Earnings Call: Q4 2019

Feb 7, 2020

Good morning, everybody, to presenting our q Q4 report. Just on starting on on page one, just looking at our at our average growth rate over the last six years of around 88.5%, in fact. It's been a little bit higher in 2019 as have been our CAGR over the previous years of around 7%. Going on to Page three, 2019. Strong growth in sales and improved results. So all in all, a 12% growth during the year and a 19% increase in adjusted EBIT. We saw a strong growth and good result in the quarter, 12% revenue growth also in this quarter. EBIT came in at $104,000,000 so strong operational cash flow and a 14% return on equity. The Board recommends a dividend of DKK 2.25, up from DKK $2.00 last year per share. Going on to the next page. Q4 was also a quarter with exceptional top line growth, 10% underlying growth, mainly driven by the ready to eat products. They represent altogether about twothree of the growth we deliver in this quarter. But also strong performance in radio to cookware products. Currency represents 2%. And for 2020, we anticipate a more modest growth rate coming after a very strong growth in Ready to Eat in 2019. And also, as you are aware, we have an impact from this pricing formula where we get compensation for raw material inflation that has led to price increases during 2019. And in 2020, that will turn a bit 50 other way. This does not change our long term anticipated growth to continue around the 6%, 7% we have seen historically. Going on to talk a little bit about sustainability. As you know, it's very important focus area for us in the group. Just going on to Page six, just being at one example of one of the focus areas within our sustainability agenda, which is to improve the feed conversion ratio. First of all, as you're aware, chicken is already about 4.5x more feed efficient and thereby climate friendly versus feed. You see that on the first chart. But on top of that, well, chicken all in all have a feed conversion rate here internationally of around 1.6. We have, over the last four years, managed to reduce that, so we now are at 1.52. That equals a reduction in feed used of 25,000 tons. And another way of explaining that is that it frees up 4,000 pixels of polygraph. Very important sustainability metric. Going on to Page seven. For 2019, we saw strong earnings development, driven partly by strong volume growth, mainly in the Ready to Cook and Ready to Eat. We also delivered a strong contribution from improved mix. We saw an increased proportion of branded sales contributing. And we have had price increases which have matched the raw material inflation that has occurred during the year. And that's coming back to this pricing model that we have implemented with our key clients. In the year, we have had some OpEx increases, mainly marketing and generalization. And just when you look at quarter, please be aware that we had very low depreciation in Q4 'eighteen, which means that adjusting for that, we also saw improved profitability in this quarter. Going on to Page eight. So solid development in our most profitable product categories continued, so 9% growth in the quarter in Ready to Cook. So both of the volume impact, there's improved mix, but also a pricing impact from this raw material compensation I talked about. In Ready to Eat, we delivered another quarter with exceptional growth of 34%. The capacity increases that we have put in place over the last couple of years, we have absorbed quite a lot of that. So volume increases both in braided and also in un braided categories, and more and more benefits coming from our very extensive product development initiatives that have been taken in this category over several years that continued into this quarter. The quarter was impacted by some inventory clearance of frozen products that have led to increased sales of some of these categories compared to the norm. Going on to Page nine, just point to the ready to eat category development over the last five years. Sales have increased with about 4x, all of that organically. And the weighted to total sales have gone from 9% to now 20% for the year. It reflects this market is clearly growing, and we are taking a lot of initiatives to develop the market and to remain a strong leader in this category. And we see this as an important platform for developing the business into the future. Flipping page, looking at the breakdown in terms of sales channel. Retail continued to grow, representing a growth of 9%, combination of both growth with discounted but also with high end retailers. Foodservice also continued to perform very well with a growth of 33%, reflecting people are eating more and more ads, but also our growth within the quick service restaurants, but also a very strong product innovation pipeline and where we have strengthened the organization in quite a number of areas. Going on to Page 11. So earnings improvement in all countries in 2019. Altogether, 19% improved EBIT, and all countries have contributed to that development. For Q4, we see a more stable development in terms of EBIT, but when you adjust for the depreciation, that was exceptional in the Q4 of 'eighteen. As I mentioned, you see also an improved development in this quarter. Talking a little bit about the countries. Sweden delivered solid growth and improved margins, 6% increase in sales, reflecting a good market growth. We delivered an improved EBIT margin, mainly coming from increased cost efficiency and also increased yields. And we continue to have a positive market outlook. Denmark, a quarter with exceptional growth and low margins, so 24% revenue growth coming mainly from the B2E area, but also continued positive development for the new brand. The quarter the impact the quarterly results were impacted by some special items. There were some frozen inventory clearance, but also some restructuring initiatives taking place in the quarter. And going forward, we will have a strong focus on improving margins and anticipate the situation to gradually normalize during 2020. Current Norway, continuing a very strong performance. Top line wise, the growth of 3%, 5% in local. And not least, the Rated to Eat segment have contributed to that positive top line development. Continued absolute best in class margins. We see a strong contribution from the product portfolio and also a clearly improved operational performance taking place in Norway. Ireland coming in with another good quarter, 6% revenue growth, 3% in local, coming mainly from a good operational performance and also some effect of some successful investments that we've made during the course of last year, both to deliver improved cost efficiency, also some improved animal welfare and food safety, and we'll also deliver some debottlenecking in certain parts of the operation. Going on to Finland, strong growth, but a soft quarter in terms of results. 22% revenue growth, so weak margins in the quarter, mainly coming from seasonal costs and also some inventory clearance taking place. We see that going into 2020, there will be further improvements on our performance coming partly from some debottlenecking activities, improved product mix and further innovations. And we also see further opportunities to reduce cost and improve yields within operation. With that, I'd to hand over to Julia for the income statement. Thank you. We turn to Page 17, coming back to the income statement. As I said, we have strong growth in the quarter of 12% and adjusted EBITDA margin of 10% increases to a margin growth in the EBITDA margin, which gives us a margin of 7.6%, roughly the same as last year. As Lake mentioned, we have the increased depreciation in this quarter. Last year, we did a restatement of the expected asset life, which had a positive one off effect in 2018. But this year, we are more in line with the run rate. We have a stable adjusted EBIT. There are some nonrecurring items in the quarter. It's mainly related to restructuring in Denmark. Looking at the tax rate, it's 37% this quarter, it's very high. It's related to a revaluation of losses carried forward of roughly SEK16 million adjusted for this to be more at normal levels. And this leads us to a net income of SEK42 million in the quarter. Looking at the statements for our financial position, the return on capital employed has improved with 1.3%, up to 11% now. And the return on equity for the year is at 14.2%, up 1% from last year. And the equity ratio is at 28%, also improving from last year's 27%. This is a note with the implementation of IFRS 16 related to the leasing of assets. This has an effect, of course, on the net interest bearing debt of around CHF $445,000,000 in 2019, roughly the same level as we have been in 2018. Turning to the working capital on Page 19. We have seen a reduction in the working capital in this quarter. It's partly related to seasonal effects and also some temporary items, but we've also increased our vendor financing activities. And this leads to a very low level of working capital ratio at 2.1%. We don't expect this to last, but the normal level should be more in the area of 446%. Looking at the cash flow, we see a strong improvement here. It is driven both by the improvement in EBITDA, of course, the significant release of working capital. So despite having a high quarterly expenditure, we still see a positive effect on the net cash flow. And the net cash flow per share is at SEK 5.12. Coming to the cash flow guidance. The dividend policy is remaining the same. It's to be 60% of net income over time. As Leith mentioned in the beginning, the dividend proposal now is at SEK 2.256, up 12.5% from last year, and it should be paid in the 2020. The paid interest is still estimated to be at 3% to 2.5% of the average net interest bearing debt. And the blended effective tax rate is around 20% to 21%. Looking at the capital expenditures for 2020, we are estimated to be in line with this year to close to $420,000,000. It is to be spread within the group, and the focus is on facilitating growth and margin improvements across the group. Just to comment, the corporate cost for the next year is estimated to be around CHF 20,000,000 per quarter. Last comment on the contingent liabilities. We have our Manulpharm acquisition. As you know, there are three earn up tranches here. The first one we paid in 2019, SEK133 million. Second will come now in 2020. And the third and final one will be in 2021. And with that, I hand back to Leif. Thank you. So summing up the year, we saw strong growth and good results, continued to see solid demand for our products across the market, by people being more and more impacted by climate implication of our choices, but also on health. 2019 delivered a growth as well above our five year average of about 6% to 7%. Solid innovations continue to drive both our top line and our mix improvements, so also that continuing into 'nineteen. We saw further strengthening on our brand. We do anticipate a lower top line growth for 2020 following this exceptional 2019. And we will be focusing increasingly on margin improvements from Q4 of 'nineteen. Continue to follow structural opportunities closely, and the Board are recommending a dividend of €2.25 per share. With that, we would like to take any questions. Thank Our first question comes from Daniel Schmidt of Danske Bank. A couple of questions from me then. Starting with price increases you mentioned in the quarter and also, of course, you reiterate at the same time what you said in connection with the Q3 report looking into 2020 that there will be a moderation of growth given the comps, but also in terms of raw material going the other way and so on. Could you give us any sort of indication of how much price increases you had in the current quarter and what you expect to reverse going into 2020? We'll say that we have seen any that the growth in 2019 have been inflated with three to four percentage points altogether. And we will see that normalizing somewhat, not to the full degree into 2020. Okay. Good. But also bear in mind that we have had to be very exceptional growth in the very sweet area. Yes. Sure. And then I know that you're fairly neutral when it comes to raw material, but there is some deviations when it comes to Ireland, if I'm correct. And would that mean that you will be gaining a little bit in terms of raw material and input costs in the Irish business starting in 2020? No. I would say that these numbers are more or less relevant for across the group, where we have managed to get compensation for the raw material, which is an important part of our business model. And we will see that effect also continuing into 2020. Okay. So no deviation really versus the Nordics then? No. No. All right. And then moving on to Denmark and efficiency, and you've been sort of focused on improving efficiency now in the 2019 and maybe even earlier when it comes to the Danish business. Have we seen the end of restructuring now as we go into 2020 when it comes to this particular area? Yes, I would say so. We have taken by far the volume of the initiatives we want to take and we anticipate that margins will normalize during 2020. And is that sort of a gradual normalization or Yes, exactly. More gradual improvement, we will anticipate that. After a year with very, very exceptional growth, You will see a much stronger focus on improving the margins and get that back to where it should be. Yes. Could you give us more shed some more light on what the one offs relate to more exactly in the quarter? I've seen some stock clearance, some changes in various parts of the organization. And that has basically in an effort to ensure that that very exceptional top line growth, that we also get some margin improvements from that into the future. All right. And any sort of comments at all on sort of the latest news flow in terms of Eastern Europe and bird flu and the breakouts that we've seen there? It seems like it hasn't been any new in the past two, three weeks. Do you have any more to sort of to add to that? Not really. Of course, we follow the situation. We have very strong measures to prevent this from affecting us, and we just continue to reiterate those. But otherwise, it's pretty far away from us, and but of course, we follow the situation. Okay. All right. That's all for me. Thank