Scandi Standard AB (publ)

STO:SCST

Earnings Call Transcript 2022-Q4

[Operator]

Hello, and welcome to the Scandi Standard Interim Report for the Fourth Quarter 2022 Call. My name is Lauren, and I will be coordinating your call today. [Operator Instructions].

I will now hand you over to your host, Jonas Tunestål, CEO, to begin. Jonas, please go ahead.

[Jonas Tunestål, executive]

Thank you, and good morning, everyone, and welcome to this presentation of Scandi Standard's results for Q4 2022. I'm Jonas Tunestål, CEO and Managing Director of Scandi Standard. With me, I have Julia Lagerqvist, our CFO, and I'm pleased to have her by my side today to report a strong result in a challenging market.

So next slide, please. During 2022, we have demonstrated ability to counter the ongoing strong inflation together with our suppliers and customers. I'm very pleased to report another strong result in a challenging market. The result is driven by successful implementation of price increases, profitable growth in Ready-to-eat segments and high export prices. Although I'm encouraged to be strong -- the strong recovery, there are still significant gaps to be closed in terms of pricing, and our results remain heavily impacted by the large -- in our Ready-to-cook plant in Denmark.

Provided a successful recovery, we are in position to relax the strict cash preservation measures imposed earlier. This allows us to embark on a substantial expansion of our most profitable business, Ready-to-eat. And the Board has also decided to propose a dividend of SEK 1.15 to this year's AGM. Although most costs are now stabilizing, we have continued plans in place to forcefully counter further turbulence in our markets.

So next slide, please. Over the years, Scandi Standard has been generating substantial organic growth with stable EBIT margin of around 4% and 10% return on capital employed. In the second half '21 and in Q1 '22, we experienced a significant drop in margins mainly due to the lead time in obtaining compensation for high cost inflation and lower export prices. From the second quarter '22, we have largely managed to compensate inflation through price increases and profitable growth in our Ready-to-eat segments and higher export prices. There are still significant gaps to be closed and costs are increasing into the first half of '23.

So next slide, please. And when you look into this slide, major cost components at feed prices and energy and et cetera, are leveling off, even though the risk is still on. And we will not see the full cost effect of an eventual cost reduction in the coming period due to hedges. But chicken is positioned, even though the current price is making thresholds in the market, mainly due to oversupply from other proteins.

So next slide, please. And on this slide, I want to remind you of our leading positions in domestic cater markets. We have been able to compensate inflation mainly for price increases, supported by reduced throughput, and we expect the throughput still to be low during the coming quarters, even though it will differ from market to market. But when other proteins are more in balance, Scandi Standard is prepared to increase raw material supply again.

So next slide, please. And looking into export prices on this slide, we are seeing continued increase in export prices within the quarter. We think that we'll see more stable price levels into Q1. But we also see that our efforts to build more solid export business within European and Southeast Asian retail and food service customers started to yield results. And then we have the new regionalized export restriction agreement related to bird flu that also has lowered our risk in the export business.

So next slide, please. And this table shows the reconciliation of our segments. We see a positive contribution from all areas compared to Q4 '21, and the category other includes our Ingredients business and our corporate costs. We can note that EBIT for Q4 '21 includes a noncomparable income of SEK 26 million, leading to an acquisition purchase price agreement.

So next slide, please. When we look into Ready-to-cook, we see strong improvement in our profitability. We had 21% increase in net sales and an EBIT of SEK 31 million compared to minus SEK 32 million last year. We also see a good improvement in our LTI performance in all sites during 2022, but we still see large room for improvement. So as noted in previous quarters, we have taken measures to address temporary increase in our biological indicators in Ireland and we start to see improvements in the fourth quarter.

So next slide, please. And this slide shows that EBIT in Ready-to-cook is still lagging our historical performance. The performance is partly offset by strong performance in our Ingredients business. This business refines part of our birds not applicable for direct consumption into mainly pet, food and biogas. The earnings increase is driven by strong price increase in these markets. Taking this into account, the compliance business is still lagging historical performance, underlying the requirement to close outstanding gap. And when you look at the right side and tables, you see that this table shows the combined continuous improvement we make in this part of the business.

So next slide, please. As you know, we have realized large losses for a long time in our Ready-to-cook business in Denmark. The business has recently been further challenged by limited demand for premium products in the Danish market. Our retail clients are reacting to this by largely abandoning high ambitions and meeting the changed demand by importing low-end products from Eastern Europe. In the absence of hard commitments behind the radical move into this segment, we have no alternative to selling the high-end products for prices largely reflecting those of conventional. Thanks to the strong export business, we are partly compensated for this development.

But naturally, the situation for this business is unsatisfactory, and we have hence implemented changes gradually taking effect from the second quarter '23. Most notably, we are adapting the consumer preferences by shifting towards higher proportion of conventional birds. This will also allow us to commence a higher degree of integration with our Ready-to-eat business, replacing volumes from external vendors. So in parallel with the incremental improvements underway, we are working actively to identify further measures to accelerate the turnaround.

So next slide, please. On this slide, you can see the channel development more in detail. Through these details, you can note there's a strong increase in food service channel in the quarter, which is driven by both price and volume. We see somewhat slow development in retail, which is due to the price electricity in this channel.

So next slide, please. Now we move into Ready-to-eat and we see a significant and profitable growth in the Ready-to-eat business. 39% increase in net sales at stable volumes, an EBIT of SEK 53 million compared to last year of SEK 32 million. So Ready-to-eat is by far the most profitable segment in Scandi Standard, and we have now started to expand our largest plant. This investment will pave the way for capacity increase of 25% in this segment.

Next slide, please. And this slide here, you can see examples of our Ready-to-eat products in retail. Worth to mention is that food service is our biggest sales channel in this segment.

So we move on forward to the next slide. And here, you can see the figures. It is, of course, very encouraging to see the Ready-to-eat is growing and outperforming prepandemic sales. The development is driven by increased sales in food service channel. But during the quarter, we also see that RTE, Ready-to-eat, is growing in the retail segment. So growth in this segment will be a priority for me in the coming years. Ready-to-eat will be an important tool on developing EBIT per kilo, i.e., increasing the value of our product.

And with that, I hand over to Julia for a more deep dive on our financials. So next slide, please.

[Julia Lagerqvist, executive]

Thank you, Jonas. If we then move to Page 16, we come back to the overall P&L. And as you've seen, the quarter performance showed a clear improvement versus the previous year with an EBITDA at SEK 202 million and an EBITDA margin of 6.6%. There were no noncomparable items booked in the quarter, and not for the entire year of '22, and the EBIT in the quarter landed at SEK 99 million. Finance costs are increasing. It was driven by higher base rates and also a temporary increase in margins linked to the new financing deal we had in place. But all in all, the net income for the period ended SEK 55 million far above last year, indicating an EPS of SEK 0.86 for the quarter, and 2.02% for the year.

Looking at feed conversion ratio or feed efficiency. This is measured as the kilo feed needed for 1 kilo live weight. And here, chicken is one of the lowest levels of animal proteins. In the quarter, we added 1.51 kilos. This has been quite stable throughout the year and slightly improving versus last year. For the full year, we landed at 1.5, which is in line with our targets.

Coming to the next page, Page 17, we look at our return measures. Return on capital employed was at 6.7% for the last 12 months, a slight increase versus previous year and was an improvement versus the previous quarter. So we are on a positive trend. And looking at the annualized return based on the Q4 results, the return on capital employed would have been above 9%. At the same time, our equity ratio has improved to 23.5%. This mainly related to retained earnings and also exchange rate differences related to translation of our foreign operations.

Moving on to the next page, our cash flow overview. And we have, in the quarter, relaxed our cash preservation measures, and we have faced in large investments as per the plan to ramp up after a period of lower level of investment. We also have a large increase in working capital in the quarter. I will come back to this in the next pages. Paid financing items are also increasingly driven by the increased base rates as previously mentioned. And all in all, our net interest bearing debt for the year ended at similar level as year-end 2021.

Coming to Page 19, you have a overview of working capital. And inventory has increased versus the same period last year and versus last quarter. This is an important focus area, of course, and I will share some details on the next slide. Payables and receivables both increased over last year, driven by the cost and price increases as would be expected. We have also early in the accounted some of our expenses factoring solutions.

At the same time, we now also see the reverse effect of the positive timing effects and early payments that led to an exceptionally low working capital in Q3. All in all, this leads to working capital to sales ratio of 0.2% in the quarter. Our target level is excluding financing items. It remains to be around 6%. We are currently somewhat above this level.

Coming to next slide, Page 20. We look at our inventory values, which are increasing versus last year. However, our volumes on inventory actually down 6% versus the same quarter last year, and the value increase is mainly driven by cost increases. In addition, we normally see a seasonal increase in Q4. And in '22, we also noted a fairly large lower effect impacting the inventory value. Nevertheless, we observe an increasing trend in the last quarters, and this is a clear focus area going forward.

What we can do, we can use our flexibility in bird and take the balance of supply and demand. We also work on optimizing the sales and operations planning to make sure that we produce the right products. And we use export channels for surplus sales to not interfere necessarily with our domestic pricing. We continue to closely monitoring our inventory levels going forward, and we are ready to take forceful measures if needed. We do not speculate on our inventory. As you know that the first loss is normally the lease loss.

Coming to Page 21, you have our cash flow guidance. And CapEx for '23 is estimated to be around SEK 400 million versus the SEK 311 million we saw in '22. Focus is on facilitating the further growth in Ready-to-eat as Jonas has been talking about. And we also have our ESG implementation, on top of growing maintenance. The paid interest level is estimated to be around 6% to 6.5% and the blended tax rate is expected to be around 21%. We have, as previously reported, a new 5-year financing effect since the mid-Q2. And finally, the dividend proposal from the Board of Scandi is at SEK 1.15 per share, which is closely in line with the policy of 60% of net earnings over time.

Coming to Page 22, we look at our sustainability KPIs. In the table to the left, you can see our '22 performance compared to last year and the target. As Jonas has previously mentioned, we are pleased to see that we have met our ambitious LTI target, which was to be below 25% in Q4. During '22, we have seen improvements in all production sites here, and we'll continue to focus on this every day. However, as reported in the quarters, we have unacceptably high figures on our main animal welfare indicated with food, pet score and also use of antibiotics. This is mainly driven by a decline in the Irish performance.

We have added group resources to address these issues, and we have seen some improvement in Q4 compared to the previous quarters. The focus is to continue this work throughout '23, and this is reflected in the '23 targes. Q2 intensity has gone down but this is driven by changes in reporting practices. And together with lower volumes, the real intensity has gone up, while our CO2 emissions have gone down. We have set new ambitious targets for next year.

Coming to principal complaints. We have managed to reduce significantly versus last year, now down to 2 for the full year. The target is to be at 0, and this is also the target for next year. Feed efficiency of feed conversion, as previously mentioned, has been improved, and we target further improvements in the next year.

Coming to Page 23, and building on the sustainability. In Q4, the Scandi Standard Board of Directors approved our new sustainability goals, setting the direction for 2030. The goal is to address key sustainability topics and provide a clear framework of key performance indicators that will be used in all levels at the company. The six goals cover all our important sustainability areas and over 20 KPIs have been identified to follow on progress. We are now working to make these more operational by breaking them down on country level and defining clear action plans. This will be our new basis for reporting in '24.

And with that, I hand back the word to Jonas.

[Jonas Tunestål, executive]

Thank you. So next slide, please. And this work is one aspect of building a future-proof company, the thing that Julia mentioned, one of the pillars in the strategic framework that we have developed to take Scandi Standard to the next level. And we try to keep it simple and focused. And if we go to next slide, I will sort of mention the six areas of large potential that we see.

And of course, one of the things is an efficient S&OP process and mass demand -- domestic demand and supply. And we've talked about that in the presentation, the importance of taking up and down volumes to actually be in balance in our domestic market. That is a key factor for profitability in our business.

Another long-term key factor for our business is to increase the value of our whole bird, and we will be focused on utilizing as much value as possible from the whole bird. And then we try to move up, as we cover the poultry ladder, move up the products, and this is in the Ready-to-eat segment, one of our most important potentials we have done. So increased -- focus on increasing our Ready-to-eat segment is a huge importance for us. So all these six pillars, they are vital for our industry, and we will be action-oriented. Some things will take more time. Some things will be ongoing work to continue improvements, and some things we can change more rapidly.

So with that said, to move into next slide to summarize. So in summary, I'm proud to report a strong result for the fourth quarter in a challenging market. Although we still experienced some cost increases into the first quarter, I'm confident in our ability to continue adapting to the challenging market through full focus on, one, obtaining full price compensation; two, continual adjustment to secure the right inventory level; and the third thing, radial turnaround of our Ready-to-cook Denmark. So we're also preparing to gradually regain volume once beef and pork markets are in balance.

As we are moving into calmer waters, my focus will gradually shift towards increasing value per bird processed over the coming years, and I'm confident in the long-term margin potential, for which the investment in Ready-to-eat expansion is the first tangible step. And then the Board has decided to recommend a dividend of SEK 1.15 per share to this year's AGM.

So with that summary, we end the presentation and open up for questions.

[Operator]

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

[Daniel Schmidt, analyst]

Hope you can hear me. A couple of questions from me then. And maybe starting with the cost increases that you mentioned in the report and also on the last slide, and the lead time and the lag to sort of catch up with those when it comes to price increases. Do you see that that's different in this quarter compared to what you experienced during 2022, has sort of cross accelerated a bit more in the start of '23 than what was the pace during the past 3 quarters? Or how should we view that comment?

[Jonas Tunestål, executive]

No. I think that you should look it up upon that some lagging of the price increases that we see. So we have seen discrete price increases in '22 but now we see the commodities are stabilizing, and we can see that in wheat, and we can see that in oil and gas, but as an uncertainty and there are some delays on those price increases. So that's how we should look at that.

[Daniel Schmidt, analyst]

Yes. But I'm just sort of how should we sort of stack it up against the past quarters? Is that uncertainty and that delay a bit bigger now? Or is it more the same?

[Jonas Tunestål, executive]

We see pretty much the same as before. We just want to mention that the price increases, they're not finished for the fourth quarter, even though we see that the commodities are stabilized.

[Daniel Schmidt, analyst]

Okay. So if I get you right, you don't want to signal that the challenge is even bigger now. You're just saying that the challenge is still there. Is that a right interpretation?

[Jonas Tunestål, executive]

Yes.

[Daniel Schmidt, analyst]

Yes. Okay. Good. Because as you say, we do -- we have seen sort of feed prices stabilizing and I guess, sort of packaging and energy, or especially energy, hasn't turned out as bad as we feared a couple of months ago. So that should be a relief, but it will take some time to catch up. And I guess you have some -- you mentioned some hedging as well. Can you sort of give us some insight on that as well?

[Jonas Tunestål, executive]

We don't want to go in details in the hedging, but you're doing right conclusion in that manner that we have some hedges. And of course, that's delayed even though we see that the spot market is stabilized.

[Daniel Schmidt, analyst]

And -- but is it fair -- if we don't see a further pickup in terms of input costs, and they stay flat now for the coming months, do you feel that as we go into Q2 that the challenge will be less when it comes to price increases? If it's an equal challenge now compared to last year, will we have a better situation in the quarter's time?

[Jonas Tunestål, executive]

Yes. If we see things -- if we see the commodities will stabilize then, of course, we'll see gradually stabilizing our effective input cost as well. Yes.

[Daniel Schmidt, analyst]

Yes. But is it fair to assume that, that is another quarter out, all else equal?

[Jonas Tunestål, executive]

Yes, it will gradually fade out, of course, if you see lower, right.

[Daniel Schmidt, analyst]

All right. And then just coming back to the capacity investments that you're doing in Ready-to-eat, I think you said 25% increase from 2024. And that sort of, of course, signals a lot of confidence when it comes to that market and your position in that market. In terms of the capacity expansion, how fast do you believe that that's going to be filled up?

[Jonas Tunestål, executive]

We're -- and that, of course, due to what will happen in the market, but we are confident in the growth we have, and we are planning for gradually fill it up throughout the coming years. But as you say, it's -- and that, I think, is -- that we need to state that it's a capacity increase in the January '24, and then we will gradually fill it up, and that will be due to market conditions, of course. But we are confident in that we see growth in that segment.

[Daniel Schmidt, analyst]

Should we then expect some sort of under absorption of fixed costs at the start of that year as you go live with that new capacity and then gradually see a better sort of absorption as we go through '24? Is that sort of the normal procedure?

[Jonas Tunestål, executive]

Yes. You can see, of course, slightly higher fixed costs enough. Yes.

[Daniel Schmidt, analyst]

Yes. All right. And coming back to Denmark, even though sort of the losses in Ready-to-cook were unchanged quarter-over-quarter, it does sound like you are making changes now and you're pushing through things that will have a better impact from the second quarter of '23, as I understand it. Could you shed some more light on that?

[Jonas Tunestål, executive]

We are -- as we said in repo, we are facing headwinds in terms of the price focus and we have more slowing on bird with the high cost. And now we are changing the mix to actually be a part of -- to have the right mix for the consumer. And that focus, together with a focus on increasing our general efficiency, we will see improvements. And we see improvements in Q4 as well, but we are facing headwinds. And of course, that will mitigate that improvement. And that is what we're trying to explain for Denmark. So we're actually doing fixtures in the bird intake and how we will integrate it even more as we're explaining to the -- our own RTE factory. And that is -- it's a big change. But of course, it will take time and the quarter 2 -- we will start the effect in quarter 2 then.

[Daniel Schmidt, analyst]

The headwinds that you are facing, is that relating to energy when it comes to the Danish business?

[Jonas Tunestål, executive]

Yes. It's related to more price focused and that we have a high proportion of slow-growing birds.

[Daniel Schmidt, analyst]

Yes. But also, sort of internally...

[Jonas Tunestål, executive]

Yes. Internally, of course, we are at -- everyone else effect of high input costs. But the significant...

[Daniel Schmidt, analyst]

I think you gave some guidance in connection with Q3. How should we think about the sort of the next quarter for this particular business? Would you be willing to do the same now?

[Jonas Tunestål, executive]

I think that I will retake what I said in this presentation that we are now on short-term things, and we have been focused on short-term things in quarter 4, and we will do that for the coming quarter as well. But as we mentioned in the presentation, now we're taking some bigger shifts as well when it comes to bird intakes and when it comes to how we integrate our business, and that will be an incremental improvements, but it will take time and it will come gradually.

[Daniel Schmidt, analyst]

And do you think that's going to be enough to get this business back to breakeven? Or is it going to be -- does it have to be more -- does it have to require more actions further on in '23 to get there?

[Jonas Tunestål, executive]

Yes. We will do the preferred actions to get this business up and running and we think where we are on a good journey.

[Daniel Schmidt, analyst]

I was just thinking -- I think you also mentioned in the last slide, if I'm not mistaken, or some of that slide, that you're integrating it more with Ready-to-eat in Denmark, correct me if I'm wrong. But is that indicating that this business is not going to be spun off?

[Jonas Tunestål, executive]

It's about optimizing the raw material between our RTC business and RTE business. We can purchase from externally. We can purchase from ourselves, and then we need to have the right bird size for selling into our RTE business. But that is a change that can be made over time, but we see an impact for us if we can have an efficient supply chain between RTC and RTE business. But that will not change our ability to do other -- take other decisions because we are buying externally today.

[Daniel Schmidt, analyst]

Yes. Okay. That's interesting. All right. I think that was -- maybe one last question on feed prices. You indicate that they are sort of flattening out, which we also can see in the wheat price. Anything sort of else in terms of external factors that have changed recently? Or any indications that will sort of anything that's going to impact externally as of late that has changed?

[Jonas Tunestål, executive]

No, no, nothing more than at present. We know that it's still a volatile market. And of course, there's an uncertainty in terms of the feed price and so on. But we have, I think, the latest time, we have seen stabilized more, and that's what we're looking for and planning.

[Daniel Schmidt, analyst]

Maybe just one final question on your financial targets. And they are, of course, the same when it comes to the ones that are related to the P&L. And you do mention, of course, or you do right again exceed 10% in EBITDA, which you've never been really close to historically. Do you still think that, that is a relevant target?

[Jonas Tunestål, executive]

We will, now, in the -- in 2023 look into a review the financial targets for the future.

[Daniel Schmidt, analyst]

But you sort of stand by the fact that this company used to make 4% or above 4% EBIT margin and you see no reason why you shouldn't get back to that level at least?

[Jonas Tunestål, executive]

We have said that we have historically 4% margin, and our focus has been on recovery on EBIT, and we're also looking into margin to recover the margin when the inflation is lapping out. So, that.

[Operator]

[Operator Instructions] Our next question is from Christian Nordby from Kepler Cheuvreux.

[Christian Nordby, analyst]

So I have a question regarding your conventional share increasing in Denmark from Q2 '23. Can you comment a bit on the levels we're talking about here? Is it that conventional share, is that 30% going to 32%? Or is it that it's, for example, 30% and going to 60%? What are we talking?

[Jonas Tunestål, executive]

We can't comment on the specific percent, but we will say, so the demand will match the supply, and we will, as we see it now, have a high proportion of conventional birds than we all mentioned.

[Christian Nordby, analyst]

And what's the pace of this increase? Is it that by Q3, it's similar improvement in the pace as Q2 and Q4 similar? Is it that it goes quite rapidly better in Q2 and then stable from there?

[Jonas Tunestål, executive]

There will be gradually into Q4 and of course, there's a time lag in that when it comes to moving out and slow growing. And we will look into it. So we have the right mix between the birds and more flexible way of handling this for the future.

[Christian Nordby, analyst]

And so, as of now, you hope that by the end of 2023, you have sort of the ideal mix with conventional and slow growing share. Is that what you're saying?

[Jonas Tunestål, executive]

Yes.

[Christian Nordby, analyst]

Yes, yes. And what's -- if we look at the EBIT losses in relative to Denmark today, what does that improvement mean for that segment on an isolated basis? Would that alone put it into breakeven or positive EBIT levels? Or is it other factors, too that matter there?

[Jonas Tunestål, executive]

I'll take the question once again.

[Christian Nordby, analyst]

I just said, once you finally get to the state that you want to be an unconventional share in Ready-to-cook Denmark, is that alone enough to bring EBIT in the positive territory for that segment? Or do you need other initiatives as well?

[Jonas Tunestål, executive]

Yes. There will be improvement in that. And -- but we can't comment on where it will end. Of course, we will -- we are confident in the way that we're going to move the Danish business. And of course, there's some time lag in our chains but we will not get into specific quarters when things will happen. But we are moving it and we'll see improvements throughout the year.

[Christian Nordby, analyst]

Yes. I'm just asking if that's alone enough to sort of help the segment? Or if there are others, if that's sort of by far the most important part? Or if there are other things as well that are very meaningful for Denmark?

[Jonas Tunestål, executive]

If we look into our Danish business, we have our Ready-to-cook business and we have Ready-to-eat business that is Scandi production. But looking into our competitive advantage of having an integrated value chain, I'm confident that we will move and improve our total business in RTC Denmark.

[Christian Nordby, analyst]

All right. And on the 25% Ready-to-eat expansion, what does this mean for your EBIT potential in Ready-to-eat overall in '24, '25 relative to today, assuming normalized margins? Is it 20% to 25% higher as simple as that? Or is it some other impacts that we should think about?

[Jonas Tunestål, executive]

We can't comment on that specific in the future, but we can -- that, we can say that you can see our margins today and -- presented in our Q4 report. And we're also saying that we are investing and increasing our RTE segment with 25%, and we will have gradually -- gain business gradually from this capacity increase. So of course, we will see in medium term, that will increase the margins in Scandi Standard. We can't comment on specific so far in the future.

[Operator]

We currently have no further questions. I will now hand you back over to Jonas Tunestål for closing remarks.

[Jonas Tunestål, executive]

Yes. Well, thank everyone for listening in to our presentation. So with that said, thank you very much.