Scandi Standard AB (publ)

STO:SCST

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, everyone, and welcome to the Scandi Standard Interim Report for the Third Quarter 2023. My name is Seth, and I will be the operator for your call today. [Operator Instructions]

I will now hand the floor to Jonas Tunestål, CEO, to begin. Please go ahead.

[Jonas Tunestål, executive]

Good morning, everyone, and welcome to this presentation of Scandi Standard's results for Q3 2023. I'm Jonas Tunestål, CEO and Managing Director, Scandi Standard. And with me, I have Julia Lagerqvist, our CFO, and I'm pleased to have her by my side today, and I'm glad to report continued margins improvement and a strong cash flow in the third quarter.

Next slide, please. And this is another step on our journey to improve our margins, and we have now recovered our earnings to historical numbers. And this allows me to turn focus from turnaround to long-term value creation. And we see a 2% top line growth and 8% higher harvest volume. And it is encouraging demand in several markets.

We have increased volumes in some markets, even though we still set earnings before growth. We increased our adjusted EBIT with 16% and delivered an adjusted EBIT of SEK 130 million and a strong cash flow. And the improvement was driven by a strong quarter in Ready-to-cook, Ready-to-eat and ingredients was, however, weaker as expected.

The net interest bank debt was significantly reduced in the quarter due to the strong earnings, seasonal working capital release and the divestment of Rokkedahl.

Next slide, please. And this slide shows our successful turnaround process, and we are proud to have recovered our margins after a tough period for Scandi Standard. And I want to give credit to the organization for the resolute handling of our challenges over the past years. And with recovered margins and a stronger balance sheet, we have a solid position for the next stage in our journey. So I look forward to sharing our thoughts on this, the 28th of November in our Capital Markets Day.

Next slide, please. And this slide shows our input costs, and we have seen some reduction in our input prices during the last quarters, which we are increasingly benefiting from. Although we see [indiscernible] now, we, however, have to be prepared for the further volatility during the winter.

And we are encouraged to see demand increasing strongly in many of our markets in parallel with consumer spending is coming under pressure. So chicken require far less feed and resources compared to pork and cattle and we're proud to offer high-quality affordable products to our clients.

So next slide, please. And this one shows our strong basis for further profitable growth. There are strong macro factors that are supporting us, and I'm enthusiastic about the long-term opportunities in this industry. And you can see in the left corner, we have a very strong historic growth in consumption and trends expected to continue and they're driven by health trends, versatility, sustainability metrics and not at least in this environment affordability.

We move to next slide, please. And this slide is to remind you on our strong market position in all our 5 home markets, and the country is highly consolidated. These markets have large entry barriers, and they can envision, they are regarded as semi closed markets due to the strong consumer preference for domestic produce. And due to our strong market position, our own supply decision had a meaningful impact on the market balance, which has helped us in the recovery process from inflation.

We move into next slide. And here we look at the export prices, and they remain at high level. We have seen a slight increase of the prices in the quarter. And 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 market which have and will have a positive impact on our export business.

We are also focusing on broadening our export permits to the most attractive export markets in order to get more value out of every bird. We see a slight decrease in prices in the beginning of the fourth quarter though.

Next slide, please. And this slide shows a reconciliation of our segments. We see a strong positive contribution in RTC and a decline in RTE and others as expected compared to Q3 2022. And we want to remind you of the [indiscernible] other includes our ingredients business and our corporate costs. And then we look into our Ready-to-cook segment, and we have an increase in net sales of 7% to represent an EBIT of SEK 97 million compared to SEK 34 million last year. And it is a strong improvement driven by the turnaround measures and the increase in demand in several markets.

We also see strong improvement in our animal welfare metrics, and they're mainly driven by Ireland, improved foot pad scores and a 56% reduction of flocks treated with antibiotics. We also have a strong focus on our LTI performance, and we continue our journey of improvement there.

Next slide, please. And this slide will look into Ready-to-cook over time. We are now on a journey of profitable volume growth in most of our countries. And as you can see in this slide, we've been able to recover our earnings in per kilo. We see some downward adjustment in net sales per kilo, but that is reflecting lower input costs.

We also see a normalization of ingredients earnings that will continue into Q4. So we are for increased value upgrade somewhat mitigated this trend, and that is a strong focus for us in the coming years to extract the value potential and it will be and will represent a substantial opportunity for us.

And moving to next slide. And this slide just show you some of the investment we do to support improvement in our business. On top of this, we are investing a lot in machines to better utilize all parts of the chicken, which will benefit our ingredients business in the future.

We can move into next slide. And then we go into Ready-to-cook Denmark. And as you can see, it's another leap in the right direction. We are in the process of reversing an unsuccessful full implementation of slow growing bird strategy. And we see that it will be normalizing in Q4, Q1. And it is expected to continue sequential improvements, and we are gradually changing our product offer to be more aligned with the demand. And we need to remember compared to other countries, Denmark is more exposed to the export markets. To mitigate this, we are in the process of increasing the integration with our Ready-to-eat business, which also will be made possible by the changeover to a high proportion conventional birds.

And we expect to reach an optimal breed mix at the year-end 2023, and this will also be supported by a change in customer mix in our Ready-to-eat business [indiscernible].

And moving to next slide, please. And on this slide, you can see the channel development more in detail. And for these details, you can notice a strong increase in retail channel in the quarter, which was driven mainly by volume. We have been seeing a strong demand growth in some of our markets in the quarter, and that's particularly Ireland and Finland.

We can move into next slide. And now we look into our Ready-to-eat and we see temporary reduced activity level. We have this as mentioned last quarter, loss of breaded contract to Continental Europe. That was a high-volume, low-margin business, and it was phased out the 1st of July, and the 1st of October.

We see good traction in replacing those business, and we are aiming for more diversified and profitable client portfolio. And if we look into the EBIT in the quarter, it's SEK 32 million compared to SEK 70 million last year and which further moderate of EBIT drop expected in Q4, but we have a really positive momentum, and it is expected to build and start in Q1 2024.

We're also using this window of lower utilization in our final plant to upgrade machine and maintenance to meet the higher standards, and we're also preparing for our future expansion. And when we look into our orders in quarter 4, we see that we're filling up with new orders already.

Next slide, please. And this slide shows the strong uneven growth and is expected to continue. I'm not very concerned about recovering our recently lost volumes over the coming period. We have this historically strong growth and uneven demand, and we expect continuous growth over time. and growth in this segment comes in sequences. And trend drivers are particularly strong for convenience products and it's typically 2 main type of business. It's the international breaded business, and then there is the integrated local business. And our Ready-to-eat business yields a significantly higher return on capital employed compared to Ready-to-cook. And after 4% growth in 2022, we are now expected reduced orders for breaded products for some of our European markets outside Nordic. But the planned expansion of breaded business in fact is still being prepared and can be initiated in a short notice when required.

Moving to next slide. And here, you can see it in figures. It is, of course, encouraging to see that Ready-to-eat is growing in retail. However, development of food service sales declined due to the reasons mentioned in the former slide. And growth in this segment will be a priority for me the coming years. In short term, we will see the volume growth due to low sales market outside our home markets, but we are confident that we'll replace it with other more profitable orders in the coming year, and we're already slowly started up to fill it up with new orders, and we'll continue to do that for the coming periods. So Ready-to-eat would be an important tool in developing our EBIT per kilo and increasing the value of our protein.

And then yes, with that, I hand over to Julia for more details in the financials.

[Julia Lagerqvist, executive]

Thank you, Jonas. If you go on to Page 18, we come back to the overall P&L. And as you've seen, the quarterly performance showed an improvement versus the previous year with an EBITDA at SEK 248 million and an EBITDA margin at 7.5%. There was a positive noncomparable item booked in the quarter related to the Rokkedahl divestment and EBIT landed at SEK 139 million in Q3.

The finance costs are increasing with the higher base rates as we've seen in the previous quarters. This has been partly compensated by lower credit margin due to the lower leverage. And all in all, the net income for the period landed at SEK 90 million, far above last year and indicating an earnings per share of SEK 1.16 for the quarter.

Looking at the feed conversion ratio or feed efficiency. This is measured at the kilo feed needed for 1 kilo of live weight. And here chicken is one of the lowest levels for animal proteins. In Q3, it was at 1.5 kilos and this has been at this stable low level in the last year.

Coming to Page 19, we look at our return measures. Return on cap employed was at 10.5% for the last 12 months. This is an increase versus the previous low year. It is also an improvement versus the previous quarter, and we are on a continued positive trend, and we are now happy to report that we are back at historic levels.

At the same time, our equity ratio has improved to 34.5% versus 31.5% last year. It is also an improvement versus Q2 and then mainly related to the reduced balance sheet due to the divestment of Rokkedahl and lower inventory.

Moving to the next page, we have our cash flow overview. EBITDA is, as I said, improving versus previous year. We also have an improvement in working capital, mainly driven by lower inventory. I will come back to this in the next pages. We are stepping up a bit in our investments, but we still see a strong operating cash flow similar to last year. Paid financing items are increasing, driven by the increased base rates as previously mentioned. And there is also a negative timing effect driven by our payments fall between the quarters.

The divestment of Rokkedahl Food has had a large positive effect on our net debt, mainly due to lower leasing values. In addition, there has been some changes to our leasing asset values and some currency effects. None of this has a cash impact. And all in all, our net interest-bearing debt at the end of the quarter improved with close to SEK 300 million from the previous period, and the leverage is now at 1.9. We're happy to say that we have come out of a tough period with a stronger balance sheet, which is giving us improved strategic flexibility going forward.

On the next page, we have a working capital overview. Inventory is in line with the same period last year, and as mentioned, improving versus previous quarter and the year, and I will share some more details on the next slide.

Payables and receivables are increasing, mainly driven by the cost increases and increased sales on top of currency impact. This also impacted other net working capital items, which is mainly other payables. Note that we have had some positive timing effects in the quarter, improving our working capital. This all leads to working capital of minus SEK 100 million in the quarter and hence, a working capital sales ratio of minus 0.8%. Our target level of working capital, if we exclude financing items, remains to be around 6%. We are currently somewhat below this at 5%.

Looking then at the inventory levels on Page 22. We have decreased in value in Q3, mainly driven by reduced inventorial Ready-to-eat in line with plan. There is a positive mix effect in the inventory with less valuable items and even if the volumes were stable versus the second quarter and the value is now closely in line with Q3 last year. We do have some positive seasonality effects driven by higher sales in the summer season, and we do expect some buildup in inventory in the coming quarters as is the seasonal trend. But inventory, of course, remains a clear focus area going forward.

And as always, we try to use flexibility in bird intake to balance the supply and demand. And we always work on optimizing the sales and operations planning to make sure we could use the right products. And we also use the export channel for surplus sales to not interfere unnecessarily with domestic pricing.

On Page 23, then you have our cash flow guidance. Looking at our capital expenditures, we have estimated for '23 to be around SEK 340 million, which is SEK 311 million last year. The priorities are the RTE expansion in Norway and upgrades in Denmark and also investing in efficiency as Jonas was talking about.

In addition, we have our ERP implementation on top of growing maintenance. Interest rate on bank financing is now at 5.5%, if annualized, and then if we add the IFRS components of leasing in addition factoring and vendor-financing interest costs, the paid financing cost is estimated to be at around 8% of meat in the fourth quarter. In Q2, we paid dividend of SEK 1.15 per share, which was close in line to the policy of 60% of net earnings over time.

We then look at our sustainability KPIs on Page 24. This is a fairly busy slide. But in the table on the left, we see our quarter 3 performance compared to last year and the targets. In the graph, you can see the performance per quarter. As we already talked, LTI, the lost time injuries continues to improve. This quarter, 19% below last year's figures and in fact, one to be achieved. They're '23 targets. Of course, improving health and safety practices at sites continue to be a key priority in the organization and it's rewarding to see that actions are gaining results. Use of antibiotics, as Jonas mentioned, is mainly driven by the Irish performance as Nordics continue to be very close to 0. And during the quarter, we have seen clear effects of the improvement measures in Ireland, and we are now below 5%. This also means that we are on track to reach this year's antibiotic target.

CO2 emissions are improving versus Q2, but we are above last year, and we continue throughout to deliver on our targets. The work is ongoing to develop a detailed carbon transition plan and several projects are in the pipeline.

We are glad to report that our animal -- key animal welfare indicator, the foot pad score is improving and also here is the result of focused work in Irish operations. We have had 0 critical complaints year-to-date. This is, of course, a very good step towards delivering the ambitious target of 0 complaints for the full year '23. And the feed conversion or feed efficiency, as we talk, at a very stable level.

And with that, I hand back over to Jonas.

[Jonas Tunestål, executive]

Thank you. And on this slide, so we are working on shaping the strategy to develop the potential of Scandi Standard, and this one shows the main pillars of our strategy. But we will talk more about this. We want to talk a little bit about our areas of large potential. And we see the match of domestic supply and demand. That isn't super important thing for us to optimizing our business. We are 5 domestic countries with strong domestic value creation. So that's important for us to have the right as on a feed process. And if we look into the value of the whole bird, we have talked about that earlier in this presentation, it is about planning the poultry ladder throughout, and it is about taking more value out of each detail of our bird.

And also the Ready-to-eat potential. We talked about that before when we're integrating Ready-to-cook and Ready-to-eat and actually able to upgrade our products, we see that we can take out more value. So these 3 are strong, important factors for us to delivering our EBIT going forward. And then we look into our quality and production processes, and it is about yield and quality to provide them the right quality to the customer and paying out as much yield as possible in our production process.

And here, we have a lot of things to do and a lot of things to optimize, but I think that we have a good process to be improving that going forward. And then, of course, being one Scandi Standard is important. We are 5 domestic and countries, but being as one group when it comes to activities using best practice and using our current strength in our export business and finding big strategic clients, international clients is important, but being in a group of Scandi Standard. So these areas have large potential, and we will get back and to have a deep dive on the 28th on our Capital Markets Day.

So if we move to the next slide and summarize it. We can see that we have further margin improvement in the quarter. We have strong demand growth and increase in profitability in our Ready-to-cook segment. We have a good traction in replacing the lost RTE business and solid volumes and earnings is expected to bottom up in Q4 2023, and we see strong demand from existing and new clients.

And our Ready-to-cook improvements expected to compensate for further reduce RTE activity in Q4, and we need to remember that Q4 is seasonal weak due to Christmas season. And we're really glad to the 28th of November, present our Capital Markets Day, so we can shift from turnaround to long-term value creation focus and we also want to give you a deeper insight into the key drivers for growth in EBIT per kilo expansion, and we will also present the final financial targets when they are decided. So we see a strong margin improvement in the quarter.

And with that, we hand over for questions.

[Operator]

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

[Daniel Schmidt, analyst]

Yes. Jonas and Julia, I hope you can hear me. A couple of questions from me then. And starting with Denmark, maybe where you've sort of taken big steps forward in this quarter. And when you say that you are expecting to reach optimal breed mix by the end of '23, is that implicitly -- I think you also said that we should expect sequential improvements from here. Should we see that this businesses will generate positive EBIT at the start of '24? Is that sort of a fair assumption?

[Jonas Tunestål, executive]

We're not guiding on -- again it's 2024. What we can say is that what we said, where we see sequential improvements, we need to keep in mind that our seasonal changes as well so compared to the comparable quarter for the last year but we are really proud of that. We see a good traction, and we're working on getting the right mix. And as we said before, we will have the right building mix in the Quarter 4 and Quarter 1.

[Daniel Schmidt, analyst]

Okay. But given where you are basically, if you judge it from where you are on an EBIT basis, you're not that far off or breakeven in this quarter, if I'm not mistaken. And if you do consider some seasonal mix or changes in Q4 versus Q3. And at the same time, you're saying that you are moving forward very hard to not get to the conclusion that this should be something that will generate an operating profit by the start of next year. Why is that hard to declare? What am I missing?

[Jonas Tunestål, executive]

I don't think -- you need to do your conclusion but what we see is that we are improving quarter by quarter. And we see that, that will continue. And we need to compare it with the last quarters when we're saying that we are -- decrease in [indiscernible]. So what it is, that don't guide that results in 2024.

[Daniel Schmidt, analyst]

No, you see that you can't promise anything, of course, but you can have a clear opinion, I assume. And is there anything that sort of -- that has been exaggerated to the positive in this particular quarter that we need to deduct going forward?

[Jonas Tunestål, executive]

No, not in the adjusted EBIT. We have this sale of Rokkedahl in our Ready-to-cook business but not in the adjusted EBIT, not more than the seasonal effects.

[Daniel Schmidt, analyst]

Okay. And could you give any sort of indication of what the seasonal effect difference is between the quarters in the second half?

[Jonas Tunestål, executive]

No, you can look at the historical numbers to just. But what we are saying is that in overall, we see always a seasonal factor increasing in Q2, Q3, and then it's the Christmas period comes for Q4.

[Daniel Schmidt, analyst]

But just looking at Denmark, you don't see any difference in earnings, at least in the H2 last year or in H2 the year before, it's been the same?

[Jonas Tunestål, executive]

Yes, for Denmark it's specific. But if you look into the overall Denmark has been a special thing with the slow growing and relatively slow-growing strategy. Now we are balancing that one, and it will be more normalized due to the rest of that.

[Daniel Schmidt, analyst]

Okay. I still don't get it. Anyway, jumping on then maybe to Ready-to-eat. If you look at food service, which was, of course, weak, as you alluded to in connection with Q2. And could you -- was it your sort of -- or is it right to believe that you're saying that we should see a further deceleration or further decline of profitability in Q4 versus Q3. And then as we go into Q1, you'll start to see a recovery of profitability in Ready-to-eat, is that correct?

[Jonas Tunestål, executive]

Yes, that is correct, a moderate drop in Q4. But I also want to mention here, it's important to mention that, that the drop was the 1st of October, and we're filling up with new orders already. But poultry you would see that as we explained.

[Daniel Schmidt, analyst]

Okay. And do you feel confident that you will be able to replace what's been lost entirely as we get into 2024? Is that gradual progress through '24 to get back to square one?

[Jonas Tunestål, executive]

Yes, we expect to replace it with new orders and we're also saying that we think that we will see a more diverse customer mix and our customer mix with stronger margins. And then of course, the product mix will look a little bit different, but we are expecting during the coming periods in 2024 to fill up the volumes with new orders. And we are really confident that we see a strong underlying demand in the slide before, where we can see a strong but uneven demand. So it goes into plateaus and then goes a little bit back and then it goes up again. And that is the logic [indiscernible]. And we're also preparing now in the period for -- be ready for further expansion when the order book is full again.

[Daniel Schmidt, analyst]

Okay. And the drop that we saw in Q3, is that entirely due to the loss of this contract? Or is there any sort of underlying weakness in the food service market. At the same time, you are saying that you're sort of taking on a lot of new contracts. So maybe not, but just to be sure?

[Jonas Tunestål, executive]

No, we don't see any weakness, and it's related to the loss of contracts, but we also should be aware of that we are putting the factory in the right balance and adjust the production capacity within this period. That's why you're seeing the drop compared to net sales and just the moderate drop, that's how our expectation.

[Daniel Schmidt, analyst]

Okay. And you also mentioned that sort of export prices have been rising again, but looking into Q4, you saw a slight decrease in export prices. Is that meaningful? Or is it as you say, slight?

[Jonas Tunestål, executive]

It's slight. And we also -- as I started saying when the presentation, we see stable export prices and off-course, it's also a little bit volatility between the periods, but we don't see that much decrease in Quarter 4. We're also doing -- taking a lot of new orders and strategic clients. So we're moving away more and more from the commodity exposure.

[Daniel Schmidt, analyst]

Okay. Good. And just nitty-gritty one on Page 4, where you post sort of feed price, packaging and energy sort of a bit surprised that feed prices are down more and that energy prices are looking to be up in Q4 versus the index that you had in Q3. I don't know if this is sort of relating to Swedish SE3 spot prices. And to my knowledge, they have continued to go down?

[Jonas Tunestål, executive]

It's related to spot prices and the spot prices are a little bit increasing in this. Actually, I'm looking at the earlier, but...

[Daniel Schmidt, analyst]

They are actually not. They're actually further decreasing so far this year in this quarter?

[Julia Lagerqvist, executive]

We do expect for Q4, obviously, with the colder weather. [ I mean cost ] index is comparing versus a full year of 2021, right? So it's a seasonal effect that you see in energy prices.

[Daniel Schmidt, analyst]

Yes. But the seasonal effect is actually not -- it's actually further down versus Q3, if you look at Sweden. So that has to be a forecast another spot price?

[Julia Lagerqvist, executive]

Yes. It's a forecast on our internal analysis.

[Daniel Schmidt, analyst]

But it's a spot price. So anyway, it doesn't matter.

[Operator]

Our next question comes from Christian Nordby from Kepler.

[Christian Nordby, analyst]

So I have a question regarding the export price development. How sensitive is the Ready-to-cook Denmark to changes in the export price, I mean, going forward because now you're basically breakeven and the export price index was 144. If, for example, export price is 130, how significant is that for the Denmark business?

[Jonas Tunestål, executive]

It is more is more -- Denmark is more exposed, but with an increased integration with our RTE business in [indiscernible], it will be less exposed and also more strategic client that is -- that have a less volatile market price. So it will be less exposed due to -- compared to historical. Julia is taking over.

[Julia Lagerqvist, executive]

Sorry, Jonas unfortunately have to step out to take an interview. We have a bit a busy schedule today. So I will try to answer any remaining questions as well. But did you catch his answer there correctly?

[Christian Nordby, analyst]

Yes. But for example, if you look at Q2 minus SEK 27 million, in Denmark and then in Q4, Q3 minus SEK 4 million and then the export prices from SEK 135 million to SEK 144 million, is how much of that increase is due to the export prices and how much is internal?

[Julia Lagerqvist, executive]

I would say it's marginal impact on the export prices in this case. It's mainly the internal work and the shift to have a better balance between the slow going and the conventional bird that has led to the improvement.

[Christian Nordby, analyst]

And then my last question, how long term are the new Ready-to-eat contract for ready product? Are they like monthly contracts or 2-year contracts or how stable are they?

[Julia Lagerqvist, executive]

I don't have the complete overview, but it is more of a 1-year contract, I would say where you're going [indiscernible].

[Operator]

[Operator Instructions] We have no further questions. So I will hand the call back to you, Julia.

[Julia Lagerqvist, executive]

Thank you so much. Apologies for Jonas quick departure here, but I thank you for attending today, and wish you all the best for the rest of the day. Thank you.