Morning, everybody, welcome to the Scandi Standard Q3 report. Leif Bergvall Hansen speaking. It's a quarter where we report a record margin, EBITDA margin of 8.8%. Going on to page three, it's a quarter with solid growth and strong operating performance. We deliver a 3% growth in net sales, which corresponds to 7% in local currency. It represents 5.6% of Adjusted EBIT margin, which is at record level. It's a quarter where we deliver a very strong cash flow, and all in all, share a business that is resilient to the COVID-19 effects. As you can see, there is some non-recurring reporting in this quarter, and that gives me an opportunity to talk about where it comes from, which is the very successful integration of Manor Farm. We go on to page four. This very strong performance have resulted in some increase in our operation.
Just to remind you, Manor Farm we acquired in August of 2017. It's by far the largest chicken operator in the Republic of Ireland, with more than a 50% share. On terms of some key success factors when we went into the business, it's a very high-quality business. Already, it was very profitable. There was a clear market leader, very capable and experienced management team. We identify quite a number of tangible best practice opportunities across the entire value chain. As a result of implementing a lot of those and even more, we can now see an EBITDA margin that since the acquisition, have gone up from around 7.5 percentage points to now around 10. That means that we have an increase in our operation, and that represents SEK 31 million altogether.
If you go on to page five, deliver solid growth driven particularly by a very good retail demand. We have 7% growth in retail sales, representing 64% of total revenue. It's a very strong demand in basically all our domestic markets. We have seen an improved momentum in food service. If you look at the quarter-on-quarter drop, in Q2, we experienced a 20% drop in sales to food service, the food service channel, whereas in Q3, that drop is now 8%. We have a positive mix, some higher retail sales, particularly chilled, Ready-to-cook products. Going on to page six, you will here see the development of retail versus food service. The strong increase in retail sales, 7% as mentioned, as an average over the quarter of Q3. We see a continued volatile demand in food service, 8% decrease in Q3.
We see also in different food service establishments continue to adapt to changing COVID-19 restrictions. Looking a little bit ahead, we anticipate to see a continued solid demand from retail, but also we anticipate to see food service to remain volatile for some time ahead, not least reflecting the restrictions that is now coming and going, particularly coming at this point in time, into the different markets in which we operate. Q3 by product category and country, 8% growth in Ready-to-cook, chilled. We saw frozen sales be more or less flat and a 3% drop in Ready-to-eat, reflecting that this product group has a very high exposure to the food service market. All countries contribute to the growth that we deliver in this quarter. Go on to page eight, record strong Adjusted EBIT.
The improvement from SEK 125 million of Q3 last year to SEK 147 of this year can be broken down to SEK 20 million coming from volume growth of around 3%. We have a positive net effect of price and mix versus the increases in COGS. The positive mix, particularly the more chilled versus frozen, also improved efficiency across the operation. Good cost control across the business, this result is delivered in spite of a negative currency effect of SEK 7 million. Going on to page nine, looking at the four times growth of the Ready-to-eat sales over the last five years. We see a strong track record and have a positive outlook for how this convenience product category will develop over time, despite some temporary setbacks due to the COVID-19 and less activity in the food service market.
It's a platform that we are very encouraged by for the future, and is also one of the reasons why we are looking at entering non-meat products going into this category. Going on to Sweden. A quarter with good growth and strong margins. We have had a decreased proportion of frozen products, very good cost control, and here deliver an 8.3% EBIT margin that corresponds to a 10.9% EBITDA margin. Denmark on the next page. Denmark is the country with the largest food service exposure and also with the highest impact from the COVID-19 implications. A 2.4% EBIT margin, which is explained by, we have some additional costs from this differentiation strategy we have talked about. In the current market environment, we have not been able to absorb, and we've also seen some exceptionally low export prices because of surplus products being offered in the European commodity market.
Going on to Norway, very strong performance, 3% increase in sales, 15% in local currency. We have seen a strong demand from retail clients, particularly within Ready-to-cook category. Very good cost control and a 10.6% EBIT margin or a more than 14% EBITDA margin. Ireland, another solid quarter, 3% increase in sales, 6% in local, and an EBIT margin of 7.6%, talking to an 11% EBITDA margin. That comes from basically improvements through the entire value chain and a lot of the best practice initiatives being implemented very successfully by the Irish team. Going on to Finland, 14% growth in local currency. It's in a business we have, which is very retail-oriented with limited exposure to food service. We continue to see margin improvements, 5.7% EBITDA margin, 1.7% EBIT, basically coming from improved operation efficiency and also some improved product mix.
We have investment underway to facilitate further growth going forward. With that, I'd like to hand over to you, Julia.
Thank you, Leif. We come back to the grouping statement on page 15. As already shared, we had a very strong adjusted result this quarter, seeing with an EBITDA margin of 8.8%, up from last year at 8.2% same quarter. I mean our long-term target is 10%, and we see this as a good step in the right direction. We do have the non-recurring items in this quarter of SEK 31 million that Leif was mentioning before as well. As said, this is related to the increased provision for the earnout payments in Ireland due to the strong results we're seeing there. We're also having some fairly low net financial items in this quarter of SEK 15 million. This is mainly driven by positive currency impact with the strength in SEK, but also somewhat lower interest rates.
We have, on the opposite side, a bit of a high quarterly tax rate due to country mix of 23%. Last year it was at 21%. It's also partly driven by some adjustments in previous quarters. All in all, this is leading us to an EPS of SEK 1.21 versus last year at SEK 1.12, and the Adjusted EPS of SEK 1.68 versus SEK 1.12 last year, an overall increase of 50% in Adjusted quarterly EPS. Looking at the statement of financial position, this leads us to continued improved returns where the Adjusted Return on Capital employed now is at 12.2% and the Adjusted Return Equity is at 17.4% despite the increase in equity. Equity ratio is at 28.7%, up from 27.9% last year. Turning to page 17, looking at our working capital. We actually have a negative working capital this quarter.
This is driven by reduced inventory due to the high demand we are seeing in this quarter. We also still have a positive contribution from COVID-19-related state aid, driven by the fact that we were allowed to postpone social fees and VAT of around SEK 90 million. If you compare to last year, there's also a fairly big increase in our factoring vendor financing solutions. All in all, leading us to this SEK -9 million in working capital. If we look at our working capital to sales ratio, it's continuing to decline. We have a target level of adjusted for financing items to be at around 7%.
In Q3, if we adjust for the COVID-19 state aid and also the financing element, we are at 6.2%, which is still an improvement versus if we do the same adjustments for last year, we would have been at 8.5%. If I look only to the COVID-19 state aid received, just for this, the Q3 of 2020 would have been at 0.8%. If we move over to page 18, looking at our cash flow. As we have looked at, we have a significant working capital release, which is leading us to an overall strong operating cash flow of SEK 240 million. Our paid tax is up somewhat from the low quarter last year. At the same time, we have paid the earnout payments of SEK 104 million this quarter related to the Manor Farm acquisition.
This is leading us to a net cash flow of SEK 129 million positive number. Which gives us actually having a lower NIBD versus the previous quarter and the previous year. Rounding up from my side, at least, looking at some small updates to our cash flow guidance on page 19. Our capital expenditure, we estimated this will be at SEK 350 million for the full 2020, which is up from previous guidance of SEK 300, driven by the fact that we see that we have had such solid results and a solid balance sheet now. We want to move for this, but it's still below last year of SEK 490 million. The paid interest estimates remains to be at 3% to 3.5% of average NIBD.
While, we're guiding to be between 19% to 20% going forward, which is somewhat lower from the previous guidance of 20% to 21%, given the environment of updated country mix. We still have our contingent liabilities in the shape of the Manor Farm acquisition, which has three earn-out tranches. One was paid last year in 2019, one we paid in 2020, and the last one in 2021. The earn-out tranche for 2020, this process has been somewhat dragged out, it will be determined in the Q4, but we have paid the expected amount of SEK 104 million now in Q3. Our dividend policy remains to be at 60% roughly our net earnings over time. For the 2020 dividend has been suspended as a precautionary capital measure in light of the COVID-19 uncertainty. With that, I would like to hand back to Leif.
Yeah, thank you. Under The Scandi Way, that's heading all our work within sustainability. A very important part for this business, where we have a significant amount of important work streams underway. At this time, I'm going to put light on two. One is a healthy workplace, and the other thing is how we work from a climate perspective. If you go on to the next page, to ensure the safety of our workforce is, of course, the number one, two, and three priority, and an area where a lot of effort is put into these days during this pandemic. We're taking a lot of measures to ensure that people stay healthy, taking a lot of advice from a number of different people, and continuing our strengthening what we do within this field.
Within planet, we have set a target to halve our CO2 emissions every 10th year, with 2016 as our base year, which is fully in line with the Paris Agreement. We are taking two important steps now to get us towards that target. One is to move into CO2 neutral cold storage in Denmark. That's all powered by clean energy, and also that we will change our logistical setup in Sweden, in a manner that will significantly reduce our transport mileage. Summing up on the last page, we here deliver a quarter with very solid growth and record margins. Overall, we prove the business to be resilient to COVID-19. However, we have taken a number of contingency plans in case of business disruptions. We have ensured a very solid balance sheet and also taken a number of initiatives to improve our liquidity situation.
We do continue to follow structural opportunities very closely. Looking a little bit ahead, we do expect the Q4 to be yet another quarter with improved results compared to the previous year. With that, we'd like to take any questions. Thank you for listening.
Thank you very much. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure you are unmuted locally. Our first question is from Daniel Schmidt of Danske Bank. Your line is now open. Please go ahead.
Yes. Good morning, Leif and Julia. Hope you can hear me.
Morning.
Morning.
A couple of questions from me, then. When you give your outlook for Q4 and you expect another quarter of improved results compared to last year, can you tell us anything about the assessment that you're making when it comes to the food service business in that guidance?
We do anticipate food service to be volatile. We saw in the springtime food service delivering only index 80 across all our markets and all our food service channels. That improved into Q3 with only an 8% decrease on index 92. I think it's fair to say that given further lockdowns, we would anticipate to see a lower demand going into Q4 versus what we have seen in Q3. It is very volatile and very hard to predict. I also feel that what we have proven since we saw this pandemic is that the business is rather resilient to these developments.
Yeah. All right. Your assessment for Q4 includes a bit of a weaker food service in Q4 versus Q3. Is that correct? Is that how I should read you?
Yeah. As I said, it is very difficult to predict.
Yeah. You gave us the exit rate there with September being down 13%. I assume that going into November, with all the things that have been happening in the Nordics and across Europe, things are not getting better. Rather, the opposite, maybe.
No, exactly.
Yeah.
Exactly. It's more the opposite.
Yeah.
I think when we had the pandemic outbreak, there was a lot of, let's say, closed down measures being taken. I think a lot of societies, we were unsure about what would be the impact of those. Would it combat the virus spreading? I think that was shown that these measures do work. Now it seems to a large degree that it is similar measures being taken. Also my view is that we can be relatively, let's say, confident that these measures will result in reduced illness.
Sorry, I didn't hear the last thing you said there. Sorry.
These measures will have a positive impact.
Yeah.
You will see fewer people getting ill.
Yeah.
That you will see, hopefully, the food service market reopening again.
Yeah. At the same time, of course, you still have, on the other hand, good support on the retail side.
Yeah.
Yeah. Speaking of retail, you write on slide five, reduced campaign activity. Could you shed some more light on that? Is that just a function of the fact that the market's been so strong in retail, so you don't need to really sort of campaign that much?
Yeah. This was more, what we saw in Q2. We've seen less of that in Q3.
Okay. All right. Just to get the earn-out sort of numbers right here, you're paying SEK 104 million. Is that SEK 30 million more than you assessed that you would've been paying, when you lay out your forecast, basically? Is that how you should read the extra SEK 31 million that you take through the P&L?
Would you say that, Julia, or?
You want me? No, the SEK 31 million that we took as a provision, if I understood your question, right, what that is relating to. That's what you were asking, Daniel?
Yeah, exactly.
Yes.
You're basically saying that.
It's more related.
They're performing better than you assessed.
Yeah.
When you bought them, basically.
Yeah. The increased provision is mainly related to the good results we're seeing in 2020, which we need to adjust for then, for the over-provision for what will be paid in 2021.
Sorry, please repeat the last one. It relates to what you did, of course, what you've seen in 2020, you said something about 2021.
No, the earn-out charge that will be paid in 2021, which is based on the results in 2020.
Yeah. All right. Okay. I think that's all for me. Thank you.
Okay.
Our next question is from Mikael Löfdahl of Carnegie. Your line is now open. Please go ahead.
Yes. Hi, good morning. First of all, when you look at the current mix now with the rather significant change, demand or consumer behavior, would you say that your operations and your production and everything is aligned with the current mix shift? You had some difficulties obviously initially, for the rapid mix shift. Are you more aligned now and can sort of more benefit from this mix shift also going forward?
It was much more challenging, in the springtime where we saw a rapid decline in food service, and retail where a lot of consumers were basically buying and stocking up. That was a very difficult period for us, lasting some weeks there. We see that we have adapted. There are some lines that are operating some overtime, too, because we have seen increased demand for certain products, whereas we have other manufacturing lines that are operating less hours than what they did before, but no significant impact. We have largely adapted to these sort of adjusted patterns.
If we were to see a continued mix like we have now, that will obviously be good for your margins then?
Yeah. All in all. If you see the margin improvement, it's driven by a number of different factors. One is increased sales of chilled ready-to-cook products, it's also a number of investments that we have done in increased efficiencies, increased yields that are delivering an uplift in the performance. It's a combination of those two.
Yeah, that was my next question. When looking at your EBIT bridge and when trying to assess what is what, when you look at the price mix factor there, obviously a very big chunk of the earnings improvement. How much of that is due to the changed consumer behavior and how much is due to your sort of more own internal development and perhaps also better products with higher margins, more convenient products or what have you, also within the retail segment, not just the shift from food service to retail?
The majority of this is the more chilled sales and less frozen sales, basically. Although frozen improved with 1%, it's a shift in balance with more chilled sales. That's the main one. Also if you step back a little bit, if you look over the last five years, we've grown the business with around 7% to 8% annually. This is more or less the growth we see in retail now, basically. Even though you see change behavior, it is not sort of massively changed to the development we have seen over a number of years. You're asking how can we break that down? How much is operational efficiency, how much is more chilled sales? How much is the less food service sales? It's a very difficult one to break down. As I said, the two main ones is more chilled, relatively less frozen, and more operational efficiency.
If you're pushing me to say, if you really should split those two, I would say, assuming that they are equally important in the improvement, it would probably not be a bad shot.
Okay, good. Adding to the question about reduced campaign activity that you mentioned, does this imply that you have had, during the last now two quarters, lower marketing spend, that is shown in the better margins, especially in Sweden?
No, our marketing spend, we have not cut down on marketing spend. The move towards more differentiated product offering, more branded sales, and so forth, that we have continued. We were at the time when the outbreak of COVID-19 in the beginning of the year, we were sort of holding back for a couple of months on marketing spend. As we have seen, more, I wouldn't say business as usual, but you know what I mean. We have continued to invest for the long term in building our branded positions and innovations.
Okay. All in all then, when you look at once the market starts to, or the consumer behavior starts to normalize, when that happens, and anyone's guess, I guess, but there will still be sustainable margin improvements not just going back to where you were before the pandemic.
Yes. That's what we believe.
Okay, thanks. Just another detail on Ireland. Where are you currently in terms of the usage of antibiotics? I know that you have obviously a 0% goal for the group, and you are basically there in the Nordics, but where are you in Ireland? On that topic also, can you say something about when you speak about M&A opportunities in Europe, where are you seeing other companies like you, in Europe? Where are they in this matter, and what do they need to do to be compliant in new EU regulations, which will come in place, I think it's two, three years from now.
We take Ireland first, when we got into Ireland, the usage of, t here was about 70% of all birds that were treated. We are down to a bit below 20. A significant reduction but there's still more work to be done to get closer to our basically zero level we have in the Nordic countries. It kind of shows the impact of sharing best practice, but it also shows that even though that it is the kind of zero standard is something we have been operating for years and years, it's not something you kind of replicate overnight because it impacts the entire value chain, the egg, how you develop the day-old chick, the feed industry, the quality of the housing, the actual feed recipes and how they are applied.
It's a whole list that needs to be addressed to reduce the use of antibiotics.
Where do you see the competitors in Europe and the challenges that they are facing, and which might open up for M&A opportunities?
We do see opportunities. This is clearly so that in this pandemic, when we do our consumer research, it is this risk of resistant bacteria. It has been high on the agenda for a lot of customers, but also for a lot of consumers. We have seen this moving up the ladder for a bigger proportion of consumers, really getting concerned if current medicine is no longer effective, what situation would we then be in? It is increasing its importance. It's important part in our brands, whether it's The Happy Chicken Project or whether it's the Family Farm that we roll out, they are all antibiotics free. When we look across the use of antibiotics across Europe, it is an area where the statistics is not very good. We see a lot of the overall uses of antibiotics across Europe.
The data we have available show that it's still around two-thirds of all birds that are treated. There's a lot of work ahead of these operators, to get those numbers down.
That's interesting. A final question, you mentioned in connection with the Q2 report that you're looking into two plant-based ingredients and to add that in some of the products, that's a possibility for you, and I guess that could be a growth area. Could you say something more about that? How you're seeing this and which type of products it's most suitable for and, I guess, if you need to make any investments to make that possible?
It is basically building on the business we have created within Ready-to-eat. Products we are developing with the plant-based substance are basically products that we can produce on some of these Ready-to-eat production lines that are currently using chicken as the raw material. In terms of CapEx, we're talking about very little CapEx. It's not something you will be able to see in the numbers. In terms of where we are, further development work are being done in terms of recipes, texture, and also some work is being done in terms of concept positioning.
Okay, good. One final detail from me. Just in the net financials you mentioned there was a currency impact there. Could you say how big the FX impact was and what to be expected maybe for Q4 in that sense?
Could you take that one, Julia?
Yeah. The FX impact was around, if I remember rightly, SEK 17 million. No, sorry, not SEK 17 million, SEK 12 million in this quarter. I would expect, obviously it depends on how the Swedish krona fares in the fourth quarter, but I would expect it to be maybe a little bit lower, but still positive.
A positive impact of SEK 12 million in Q3? That seems a lot for-
No, sorry, maybe I'm quoting the numbers wrong here. Now, because I've highlighted, I think it was somewhere in there between SEK 5 million to SEK 10 million. I will double-check this one again. Really sorry.
Okay. Thank you.
Thank you. Other questions?
We currently have no further questions. I will reiterate, should you wish to ask one, it is star followed by one on your telephone keypad. When preparing to ask your question, please ensure you are unmuted locally. We have no further questions. I'll hand back to your host.
All right. Thank you, everybody. Thank you for your time. Thank you for good questions. I do realize that we are fighting with an election that's taking a fair bit of attention today. Have a great day, everybody. Thank you. Bye.