Earnings Call: Q3 2020

Nov 4, 2020

Good morning, everybody, and welcome to the Skandi Standards Q3 report. Life represents speaking. It's a quarter where we report a record margin, EBITDA margin of 8.8%. Going on to Page 3, the quarter with solid growth and strong operating performance. We delivered 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 our business that is resilient to the COVID-nineteen effects. As you can see, there is some non comp reporting in this quarter, and that gives me an opportunity to talk about where it comes from, which is the integration very successful integration of ManaPharm. We go on to Page 4. And this very strong performance have resulted in some increased earnout provision. Just to remind you, Mana Farm, we acquired in August of 2017. It's by far the largest chicken operator in the big tropical island with more than a 50% share. On terms of some key success factors, when we went into the business, 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. And 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. And that means that we have an increase in our and that represents SEK 31,000,000 altogether. If you go on to Page 5, delivered solid growth driven particularly by a very good retail demand of 7% growth in retail sales, representing 64% of total revenue, very strong demand in basically all our domestic markets. We have seen an improved momentum in Foodservice. If you look at the quarter on quarter drop in Q2, we did We experienced a 20% drop in sales to foodservice, the foodservice channel, whereas in Q3, that drop is now 8%. We have a positive mix from higher retail sales, particularly chilled ready to prove products. Going on to Page 6, you will see the development of retail versus foodservice. The strong increase in retail sales, 7% as mentioned as an average over the quarter for Q3. We see a continued volatile demand in Food Service, 8% decrease in Q3. And we see also in different foodservice establishments when adapting to also continue to adapt to changing COVID-nineteen restrictions. Looking a little bit ahead, we anticipate to see continued solid demand from retail. But also, we anticipate to see foodservice to remain volatile for some time ahead, not least expecting 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, Tilt. We saw frozen sales be more or less flat and a 3% drop in Ready to Eat, reflecting that this product group is have a very high exposure to the service market. All countries contributed to the growth that we deliver in this quarter. Turning to Page 8, record strong adjusted EBIT. The improvement from SEK 125,000,000 of Q3 last year to SEK 147,000,000 of this year can be broken down to SEK 20,000,000 coming from volume growth, 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, but also improved efficiency across the operation. Good cost control for the business, and this result is delivered in spite of a negative currency effect of SEK 7. Going on to Page 9, looking at the 4 times growth of the Ready to Eat sales over the last 5 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-nineteen and this activity in the foodservice 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. So 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 foodservice exposure and also with the highest impact from the COVID-nineteen implications. So a 2.4% EBIT margin, which is explained by we have some additional costs from this differentiation strategy we have talked about that 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 the to food category, very good cost control and a 10.6% EBIT margin or 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. And that comes from a basically the improvements through the entire value chain and a lot of the best practice initiatives being implemented very successfully by the Irish team. Moving on to Finland, 14% growth in local currency. It's in a business we have, which is very retail oriented with limited exposure to foodservice. We continue to see margin improvements, 5.7 percent EBITDA margin, 1.7 percent EBIT, basically coming from improved operational efficiency and also some improved product mix. We have an investment underway to facilitate further growth going forward. With that, I'd like to hand over to you, Julia. Thank you, Leit. So we come back to the grouping statement on Page 15. And as already shared, we had a very strong adjusted results this quarter, seeing it 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 nonrecurring items in this quarter of NOK 33,000,000 that Leif was mentioning before as well. As this is related to the increased position for the earn off 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 €15,000,000 This is mainly driven by a positive currency impact with the strength in SEK, but also somewhat lower interest rates. We have on the opposite side, we have a high quarterly tax rate due to country mix of 23%. Last year, it was 21%. It's also partly driven by some adjustments from previous quarters. All in all, this is leading us to an EPS of SEK1.21 versus last year of SEK1.12 and the adjusted EPS of SEK1.68 versus 1.12 last year, an overall increase of 50% in adjusted quarterly EPS. Looking at the statements of financial position, this leads us to continued improved returns where the adjusted return on capital employed now is at 12 point 2 percent and adjusted return equity is at 17.4 percent despite the increase in equity. And equity ratio is at 28.7 percent, up from 27% to 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 demand we're seeing in this quarter. We also still have a positive contribution from COVID-nineteen related state aid, driven by the fact we were allowed to postpone social fees and VAT around SEK90 1,000,000. And if you compare to last year, there was also a fairly big increase in our factoring vendor financing solutions, all in all leading up to this minus €9,000,000 in working capital. And if we look at our working capital to save 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-nineteen state aid and also the financing elements, we are at 6.2%, which is still an improvement versus same if you do the same adjustments for last year, would have been at 8.5%. If I look only to the COVID-nineteen state it received just for this, the Q3 of 2020 would have been at 0.8%. If we move over to the 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 SEK240 1,000,000. Our tax pay tax is up somewhat from the low quarter last year. At the same time, we have paid the earn out payment of SEK 104,000,000 this quarter related to the Manopharma acquisition. This is leading us to a net cash flow of SEK129,000,000 of the number and which gives us to actually having a lower NIBDA versus the previous quarter and the previous year. Rounding up from my side at least, looking at some more updates to our cash flow guidance on Page 19. Our capital expenditure, we estimated this will be at SEK 350,000,000 for the full 2020, which is up from previous guidance of SEK 300,000,000 driven by the fact that we see that we have had such solid results and a solid balance sheet now. So we want to move forward this, but it's still below last year of SEK 490,000,000. The paid interest estimates remains to be at 3% to 3.5% of average NIBD, while the blended tax rate is about regarding to be between 19% 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 Manifor acquisition, which has 3 earnout tranches. One was paid last year in 2019, one was paid in 2020 and the last one in 2021. The earnout tranche for 2020, this process has been somewhat drag out. It will be determined in the Q4, but we have paid the expected amount of SEK 104,000,000 now in Q3. Our dividend policy remains to be at 60% roughly of net earnings over time. However, for 2020, dividend has been rescinded as a proportionate capital measure in light of the COVID-nineteen uncertainty. And with that, I would like to hand back to Leit. Yes, thank you. Under this handy way that's heading all our work within sustainability, very, 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 lights on 2. 1 is healthy workplace and the other thing is how we work from a climate perspective. And if you go on to the next page, just in secure the safety of our workforce is, of course, the number 1, 2 and 3 priority and an area where a lot of effort is put into these days given the 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 half our CO2 emissions every 10th year, with 16 as our base year, which is fully in line with the Paris agreement. We are taking 2 important steps now to get us towards that target. 1 is to move into CO2 neutral cold storage in Denmark, where 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 transport mileage. Summing up on the last page, we here delivered a quarter with very solid growth and record margins. Overall, we proved the business to be resilient to COVID-nineteen. And 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. And looking a little bit ahead, we do expect the Q4 to be yet another quarter with improved results compared to the previous year. So with that, we'd like to take any questions. Thank you for listening. Thank you very much. Our first question is from Daniel Schmidt of Danske Bank. Your line is now open. Please go ahead. Yes. Good morning, Leif and Julia. I hope you can hear me. Good morning. Good morning. A couple of questions for 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 Foodservice business in that guidance? I mean, we do anticipate Foodservice to be volatile. We saw in the springtime foodservicedelivering only index 80 across all our markets and all our foodservice channels. That improved into Q3 with only a 8% decrease or index 92. I think it's fair to say that giving sort of further lockdowns, we would anticipate to see lower demand going into Q4 versus what we have seen in Q3. But it is very volatile and very hard to predict. But I also feel that what we have proven since we saw this pandemic is that the business is rather resilient to lease development. Yes. All right. So your assessment for Q4 includes a bit of a weaker foodservice in Q4 versus Q3. Is that correct? Is that how I should sort of read you? Yes. But as I said, it is very difficult to predict. Yes. Because you gave us the exit rate there with September being down 13%. And 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. Exactly. It's more the opposite. So Yes. But do you feel that But we also as I think what is when we had the pandemic outbreak, we were there was a lot of, let's say, closed down measures being taken. I think a lot of societies and we were unsure about how would these measures what would be the impact of those? Would it come back the virus spreading? And I think that was shown that these measures do work. And now it seems to a large degree that it is similar measures being taken. So I also my view is that we can be relatively, let's say, confident that these measures will reduce will result in a reduced illness. Sorry, I didn't hear the last thing you said there, sorry. That these measures will have a positive impact, But you will see fewer people getting ill and also that we will see hopefully the foodservice market reopening again. Yes. And at the same time, of course, you still have, on the other hand, good support on the retail side. Yes. And speaking of retail, you're right on Slide 5, reduced campaign activity. Could you shed some more light on that? Is that just a function of the fact that the market has been so strong in retail, so you don't need to really sort of campaign that much? Yes. And this was more what we saw in Q2. We've seen less of that in Q3. Okay. All right. And just to get the earn out sort of numbers right there, you're paying for EUR 104,000,000. Is that EUR 30,000,000 more than you assessed that you would have been paying when you lay out your forecast basically? Is that how you should read the extra EUR 31,000,000 that you take through the P and L? You said that, no? No, the €31,000,000 that we took as a provision, if I understood your question right, what that is relating to. That's what you're asking, Daniel? Yes, exactly. Sort of you're basically saying that they're performing better you than you said when you bought them basically? Yes. So the increased provision is mainly related to the good results we're seeing in 2020, which we need to adjust for then for the overall provision for what needs to be paid in 2021. Sorry, please repeat the last one. It relates to what you did, of course, what you've seen in 2020. And then you said something about 2021. No. So that's so the earnout transcript will be paid in 2021, which is based on the result in 2020. Yes. All right. Okay. I think that's all for me. Thank you. Our next question is from Michael Lufdahl of Carnegie. Your line is now open. Please go ahead. Yes. Hi, good morning. So 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? Or because you had some difficulties, obviously, initially for the rapid mix shift. But are you more aligned now and can sort of more benefit from this mix shift also going forward? Yes. It was much more challenging in the springtime where we saw a rapid decline in foodservice 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. But we see that we have adapted. There are some lines that are operating some over time 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 actually sort of adjusted patterns. So if we were to see a continued mix like we have now, that will obviously be good for your margins then? Yes. All in all, if you see the margin improvement, it's driven by a number of different factors. 1 is increased sales of chilled ready to cook products, but it's also a number of investments that we have done in increased efficiencies, increased yields that are delivering an uplift in the performance. So it's a combination of those 2. Yes. 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, they're obviously a very big chunk of the earnings improvement. And that was my next question, 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 foodservice to retail? The majority of this is the more chilled sales and less frozen sales, basically. Although frozen food with 1%, it's a shift in balance with more chilled sales. That's the main one. But also, if you step back a little bit, if you look over the last 5 years, we have grown the business with around 7%, 8% annually. This is more or less the growth we see in retail now basically. So even though you see changed behavior, it is not sort of massively changed to the development we have seen over a number of years. So you're asking how can we break that down? How much is operation efficiency? How much is more chill sales? How much is the less foodservice sales? It's a very difficult one to break down. But as I said, the 2 main ones is more chilled, relatively less frozen and more operation efficiency. And if you're pushing me to say how would if you really should split those 2, I would say, assuming that they are equally important in the improvement, it would probably not be a bad shot. Okay. Okay, good. And then also adding to the question about reduced campaign activity that you mentioned, is this does this imply that you have had during the last now quarter 2 quarters lower marketing spend that is shown in the better margins, especially in Sweden? No. We our marketing spend have we have not put down our marketing spend. So 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-nineteen in the beginning of the year, we were sort of holding back for a couple of months on marketing spend. But as we have seen more, I would say, business as usual. But we all do you know what I mean? We have continued to invest for the long term in building our branded positions and innovations. Okay. So all in all, when you look at the once the market starts to or the consumer behavior starts to normalize that when that happens, and then anyone 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, but you are basically there in the Nordics. But where are you in Ireland? And on that topic also, do you can you say something about when you speak about the M and 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 to new EU regulations, which will come in place, I think, in 2, 3 years from now? If we take Ireland first, when we got into Ireland, the usage of there was about 70%, 70% of all birds that were treated. Now we are down to a bit below 20%. So 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. So it kind of shows the impact of sharing best practice, but it also shows that even though that it is the kind of serial standard is something we have been operating for years years, It's not something you kind of replicate overnight because it impacts the entire value chain, the how you develop the day old chick, the feed industry, the quality of the housing, the actual feed recipes and how they are applied. So it's a whole list that needs to be addressed to reduce the use of antibiotics. And where do you see the competitors in Europe and the challenges that they are facing and which might open up for M and A opportunities? Well, we do see opportunities. This is clearly so that in the 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. But we have seen this moving up the ladder for a bigger proportion of consumers really getting concerned if we cannot if current medicine is no longer effective, what situation will we then be in? So it is increasing. It's important part in our brands, whether they have Chicken project or whether it's the Family Farm project that we roll out, they are all antibiotics free. And but when we look across the use of antibiotics across Europe, it is an area where these statistics is not very good. But we see a lot of the overall uses of antibiotics across Europe, the data we have available show that it's still around 2 thirds of all birds that are treated. So there's a lot of work ahead of these operators to get those numbers down. Okay. That's interesting. A final question. You mentioned in connection with the Q2 report that you are looking into 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 how which type of products it's most suitable for? And I guess if you need to make any investments to make that possible. It's it is basically building on the business we have created within Ready to Eat. So products we are developing with 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. So 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 for 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 for maybe for Q4 in that sense? Would you take that, Julia? Yes. So the FX impact was around, if I remember rightly, euros 17,000,000. No, sorry, euros 12,000,000 in this quarter. And I would expect it obviously depends on how the Swedish krona fares in the 4th quarter. But I would expect it to be maybe a little bit lower, but still positive. So a positive impact of SEK 12,000,000 in Q3. That seems a lot for No, no, sorry. Maybe I'm quoting the numbers wrong here. No, because it was highlighted. I think it's in the year, but it was somewhere in there between €5,000,000 to €10,000,000 I will double check this one again. Okay. Okay. Thank you. Thank you, Martin. Other questions? We currently have no further questions, but I will reiterate should you wish to ask star followed by 1 on your telephone keypad. When preparing to ask your question, please ensure you are unmuted locally. We have no further questions. So 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. So have a great day, everybody. Thank you. Bye.