Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2020-Q3

[Leif Stig Hansen, CEO, President & MD]

Good morning, everybody, and welcome to the Scandi Standard Q3 report. Leif Hansen speaking. It's a quarter where we report a record margin, EBITDA margin of 8.8%. Going on to Page 3. A quarter with solid growth and strong operating performance. We delivered a 3% growth in net sales which corresponds to 7% in local currency. It represents 5.6% of adjusted EBIT margin, which is at a record level. It's a quarter where we delivered a very strong cash flow. And all in all, showed a business that is resilient to the COVID-19 effects. As you can see, there is some non-comp reporting in this quarter, and that gives me an opportunity to talk about where it comes from, which is the integration -- very successful integration of Manor Farm, if you go on to Page 4. And this very strong performance have resulted in some increased earn-out provision. Just to remind you, it was Manor Farm we acquired in August of 2017. It's, by far, the largest chicken operator in the Republic of Ireland with more than a 50% share. In terms of some key success factors, when we went into the business, a very high-quality business already, it was very profitable. It was a clear market leader, very capable and experienced management team. We identified quite a number of tangible best practice opportunities across the entire value chain. And as a result of implementing a lot of those and even more, we can now see an EBITDA margin, since the acquisition, has gone up from around 7.5 percentage points to now around 10%, and that means that we have an increased earn-out provision, and that represents SEK 31 million altogether. If you go on to Page 5, delivered solid growth, driven particularly by a very good retail demand of 7% growth in retail sales representing 64% of total revenue, very strong demand in basically all our domestic markets. We have seen an improved momentum in food service. If you look at the quarter-on-quarter drop in Q2, we did -- we experienced a 20% drop in sales to Foodservice, the Foodservice channel. Whereas in Q3, that drop is now 8%. We have a positive mix from higher retail sales, particularly Chilled ready-to-cook products. Going on to Page 6. You will here see the development of retail versus food service. The strong increase in retail sales, 7%, as mentioned, as an average over the quarter of Q3. We see a continued volatile demand in food service, 8% decrease in Q3. And we see also in different Foodservice establishment adapting to -- and so continue to adapt to changing COVID-19 restrictions.Looking a little bit ahead, we anticipate to see a continued solid demand from retail, but also we anticipate to see Foodservice to remain volatile for some time ahead, not least expecting the expected that is now coming and going, particularly coming at this point in time into the different markets in which we operate. Q3 by product category and country, 8% growth in ready-to-cook Chilled. We saw frozen sales be more or less flat and a 3% drop in ready-to-eat, reflecting that this product group is -- have a very high exposure to the food service market. All countries contribute to the growth that we delivered in this quarter. Going to Page 8. Record strong adjusted EBIT. The improvement from SEK 125 million of Q3 last year to SEK 147 million of this year can be broken down to SEK 20 million coming from volume growth, volume growth of around 3%. We have a positive net effect of price and mix versus the increases in COGS. The positive mix, particularly the more Chilled versus frozen but also improved efficiency across the operations. Good cost control across the business, and this result is delivered in spite of a negative currency effect of SEK 7 million. Going on to Page 9. Looking at the 4x growth of the ready-to-eat sales over the last 5 years. We see it has strong track record and have a positive outlook for how this convenience product category will develop over time, despite some temporary setbacks due to the COVID-19 and the less activity in the Foodservice market. It's a platform that we are very encouraged by for the future. It is also one of the reasons why we are looking at entering nonmeat products going into this category. Going on to Sweden. Saw a quarter with good growth and strong margins. We've had a decreased proportion of frozen products, very good cost control and here, delivered an 8.3% EBIT margin. That corresponds to a 10.9% EBITDA margin. Denmark on the next page. Denmark is the country with the largest Foodservice exposure and also with the highest impact of the COVID-19 implications. So a 2.4% EBIT margin which is explained by we have some additional costs from this differentiation strategy we have talked about that in the current market environment, we have not been able to absorb, and they've also seen some exceptionally low export prices because of surplus products being offered in the European commodity market. Going on to Norway. Very strong performance, 3% increase in sales, 15% in local currency. We have seen a strong demand from retail clients, particularly within ready-to-cook category. Very good cost control and a 10.6% EBIT margin or more than 14% EBITDA margin. Ireland, another solid quarter, 3% increase in sales, 6% in local and at an EBIT margin of 7.6%, topping with an 11% EBITDA margin. And that comes from a -- especially the improvement through the entire value chain and a lot of the best practice initiatives being implemented very successfully by the RF team.Going on to Finland. 14% growth in local currency. It's in a business we have, which is very retail-oriented with limited exposure to Foodservice. We continue to see margin improvements, 5.7% EBITDA margin, 1.7% EBIT, especially coming from improved operational efficiency and also some improved product mix. We have an investment underway to facilitate further growth going forward. With that, I'd like to hand over to you, Julia.

[Julia Lagerqvist, Chief Financial Officer]

Thank you, Leif. So we come back to the group income statement on Page 15. As already Leif shared, we had a very strong adjusted results this quarter, seeing it with an EBITDA margin of 8.8% up from last year's 8.2% same quarter. I mean, our long-term target is 10%, and we see this as a good step in the right direction. We do have the nonrecurring items in this quarter of SEK 33 million (sic) [ SEK 31 million ] that Leif was mentioning before as well. As said, this is related to the increased provision for the earn-out payment in Ireland due to the strong results we're seeing there. We're also having some fairly low net financial items in this quarter of SEK 15 million. This is mainly driven by a positive currency impact with the strength in SEK, but also somewhat lower interest rates. We have, on the opposite side, a little bit high quarterly tax rate due to country mix at 23%, last year it was at 21%. It was partly driven by some adjustments in previous quarters. All in all, this is leading us to an EPS of SEK 1.21, which was last year at SEK 1.12, and the adjusted EPS of SEK 1.68 versus SEK 1.12 last year, and we will increase that 50% in adjusted quarterly EPS.Looking at the statements of financial position. This leads us to continued improved returns with the adjusted return on capital employed now is at 12.2% (sic) [ 11.2% ], and the adjusted return on equity is at 17.4% despite the increase in equity. And the equity ratio is at 28.7% up from 27.9% last year. Turning to Page 17, looking at our working capital. We actually have a negative working capital this quarter. This is driven by reduced inventory due to the demand we're seeing in this quarter. We also still have a positive contribution from COVID-19 related state aid driven by the factory roll out to postpone social fees and VAT of around SEK 90 million. And if you compare to last year, there's also a fairly big increase in our factoring and vendor financing solutions. All in all, leading us to this SEK 9 million in working capital. And if you look at our working capital to sales ratio, it's continuing to decline. We have a target level of adjusted for financing items to be at around 7%. And in Q3, if we adjust for the COVID-19 state aid and also the financing elements, we are at 6.2%, which is still an improvement versus the same -- if you do the same adjustment for last year it would have been at 8.5%. If I look only to the Q3 COVID-19 state aid received and adjust for this, the Q3 of 2020 would have been at 0.8%. If we move over to the Page 18, looking at our cash flow. As we have looked at, we have a significant working capital release which is leading us to an overall strong operating cash flow of SEK 240 million. Our tax -- paid tax is up somewhat from the low quarter last year. At the same time, we have paid the earn-out payments of SEK 104 million this quarter related to the Manor Farm acquisition. This is leading us to a net cash flow of SEK 129 million posted number and which gives us to actually having a lower NIBD versus the previous quarter and the previous year. Rounding up from Leif's side at least, looking at some more updates to our cash flow guidance on Page 19. Our capital expenditure, we estimated this will be at SEK 350 million for the full 2020 which is up from previous guidance of SEK 300 million, driven by the fact that we see that we have had solid results and a solid balance sheet as we move with this, but it's still below last year of SEK 419 million. The paid interest estimate remains to be at 3% to 3.5% of average NIBD, while the blended tax rate is about -- we're guiding it to be between 19% and 20% going forward, which is somewhat lower from the previous guidance for 20% to 21%, given the -- a bit of updated country mix. We still have our contingent liabilities which is for the Manor Farm acquisition, which has 3 earn-out tranches. One was paid last year in 2019, 1 we paid in 2020 and the last one in 2021. So on a tranche for 2020, this process has been somewhat dragged out. It will be determined in the Q4, but we have paid -- we paid the expected amount of SEK 104 million now in Q3. Our dividend policy remains to be at 60% roughly of net earnings over time. However, for 2020, dividend has been suspended as a precautionary capital measure in light of the COVID-19 uncertainty. And with that, I would like to hand back to Leif.

[Leif Stig Hansen, CEO, President & MD]

Yes. Thank you. Under the Scandi way, that's heading all our work within sustainability, a very, very important part for this business where we have a significant amount of important work streams underway. At this time, I'm going to put light on 2: One is a healthy workplace; and the other thing is how we work from a planet perspective. And if you go on to the next page, just in secure the safety of our workforce is, of course, the 1, 2 and 3 priority and an area where a lot of effort is put into these days, given the pandemic. We're taking a lot of measures to ensure that people stay healthy, taking a lot of advice from a number of different people and continuing and strengthening what we do within this field.Within Planet, we have set a target to halve our CO2 emissions every 10th year, with '16 as our base year, which is fully in line with the Paris agreement. We have taken 2 important steps now to get us towards that target. One is to move into CO2-neutral cold storage in Denmark, that's all powered by green energy and also that we will change our logistical setup in Sweden in a manner that will significantly reduce our transport mileage. Summing up on the last page. We here delivered a quarter with very solid growth and record margins. Overall, we prove the business to be resilient to COVID-19. In -- however, we have taken a number of contingency plans in case of business disruptions. We have ensured a very solid balance sheet and also taking a number of initiatives to improve our liquidity situation. We do continue to follow structural opportunities very closely. And looking a little bit ahead, we do expect the Q4 to be yet another quarter with improved results compared to the previous year. So with that, I would like to take any questions. Thank you for listening.

[Operator]

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

[Daniel Schmidt, Research Analyst]

Yes. Hope you can hear me. A couple of questions from me then. When you give your outlook for Q4 and you expect another quarter of improved results compared to last year. Can you tell us anything about the assessment that you're making when it comes to the Foodservice business in that guidance?

[Leif Stig Hansen, CEO, President & MD]

I mean, we do anticipate Foodservice to be volatile. We saw in the springtime Foodservice delivering only index 80 across all our markets and all our Foodservice channels. That improved into Q3 with only an 8% decrease on index 92. I think it's fair to say that given sort of further lockdowns we will anticipate to see a lower demand going into Q4 versus what we have seen in Q3, but it is very volatile and it is very hard to predict. But I also feel that what we have proven since we saw this pandemic is that the business is rather resilient to these developments.

[Daniel Schmidt, Research Analyst]

Yes. All right. So you're assessment for Q4 includes a bit of a weaker Foodservice in Q4 versus Q3 is that correct? Is that how I should sort of read you?

[Leif Stig Hansen, CEO, President & MD]

Yes. Yes. But for us it is very difficult to predict if there are...

[Daniel Schmidt, Research Analyst]

Because you gave us the exit rate there with September being down 13% and I assume that going into November, with all the things that have been happening in the Nordics and across Europe, things are not getting better, rather the opposite.

[Leif Stig Hansen, CEO, President & MD]

No. Exactly.

[Daniel Schmidt, Research Analyst]

Yes.

[Leif Stig Hansen, CEO, President & MD]

It's more of the opposite. So...

[Daniel Schmidt, Research Analyst]

But do you feel that...

[Leif Stig Hansen, CEO, President & MD]

We also are assessing what it is when we had the pandemic outbreak, we were -- there was a lot of, let's say, close down measures being taken. I think a lot of processes and we were unsure about how would these measures -- what would be the impact of those. Would it combat the virus spreading. And I think that was shown that these measures do work. And now it seems to a large degree that it is similar measures being taken. So I also -- my view is that we can be relatively, let's say, confident that these measures will reduce -- will result in reduced illness.

[Daniel Schmidt, Research Analyst]

Sorry, I didn't hear the last thing you said there, sorry.

[Leif Stig Hansen, CEO, President & MD]

That these measures will have a positive impact where you will see fewer people getting ill and also that you will see, hopefully, the Foodservice market reopening again.

[Daniel Schmidt, Research Analyst]

Yes. But at the same time, of course, you still have, on the other hand, good support on the retail side?

[Leif Stig Hansen, CEO, President & MD]

Yes.

[Daniel Schmidt, Research Analyst]

Yes. And speaking of retail, you're right on Slide 5, reduced campaign activity. Could you shed some more light on that? Is that just a function of the fact that the market has been so strong in retail, so you don't need to really sort of campaign that much?

[Leif Stig Hansen, CEO, President & MD]

Yes. And this was more what we saw in Q2. We've seen less of that in Q3.

[Daniel Schmidt, Research Analyst]

Okay. Okay. Okay. All right. And just to get the earn-out sort of numbers right here, you're paying SEK 104 million. Is that SEK 30 million more than you assessed that you would have been paying when you laid out your forecast basically? Is that how we should read the extra SEK 31 million that you take through the P&L?

[Leif Stig Hansen, CEO, President & MD]

Will you take that?

[Julia Lagerqvist, Chief Financial Officer]

Yes. So the SEK 31 million that we took as a provision, if I understood your question right, so that is relating to? That's what you're asking, Daniel?

[Daniel Schmidt, Research Analyst]

Yes, exactly. Sort of you're basically saying that they are performing better than you assessed when you bought them basically?

[Julia Lagerqvist, Chief Financial Officer]

Yes. So the increased provision is mainly related to the good results we're seeing in 2020. So which you need to adjust for them -- for those operations for what we paid in 2021.

[Daniel Schmidt, Research Analyst]

Sorry, please repeat the last one. That it relates to what you did across what you've seen in 2020 and then you said something about '21?

[Julia Lagerqvist, Chief Financial Officer]

No. So that's a -- so this earn-out tranche, it will be paid in 2021. So it's really -- this is based on the results in 2020.

[Daniel Schmidt, Research Analyst]

Yes. All right. Okay. I think that's the -- that's all for me.

[Operator]

Our next question is from Mikael Löfdahl of Carnegie.

[Mikael Löfdahl, Research Analyst]

Yes. So first of all, when you look at the current mix now with the rather significant changed demand or consumer behavior, would you say that your operations and your production and everything is aligned with the current mix shift or -- because you had some difficulties, obviously, initially for the rapid mix shift. But are you more aligned now? And can sort of more benefit from this mix shift also going forward?

[Leif Stig Hansen, CEO, President & MD]

Yes. It was much more challenging in the springtime where we saw a rapid decline in Foodservice and retail where a lot of consumers who were basically buying and stocking up. That was a very difficult period for us lasting some weeks there. But we see that we have adapted. There are some lines that are operating some over time too because we have seen increased demand for certain products, whereas as we have other manufacturing lines that are operating less hours than what they did before, but no significant impact. We have largely adapted to these sort of adjusted patterns.

[Mikael Löfdahl, Research Analyst]

So if we were to see a continued mix like we have now, that will obviously be good for your margins then?

[Leif Stig Hansen, CEO, President & MD]

Yes. All in all, if you see the margin improvement, it is driven by a number of different factors. One is increased sales of Chilled ready-to-cook products. But there's also a number of investments that we have done in increased efficiencies, increased yields that are delivering an uplift in the performance. So it's a combination of those 2.

[Mikael Löfdahl, Research Analyst]

Yes. That was my next question. When looking at your EBIT bridge and when trying to assess what is what. When you look at the price mix factor there, obviously, a very big chunk of the earnings improvement. And that was my next question, how much of that is due to the changed consumer behavior and how much is due to your sort of more own internal development and perhaps also better products with higher margins, more convenient products or what have you, also within the retail segment, not just the shift from Foodservice to retail?

[Leif Stig Hansen, CEO, President & MD]

The majority of this is the more Chilled sales and less frozen sales basically although frozen grew with 1%. It's a perfect shift in balance with more Chilled sales. That's the main one. But also, if you step back a little bit, if you look over the last 5 years, we have grown the business with around 7%, 8% annually. This is more or less the growth we see in retail now basically. So even though you see changed behavior, it has not sort of massively changed to the development we have seen over a number of years. So you're asking how can we break that down? How much is operational efficiency? How much is more Chilled sales? How much is the investment service sales. It's a very difficult one to break down. But as I said, the 2 main ones is more Chilled, relatively less frozen and more operational efficiency. And if you If you're pushing me to say how would -- if you really should split those 2, I would say, assuming that they are equally important in the improvement, it will probably not be a bad job.

[Mikael Löfdahl, Research Analyst]

Okay. Okay. Good. And then also adding to the question about reduced campaign activity that you mentioned. Is this -- does this imply that you have had during the last now quarter -- 2 quarters, lower marketing spend that is shown in the better margins, especially in Sweden?

[Leif Stig Hansen, CEO, President & MD]

No. We -- our marketing spend -- we have not cut down on marketing spend. So the move towards more differentiated product offering, more branded sales and so forth, that we have continued. We were at the time when the outbreak of COVID-19 in the beginning of the year. We were sort of holding back for a couple of months of marketing spend. But as we have seen more, I wouldn't say business as usual, but we all do -- I think you know what I mean. We have continued to invest for the long term in building our branded positions and innovations.

[Mikael Löfdahl, Research Analyst]

Okay. So all in all, when you look at -- once the market starts to -- or the consumer behavior starts to normalize when that happens, it's anyones guess, I guess, but there will still be sustainable margin improvements, not just going back to where you were before the -- before the pandemic?

[Leif Stig Hansen, CEO, President & MD]

Yes, that's what we believe.

[Mikael Löfdahl, Research Analyst]

Okay. Fine. Just another detail on Ireland. Where are you currently in terms of the usage of antibiotics? I know that you have a obviously, a 0% goal for the group, but -- and you are basically there in the Nordics. But where are you in Ireland? And on that topic also, do you -- can you say something about when you speak about the M&A opportunities in Europe where are you seeing other companies like you in Europe? Where are they in this matter? And what do they need to do to be compliant to new EU regulations, which will come in place, I think, in -- I think it's 2, 3 years from now?

[Leif Stig Hansen, CEO, President & MD]

If we take Ireland first, when we got into Ireland, the usage of -- there was about 70%, 7-0, of old birds that were treated. Now we are down to a bit below 20%. So a significant reduction, but there's still more work to be done to get closer to our basically 0 level we have in the Nordic countries. So it kind of shows the impact of sharing best practice, but it also shows that even though that it is the kind of 0 standard is something we have been operating for years and years. It's not something you kind of replicate overnight because it impacts the entire value chain, reck how you develop the -- a day old chick, the feed industry, the quality of the housing, actually feed recipes and how they are applied. So it's a whole list that needs to be addressed to reduce the use of antibiotics.

[Mikael Löfdahl, Research Analyst]

And where do you see the competitors in Europe? And the challenges that they are facing and which might open up for M&A opportunities?

[Leif Stig Hansen, CEO, President & MD]

Well, we do see opportunities. This is clearly so that in this pandemic, when we do our consumer research, it is this risk of resistant bacteria. It has been high on the agenda for a lot of customers, but also for a lot of consumers. But we have seen this moving up the ladder for a bigger proportion of consumers really getting concerned if we can -- if in turn medicine is no longer effective, what situation we will be then be in. So it is increasing its importance. It's an important part in our brands, whether it's -- they have the chicken project or whether it's the family farm project that we roll out, they are all antibiotics-free. And -- but when we look across the use of antibiotics across Europe, it is an area where the statistics is not very good. But we see a lot of -- the overall uses of antibiotics across Europe, the data we have available show that it's still around 2/3 of all birds that are treated. So there's a lot of work ahead of these operators to get those numbers down.

[Mikael Löfdahl, Research Analyst]

Okay. That's interesting. A final question of you mentioned in connection with the Q2 report that you are looking into 2 plant-based ingredients and to add that in some of the products, that's a possibility for you. And I guess that could be a growth area. Could you say something more about that how you are seeing this and how -- and which type of products its most suitable for? And I guess if you need to make any investments to make that possible?

[Leif Stig Hansen, CEO, President & MD]

It is basically building on the business we have created within ready-to-eat. So products we are developing with plant-based, the substance are basically products that we can reduce on some of these ready-to-eat production lines that are currently using chicken as the raw material. So in terms of CapEx, we're talking about very little CapEx. It's not something you will be able to see in the numbers. In terms of where we are, further development work are being done in terms of recipes, the texture and also some work is being been done in terms of concept positioning.

[Operator]

Okay. Good. One final detail for me. Just in the net financials, you mentioned there was a currency impact there. Could you say how big the FX impact was? And what should be expected for right before Q4 in that sense?

[Leif Stig Hansen, CEO, President & MD]

Would you take that Julia?

[Julia Lagerqvist, Chief Financial Officer]

Yes. So the FX impact was around, if I remember rightly, SEK 17 million -- no, sorry, it's SEK 12 million in this quarter. And I would expect -- and it obviously depends on how the Swedish krona fares in the fourth quarter, but I would expect it to be maybe a little bit lower, but still positive.

[Mikael Löfdahl, Research Analyst]

A positive impact of SEK 12 million in Q3. That seems a lot for...

[Julia Lagerqvist, Chief Financial Officer]

No, no, sorry. Maybe I'm quoting the numbers wrong here. No, because it was highlighted. I think, it's somewhere in there between SEK 5 million to SEK 10 million. I think I will double check this one again, seriously.

[Leif Stig Hansen, CEO, President & MD]

No other questions?

[Operator]

We currently have no further questions. [Operator Instructions] We have no further questions. I'll hand back to your host.

[Leif Stig Hansen, CEO, President & MD]

All right. Thank you, everybody. Thank you for your time. Thank you for good questions. I do realize that we are fighting with an election that's taking a fair bit of attention today. So have a great day, everybody. Thank you. Bye.

[Operator]

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