in marketing, so we would anticipate to continue those efforts.

[Daniel Schmidt, Research Analyst]

Yes. Okay. Good. And then -- and jumping on to what you said in terms of the Danish business. And of course, clearly, we see that the operating leverage hasn't been there, given the growth that you've had now for a couple of quarters and sort of unchanged EBIT in Q3. And you're saying that they will -- you'll take some measures that it will have adverse effect on earnings in Q4 in Denmark. Do you want to -- or can you, in any way, shed some more light in terms of details? How much are we talking about? And what are you planning more exactly to do?

[Leif Bergvall Hansen, CEO, President & MD]

Yes, you're right in saying that we have seen a very exceptional growth this year, the growth that has been clearly higher than what we had planned for. So we could have planned that better. And that have had a negative impact on our operations in Denmark, where we have had to hire in more people, run more overtime with some negative impact, and it's some of those negative impacts that we are dealing with. So we do anticipate that we will see an improved margin situation coming through next year. But we're just warning that, Q4, there will be some measures taken to clear this situation going forward.

[Daniel Schmidt, Research Analyst]

And -- but you don't want to give us any numbers in terms of what this is going to cost, so to speak?

[Leif Bergvall Hansen, CEO, President & MD]

No. It is something that is still a work in progress, and we haven't got the exact number for it. We have just -- we're just communicating that we do see -- that we are confident that margins will pick up next year, but that we see Q4 being a quarter where there will be some measures to be taken.

[Daniel Schmidt, Research Analyst]

Yes. So it's basically isolated to the sort of the ending of this year, and then you should see some positive effects from that in 2020?

[Leif Bergvall Hansen, CEO, President & MD]

Yes, exactly.

[Daniel Schmidt, Research Analyst]

Yes. And then thirdly, raw material costs coming down and implicitly, that, of course, will have an impact on top-line growth and you have difficult comps, of course, going into 2020 given the growth that you've seen in '19. Just mechanically, if you would look at the raw material pricing put cost that you have today, how much impact does that have on top line in terms of percentage, all else equal, going into 2020?

[Leif Bergvall Hansen, CEO, President & MD]

It's still a work in progress that bit also. But I think that the best guidance we can give on revenue, where we have had really exceptional growth this year was 12%, 13%, where there is a combination of some contingency orders we have had. There is the positive price inflation impact that are also clear, and we will see those things more, let's say, normalizing next year. So the best guidance we kind of can give here is to say we have seen a CAGR of 6% to 7% over 5 years, where we, in this year, have been clearly over. Next year, we will probably be more at that level and maybe somewhat under, but still a continued growth. But these -- there is a number of these activities that were sort of more normalized coming into next year. So in terms of the actual price effect, we don't know that as yet, but that is part of the reason why we have seen the strong growth this year and a lower growth for next year.

[Operator]

Alexandra Barganowski from Nordea will be your next question.

[Alexandra Barganowski, Analyst]

I have a question regarding your Finnish division and sort of what your outlook looks like for that specific segment also coming into 2020. How do you sort of perceive the market demand and the development going forward?

[Leif Bergvall Hansen, CEO, President & MD]

Yes. Thank you. We've seen a market that continues to be with strong demand, continue -- which had quite significant revenue growth. We do anticipate that there is further growth to be achieved in Finland. And we have also seen during, basically, quarter-by-quarter this year, sort of a gradual improvement in performance and we do anticipate further development into next year. It's a relatively small part of the entire business of the total group, so to speak, but we do see further opportunities for improvement in Finland, both operation, but also commercially.

[Alexandra Barganowski, Analyst]

Okay. My next question relates more to your sort of M&A, as in -- and now that you're saying that you're following the structural opportunities more closely. Are there any specific markets that you target more or any particular divisions that you would like to look into more? And also, are you somewhat open to also other product categories?

[Leif Bergvall Hansen, CEO, President & MD]

They are -- we are looking at a number of different fields. Generally, the space across Europe is that within the individual geographical markets, the industry is relatively consolidated and so it can be a number of different markets. It's also down to that a lot of the synergies we talk about here is the transfer of best practice, not that we will transport chicken through our borders. So we are looking at a number of different markets and a number of businesses, a lot of them family-owned that are, let's say, attracted by our listed position and the fact you can -- a bit of that, obviously, with the acquisition of Manor Farm, that the current owner can continue having some role in the group going forward, but still giving an uplift to performance by being part of the group rather than being a strong #1 and [ opportunities ] in the other markets. So some of it is that there are a number of markets, number of candidates. But other than that, I cannot say any more. No.

[Operator]

Leif, your next question comes from Mikael Löfdahl from Carnegie.

[Mikael Löfdahl, Research Analyst]

So coming back to Denmark, I think -- or I would appreciate, and I think everyone, a bit more on exactly the impact -- the negative impact in Q4 and more precise what you are planning to do. And perhaps related to that, also, if you look at Denmark in the past 3 quarters now with very strong growth, what is -- I mean the mix in Denmark, one would have assumed that the mix would have been positive for your profitability with a lower share of revenues coming from the export business, for instance, and maybe the [ frozen business ]. So I think the explanations are a bit vague. If you could be a bit more specific on the margin so far? And what you will do in Q4? And thirdly, also on the same topic, perhaps a bit more broader maybe, but the African swine flu, have you -- so far, do you expect to see any impact on either raw material prices coming down because of lower feed or input prices for the feed to the chickens and/or any impact on pricing power of poultry given that the price of, well, pork, of course, but other meats also will probably come up for consumers going forward?

[Leif Bergvall Hansen, CEO, President & MD]

Yes. Thank you. Let me start with the last one and then I come back to Denmark. If you -- you're right in pointing to some of the implication of the swine fever. One is that China has traditionally been importing a lot of grain and protein to feed their pigs. And of course, as these pigs are put down, their import need is coming down and that have an impact of the raw material -- part of the reason why the raw material cost is coming down globally of grain, of protein. So that is an impact that our -- we see as a reason why we are looking into cost of grain coming down. In terms of the relative price of pork versus chicken, that is an impact as well. But you will mainly see that the cost of pig that are sold into China are, let's say, still a bit special. But all in all, some positive impact we might see. But it is -- by far, the biggest driver is consumer increasingly making their choice based on climate implications and health implications of what they do. So people are going to take in, are going to plant-based alternatives rather than red meat for those reasons unless, well, there is the swine fever on somewhere, at some places in the world. So all in all, a positive effect. Although there are other drivers that I won't talk about. I suppose that's some other story I'd like to tell. But in terms of Denmark, the performance this year, revenue-wise, have been very, very exceptional. The profit level have been disappointing. I'm not going to have that at all. The positive side of that, I suppose, is that we are now an increasingly geographically diversified group. So in spite of a disappointing market development during the course of this year in Denmark, the group has still been able to deliver, I would say, quite strong performance quarter-on-quarter. But coming back to the margins in Denmark, we will see margins coming up during next year. We are confident about that. I will also be clear in saying that, that very exceptional revenue growth has come with some additional cost in terms of staff, in terms of more overtime, in terms of sort of less deficient way of operating. And a lot of these, let's say, inefficiencies and quick solution, so to speak, to deal with this, the surprisingly high revenue growth and a revenue growth that we did not plan properly for, those adjustments we are taking during the second half of the year, and that's what we are warning for. You're asking for a specific number for Q4. Unfortunately, I'm not able to give you that. We just want to, let's say, guide you that Q4 is going to be negatively impacted by this. But in all measures, that we are confident that it will have positive margin implications for next year.

[Mikael Löfdahl, Research Analyst]

And a follow-up on that. When you say a negative impact and when we speak about some sort of guidance here, are you talking about quarter-on-quarter? Or are you talking about year-on-year here? Because last year in Q4 was a very weak quarter for Denmark in terms of margins.

[Leif Bergvall Hansen, CEO, President & MD]

More comparing to where we are today in this quarter and -- but what I'm discussing though, generally speaking, Q4 is, for the group, a relatively weaker quarter. People eat less chicken over Christmas. And we just want to make aware that we are facing some additional effects in Denmark in this quarter.

[Mikael Löfdahl, Research Analyst]

Okay. And then just a follow-up on the swine fever. Do you -- I mean your export business in Denmark, given that prices of chicken in poultry products in China is up by some 40% according to some statistics now because of this, shouldn't that impact your export business positively? And given the impact that the bird flu had on your Danish operations a few years back, I mean, this should have -- obviously, this should have some sort of positive effects if the export prices goes up, even on your products that you sell to China?

[Leif Bergvall Hansen, CEO, President & MD]

I mean, first of all, the import from Europe into China of poultry product is very small. So that additional -- and for a number of reasons, the one thing is that there's a very few of European countries that are approved to export into Mainland China, so a lot of this uplift is coming from other places. And really the part of the chicken that we sell are -- in Asia are mainly chicken feet and chicken wings. And although it is attractive price level versus what we achieved elsewhere, it is something that are -- these movements, it's not something that are really impacting us that much. So it's more that the relative importance of exports is going down. And yes -- and not so much the fact what's happening in Mainland China.

[Mikael Löfdahl, Research Analyst]

Okay. One more on Ireland. Well, is it possible to -- I mean, where are you in the investment space or rather perhaps the effects from the investments that you have done in terms of debottlenecking? Have we -- or when we receive the close effects from this? I mean the margins have grown nicely and -- but have we seen most of it already in this quarter? Or will it come more in the coming quarters? And finally, also, in terms of CapEx going forward, given the solid growth that you're having in several markets now, when will there be any additional sort of above-the-normal maintenance CapEx need in any of the countries like Sweden, for instance, if you could give some guidance on that? I guess we're talking about 2021 or something like that.

[Leif Bergvall Hansen, CEO, President & MD]

Yes. In terms of Ireland, a couple of things. One is that what -- we are aware that this sort of positive margin uplift that we saw in this quarter is partly driven by this revaluation that we talked about. We have seen some of the effects, but we will more see some of those effects of the investments going forward. We have finalized some part of it, there are still some pieces left. But that is to be finalized as we speak, basically. So during the first part of Q4, where we will see the impact of this more into next year. So -- and in terms of CapEx altogether, and as you are rightly pointing to, we are growing quite nicely. We see -- we continue to see positive market growth, do see opportunities to gain further market share, and that will come with some CapEx requirements. We haven't sort of finalized our plans exactly on CapEx, but we do anticipate to be above this depreciation for some time to deal with these opportunities that we see in the market to allow -- to give consumers an increasing choice when it comes to their chicken to replace some of their previous choices when it comes protein.

[Operator]

[Operator Instructions] And your next question comes from Alex Aukner of DNB.

[Stein Alexander Aukner, Senior Analyst]

Yes. All of my questions have been answered.

[Operator]

Leif and Julia, that was the final question. So I'll hand back For any closing remarks.

[Leif Bergvall Hansen, CEO, President & MD]

All right. Thank you, everybody. Thanks for very good questions. Thanks for your time, and have a great day.

[Operator]

Ladies and gentlemen, that does conclude today's call. Thank you for joining and enjoy the rest of your day.