Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, thank you for joining us on the Scandi Standard Fourth Quarter and Year-End Report 2018. My name is Chat, and I will be the coordinator for this conference.I would now like to hand over to Leif Bergvall Hansen to begin the presentation. Leif, please go ahead.

[Leif Bergvall Hansen, CEO, President & MD]

Thank you. Good morning, everybody. Hope you had a good start of the day.Just to give you some highlights on Q4, it's a quarter with a 5% revenue growth, where we are now as a group approaching SEK 9 billion worth of sales. So strong growth in Sweden. Growth rates in other places were positively impacted by some currency effects. EBIT came in at SEK 102 million, which is down from SEK 116 million in the same quarter of 2017.A quarter with good performance in Norway, very good performance in Ireland and also in Finland. We saw some margin pressure coming through in Sweden and in Denmark.In the quarter, we managed to reduce net interest-bearing debt with SEK 180 million, mainly driven by working capital release, but also by a relatively low CapEx in that quarter.Earnings per share came in 24% up. And the board have decided to recommend a dividend of SEK 2 per share, which is up from SEK 1.80 the year before. Flipping page, looking at Page 4. Looking at the quarterly development for the group. We've seen some quite large movement in terms of price and cost. Stable volume development across the group. We have seen our ability to implement price increases to our clients to cover for the significant raw material increases that we have seen coming through, following the drought in the second half of last year that we have reached a relatively high acceptance of those price increases. But also, that there are still a bit that we are in the process of implementing, and I'm going to come back to that.Just for comparison, in Q4 2017, we had some third-party compensation. You can see that in the bridge. And also, in this quarter, we have implemented an adjustment at lifetime that have an impact. You also see that in the bridge, and we're going to come back to that also later.Going on to Page 5, looking at the quarterly development by country. Sweden came in a bit better than the year before. We're seeing normal market dynamics being reinstated. We've had a negative impact from clearance of stock that we have built earlier that we also have communicated. That is now sold. Denmark came in soft as a consequence of some low price realization on exports, but also a continued market investment, sales marketing investment in building a new brand.Norway came in very strong with all-time high margins. Ireland came in also with a very strong quarter. And Finland delivered a good, strong underlying development also in this quarter.We have some large one-off compensations that we had in Q4 2017 that also impact the comparison, as you can see from this bridge.Flipping page to Page 6, looking at product categories and sales channels. We have seen strong growth coming through both in Chilled and in Ready-to-eat categories. The Ready-to-eat category now account for 18% of group revenue, which is -- represent -- it has doubled its share over the last 4 years. And it's positive to see that we continue to have very strong order intake in this area. So this new dedicated plant that we invested in, in Denmark to enable us to produce even more of these products, we already see strong order take for that.We have seen a decline in the less-profitable Frozen segment and also in the less-profitable Export segments. We've seen growth in both Retail and in Food Service. We see strong momentum in Chilled within Retail and then we see strong momentum within Food Service, in particular, within the Ready-to-eat product categories.Coming on to Page 7, let's talk about Sweden. The quarter was, as we have indicated, negatively impacted by quite significant stock clearances, but also that we have seen a continued solid market coming through. Revenue went up with 6% in the quarter. And the underlying Chilled market is now fully recovered and grew 8% in this quarter.Continued strong growth in the Ready-to-eat segment. Consumers continuing to substitute from red meat products into chicken, particularly sausages, meatballs and other similar categories. We have seen margins being impacted negatively by this -- by the inventory clearance that we implemented in this quarter. And we have now managed to get inventory down to more normal level.The quarter was impacted by SEK 8 million of nonrecurring items that relates to a restructuring of our premium bird operations in Sweden.Just to summarize, we see a solid market outlook for 2019. Now where markets are back to normal and we have clearance there and we have enough stock that we have with us.Going on to Page 8, to Denmark. The market -- the quarter was impacted by continued significant market investments and also cost pressure. We delivered a 4% revenue growth, with a relatively weak quarterly earnings performance, following investments in new sales force and the marketing of the new concept. We have realized a relatively low price realization on exports, mainly on frozen products. We continue to see a positive development for the new brand, Danish Family Farms, also why we are continuing to support it. And we are now -- this new brand already have a market share in the entire Danish market of 8%. And we do expect that, from this year, we will see a positive contribution to this investment in this new concept.We continue to see strong growth within the Ready-to-eat segment, but we also do continue to see export markets to remain relatively challenging.Norway, very strong performance, 3% revenue growth, always in line with market. We have seen strong margins coming through, all-time high, coming from a combination of improved product mix. We have rationalized our Food Service range that has had a negative impact on top line, but a positive impact on profitability.We have -- it's clearly, coming through as our most profitable geographical segment coming from a combination of very successful investments in various part of the operations in Norway, following the transfer of best practice from other parts of the group into a relatively isolated market.Also having the benefit of a strengthened product offering, a strong innovation effort that has taken place in Norway over the years that we see those contributing positively to the profitability in the Norwegian segment.Going to Ireland. Strong quarter. I'm happy to say that the integration is going according to plan. A 5% revenue growth, strong quarterly margin, seen significant investments that we have announced that we have planned for 2019, mainly to take out cost. As a company, we've seen to improve animal welfare and food safety, and there's also some capacity constraints that some of these investments will deal with.We want to make you aware that we anticipate a delay in Ireland in obtaining the compensation for these cost increases. We are working hard to get that through, but we do anticipate that, in the beginning of the year, there will be a negative impact coming from that.Going to Finland. A quarter where we have seen further improvements, continue to be cash generative, 6% top line growth, and a good underlying quarterly performance coming mainly from better product mix commercially, but also by better yields being achieved in the operation. The quarter was negatively impacted by SEK 4 million of exceptional costs that we took in this quarter. But in spite of that, we see positive EBITDA and positive operational cash flow.We continue the strong focus on improving product mix, yields and cost, and we do anticipate 2019 to be EBIT positive.And with that, I'd like to hand it over to you, Anders, for the income statement.

[Anders Hägg]

Thank you, Leif. Starting then with the depreciation and amortization. As Leif mentioned, we've had low quarterly depreciation due to this review and alignment we have done across the group of the estimated lifetime of our assets. Going forward, one should assume depreciation per quarter of around SEK 45 million.We also had some nonrecurring items in the quarter of SEK 13 million relating to restructuring of premium bird processing in Sweden, transaction costs in Denmark relating to the Rokkedahl acquisition, partly offset by depreciation effects that I referred to above, which relate to previous quarters that has been taken as a noncomparable.The lower net financial items relates to a positive swing on currency. And the very low tax in the quarter is due to the deferred tax liabilities have been revalued for lower corporate tax rates in Sweden and in Norway.Moving on to the next page, looking at our financial position. We now see that return on capital employed and return on equity is largely in line with Q4 2017, and we also see a slight improvement in equity-to-assets ratio. And we also see the quarterly return on equity is now at 30.3%.We have a section in the report and in the presentation on the IFRS effects that we now -- from IFRS 16 effects will now start from Q1. But in summary, net debt will increase by SEK 470 million, EBITDA will increase by SEK 99 million, EBIT will increase by SEK 12 million, and net profit will decrease by SEK 5 million. Like I said, there's more details of that in the appendix.Moving on to the next page, talking about working capital where we've seen a very good working capital release in Q4, primarily driven by a reduction in trade receivables and an increase in trade payables. We have seen an increased inventory in the quarter despite the reduction of inventory in Sweden that we've been talking about. But in Q4, we had an increase, which is primarily related to an increase of stocks in Denmark. But overall, we can see that we've been above 7% for the last 5 quarters in terms of working capital in terms of sales, but we are now below 6% in Q4.Moving on to the next page, looking at the cash flow. As Leif already mentioned, we reduced net debt by SEK 180 million in the quarter, and that is primarily related to the working capital release we just talked about and also the low quarterly investment that we also have been talking about in the last quarterly report.Moving forward to cash flow guidance. The proposal is to have a dividend of SEK 2 per share, which is 11% up on the SEK 1.80 last year. And this will equate to just about SEK 130 million in terms of dividend payment, if approved at the AGM. But we reiterate the dividend policy of 60% of net income over time.Paid interest estimated to be 3% to 3.5% of net debt, the effective tax rate somewhere between 20% and 21%. And as we said before, we estimate to invest around SEK 380 million CapEx in 2019, and the biggest chunk of that will go to the projects in Ireland that Leif mentioned before.We also, in this -- in 2019 have the first tranche of the earnout payment related to the Manor Farm acquisition, and that is estimated to SEK 125 million. Again, there are more details for that in the appendix.Moving page then, talking about our efforts in the whole sustainability area, Scandi Way. And in this report, we are highlighting what we are working on in terms of sustainable packaging where we are targeting to have 100% renewable packaging by 2023 or, to be more specific, 100% from renewable source or from recycled plastic.Back to you, Leif.

[Leif Bergvall Hansen, CEO, President & MD]

Thank you. Just to -- a slight summary. We have seen -- we see a solid outlook coming through in 2019 in Sweden as the market is now fully recovered and we have covered the overhang of inventory.We see strength in margins demonstrated in Norway, in Ireland and in Finland. We do expect positive results coming through in Finland in this year. Denmark with a bit of a mixed outlook. Positive contributions from the brand initiative that is progressing well, but still with an export market that remain challenging.We expect continued strong growth from the Ready-to-eat segment. That's supported by the investment in additional capacity, as we talked about. We do continue to follow structural opportunities very closely. And the board recommend a dividend up to SEK 2 per share for this year. With that, we'd like to take any kind of questions. Thank you.

[Operator]

[Operator Instructions] Our first question today, gentlemen, comes from the line of Alex Aukner of DNB.

[Stein Alexander Aukner, Senior Analyst]

Two questions. In terms of your changed depreciation rates for useful life, what's now the useful life of your assets? Which segments have you changed? Secondly, also, for the cost increase and the price increase, I think you mentioned Ireland, you're still struggling to get compensation. But am I understanding correctly that Sweden and Norway is working fine, but Ireland is the challenge? Is that correct?

[Anders Hägg]

Shall I take then the first question relating to depreciation? I mean, this is part of our, let's say, overall ambition in getting the basics right and aligning things across the group when it comes to some of these basics. And this is something we've done now in the second half of 2018 where we, like, basically, gone through all the assets in the group and aligned across the countries, but also then reviewed what is the actual estimated lifetime of our assets. And we have gone from, I would say, just below 7 years average depreciation to just below 10 years, so it's an increase of around 3 years in terms of depreciation. I think I would say that we have been a bit too aggressive in the past in terms of depreciation rate.

[Leif Bergvall Hansen, CEO, President & MD]

If I could follow-up on the cost recovery. We have, as we're all aware, there was a kind of serious drought during last summer that impacted grain prices in the second half of the year. And we have been working very dedicated in getting those price increases implemented in the market. And I think we have -- so far, so good. We have managed also, I suppose, as a reflection of the way we work with our clients, we have managed to get compensation in Finland, in Norway, in Sweden. We have got part compensation in Denmark. And we are working very hard in getting full compensation also in Ireland. In Ireland, as we are producing the feed there also in our own feed mill, it means that we get the negative impact a bit earlier than what we managed -- or have been able to manage to implement with our clients. So you are right in thinking of that we do anticipate a delay in getting full compensation in Ireland. And we do anticipate a negative impact from that in the first quarter and some gradual implementation in the following quarter. That's how we see it today.

[Stein Alexander Aukner, Senior Analyst]

Okay, good. Just a follow-up on this depreciation again. I mean, in your 2017 report, you have buildings depreciated over 25 to 30 years property fixtures from 10 to 25 years, standard machinery from 5 to 20 years. Which of these have you made the biggest changes? I mean, it seems to be quite normal depreciation levels that you're quoting here, so I'm just wondering what -- where did you -- where were you too aggressive in the past?

[Anders Hägg]

I would say we have -- since these are not being done aligned across countries, it's -- you can't answer that question with one answer for the group. But I would say we have been through all our assets, and internally, we look at 27 different asset classes. And we basically -- we have been through all of them and reviewed and updated the depreciation rates. So it's across the whole portfolio of assets.

[Stein Alexander Aukner, Senior Analyst]

Okay. Final question for me, just on the CapEx. So including the earnout, you're looking at SEK 505 million in CapEx or cash outflow, is that correct?

[Anders Hägg]

Yes, that is correct. SEK 380 million CapEx and SEK 125 million in the earnouts. And then on top of that, of course, also the dividend.

[Operator]

[Operator Instructions] Our next question on the line comes from Alexandra Barganowski of Nordea.

[Alexandra Barganowski, Analyst]

Yes. I have some question on margins, particularly maybe in Sweden and Denmark, and maybe just what do you see the outlook for 2019 for Sweden? And your margins have been a little bit lower there for a bit more than a year now as well as Denmark. Since you are increasing your marketing efforts, for how long are we supposed to see them, so to speak?

[Leif Bergvall Hansen, CEO, President & MD]

If we talk about Sweden first, this quarter, we came in at an EBIT margin of 6.4%; last 12 months, 5.1%; and 2017, 5.9%. If you go back, the previous year I think was 6.5% to 7%. And we see now the dynamics are back to the historic levels. So we would anticipate that the margin levels that we achieved back in '16/'17 that we should be able to get to that sort of 6%, 7%. So we see things are normalizing in Sweden.

[Alexandra Barganowski, Analyst]

Good. And Denmark?

[Leif Bergvall Hansen, CEO, President & MD]

Denmark is a bit -- we had a challenging quarter, as mentioned. But we have decided -- that's a bit proactive to really put so much effort behind establishing a new brand. But we have seen very, very good consumer acceptance of it. We launched it about 1.5 years ago and now having 8% market share. We anticipate that in the -- during the course of this year, we will see positive earnings contribution from this investment. We still have positive margins coming through for the growth in the Ready-to-eat segment but also having some challenging export situation. So if you look at the outlook going into this year, we see margins will be coming up. And if you would think about Q1 delivering an EBIT profit similar to the year before, you are probably not way off. But we see a gradual improvement coming through in Denmark, but from a relatively low level that we achieved towards the end of last year.

[Alexandra Barganowski, Analyst]

Also, a question on your M&A plans. I mean I think you need to have accurate net debt to EBITDA, an updated one because I think your leverage has come down a little bit since then. But what are sort of your thoughts on that in the coming year? I think you mentioned that you're still looking at the sector and that you're following it. And given this sort of what are your thoughts on the M&A and tender for the coming year?

[Leif Bergvall Hansen, CEO, President & MD]

Yes, we are looking. We are analyzing various cases. But because what you see is a market that, across Europe -- the individual countries are relatively concentrated. 3, 4, 5 players are kind of usually about 80% of the total industry. And we do believe that there are a number of synergies of having strong players in different countries aligning. We see that the industry going from being very much a local play to become more of an international play with some state advantages. So -- and I think the acquisition in Ireland very clearly demonstrates that there are such benefits of joining a group. So we would like to do more similar activities and are looking at various cases, but we haven't got anything just to be called on that.

[Operator]

[Operator Instructions] We have a third question lined up from Daniel Schmidt of Danske Bank.

[Daniel Schmidt, Research Analyst]

I just wanted to ask you about the compensation in Ireland. You said it's going to be a bit delayed. Could you shed some more light on that in terms of the profile going into 2019?

[Leif Bergvall Hansen, CEO, President & MD]

We do anticipate that we won't get the full compensation for this raw material inflation also in Ireland, as we have to managed to get it in other places. But as mentioned, we are producing the feed by ourselves. We do get the negative impact already here from 1st of Jan. And we are working very sort of focused on getting the price increases implemented in the market. We do anticipate that this will -- or that will impact us negatively in Q1. We do anticipate that during the course of Q2, we would have those price increases implemented. But we are not fully there, that's the situation. But this is very well justified price increases. We have seen general, as I said, good acceptance with, by far, the majority of our clients across our geographies. And now we just want to get Ireland over the line, so to speak, fully.

[Operator]

We have no further question on the phone lines, gentlemen, so I'll hand back to you.

[Leif Bergvall Hansen, CEO, President & MD]

All right, thank you. Thank you, everybody. Thank you for your time, and have a great day.

[Anders Hägg]

Thank you. Have a good day. Bye.

[Operator]

Ladies and gentlemen, thank you for joining us today. You may now disconnect your lines. Enjoy the rest of your day. Thank you.