Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, welcome to today's Scandi Standard interim report for Q4 2019. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to your host, Leif Bergvall Hansen to begin. Leif, please go ahead.

[Leif Bergvall Hansen, CEO, President & MD]

Thank you. Good morning, everybody, to presenting our Q4 report. Just on slide number page 1, just looking at our -- at what our average growth rate over the last 6 years of around 8%, 8.5%, in fact. It's been a little bit higher in '19 as has been our CAGR over the previous years of around 7%. Going on to Page 3. 2019, strong growth in sales and improved results. So all in all, a 12% growth during the year and a 19% increase in adjusted EBIT. We saw a strong growth and good results in the quarter, 12% revenue growth also in this quarter. EBIT came in at SEK 104 million. So strong operational cash flow and a 14% return on equity. The Board recommend a dividend of SEK 2.25, up from SEK 2 last year per share. Going on to the next page. Q4 was also a quarter with exceptional top line growth. 10% underlying growth, mainly driven by the Ready-to-eat products. They represent altogether, about 2/3 of the growth we delivered in this quarter. But also strong performance in Ready-to-cook products. Currency represent 2%. And for 2020, we anticipate a more modest growth rate coming after a very strong growth in Ready-to-eat in 2019. And also as you are aware, we'll have an impact from this pricing formula where we get compensation for raw material inflation that has led to price increases during '19, and for '20, that will turn a bit the other way. That does not change our long-term anticipated growth to continue around the 6%, 7% we have seen historically. Going on to talk a little bit about sustainability. As you know, it's a very important focus area for us in the group. Just going on to Page 6, to just bring 1 example of one of the focus areas within our sustainability agenda, which is to improve the feed conversion ratio. First of all, as you are aware, chicken is already about 4.5x more feed efficient, and thereby, climate friendly versus beef. You see that on the first chart, but on top of that, where the chicken all in all have a feed conversion ratio internationally around 1.6, we have, over the last 4 years, managed to reduce that. So we now are at 1.52, that equals a reduction in the feed used of 25,000 tons. Another way of explaining that is it frees up 4,000 hectares of farming land, very important sustainability metric.Going on to Page 7. For 2019, we saw strong earnings development, driven partly by strong volume growth, mainly in the Ready-to-cook and Ready-to-eat. We also delivered a strong contribution from improved mix. We saw an increased proportion of branded sales contributing, and we have had price increases which have matched the raw material inflation that has occurred during the year. And that's coming back to this -- the pricing model that we have implemented with our key clients. In the year, we had some OpEx increases, mainly marketing and general inflation. And just when you look at the quarter, please be aware that we had very low depreciation in Q4 '18 which means that adjusting for that, we also saw improved profitability in this quarter. Going on to Page 8. So a solid development in our most profitable product categories continued. So 9% growth in the quarter in Ready-to-cook. So both the volume impact that improved mix, but also a pricing impact from this raw material compensation I talked about. In Ready-to-eat, we delivered another quarter with exceptional growth of 34%. The capacity increases that we have put in place over the last couple of years, we have absorbed quite a lot of that. So volume increases, both in breaded and also in un-breaded categories. And more and more benefits coming from our very extensive product development initiatives that have been taken in this category over several years have continued into this quarter. The quarter was impacted by some inventory clearance of frozen products that have led to increased sales on some of these categories compared to the norm. Going on to Page 9. Just point to the Ready-to-eat category development over the last 5 years. Our sales have increased to about 4x, all of that organically. And the ready to -- the total sales have gone from 9% to now 20% for the year. It reflects this market is clearly growing, and we are taking a lot of initiatives to develop the market and to remain a strong leader in this category, and we see this as an important platform for developing the business into the future. Flipping page, looking at the breakdown in terms of sales channel. Retail continued to grow, representing a growth of 9%, combination of growth with discount as well also with high-end retailers. Foodservice also continued to perform very well with growth of 33% reflecting people are eating more and more out, but also our growth within quick service restaurants, but also a very strong product innovation pipeline and where we have strengthened the organization in quite a number of areas. Going on to Page 11, saw earnings improvement in all countries in 2019. Altogether, 19% improved EBIT and all countries have contributed to that development. The truth for Q4, you see a more stable development in terms of EBIT, but when you adjust for the depreciation that was exceptional in the Q4 of operating, as I mentioned, you see also an improved development in this quarter. From a little bit about the countries. Sweden delivered solid growth and improved margins, 6% increase in sales reflecting a good market growth. We delivered an improved EBIT margin, mainly coming from increased cost efficiency and also improved yields. And we continue to have a positive market outlook. Denmark, a quarter with exceptional growth and low margins, so 24% revenue growth coming mainly from the Ready-to-eat area but also continued positive development for the new brand. The quarter -- the impact -- the quarterly results were impacted by some special items. There was some frozen inventory clearance but also some restructuring initiatives taking place in the quarter. And going forward, we will have a strong focus on improving margins and anticipate the situation to gradually normalize during 2020. Going to Norway. Continuing a very strong performance. Top line-wise, a growth of 3%, 5% in local. And not least, the Ready-to-eat segment have contributed to that positive top line development. Continued absolutely the best-in-class margins. We see a strong contribution from the product portfolio and also a clearly improved operational performance taking place in Norway. Ireland is coming in another good quarter, 6% revenue growth, 3% in local. It's coming mainly from a good operational performance and also some effect of some successful investments that we've made during the course of last year, both to deliver improved cost efficiency, also some improvement in animal welfare and food safety. And we also deliver some debottlenecking in certain parts of the equation. Then on to Finland. Strong growth but a soft quarter in terms of results, 22% revenue growth. So weak margins in the quarter mainly coming from some seasonal costs and also some inventory clearance taking place. We see that's going into '20, there will be further improvements on our performance coming partly from some debottlenecking activities, improved product mix and product innovations. And we also see further opportunities to reduce costs and improve yields within operation. With that, I like to hand over to Julia for the income statement.

[Julia Lagerqvist, Chief Financial Officer]

Thank you. We turn to Page 17 and come back to the income statement. As Leif said, we have very strong growth in the quarter of 12%. The adjusted EBITDA margin of 10% which leads us to a margin, and then growth in the EBITDA margin which leads us to a margin of 7.6%, roughly the same as last year. As Leif mentioned, we have the increased depreciation in this quarter. Last year, we did the restatement of the expected asset life, which had a positive one-off effect in Q4 of 2018. But this year, we are more in line with the run rate. We have a stable adjusted EBIT. There are some nonrecurring items in the quarter. It's mainly related to restructuring in Denmark. Looking at the tax rate. It's at 37% this quarter, it's very high. And it's related to the revaluation of losses carried forward of roughly SEK 16 million, adjusted for this will be more at normal levels. And this leads us to a net income of over SEK 42 million in the quarter. Looking at the statement of our financial position. The return on capital employed has improved with 1.3% up to 11% now. And the return on equity for the year is at 14.2%, up 1% from the last year. And the equity ratio is at 28%, also improving from last year of 27%. This is to note that with the implementation of IFRS 16 related to leasing of assets, this has an effect, of course, on the net interest-bearing debt of around SEK 445 million in 2019, roughly the same level as they have been in 2018. Turning to the working capital on Page 19, we have seen a reduction in the working capital in this quarter. It's partly due to seasonal effects and also some temporary items, but there was a increase in our vendor financing activities. And this leads to a very low level of working capital ratio at 2.1%. We don't expect this to last. The normal level should be more in the area of 4% to 6%. Looking at the cash flow. We see a strong improvement here. It is driven both by the improvement in EBITDA, and of course, the significant release of working capital. So despite having a high quarterly expenditure, we still see a positive effect on the net cash flow. And the net cash flow per share is at SEK 5.12. Coming to the cash flow guidance. The dividend policy is mainly the same, it's to be 60% of net income over time. As Leif mentioned in the beginning, the dividend proposal, now it's SEK 2.25, up 12.5% from last year, and it should be paid in the quarter 2 of 2020. The paid interest is still estimated to be at 3% to 3.5% of the average net interest-bearing debt. And the blended effective tax rate is to be around 20% to 21%. Looking at the capital expenditures for 2020. We are committed to be in line with this year to close to SEK 420 million. It is to be spread within the group, and the focus is on facilitating growth and margin improvements across the group. Just a comment, the corporate costs for the next year is estimated to be around SEK 20 million per quarter. Last comment on the contingent liabilities. We have our Manor Farm acquisition. As you know, there are 3 earnout tranches here. The first one we paid in 2019, it was SEK 133 million. Second will come now in 2020. And the third and final one will be in 2021. And with that, I hand back to Leif.

[Leif Bergvall Hansen, CEO, President & MD]

Thank you. So summing up the year, we saw a strong growth and good results. Continue to see solid demand for our products across the market, driven by people being more and more impacted by the climate implication of our [ charters ], but also on health. 2019 delivered a growth as well as above our 5-year average of 5% to 7% -- sorry, 6% to 7%. Solid innovations continue to drive both our top line and our mix improvements. So also that continuing into '19. We saw a further strengthening on our brands. We do anticipate a lower top line growth for 2020 following this exceptional 2019, and we will be focusing increasingly on margin improvements from Q4 of '19. Continue to follow structural opportunities closely, and the Board are recommending a dividend of SEK 2.25 per share. With that, we would like to take any questions. Thank you.

[Operator]

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

[Daniel Schmidt, Research Analyst]

A couple of questions from me then. Starting with price increases, you mentioned in the quarter and also because you reiterate, at the same time, what you said in connection with the Q3 report, looking into 2020 that there will be a moderation of growth given the comps, but also in terms of raw materials going the other way and so on. Could you give us any sort of indication of how much price increases you had in the current quarter and what you expect to reverse going into 2020?

[Leif Bergvall Hansen, CEO, President & MD]

We'll say that we have seen any -- that the growth in '19 have been inflated with 3 to 4 percentage points altogether. And we will see that normalizing somewhat, not to the full degree into 2020. And also bear in mind that we have had exceptional growth in the Ready-to-eat area.

[Daniel Schmidt, Research Analyst]

Yes. Sure. And then I know that you're fairly neutral when it comes to raw material, but there is some deviations when it comes to Ireland, if I'm correct, then would that mean that you will be gaining a little bit in terms of raw material and input costs in the Irish business starting in 2020?

[Leif Bergvall Hansen, CEO, President & MD]

No. I would say that these numbers are more or less relevant for across the group, where we have managed to get compensation for the raw materials which is an important part of our business model. And we'll still see that -- the effect also continuing into 2020.

[Daniel Schmidt, Research Analyst]

Okay. So no deviation really versus the Nordics then?

[Leif Bergvall Hansen, CEO, President & MD]

No.

[Daniel Schmidt, Research Analyst]

No. All right. And then moving on to Denmark and efficiency. And you've been sort of focused on improving efficiency now in the second half of 2019 and maybe even earlier when it comes to the Danish business. Have we seen the end of restructuring now as we go into 2020 when it comes to this particular area?

[Leif Bergvall Hansen, CEO, President & MD]

Yes, I would say so. We have taken the -- by far, all of the initiatives we want to take, and we anticipate that margins will normalize during 2020.

[Daniel Schmidt, Research Analyst]

And is that sort of a gradual normalization or?

[Leif Bergvall Hansen, CEO, President & MD]

Yes, exactly. More gradual improvement, we will anticipate in that sector. After a year with very, very exceptional growth, you will see a much stronger formula improve the margins and get that back to where it should be.

[Daniel Schmidt, Research Analyst]

Yes. Could you give us more -- shed some more light on what the one-offs relate to more exactly in the quarter?

[Leif Bergvall Hansen, CEO, President & MD]

There has been some stock clearance, some changes in various part of the organization. And that has -- basically, in an effort to ensure that that very exceptional top line growth, that we also get some margin improvements from that into the future.

[Daniel Schmidt, Research Analyst]

All right. And any sort of comments and all on sort of the latest news flow in terms of Eastern Europe and bird flu and the breakouts that we've seen there? It seems like there hasn't been any new in the past 2, 3 weeks. Do you have any more to sort of to add to that?

[Leif Bergvall Hansen, CEO, President & MD]

Not really. Of course, we follow the situation. We have very strong measures to prevent this from affecting us, and we just continue to reiterate those. But otherwise, it's pretty, pretty far away from us and that, of course, we follow the situation.

[Operator]

[Operator Instructions] We have no further question so I'll hand back.

[Leif Bergvall Hansen, CEO, President & MD]

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

[Julia Lagerqvist, Chief Financial Officer]

Thank you.

[Operator]

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