Good morning, and welcome to the Scandi Standard Interim Report for the second quarter 2022. My name is Charlie, and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can do so by pressing star followed by one on your telephone keypads. If you've joined us online, please click the Request to Speak flag icon. I now hand the call over to Jonas Tunestål, CEO, to begin. Jonas, please go ahead.
Good morning, everyone, and welcome to this presentation of Scandi Standard's results for Q2 2022. I'm Jonas Tunestål, the 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 the results for the first quarter under my helm. Next slide, please. All of us are currently experiencing a challenging macro environment with lots of uncertainties. I'm very pleased to report that we managed to largely compensate the cost inflation we've been exposed to during the last year. However, we have chosen to terminate some projects which have resulted in write-downs of assets. We have made a provision related to an old conflict with a third party and had losses related to Q2 fire in Farre.
Together, this has impacted EBIT negatively with SEK 55 million in the quarter. The positive development in underlying EBIT is driven by a successful implementation of price increases, a strong ready-to-eat performance, and high export prices. As Julia will revert to later in this presentation, we have generated a strong operational cash flow of SEK 135 million in the quarter. Although our costs have recently stabilized, there is still high uncertainties in our macro environment. As a market leader in many of our markets, it has been important for us to allow necessary terms for our farmers in order to ensure a long-term domestic food production and a sufficient supply of chicken products in our home markets going forward. Next slide, please. Scandi Standard has been a stable business with around 4% margin.
We have strong organic growth throughout the years. In the second half of 2021 and Q1 2022, we have experienced a significant drop in margins, mainly due to the lead time in obtaining compensation for high costs, inflation, and lower export prices. In Q2, we have largely managed to compensate inflation, but margins are still lagging due to the earlier mentioned specific items. During a period with lower activity level and investment, we have started a number of initiatives to gradually strengthen our efficiency end-to-end. I'm actually now in the middle of developing a long-term planning together with the organization to secure Scandi Standard as a future-proof company. Next slide, please. On this slide, you can see the inflation is largely compensated. During the last periods, our costs above EBITDA line has increased by about 33% per kilo.
The figure on the right, that shows a strong impact on earnings during the last period and progress in underlying earnings during Q2 2022. This has been possible through a combination of things, significant price increases that has been implemented in the first half 2022, and also significant improvement in export prices and a strong Ready-to-Eat performance. I will revert to that later in the slides. Next slide, please. Here we can see at the table on the top that shows massive inflation in some of our main cost items. Of course, feed prices, our biggest item, feed prices have stabilized during the summer, even though we have still large uncertainties about European drought and the Ukraine exports. It is stabilized, but we see uncertainties for the future.
Further, we see the electricity for Q3 and Q4 that also indicates cost increases, and that will affect us and the rest of the industry. Chicken products, though, are well-positioned compared to protein peers. We have a low absolute and relative price point to consumers, which in medium term is likely to drive substitution in our direction. The short production cycle has allowed us flexibility in throughput, and we are also exposed to the positive consumer trends relating to health and sustainability. One of the most interesting thing is the flexibility through a short production cycle. That's a big difference between my former jobs with other proteins as pork and beef. I see that as a competitive advantage for poultry as a protein.
We also have a higher frequency of price discussions with the customer, and that is positive for a more well-functioning price model. This lowers our inflationary exposure, which in turn benefits the entire value chain. Next slide, please. Here we look into the development in the export prices, and we have seen a significant price increase in our export business during the second quarter. However, export prices have now increased significantly, although not to the same extent as inflation. This is mainly driven by reduced number of chickens in Europe. At the same time, we've seen increased demand from restaurant sector around the world as a consequence of the release of COVID restrictions. Our price achievement in the quarter has been positively impacted by less export restrictions related to bird flu.
There we have made progress in our efforts together with industry organization and authorities to reduce our exposure to such restrictions, where regionalization is the most important element. We're also in the process of strengthening our export model, aimed to gradually strengthen our competitiveness in the market over the coming years. We are focusing on strategic client relationships, improved sales and operation planning, and with that we mean selling the right product to the right market. Also increased flexibility between export and our Ready-to-Eat factories, with respect to the raw material. Next slide, please. This table shows the reconciliation of our segments, and it's clear that Ready-to-Eat that drives results within Q2. When adjusting for the exceptional items mentioned earlier, the results within Ready-to-Cook are still lagging in Q2 2022.
The category other includes our ingredients business, which has performed very well in the quarter due to strong price increases on pet food, MDM, and biogas as well. This business secures an optimal usage of the whole animal, and that's a focus area for us, both in terms of the profitability, but also from a sustainability point of view. Next slide, please. Now we go to the Ready-to-Cook segment. It's important to understand that chicken is first mover on price due to the short production cycle, and that the recovery in our underlying earnings has partly been facilitated by lowering the volume with 12%. We hope to gradually rebuild the volumes in line with demand, of course. I'm also happy to report that we have improved our LTI performance.
In Ireland, we're struggling with two of our animal indicators, mainly related to external parties, but we have allocated group resources to come to terms with these deviations. Next slide, please. Then we have Ready-to-Cook Denmark. As you all know, we have realized large losses during the last periods, and one of the problem has been the lacking contractual flexibility with our counterparties, which has been a barrier for implementation of required changes. It is important to obtain more balance in this contract to the best of our long-term prosperity of the entire value chain in Denmark. We are in the midst of carrying out changes to the slow-growing bird business. We try to coordinate volume and price better and align them better with the domestic retail clients. We also try the higher flexibility in mix between breeds and reduced costs.
In the current market conditions, we have strengthened our export market as well. On the other hand, we have higher price awareness among Danish consumers, and that might impact the implementation of slow-growing bird strategy. I'm happy to say, for the first time in seven quarters, the combined business, including ready-to-eat and ingredients in Denmark, shows a positive EBIT in the quarter, which is good from a margin point of view. Obviously, it's crucial to develop a sustainable platform in Denmark, which has a satisfactory return on capital. I'm spending lots of my time to facilitate this together with the local management, and we will focus on continuous improvement. Next slide, please. Yeah, on this slide, you can see channel development more in detail.
Through these details, you can notice strong increase in food service and export channels in the quarter, which is driven both by price and volume. We also see lagging development in retail, which is due to the price elasticity in the channel. It is this channel we see more future potential of the substitution from other proteins. Next slide, please. We go into the ready-to-eat business. Looking at our ready-to-eat business, we delivered a good performance in the quarter. We have net sales of SEK 748 million, and that's an increase of 39% for the quarter and an EBIT increase of 37% to SEK 51 million. Price increases is executed on long term customers in food service, retail and QSR and in export. We have also skewed our mixes towards higher margin products.
Cost inflation was to a large extent mitigated and the EBIT margin landed at 6.8% for the quarter. LTIs were in line with the levels seen in the last 12 months, and it is our priority to gradually bring it down towards the low levels seen in Q2 2021. Next slide, please. On this slide, we want to show you some examples of our Ready-to-Eat products. You can see those three products up in the left corner, right corner and down in the center. That is typically products that we sell in retail. We also have a big business together with the QSR and producing a lot of nuggets and hamburgers for the QSR industry as well.
Our RT business, we have a good growth now, and we're really proud of the product that we can present. Next slide, please. It is, of course, very encouraging to see Ready-to-Eat are growing and outperforming pre-pandemic sales. The development is driven by increased sales in food service channel. During the quarter, we also saw that Ready-to-Eat is growing in the retail and indicate a more permanent setup in retail demand, showing an increase of 90% in the quarter. To address demand, Scandi Standard invest further to increase the capacity at the company's largest production plant for Ready-to-Eat products in Farre in Denmark. Further investment in this segment will be a priority for me the coming years. Ready-to-Eat will be an important tool in developing EBIT per kilo, i.e., increase the value of our protein.
With that, I will hand over to Julia for more deep dive in the financials.
Thank you, Jonas. If we then move to page 15, we come back to the overall P&L. As you've seen, the quarterly performance was weak. However, EBITDA was still at SEK 172 million in the quarter, which is in line with last year. There were no non-comparable items booked, and EBIT landed at SEK 42 million. The finance cost was flat compared to the same period last year, and all in all, the net income for the period landed at a low SEK 7 million. If you look at page 16 and our return measures, the declining results in the last quarters has of course led to a large drop in return on capital employed from 8.4% last year to 3.2% this year.
However, looking only at the annualized Q2 results and also adjusting for the mentioned exceptional items, the return on capital employed would have been above 8%. At the same time, our equity ratio remains stable at around 30%, supported by the cash preservation measures that we have taken during this turbulent period. If we go to page 17. We continue to see low levels for working capital. Our inventory has been further decreased versus the year-end. This through targeted actions to drive down frozen inventory. Payables and receivables both continue to increase, driven by the cost and price increases we have seen. We have also in the period reduced some of our factoring solutions. This gives us in the end a working capital to sales ratio of -0.5%.
Our target level for working capital to sales, excluding financing items, remains to be around 6%, and at the moment we are somewhat below this level. Coming to page 18, we have our cash flow overview. As Jonas mentioned in the beginning, we report a strong operating cash flow in the quarter despite the poor earnings. This, as several items booked in the quarter did not have cash impact. The EBITDA was in line with last year. We have the release of working capital, and similar to last quarters, we have kept a low level of investments as part of our cash preservation measures. In total, the net interest bearing debt was reduced by SEK 84 million in the quarter. All in all, we have managed the recent tough periods without deteriorating our equity ratio and with a stable EBIT.
On page 18, we have our cash flow guidance. The CapEx for 2022 is estimated to be at around SEK 330 million, which is in line with previous statements. As Jonas said before, we have a clear focus on facilitating further growth in ready-to-eat segments, meeting the strong demand we see there. Another major priority is our ERP implementation. Year-to-date June, we had invested only SEK 75 million, so we plan for a ramp up in the second half. The paid interest level is estimated to be at 4.5%-5.5%, increased due to the slightly higher margins we have on our loan and increased base rate as we all are seeing. The blended tax rate is estimated to be around 21%. As previously reported, we have a new five-year sustainability-linked financing in place since mid Q2.
Finally, the dividend policy remains unchanged at 60% of earnings over time. Moving to the next page and looking at our sustainability KPIs, we are pleased to see that LTI, which is the lost time related injuries, has stayed at the same levels as we saw in Q1, coming down from the higher levels of 2021. Here, the action plan that was put into place to mitigate the previous poor results is delivering improvements, and we will continue this important work every day in the organization. On the other hand, our main animal welfare indicator, the foot pad score and the use of antibiotics are unacceptably high. This is mainly driven by our Irish operations, and we have our Scandi Standard experts on site to address the issues.
We put lower CO₂ emissions in the quarter, partly related to more detailed reporting practices, specifically around distinct heating emissions. In addition, we also have a lower natural gas consumption at some sites. We also want to share that we have in the quarter finalized a detailed carbon inventory, including Scope three, which Jonas will now elaborate a bit more on. I will then hand back the word to you, Jonas.
Thank you very much. We're at slide 21. Thank you, Julia. As Julia mentioned, one aspect of our sustainability efforts in the comprehensive product carbon footprint calculations that we've undertaken now certified by an external expert, the Carbon Trust. Together with them, we have developed a bespoke cradle-to-gate model, giving us a very stable knowledge base for our improvement work on the climate area. Together with our own work and with our own carbon inventory at group level, the calculation shows that the majority of Scandi Standard's climate impact is linked to feed production and feed conversion, actually around 85%, and it's what we call Scope three. Around 3.5%-4% comes from Scandi Standard's own operation in Scope one and Scope two.
It's important for us to measure all Scopes and work with continuous improvement within the total value chain. I strongly believe that our products will benefit from the development of a more holistic, accurate, and transparent measurement system for the CO₂ emissions. That's why we do this certification and inventory of the total Scopes one, two, and three. Next slide, please. Looking into this slide, this work that I mentioned on the previous slide is one aspect of building a future-proof company. One of the pillar in the strategic framework that we have developed to take Scandi Standard to the next level. As you all know, my primary focus during my first period with Scandi Standard has been and is recovery measures.
In parallel, we have also started the work together with the organization to develop our plans for taking Scandi Standard forward. Apart from building a future-proof company, it is about increasing the value of our protein. It's about ramping up our efficiency end to end. Of course, it's always start with the people and the culture. Although this will require a lot of hard work, and I'm confident that we will be able to gradually lift our performance over the coming years. Next slide. To summary, all this, inflation is largely compensated in the quarter, and we have done that through domestic price increases, and we also see a strong export market, and then our good performance in our ready-to-eat segment. We see that feed prices have stabilized during the summer, but still with a lot of uncertainty for the future.
We are well positioned for the consumer response to the inflationary environment, so we're expecting a normalized EBIT level during the second half in 2022. We have a structured work for gradual improvement over the coming years. With that said, we're humble for the fact that we see large macro uncertainty and that we need to deal with throughout the coming quarter in 2023. With that said, I think we're finished, and we will open up for Q&A.
Thank you. Of course, if you'd like to ask a question via the telephone lines, you can do so by pressing star followed by one on your telephone keypad. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. As a reminder, that's star followed by one on your telephone keypad now. Our first question comes from Daniel Schmidt of Danske Bank. Daniel, your line is now open. Please go ahead.
Yes. Good morning, Jonas and Julia. Hope you can hear me. A couple of questions from me. Starting with, maybe a nitty-gritty but, of course, important for the cost base. Feed prices have stabilized, you mentioned. Could you say anything about the lead time between soft commodity pricing and feed prices? Because clearly we've seen soft commodities coming down quite a lot during the summer.
The soft commodity price, we see that. We have seen the feed prices and the connection to the grains and so on. We see grain prices goes down. We have seen soy prices actually go up a little bit. That's a little bit difference between the prices for the grain and the prices for the feeds. That it was a little bit due to which contract our farmer has and so on. For us, where we have the feed production in Ireland, we will see a little bit more stabilized price for the future. When we look into, for example, Lantmännen we see lowering price for the grain.
It differs the mix between the feed price and the grain price, if that was the question.
Yeah.
If I understood that.
No, but I was of the impression that sort of the grain prices were the more important, but maybe I'm wrong. When I look at it now, you still had also downturn in soy prices, at least compared to where we ended in June.
Yes.
It's been moving up then as of late, maybe.
Yes.
If you put all these combined, it looks like a fairly decent step down to me, at least in the past two months.
Yeah. Totally agree. As you say, the grain prices are the majority part, and we're also seeing the soy prices goes down, and then they have gone up lately.
Yeah.
It will have effect. For our purpose, it's important for us to of course follow the prices for the grain and our efficiency in the markets. They are not totally linked, but there will of course be ongoing discussions of what's the price level and what our competitors do.
A little bit of mixed signals, but still a clear sort of cooling down, at least in the past two months when I look at it, even though soya has been moving up as of late. Okay. Moving on maybe. You mentioned, clearly this was sort of the Q2 numbers were clear improvement in my eyes at least. You mentioned that you should be able to reach normalized profitability in the second half of this year. You're new to the company, what in your eyes is normalized profitability in the second half?
We can't comment on a specific number for the second half. Our comment is that it will be normalized, and then we need to look to the historical numbers as we talk to a normalized state.
Maybe following on to that then, you also mentioned that you wanna establish a new stable level of earnings beyond the margins that you reported in 2015-2020. Just trying to get my head around that, you did report actually 5% EBIT margin in 2020 if you adjust for one-offs. You mentioned 4% as a stable margin in the period 2016-2020. What should we sort of relate that comment to? Because it is quite a difference between four and five. Sort of is the target to get to a stable level above four or above five?
We can't comment on that, but the thing that we can say, we are in the presentation, we have presented our 4% margin, as you say. Our focus has been to recover our EBIT earnings to historical levels. From there, we will have a long-term continuous improvements in trying to increase the profitability over time. That's all for me.
The 5% underlying EBIT margin that you did report in 2020 is sort of not relevant in your reflection on what is the stable historical normalized margin. That's rather the 4% that you put in the presentation then. Is that how you should view it?
Yeah, if we look back to the historical number, the stable EBIT margin that we present on slide three is 4%.
When you talk about Ready-to-Eat and the performance that was of course very strong and especially in food service, but you also mentioned retail and, was it up 17% or 18% maybe? How much of that is volume? Is that all price or?
Yeah, it was up 18.7% in.
Sorry, 18.7. Yeah.
Yeah. In the retail developments.
Is that all price or is that volume as well?
It's a combination of price and volume and estimate is about 5% volume increase.
Did you mention anything specific because you do sound a bit surprised by the retail performance? Is there anything that has sort of happened in your assortment that has pushed volumes higher in retail?
No.
Is it just general demand when it comes to consumer?
It's just that the products that we presented that we showed you, that's new product lines that we come with all the time. The thing that we have seen in the macro market is that we have seen a trend for increased food service in total instead of retail. Therefore, we think with our innovation that we're part of the development in retail as well.
Okay. Then maybe final just check. We have talked about bird flu for a long time, maybe a little bit less now in this year, and I haven't looked recently, but has there been any new cases of bird flu during the past couple of months in the Nordics or Ireland?
No. Not, that's a high pressure on bird flu in the Nordic in general, but no cases. No.
It's still present on the European continent, right?
Yes. It's still present in the European continent, but not commercial in commercial farms for our sake in the Nordics. That's what we talked about in our presentation that we together are trying to get it regionalized now, that will decrease the risk for us going forward. No decision about that. We are in the middle of the work of that.
Okay. Good. Thank you.
Thank you.
Thank you. As a reminder, if you wish to submit a question, please press star followed by one on your telephone keypad now. That's star followed by one now. We have a follow-up from Daniel Schmidt of Danske Bank. Daniel, your line is now open.
Yeah, just a follow-up. When you guys reiterated your CapEx plans for the full year, which I think was SEK 330, and you've only done, was it SEK 75 in the first half of this year. Do you see an acceleration of the CapEx sort of need going into 2023 or sort of is this how you have sort of this is just how you sort of plan for the year to have a lot in the second half?
Just to comment on the numbers, our focus has been to recovery. Therefore we have been tight on the CapEx on the first half. We'll get back to that in the Q3 report, what we're doing going forward.
All right. Okay, good. Thank you.
As a final reminder, if you wish to submit a question, please press star followed by one on your telephone keypad now. At this time, we currently have no further questions, so I'll hand back over to Jonas for any closing remarks.
No. We say thank you to everyone that was listening. With that, we close the meeting.
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.